##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION Washington, D.C.
 FORM 10-K (Mark One) þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended January 3, 2004 OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 Commission File Number 0-20001 NATIONAL VISION, INC.
(Exact name of Registrant as specified in its charter) Georgia
(State or other jurisdiction of
incorporation or organization) 58-1910859
(I.R.S. Employer Identification No.) 296 Grayson Highway, Lawrenceville, Georgia
(Address of principal executive offices) 30045
(Zip Code) Registrants telephone number, including area code: (770) 822-3600 Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $0.01 per share
12% Senior Secured Notes due 2009 Securities registered pursuant to Section 12(g) of the Act:
None Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes þNo o 1




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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes oNo þ The number of shares of Common Stock of the registrant outstanding as of March
8, 2004, was 5,243,047. The aggregate market value of shares of Common Stock
held by non-affiliates of the registrant as of June 28, 2003, was approximately
$3.3 million based on a closing price of $0.68 per share on the American Stock
Exchange on such date. For purposes of this computation, all executive
officers and directors of the registrant are deemed to be affiliates. Such
determination should not be deemed to be an admission that such directors and
officers are, in fact, affiliates of the registrant. Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities and
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes þNo o DOCUMENTS INCORPORATED BY REFERENCE Part III of this Form 10-K incorporates portions of our proxy statement mailed
to shareholders in connection with our 2004 annual meeting of shareholders. 2




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TABLE OF CONTENTS  PART IITEM 1. BUSINESSITEM 2. PROPERTIESITEM 3. LEGAL PROCEEDINGSITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSPART IIITEM 5. MARKET FOR REGISTRANTS COMMON STOCK AND RELATED STOCKHOLDER MATTERSITEM 6. SELECTED FINANCIAL DATAITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSUREITEM 9A. CONTROLS AND PROCEDURESPART IIIITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTITEM 11. EXECUTIVE COMPENSATIONITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESPART IVITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-KINDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULENOTES TO CONSOLIDATED FINANCIAL STATEMENTSSIGNATURESEX-4.4 SECOND AMENDMENT TO RIGHTS AGREEMENTEX-10.4 RETAIL LEASE AGREEMENT DATED MARCH 1999EX-10.5 LEASE EXTENSION AND MODIFICATION AGREEMENTEX-10.6 RESTATED STOCK OPTION & INCENTIVE PLANEX-10.15 MANAGEMENT INCENTIVE PLANEX-10.18 FIRST AMENDMENT TO LOAN AGREEMENTEX-10.20 SECOND AMENDMENT TO LOAN & SECURITY AGREEEX-21 SUBSIDIARIES OF THE REGISTRANTEX-23.1 CONSENT OF DELOITTE & TOUCHE LLPEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32.1 SECTION 906 CERTIFICATION OF THE CEO & CFO    Table of Contents  () 
 PART I 
 ITEM 1. BUSINESS Overview National Vision, Inc. (the Company)is a retail optical company that
operated, as of January 3, 2004, 468 vision centers in the United States and
Mexico. Our vision centers are located inside 396 Wal-Mart stores (including
37 in Mexico), 47 Fred Meyer stores and on 25 U.S. military bases located
within the United States. We depend on our domestic Wal-Mart locations for
substantially all of our revenues and cash flow. Our vision centers sell a
wide range of optical products including eyeglasses, contact lenses and
sunglasses. Independent optometrists operate their own practices within
substantially all of our vision centers, providing our customers with
convenient access to eye examinations and contact lens fittings. To support
our retail operations, we also operate two manufacturing and distribution
centers. Current and prospective shareholders and holders of our Notes are encouraged to
carefully read all of the disclosures contained in this Annual Report on Form
10-K. As described in greater detail elsewhere herein, we are primarily
focused on three significant issues: our license agreement with Wal-Mart, our
new business opportunities and our financial position including the
profitability and cash flow of our existing store base. The importance of
these issues is summarized in the remainder of this introductory section. Our leases with Wal-Mart for domestic locations have begun to expire in
significant numbers. The lease on each domestic store provides for a nine-year
initial term and a three-year renewal term. If we are operating in a store
that is converted to a Wal-Mart supercenter, our lease term at that location
starts over. To our knowledge, Wal-Mart is the only other entity operating
vision centers within its domestic stores, and Wal-Mart has not offered us
leases for additional stores or renewals of expiring leases. Since opening our
400th store within a domestic Wal-Mart location in 2001, we have, through
January 3, 2004, closed 41 such stores. We expect to close another 45 domestic
Wal-Mart locations in 2004 as a result of lease expirations. In addition and
at our request, during the first half of 2004 Wal-Mart will allow us to exit 13
unprofitable domestic stores prior to the expiration of the initial lease term
for these locations. As a result of our declining number of vision centers in Wal-Mart stores, we
devote much attention to developing new businesses. We are seeking additional
host environments in which to operate and are seeking to expand our presence on
military bases. Additionally, we have tested and expect to continue to test
new retail concepts. During 2004, for example, we will test the viability of a
home medical equipment concept by opening at least two locations within
domestic Wal-Mart stores. We emerged from bankruptcy in 2001 and issued our 12% Notes in the aggregate
face amount of $120 million, resulting in a substantial interest burden. The
Note Indenture may limit the expenditures we are able to make in businesses
outside of optical. Through January 3, 2004, we have, pursuant to the terms of
the Note Indenture, redeemed approximately $14.0 million of Notes at par.
Additionally, we have repurchased, in negotiated or open market transactions,
Notes with a par value of $10.5 million at an aggregate cost of approximately
$6.6 million. The Notes mature on March 30, 2009, and provide for continuing
mandatory semi-annual redemption payments, subject to the terms and conditions
of the indenture. We intend to continue to repurchase Notes from time to
time in negotiated or open market transactions. Our ability to develop new businesses and to reduce our debt is, of course,
tied directly to our ability to generate operating cash flow. Since emerging
from bankruptcy in 2001, we have improved our operating processes and continue
to focus on achieving greater profitability and stronger cash flow. Because we
are operating a declining number of stores, we must improve, and have improved,
individual store operating results in order to achieve bottom-line growth and
stronger cash flow in the aggregate. We remain highly focused on improving our
operating results as a means of supporting our debt reduction and business
growth objectives. The remainder of this Annual Report on Form 10-K expands further upon these
matters, describes our operating strategies and emphasizes the risks inherent
in our company and the industry in which we operate. 3




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Date of Information Unless otherwise expressly stated, all information in Item 1 of this Form 10-K
is as of January 3, 2004. History of the Company The Company was founded as National Vision Associates, Ltd. in 1990, when we
entered into a master license agreement with Wal-Mart Stores, Inc.
(Wal-Mart). As subsequently amended through 1994, the agreement gave us the
right to open 400 vision centers in Wal-Mart stores. We opened the 400th such
store in 2001. In late 1997, we made a strategic decision to diversify our revenue base
through acquisitions in the freestanding optical market. In October 1997, we
acquired Midwest Vision, Inc. with 51 freestanding retail optical centers in
four Midwest states. In July 1998, we acquired Frame-n-Lens Optical, Inc. with
150 freestanding vision centers in California and 120 vision centers located
within Sams Clubs. In October 1998, we acquired New West Eyeworks, Inc. with
175 retail optical centers in 13 states, including approximately 120 vision
centers in freestanding locations and more than 50 host vision centers in Fred
Meyer stores. Following the acquisitions, we changed our name to Vista
Eyecare, Inc. To fund the acquisitions, we issued $125 million of Senior
Subordinated Notes due 2005 bearing interest at 12.75% per annum. Sales shortfalls in the freestanding stores caused adverse pressure on cash
flow and liquidity. After failing to negotiate an out-of-court restructuring
with the holders of our Senior Subordinated Notes, we filed for reorganization
under Chapter 11 on April 5, 2000. During the bankruptcy process, we closed or disposed of all of our freestanding
stores and closed all of our host vision centers operating in Sams Clubs and
in Meijer Thrifty Acres stores. On May 31, 2001, we emerged from bankruptcy as
an optical retailer operating vision centers in host departments, including
Wal-Mart and Fred Meyer locations. Upon emerging from bankruptcy, we changed our name to National Vision, Inc.
(National Vision) and implemented fresh start accounting. As a result, all
assets and liabilities were restated to reflect their respective fair values.
The consolidated financial statements after emergence are those of a new
reporting entity (the Successor) and are not comparable to the financial
statements of the pre-confirmation company (the Predecessor). A black line
has been drawn in the financial statements to distinguish Predecessor and
Successor results. Dependence on Domestic Wal-Mart As of January 3, 2004, we operated 359 vision centers in domestic Wal-Mart
stores, all of which operate pursuant to a master license agreement (see
Managements Discussion and Analysis  Summary of Lease Agreements). These
units generated approximately 89% of our revenue in 2003 and represent the most
profitable division of our host retail operations measured as a percent of
sales. We therefore depend on Wal-Mart and on our agreement with them for our
continued viability unless and until we develop a replacement business. Vision Center Operations Our vision centers typically occupy between 500 and 3,000 square feet,
including areas for merchandise display, customer service, and contact lens
fitting. Each vision center maintains inventory of approximately 950 eyeglass
frames and 500 pairs of contact lenses, along with sunglasses and other optical
accessories. Our two optical laboratories deliver prescription eyewear to all
our vision centers. Approximately 70% of our vision centers have a finishing
laboratory, which allows the vision center to provide one-hour service for most
single vision prescription lenses. These vision centers carry inventory of
approximately 1,000 pairs of spectacle lenses. In 2002, we began selling a managed care insurance product in our Wal-Mart
California vision centers to retail customers who do not otherwise have vision
insurance coverage. 4




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Marketing We are a value provider of optical goods and stress that theme in our
marketing. We offer everyday low prices at our vision centers. National
Vision also has a satisfaction guaranteed customer policy. We are vigilant
about ways to lower our own costs so we may pass savings on to our customers. Managed Vision Care We expect that in the optical industry, retail sales through numerous managed
vision care programs will increase over the next several years as a percentage
of overall retail optical sales. Under managed vision care plans, members
fulfill their eyecare and eyewear needs either at 1) specific locations
designated by the plan sponsor, or 2) at locations outside of the plans
network where the provider can accept assignment of benefits as an
out-of-network provider. We believe our network of vision centers combined
with the convenience of their locations and our ability to offer low prices
should enable us to make competitive bids for managed care contracts and to be
an attractive provider for those plans with out-of-network benefits. Our
declining base of vision centers may adversely affect our ability to compete
for managed care contracts. (See Risk Factors  Our declining base of vision
centers in Wal-Mart stores could make it more difficult for us to compete.)
Managed care sales accounted for approximately 10%, 11% and 12% of our retail
sales in 2001, 2002, and 2003, respectively. Marks Our vision centers in domestic Wal-Mart are identified as the Vision Center
located in Wal-Mart and in Mexico as Opticas Centro de Vision. Our vision
centers on Military bases are identified as National Vision Optical. Three
of our vision centers within Fred Meyer operate as The Optical Shoppe. We
also use the Vista Optical name to identify some of our vision centers
operating in Fred Meyer locations. As part of our agreement to sell the
freestanding vision centers, we obtained a license to continue our use of this
name through January 2004. The licensor of this mark filed for bankruptcy
during 2003. We have expressed an interest in purchasing this trade-name, but
we may, however, lose the right to use this name. We are continuing to use the
Vista Optical name in certain locations while we await a response from the
trustee of the bankruptcy estate. Employees We employ 2,020 associates on a full-time basis and 645 associates on a
part-time basis. We have 2,210 associates engaged in retail sales, 215 in
laboratory and distribution operations, and 240 in management and
administration. Apart from our retail employees in Mexico, none of our
employees are governed by any collective bargaining agreements. We believe
that our employment relations are generally good. Optometrists Optometrists are important to the success of our vision centers. We strive to
have an optometrist on a full-time basis at most of our locations. These
optometrists are typically independent from us and lease a portion of our
locations for vision examinations. We typically charge rent to these
optometrists, in exchange for the premises and the equipment which we provide.
Our agreement with Wal-Mart contemplates that we generally will have an
optometrist on duty at least 48 hours each week. Our relationships with
optometrists are subject to extensive regulation. (See Government Regulation
below.) Manufacturing and Distribution We operate two manufacturing and distribution facilities that supply
substantially all merchandise requirements of our vision centers. The
facilities are located in Lawrenceville, Georgia (this facility also includes
our central administrative offices) and St. Cloud, Minnesota. Our distribution centers provide lens blanks, frames, contact lenses, and
sunglasses to our vision centers. We use an overnight delivery service to ship
completed orders and replenishment items to the vision centers. The
distribution centers and the manufacturing facilities are interfaced with our
management information system. Raw materials consist of frames and lenses
which are readily available from multiple vendors. 5




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Lease Agreements We have agreements governing our operations in host environments, such as
Wal-Mart. Typically, each agreement is for a base term, followed by an option
to renew for a specified length of time. The agreements provide for payments
of minimum and percentage rent, and also contain other customary provisions.
See Managements Discussion and Analysis of Financial Condition and Results of
Operations  Summary of Lease Agreements. Government Regulation Our business is heavily regulated by federal, state, and local law. We must
comply with federal laws such as the Social Security Act (which applies to our
participation in Medicare programs), the Health Insurance Portability and
Accountability Act of 1996 (HIPAA) (which governs our participation in
managed care programs), and the Food and Drug Administration Act (which
regulates medical devices such as contact lenses). We also must comply with
the privacy regulations and the forthcoming security regulations under HIPAA.
In addition, all states have passed laws that govern or affect our arrangements
with the optometrists who practice in our vision centers. Some states, such as
California, Texas, North Carolina, and Kansas, have particularly extensive and
burdensome requirements that affect the way we do business. In California,
optometrists who practice adjacent to our retail locations are providers to and
subtenants of a subsidiary, which is licensed as a single-service HMO. Many states also have adopted laws that mirror the federal laws described
above. Local ordinances (such as zoning requirements) can also impose
significant burdens and costs of compliance. Frequently, our competitors sit
on state and local boards. Our risks and costs of compliance are often
increased as a result. We believe that we substantially comply with material regulations that apply to
our business. Competition The retail eye care industry is extremely competitive. We compete with
national companies such as LensCrafters and Cole; we also compete with numerous
regional and local firms. In addition, optometrists, ophthalmologists, and
opticians provide many of the same goods and services we provide. The level
and intensity of competition can vary dramatically depending on the particular
market. We believe that we have numerous competitive advantages, such as our
everyday low pricing, product selection, and quality and consistency of
service. We also compete for managed care business. Our competition for this business
is principally the larger national and regional optical firms. Competition for
this business is driven by size of provider network, quality and consistency of
service, and by pricing of vision care services. We have one of the largest
networks in the country and believe that the size of the network gives us a
competitive advantage. Our declining base of vision centers may adversely
affect our ability to compete for managed care contracts. (See Risk Factors
 Our declining base of vision centers in Wal-Mart stores could make it more
difficult for us to compete.) Several of our competitors have significantly greater financial resources than
we do. As a result, they may be able to engage in extensive and prolonged
price promotions that may adversely affect our business. They may also be able
to spend more than we do for advertising. Our two largest competitors have
agreed to merge. The merger, if completed, could adversely affect our
business. (See Risk Factors  The retail eyecare industry is extremely
competitive.) 6




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Mexico Operations We operate 37 vision centers in Mexico under a master license agreement with
Wal-Mart. Our operations in Mexico face unique risks, such as currency
devaluations, inflation and difficulties in cross-cultural marketing.
Information relative to sales and long-lived assets for the United States and
Mexico for the years ended January 3, 2004 and December 28, 2002, the seven
months ended December 29, 2001, and the five months ended June 2, 2001, are
summarized in the following tables (amounts in thousands): **United States**
    
        **Mexico**
    
        **Consolidated**Successor Company:Fiscal year 2003Sales during year
    
    $
    238,971
    
    
    $
    4,378
    
    
    $
    243,349Long-lived assets at end of year
    
    $
    106,065
    
    
    $
    833
    
    
    $
    106,898Fiscal year 2002Sales during year
    
    $
    219,171
    
    
    $
    5,026
    
    
    $
    224,197Long-lived assets at end of year
    
    $
    118,177
    
    
    $
    1,204
    
    
    $
    119,381Seven months ended December 29,
            2001Sales during period
    
    $
    119,615
    
    
    $
    2,910
    
    
    $
    122,525Long-lived assets at end of period
    
    $
    131,894
    
    
    $
    1,352
    
    
    $
    133,246Predecessor Company:Five months ended June 2,
            2001Sales during period
    
    $
    108,267
    
    
    $
    2,150
    
    
    $
    110,417Long-lived assets at end of period
    
    $
    140,249
    
    
    $
    1,226
    
    
    $
    141,475
 Available Information The Securities and Exchange Commission (SEC) maintains an internet site that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC. Information about
National Vision, Inc, including our Annual Report on Form 10-K, may be obtained
at that website (www.sec.gov) or by any shareholder (without charge) upon
written request to National Vision, Inc., 296 Grayson Highway, Lawrenceville,
GA 30045, Attn: Investor Relations. In addition, our most recent public
filings with the Securities and Exchange Commission are available on our web
site at www.nationalvision.com. 7




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ITEM 2. PROPERTIES Our 468 vision centers in operation as of January 3, 2004 are located as
follows: Location
    
    Total
    
    Location
    
    TotalAlabama
    
    
    8
    
    
    Nevada
    
    
    5Alaska
    
    
    11
    
    
    New Hampshire
    
    
    3Arizona
    
    
    11
    
    
    New Jersey
    
    
    13California
    
    
    86
    
    
    New Mexico
    
    
    10Colorado
    
    
    8
    
    
    New York
    
    
    24Connecticut
    
    
    10
    
    
    North Carolina
    
    
    53Florida
    
    
    5
    
    
    Oregon
    
    
    30Georgia
    
    
    36
    
    
    Pennsylvania
    
    
    17Hawaii
    
    
    4
    
    
    Puerto Rico
    
    
    1Idaho
    
    
    3
    
    
    South Carolina
    
    
    10Kansas
    
    
    9
    
    
    South Dakota
    
    
    1Kentucky
    
    
    1
    
    
    Tennessee
    
    
    1Louisiana
    
    
    1
    
    
    Texas
    
    
    6Maine
    
    
    1
    
    
    Virginia
    
    
    23Maryland
    
    
    3
    
    
    Washington
    
    
    22Massachusetts
    
    
    5
    
    
    West Virginia
    
    
    7Montana
    
    
    2
    
    
    Wyoming
    
    
    1Mexico
    
    
    37
 Our headquarters in Lawrenceville, Georgia are located in a 66,000 square foot
building that includes a distribution center and optical laboratory. The
building is leased through January 2009. We operate a second distribution center and optical laboratory facility located
in St. Cloud, Minnesota. This 20,000 square foot facility is subject to a
lease that expires in October 2007. 
 ITEM 3. LEGAL PROCEEDINGS Litigation in California On September 3, 2003, the Second Appellate District of the California Court of
Appeal affirmed a prior judgment of the Los Angeles County Superior Court (Case
No. BC 274257) dismissing litigation that had been instituted against us on May
20, 2002 by Consumer Cause, Inc. alleging that our business model in California
failed to comply with applicable legal requirements. The complaint sought
attorney fees and an injunction prohibiting us from continuing the alleged
violations.
The case brought by Consumer Cause, Inc. against us was similar to a case
previously brought by the California Attorney General against one of our
competitors, alleging, among other things, that their business model fails to
comply with applicable legal requirements. (See Risk Factors  We are
subject to state and local regulations of the vision care industry). The
California Supreme Court has depublished the favorable opinion of the Court
of Appeal in the case brought against us by Consumer Cause, Inc. Under
California law, the effect of depublication is to prevent other parties from
citing the case as legal authority. 8




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Chapter 11 Proceedings On November 7, 2003, we resolved the final outstanding claim in our Chapter 11
proceeding. In mid-February 2004, we authorized the trustee to distribute the
remaining Notes to creditors on a pro rata basis. We expect that all remaining
Notes and shares of common stock will be distributed during the second calendar
quarter of 2004. The issuance of these notes and shares could depress
the price for our securities. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the last quarter
of fiscal 2003. 9




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PART II 
 ITEM 5. MARKET FOR REGISTRANTS COMMON STOCK AND RELATED STOCKHOLDER MATTERS Our Common Stock is listed on the American Stock Exchange under the symbol
NVI. The following table sets forth for the periods indicated the high and
low prices of our Common Stock. **High**
    
        **Low**Fiscal 2002
    
    March 30, 2002
    
    $
    1.44
    
    
    $
    0.65June 29, 2002
    
    $
    1.18
    
    
    $
    0.65September 28, 2002
    
    $
    1.20
    
    
    $
    0.70December 28, 2002
    
    $
    0.75
    
    
    $
    0.25Fiscal 2003
    
    March 29, 2003
    
    $
    0.47
    
    
    $
    0.32June 28, 2003
    
    $
    0.69
    
    
    $
    0.25September 27, 2003
    
    $
    0.90
    
    
    $
    0.55January 3, 2004
    
    $
    2.75
    
    
    $
    0.67
 As of March 1, 2004, there were approximately 371 holders of record of our
Common Stock. We have never paid dividends on our common stock. In addition, each of our
indenture and our credit facility prohibits us from paying cash dividends. 10




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ITEM 6. SELECTED FINANCIAL DATA The following selected financial data is derived from the Consolidated
Financial Statements of the Successor for the years ended January 3, 2004
(2003) and December 28, 2002, (2002) and the seven months ended December
29, 2001, and from the Consolidated Financial Statements of the Predecessor for
the five months ended June 2, 2001 and the years ended December 30, 2000
(2000) and January 1, 2000 (1999) (dollars in thousands): Successor


        
        PredecessorSeven months


        
        Five monthsended


        
        endedDecember 29,


        
        June 2,2003
        
        2002
        
        2001


        
        2001(B)
        
        2000
        
        1999Total net revenue
        
        $
        243,349
        
        
        $
        224,197
        
        
        $
        122,525
        


        
        $
        110,417
        
        
        $
        283,423
        
        
        $
        304,115Gross profit
        
        $
        132,442
        
        
        $
        123,498
        
        
        $
        67,688
        


        
        $
        58,124
        
        
        $
        151,673
        
        
        $
        167,817Gross profit percentage
        
        
        54.4
        %
        
        
        55.1
        %
        
        
        55.2
        %


        
        
        52.6
        %
        
        
        53.5
        %
        
        
        55.2
        %Interest expense
        
        $
        12,913
        
        
        $
        14,099
        
        
        $
        8,459
        


        
        $
        1,154
        
        
        $
        7,783
        
        
        $
        19,391Operating income
            (loss) from continuing operations (A)
        
        $
        7,695
        
        
        $
        4,047
        
        
        $
        1,498
        


        
        $
        (6,129
        )
        
        $
        (9,944
        )
        
        $
        (2,081
        )Income (loss) from
            discontinued operations (A)
        
        $
        (259
        )
        
        $
        1,812
        
        
        $
        1,031
        


        
        $
        905
        
        
        $
        3,531
        
        
        $
        4,254Net earnings (loss)
        
        $
        (3,868
        )
        
        $
        (6,204
        )
        
        $
        (5,860
        )


        
        $
        113,323
        
        
        $
        (139,880
        )
        
        $
        (17,562
        )BALANCE SHEET DATA:Total assets
        
        $
        140,297
        
        
        $
        153,801
        
        
        $
        171,217
        


        
        $
        186,688
        
        
        $
        90,888
        
        
        $
        220,219Current and long-term
            debt obligations
        
        $
        95,484
        
        
        $
        109,706
        
        
        $
        120,000
        


        
        $
        123,000
        
        
        $
        183,735
        
        
        $
        151,902Shareholders
            equity (deficit)
        
        $
        8,870
        
        
        $
        12,829
        
        
        $
        19,274
        


        
        $
        25,000
        
        
        $
        (113,323
        )
        
        $
        26,557STATISTICAL DATA:Domestic vision
            centers open at end of period
            Leased department vision centers
        
        
        431
        
        
        
        481
        
        
        
        479
        


        
        
        473
        
        
        
        472
        
        
        
        577Freestanding vision
            centers
        
        
        
        
        
        
        
        
        
        
        
        


        
        
        
        
        
        
        226
        
        
        
        322Capital expenditures
        
        $
        4,517
        
        
        $
        5,209
        
        
        $
        2,750
        


        
        $
        2,084
        
        
        $
        5,379
        
        
        $
        12,704Depreciation and
            amortization
        
        $
        15,962
        
        
        $
        18,999
        
        
        $
        11,425
        


        
        $
        4,808
        
        
        $
        17,526
        
        
        $
        18,602
 Fiscal 2003 included 53 weeks, whereas each of the other full years presented
herein represents a 52-week fiscal year.  (A)
    
    At the beginning of 2002, we adopted Financial Accounting Standard No.
144, Accounting for the Impairment or Disposal of Long Lived Assets
(FAS No. 144) which includes a requirement that discontinued operations
be evaluated at the lowest levels to which cash flow is attributed. We
prepare separate internal financial statements for each store we operate;
we have determined to present principally all closed stores within
Discontinued Operations. During 2003, there were 54 such locations.
Individual locations that were closed or disposed of prior to the adoption
of FAS No. 144, such as the freestanding and Sams Club locations, did not
qualify for Discontinued Operations presentation and are included within
results from Continuing Operations of the Predecessor.(B)
    
    We emerged from Chapter 11 on May 31, 2001 and implemented fresh start
accounting as of June 2, 2001. Results of operations for the 3-day period
from May 31, 2001 through June 2, 2001 were not material. In accordance
with fresh start accounting, all assets and liabilities were restated to
reflect their respective fair values. The consolidated financial
statements after that date are those of a new reporting entity and are not
comparable to the pre-confirmation periods. 11




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##### Table of Contents



ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS Overview of Results Our primary source of revenue is from retail sales of eyeglasses, contact
lenses and other optical merchandise in the vision centers we operate within
host environments and on military bases. In 2002 we also began selling vision
examination insurance in our California stores. In 2003, we began
manufacturing eyeglasses for a fifteen-store independent optical chain. Fiscal 2003 was the first year in which we closed a significant number of
domestic vision centers as we reached the end of their contractual option
period. We had opened our 400th domestic Wal-Mart store in 2001 and still
operated 399 of these at the end of 2002. During 2003, forty of these leases
expired and we operated 359 vision centers within domestic Wal-Mart locations
at January 3, 2004. During 2004, we expect to close an additional 58 stores, including thirteen
stores whose leases were not scheduled to expire, but which we requested to
close because of poor operating results and prospects. In 2003, we began to narrow our strategies for coping with the gradual closing
of stores. We settled on three dominant strategies:  
    
    First, we focused on optimizing the profitability of our
existing stores to help maximize the time available to develop new,
sustainable growth vehicles.
    
    Next, we reviewed and tested growth opportunities within optics.
    
    Finally, we have identified and will begin testing non-optics opportunities inside Wal-Mart. We made significant changes in our existing optical business in 2003. These
changes began to benefit our financial results by late in the third quarter of
2003, and we expect that they will benefit future periods as well. The
financial impact of these changes is discussed in further detail in the
following sections. In addition to the operational changes, we also tested two concepts within the
optics category in 2003: 1) operating optical kiosks within a mall environment
and 2) selling disposable hearing aids and hearing exams within existing vision
centers. Neither of these concepts was sufficiently successful to justify
continued investment, and both tests were stopped by the end of the year. The
financial impact of these two tests was not significant to us. 12




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##### Table of Contents



Results of Operations Our results of operations in any period are significantly affected by the
number and mix of vision centers operating during such period. At January 3,
2004, we operated 468 vision centers, versus 518 vision centers at December 28,
2002 and 514 vision centers at December 29, 2001. The following table sets
forth information about the number and type of vision centers we owned and
operated as of the end of fiscal 2003, 2002 and 2001, respectively. **January 3, 2004**
        
        **December 28, 2002**
        
        **December 29, 2001**Wal-Mart:Domestic
        
        
        359
        
        
        
        399
        
        
        
        400Mexico
        
        
        37
        
        
        
        37
        
        
        
        35Fred Meyer
        
        
        47
        
        
        
        58
        
        
        
        55Military
        
        
        25
        
        
        
        24
        
        
        
        24Total
        
        
        468
        
        
        
        518
        
        
        
        514Vision centers currently
            reported in continuing operations
        
        
        468
        
        
        
        464
        
        
        
        460
 13




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##### Table of Contents



National Vision, Inc.
Consolidated Statements of Operations
For the years ended January 3, 2004, December 28, 2002,
and December 29, 2001
(In thousands) **Year Ended**
        
        **Year Ended**
        
        **Year Ended****January 3, 2004**
        
        **December 28, 2002**
        
        **December 29, 2001****(53 Weeks)**
        
        **(52 Weeks)**
        
        **(52 Weeks)**Retail sales, net
        
        $
        236,125
        
        
        $
        222,156
        
        
        $
        232,942Premium revenue
        
        
        6,347
        
        
        
        2,041
        
        
        
        Other revenue
        
        
        877
        
        
        
        
        
        
        
        Total net revenue
        
        
        243,349
        
        
        
        224,197
        
        
        
        232,942Cost of goods sold
        
        
        110,907
        
        
        
        100,699
        
        
        
        107,130Gross profit
        
        
        132,442
        
        
        
        123,498
        
        
        
        125,812Operating expenses:Selling, general
            & administrative expense
        
        
        123,713
        
        
        
        119,451
        
        
        
        130,443Impairment of long-lived
            assets
        
        
        550
        
        
        
        
        
        
        
        Restructuring expense
        
        
        484
        
        
        
        
        
        
        
        Total operating expense
        
        
        124,747
        
        
        
        119,451
        
        
        
        130,443Operating income
            (loss)
        
        
        7,695
        
        
        
        4,047
        
        
        
        (4,631
        )Other expense, net:Interest expense
        
        
        (12,913
        )
        
        
        (14,099
        )
        
        
        (9,613
        )Gain on repurchase
            of Notes
        
        
        2,321
        
        
        
        1,566
        
        
        
        Other income, net
        
        
        50
        
        
        
        470
        
        
        
        74Loss before reorganization
            items, taxes, discontinued operations and cumulative effect of a change
            in accounting principle
        
        
        (2,847
        )
        
        
        (8,016
        )
        
        
        (14,170
        )Reorganization gain
        
        
        
        
        
        
        
        
        
        
        102,515Gain on restructuring
            of debt
        
        
        
        
        
        
        
        
        
        
        17,182Earnings (loss) before
            taxes, discontinued operations and cumulative effect of a change in
            accounting principle
        
        
        (2,847
        )
        
        
        (8,016
        )
        
        
        105,527Income tax expense
        
        
        (198
        )
        
        
        
        
        
        
        Net earnings (loss) before
            discontinued operations and cumulative effect of a change in accounting
            principle
        
        
        (3,045
        )
        
        
        (8,016
        )
        
        
        105,527Discontinued Operations:Operating income
            (loss) from discontinued operations
        
        
        (200
        )
        
        
        1,862
        
        
        
        1,936Loss on disposal
        
        
        (59
        )
        
        
        (50
        )
        
        
        Income (loss) from
            discontinued operations
        
        
        (259
        )
        
        
        1,812
        
        
        
        1,936Earnings (loss) before
            cumulative effect of a change in accounting principle
        
        
        (3,304
        )
        
        
        (6,204
        )
        
        
        107,463Cumulative effect
            of a change in accounting principle
        
        
        (564
        )
        
        
        
        
        
        
        Net earnings (loss)
        
        $
        (3,868
        )
        
        $
        (6,204
        )
        
        $
        107,463
 We emerged from Chapter 11 on May 31, 2001 and implemented fresh start accounting as of June 2, 2001. Results of operations for the 3-day period from May
31, 2001 through June 2, 2001 were not material. In accordance with fresh start accounting, all assets and liabilities were restated to reflect their
respective fair values. The consolidated financial statements after that date are those of a new reporting entity and are not comparable to the periods prior
to emergence. However, for purposes of this discussion, the Successor results for the seven months ended December 29, 2001 have been combined with the
Predecessor results of five months ended June 2, 2001. Differences resulting from fresh start accounting are explained when necessary. 14




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##### Table of Contents



Continuing Operations Total Net Revenue.Total net revenue is comprised of retail sales, premium
revenues and other revenues. In 2003, total domestic comparable store sales
were up 5.0% over the prior year. Domestic comparable store sales for 2003
were calculated using the first 52 weeks of 2003 compared to fiscal 2002 which
was a 52-week year. This calculation only includes vision centers that were
open for all of fiscal 2002 and 2003. The following reconciliation shows the
components of the change in retail sales (amounts in thousands): 2003
    
    2002vs. 2002
    
    vs. 20012003
    
    2002
    
    2001
    
    % Change
    
    % ChangeDomestic  first 52 weeks (a)
    
    $
    227,467
    
    
    $
    216,699
    
    
    $
    209,385
    
    
    
    5.0
    %
    
    
    3.5
    %Domestic  53rd week (a)
    
    
    3,075Domestic   other (b)
    
    
    1,205
    
    
    
    431
    
    
    
    281
    
    
    
    179.6
    %
    
    
    53.5
    %Mexico (c)
    
    
    4,378
    
    
    
    5,026
    
    
    
    5,060
    
    
    
    -12.9
    %
    
    
    -0.7
    %Stores disposed of during reorganization
    
    
    
    
    
    
    
    
    
    
    18,216
    
    
    
    
    
    
    
    -100.0
    %Total retail sales, net
    
    $
    236,125
    
    
    $
    222,156
    
    
    $
    232,942
    
    
    
    6.3
    %
    
    
    -4.6
    %
  (a)
    
    We operate on a 52/53 week fiscal year. As a result, fiscal 2003
contained 53 weeks whereas 2002 and 2001 each contained 52 weeks. Sales
for the 53rd week has been shown separately to reflect more comparable
results. In addition, this category includes locations that were open
for all of 2002 and 2003 and are included in the domestic comparable
store sales calculation.(b)
    
    This category includes individual store locations that were not open
for all of 2002 and 2003, and, therefore, were not part of the domestic
comparable store sales calculation.(c)
    
    Our Mexico operations are consolidated using the 12 calendar months
ended November 30th each year. During 2003 we made several changes to help drive domestic sales. Although it
is difficult to quantify the result of each of these activities, we believe
that the following factors had the most significant impact on our retail
domestic comparable store sales increase of $10.8 million or 5% over 2002:  1.
    
    We implemented significant merchandising changes in every major
category (frames, spectacle lenses and contact lenses) to modernize our
collection and simplify the presentation for the customer. The most
significant category changes are as follows:  a.
    
    In the first quarter of 2003, we updated our frame collection
to modernize and simplify our presentation. As part of this process,
we substantially reduced the number of frame vendors, consolidated
price points, and enhanced the presentation of frames to make them
more brand focused for the customer, and easier to manage for our
associates.b.
    
    During the first half of 2003, we aligned our contact lens
selection with the products most frequently prescribed by our
independent doctors. This favorably impacted our 2003 contact lens
sales, which are up approximately 9% over 2002 and approximately 15%
over 2001.c.
    
    We also updated our accessory collection to complement our
spectacle offering, increasing 2003 accessory sales by approximately
19% over 2002.  2.
    
    We restructured our personnel scheduling at the store-level to
provide for consistent coverage based on operating needs by sales volume
levels3.
    
    We amended our incentive programs to increase potential participation
by, and therefore the productivity of, our associates. 15




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##### Table of Contents



Our 2002 domestic comparable store sales increase of approximately $7.3 million
over 2001 was largely the result of a change in our frame and lens
presentation. Historically, our in-store presentation of frame and lens
options was based on a package price concept. The package price included a
pair of base lenses, a frame and certain lens options. In July 2002, we
changed our presentation strategy by unbundling the package price so that
pricing for frames and lenses is presented separately in the store. The
presentation is intended to be clearer as well as more concise and
customer-friendly, and is similar to product and price presentation at a
majority of our competitors stores. After an initial orientation phase, we
experienced increases in the number of spectacle units sold and in the average
spectacle transaction value. Managed care sales accounted for approximately 10%, 11% and 12% of our sales in
2001, 2002 and 2003, respectively. We work with large and small managed care
payors to provide vision benefits to their members. We expect that retail
optical sales through managed vision care programs will increase over the next
several years as a percentage of overall retail optical sales. (See Risk
Factors  Our declining base of vision centers in Wal-Mart stores could make
it more difficult for us to compete.) As such, changes in the managed vision
care industry are likely to impact our sales. Effective October 1, 2003, a
large national managed care payor changed its policy regarding out-of-network
providers. These changes limited our ability to verify benefit coverage and to
accept assignment of the payors benefits on behalf of our customer. Prior to
October 2003, we were generating sales of approximately $3.7 million on an
annualized basis as a result of being an out-of-network provider for this
payor. The net impact of this change has been a substantial reduction in sales
as an out-of-network provider for this payor. We are working aggressively to
mitigate the decreases in lost sales. We have attempted to discuss these
matters with the payor, but do not believe that the payor intends to change its
new policy. We are evaluating alternatives but can provide no assurance that
they will be successful or that we will again be able to participate as an
out-of-network provider for this payor. We will continue to work toward adding
third party plans and payors as part of our ongoing managed care growth
strategy. In May 2003, we began offering a twelve month extended warranty plan in our
Wal-Mart vision centers to provide for repair and replacement service during
the first year after purchase. Revenue recognized in 2003 was approximately
$2.0 million. By the fourth quarter of 2003, approximately 45% of our eyeglass
transactions included an extended warranty purchase. We expect these increased
warranty sales to continue into 2004. This revenue is reflected within Retail
sales, net in our Consolidated Statements of Operations. The 2003 increase of $4.3 million in premium revenue can be largely attributed
to increased enrollments in our California health maintenance organization.
The HMO had 150,000 enrollees (or participants) at the end of 2003 compared to
48,000 at the end of 2002. We began selling this managed care insurance
product in the Wal-Mart California vision centers in the second quarter of
2002. Revenue from premiums is recognized over the life of the policy as the
related services are rendered. In 2003, we began manufacturing eyeglasses for an independent chain of fifteen
vision centers. Total revenue from this activity was $877,000 during the year. 16




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##### Table of Contents



Gross Profit.The components of sales and gross profit are detailed below
(dollars in thousands): **Year ended**
        
        **Year ended**
        
        **Year ended****January 3, 2004**
        
        **December 28, 2002**
        
        **December 29, 2001****(53 weeks)**
        
        **(52 weeks)**
        
        **(52 weeks)**Retail sales, net
        
        $
        236,125
        
        
        
        100.0
        %
        
        $
        222,156
        
        
        
        100.0
        %
        
        $
        232,942
        
        
        
        100.0
        %Retail cost of goods
            sold
        
        
        104,572
        
        
        
        44.3
        %
        
        
        98,872
        
        
        
        44.5
        %
        
        
        107,130
        
        
        
        46.0
        %Retail gross profit
        
        $
        131,553
        
        
        
        55.7
        %
        
        $
        123,284
        
        
        
        55.5
        %
        
        $
        125,812
        
        
        
        54.0
        %Premium revenue
        
        $
        6,347
        
        
        
        100.0
        %
        
        $
        2,041
        
        
        
        100.0
        %Claims expense
        
        
        5,994
        
        
        
        94.4
        %
        
        
        1,827
        
        
        
        89.5
        %Insurance gross profit
        
        $
        353
        
        
        
        5.6
        %
        
        $
        214
        
        
        
        10.5
        %Other revenue
        
        $
        877
        
        
        
        100.0
        %Other cost of sales
        
        
        341
        
        
        
        38.9
        %Other gross profit
        
        $
        536
        
        
        
        61.1
        %Total net revenue
        
        $
        243,349
        
        
        
        100.0
        %
        
        $
        224,197
        
        
        
        100.0
        %
        
        $
        232,942
        
        
        
        100.0
        %Total cost of goods
            sold
        
        
        110,907
        
        
        
        45.6
        %
        
        
        100,699
        
        
        
        44.9
        %
        
        
        107,130
        
        
        
        46.0
        %Total gross profit
        
        $
        132,442
        
        
        
        54.4
        %
        
        $
        123,498
        
        
        
        55.1
        %
        
        $
        125,812
        
        
        
        54.0
        %
 We attribute the 2003 increase in retail gross profit dollars primarily to
sales increases arising out of merchandising changes made beginning in mid-2002
and continuing throughout 2003. We have also established a process for
updating our selections on a more regular basis. Eyeglass sales are more than
70% of our retail sales. Therefore, changes in frames and lenses have the
greatest impact on our business. The 2002 improvement in gross profit margin percentage and a portion of the
2003 improvement are primarily the result of a shift in sales mix towards
eyeglasses, coupled with an increase in eyeglass margins due to the Companys
unbundling of frame and lens pricing. In the second half of 2003, we began
testing different lens offerings to improve eyeglass profit margins and
simplify customer presentation. We have substantially completed our lens test
as it relates to single vision lenses, but expect this process to continue for
multifocal lenses throughout 2004. We have begun to see slight improvements in
eyeglass margins as a result of the change in lens offering in the fourth
quarter of 2003 and expect this to continue. These improvements in 2003 and 2002 retail gross profit margins were somewhat
reduced by increases in rent as the number of Wal-Mart locations entering the
option period of their lease increased in relation to the total number of
vision centers. In 2003, we recorded an effective rent of approximately 14% on
revenues from our Wal-Mart locations. Because of minimum rent increases during
the option period, we need to increase comparable store sales in order to keep
our rent percentage at these levels. Any decrease in sales would have a
negative impact on occupancy expense as a percent of sales. Approximately 124
and 126 vision centers were operating within their option period at January 3,
2004 and December 28, 2002, respectively. The 2002 decrease in gross profit
dollars is the result of the disposal of the freestanding vision centers in
April 2001. Insurance gross profit represents premium revenue less claims expenses for a
managed care product that we began selling in the Wal-Mart California vision
centers in the second quarter of 2002. This insurance product has
significantly lower margins than do our retail products. The introduction of
this product increased total 2003 revenues by $4.3 million over 2002 and gross
profit dollars by $139,000, but decreased total gross profit as a percent of
net sales by 0.8 percentage points. 17




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##### Table of Contents



Selling, General and Administrative Expense (SG&A expense).Selling, general
and administrative expense includes both store operating expenses and home
office overhead costs and is shown below. **2003**
        
        **2002**
        
        **2001**Selling, general
            and administrative expense
        
        $
        123,713
        
        
        $
        119,451
        
        
        $
        130,443As a percent of total
            net revenue
        
        
        50.8
        %
        
        
        53.3
        %
        
        
        56.0
        %
 Sales increases in 2003 resulted in a reduction of SG & A expense as a percent
of sales. 2002 expenses are not directly comparable to 2001 expenses because
of the freestanding stores that were disposed of during the first four months
of 2001. As a result, comparisons to 2001 are not meaningful. Significant
factors influencing changes in expenses in 2003 are discussed below. The following factors influenced vision center payroll and field supervision
costs. These costs comprise approximately 56% of our selling, general and
administrative expense:  
    
    An increase in retail-level compensation of approximately $2.0
million for 2003. This includes store payroll costs and
supervision-level costs. Substantially all of the increase in base
payroll is due to higher rates in certain markets, where availability of
dispensing opticians and growing competition resulted in upward pressure
on rates for optical personnel. Also in 2003, we restructured payroll
scheduling, to provide consistent coverage based on operating need by
volume levels. This change did not have a significant impact on the
hours of coverage.
    
    An increase in store level incentive costs of $1.2 million in 2003
due to a change in incentive structure in 2003, combined with improved
performance.
    
    An increase in health and medical benefit costs of approximately
$800,000 in 2003. The following factors influenced other expenses included within the selling,
general and administrative expense category:  
    
    Workers compensation expense, which increased approximately $800,000
in 2003. This increase was due to adverse development of claims from
previous years, particularly in California.
    
    An increase in professional fees of approximately $600,000 in 2003, a
portion of which was incurred as a result of the re-audit of the
2001 financial statements and the completion of the 2002 financial
statements.
    
    Additionally, during 2003, we realized a reduction in depreciation
and amortization expense of approximately $3.0 million largely due to
leasehold improvements and equipment at some stores becoming fully
depreciated. We expect this decline in depreciation expense to
continue, but to a lesser degree. Restructuring Expense.During August 2003, we initiated and completed a
restructuring of the retail field and home office retail support center. The
process resulted in a reduction in headcount approximating 15% of both the
retail field management organization and the home office retail support center
organization. The cost of the restructuring process was $484,000, which
included separation costs and outplacement costs. The annual payroll and
related costs represented by the reduction in force was approximately $1.9
million. We cannot guarantee the savings from this reduction in force will
reduce our payroll and related costs in subsequent years or that it will reduce
such expense by the same or similar amounts in subsequent years. 18




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##### Table of Contents



Impairment of Long Lived
Assets. Historically, we have operated our vision centers to the
maximum term of the lease, including the exercise of all available
renewal options in most cases. Our strategy was to maintain store
operations, even if the store was under-performing and devote our
attention to correcting the stores problems. In the fourth quarter
of 2003, we revised our strategy to assess under-performing stores
prior to the lease termination date, and potentially close the
under-performing stores in order to maximize operating profitability.
As a result, we identified certain store locations with a history of
operating losses that we do not expect to become profitable without
significant cost and effort. We intend to close 13 of these locations
in March and April of 2004. Closing these vision centers prior to the
end of their lease term (or option period) allows us to focus greater
attention on maximizing profits from more promising locations and
developing a new business model. For the 13 locations that we
expect to close prior to the lease termination date, we reviewed the
locations for potential impairment by comparing the future expected
undiscounted cash flows for these locations to the carrying value of
their long-lived assets. The long-lived asset carrying value for 12
of the locations exceeded the future expected undiscounted cash flows
from the locations. Therefore, impairment was determined to exist for
these 12 locations. We also reviewed the remainder of store locations
for potential impairment and identified 30 additional vision centers
in Wal-Mart, Wal-Mart de Mexico, Fred Meyer and on military
bases which were determined to be impaired given that the expected
future undiscounted cash flows from these locations are less than the
carrying value of their assets. As a result, we have recorded a
non-cash impairment charge of $550,000 to write-down these long-lived
assets to their fair market value. Fair market value was determined
using the expected discounted cash flows for each location. This
impairment was reflected for leasehold improvements, furniture,
fixtures and equipment at these 42 locations. Interest Expense.The outstanding balance of our long-term Senior Subordinated
Notes is the primary driver of interest expense. Interest expense decreased by
approximately $1.2 million in 2003 compared to 2002 due to principal repayments
and Note repurchases made during 2002 and 2003. During the first five months
of 2001, when we were under the protection of the bankruptcy court, we did not
accrue interest expense on our former Senior Subordinated Notes outstanding of
$125 million. When we emerged from bankruptcy on May 31, 2001, we restructured
our debt and began accruing interest at 12% on our $120 million of newly issued
Senior Subordinated Notes. The table below rolls forward our long-term
outstanding debt balances for 2003, 2002 and 2001 and the principal repayments
and Note repurchases made each year (in thousands): **2003**
        
        **2002**
        
        **2001**Senior subordinated
            notes outstanding at beginning of year
        
        $
        109,706
        
        
        $
        120,000
        
        
        $
        125,000Mandatory redemptions,
            at par
        
        
        (8,161
        )
        
        
        (5,796
        )Repurchases at discounted
            prices
        
        
        (6,023
        )
        
        
        (4,498
        )Retirement of unissued
            Notes
        
        
        (38
        )
        
        
        Senior subordinated
            notes outstanding at end of year
        
        $
        95,484
        
        
        $
        109,706
        
        
        $
        120,000Weighted average
            balance outstanding for the year
        
        $
        104,366
        
        
        $
        115,526
 The outstanding Senior Note balance at December 29, 2001 is not comparable to Senior Notes outstanding
at the beginning of 2001. The outstanding notes at the beginning of 2001 were issued by the Predecessor
and were not accruing interest due to our Chapter 11 proceedings. The weighted average balance
outstanding for 2001 is not meaningful. Gain on Repurchase of Notes.During 2003 and 2002, we repurchased our Senior
Subordinated Notes and recorded gains from those repurchases as shown below: **2003**
        
        **2002**Face value repurchased
        
        $
        6,023
        
        
        $
        4,498Purchase price
        
        
        3,702
        
        
        
        2,932Gain on repurchase
            of Notes
        
        $
        2,321
        
        
        $
        1,566
 19




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##### Table of Contents



Discontinued Operations.During 2003, 42 of our vision center leases expired,
resulting in the closure of 40 Wal-Mart vision centers and 2 vision centers on
military bases. In addition, during the second and third quarter of 2003, we
closed 12 under-performing vision centers in Fred Meyer locations prior to
their scheduled lease expiration. Condensed information for these 54 closed
stores is presented below. The net loss on disposal of these operations
includes severance and closing costs and gains from the sale of certain assets.
Operating results for these closed vision centers have been presented
separately as discontinued operations for all periods in the Consolidated
Statements of Operations. **Years Ended****January 3, 2004**
        
        **December 28, 2002**
        
        **December 29, 2001**(53 weeks)
        
        (52 weeks)
        
        (52 weeks)Total net sales
        
        $
        9,798
        
        
        $
        22,823
        
        
        $
        23,158Operating income
            (loss)
        
        $
        (200
        )
        
        $
        1,862
        
        
        $
        1,936Loss on disposal
        
        $
        (59
        )
        
        $
        (50
        )
        
        $
        
 Cumulative Effect of a Change in Accounting Principle.We adopted Emerging
Issues Task Force Issue No. 02  16, Accounting by a Customer for Certain
Consideration Received from a Vendor (EITF 02-16) at the beginning of 2003.
This Issue addresses the method by which retailers account for vendor
allowances. Prior to fiscal 2003, we received vendor allowances through co-op
advertising agreements, which were classified in the income statement as a
reduction of advertising expense. As a result of the adoption of EITF 02-16,
certain vendor allowances, which formerly were treated as a reduction in
advertising costs, are presented as a reduction of inventory cost and
subsequently as a component of cost of goods sold. On the first day of fiscal
2003, we recorded additional expense of $564,000 as the cumulative effect for
this change in accounting principle. This amount reflects the portion of
vendor allowances that would have reduced inventory costs had this new
accounting pronouncement been in effect at the end of 2002. 20




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##### Table of Contents



Use of Non-GAAP Financial Measures: EBITDA We frequently refer to EBITDA in this document. EBITDA is calculated as net
earnings before interest, taxes, depreciation, amortization, cumulative effect
of a change in accounting principle, non-cash items, and reorganization items
as defined in the terms of our Senior Subordinated Debt Indenture. We refer to
EBITDA because:  
    
    it is the basis for the calculation of the excess cash flow
principal repayment under our Senior Subordinated Notes; and
    
    it is a widely accepted financial indicator of a companys ability
to service or incur indebtedness. EBITDA does not represent cash flow from operations as defined by generally
accepted accounting principles, is not necessarily indicative of cash available
to fund all cash flow needs, should not be considered an alternative to net
income or to cash flow from operations (as determined in accordance with GAAP)
and should not be considered an indication of our operating performance or as a
measure of liquidity. EBITDA is not necessarily comparable to similarly titled
measures for other companies. The following is a reconciliation of net earnings to EBITDA (amounts in
thousands): 2003
    
    2002
    
    2001Net earnings (loss)
    
    $
    (3,868
    )
    
    $
    (6,204
    )
    
    $
    107,463Adjustments:Interest expense
    
    
    12,913
    
    
    
    14,099
    
    
    
    9,613Interest income
    
    
    (50
    )
    
    
    (147
    )
    
    
    (74
    )Income tax expense
    
    
    198
    
    
    
    
    
    
    
    Depreciation and amortization
    
    
    15,962
    
    
    
    18,999
    
    
    
    16,233Cumulative effect of a change in
accounting principle
    
    
    564
    
    
    
    
    
    
    
    Non-cash items (a)
    
    
    (1,771
    )
    
    
    (1,889
    )
    
    
    (17,182
    )Reorganization expense (gain)
    
    
    
    
    
    
    
    
    
    
    (102,515
    )EBITDA
    
    $
    23,948
    
    
    $
    24,858
    
    
    $
    13,538
   (a)
    
    These items consist of the gains on
repurchase of Notes, the impairment of long-lived assets, the gain on
recovery of assets previously written off and the
Predecessor gain on extinguishment of debt. SUMMARY OF LEASE AGREEMENTS We have agreements governing our operations in host environments. Typically,
each agreement is for a base term, followed by an option to renew for a
specified length of time. The agreements provide for payments of base and/or
percentage rent, and also contain other customary leasing provisions. The
table below sets forth key data about each of these agreements: No. of OptionsVision Centers
    
    No. of Units as of
    
    Length of Base
    
    Length of Option
    
    Exercisable inLocated In
    
    January 3, 2004
    
    Term (in years)
    
    Term (in years)
    
    Fiscal 2004Wal-Mart:Domestic
    
    
    359
    
    
    
    9
    
    
    
    3
    
    
    
    57Mexico
    
    
    37
    
    
    
    5
    
    
    2 or 1
    
    
    
    11Fred Meyer
    
    
    47
    
    
    
    3
    
    
    
    
    
    
    
    U.S. Military Bases
    
    
    25
    
    
    2 or 5
    
    
    
    
    
    
    
    3
 21




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##### Table of Contents



Domestic Wal-Mart Vision Centers Our agreement with Wal-Mart gave us the right to open 400 vision centers, the
last of which opened in 2001. Our agreement with Wal-Mart also provides that,
if Wal-Mart relocates our vision center for any reason, including converting
its own store to a supercenter (a store which contains a grocery department in
addition to the traditional Wal-Mart store offering) the term of our lease
begins again. During 2003, 18 locations were relocated, effectively renewing
these leases. For these 18 relocations, an average of 117 months were added to
the lease term assuming all available options are exercised. We expect
approximately 15 to 20 leases to relocate to supercenters in 2004. We expect
the 2004 relocations to add an average of approximately 117 months to each
relocated vision centers maximum lease term. As of January 3, 2004, we have
158 vision centers located in Wal-Mart supercenters. We believe that Wal-Mart
may in the future convert many of its stores and thereby cause many of our
leases to start again. The number of lease expirations indicated could
decrease if there are future supercenter conversions. We have received no
assurances from Wal-Mart as to how many of their locations will ultimately be
converted. On a frequent basis, we monitor the number of vision centers along with total
lease months remaining under the Wal-Mart Master License Agreement. Our
measurement of lease months assumes that we exercise all available renewal
options, exclusive of known and expected non-renewals, and that supercenter
conversions currently scheduled will trigger new vision center leases. The
remaining lease months may be affected by the conversion of the host store to a
supercenter.
Additionally, the remaining lease months may be affected by our decisions
regarding exercise of lease renewal options. Lease months shown reflect: 1) expected vision center relocations, whether
confirmed or unconfirmed, 2) the expected closure of locations prior to the end
of their lease term, and 3) any lease options that are not expected to be
exercised. The following table lists our remaining lease months under our
Wal-Mart agreement as of the respective fiscal months. As of the end of fiscal month
    
    Lease months remainingJanuary 2003
    
    
    24,867February 2003
    
    
    24,479March 2003
    
    
    24,094April 2003
    
    
    23,710May 2003
    
    
    23,440June 2003
    
    
    25,164July 2003
    
    
    24,784August 2003
    
    
    24,267September 2003
    
    
    24,008October 2003
    
    
    23,746November 2003
    
    
    23,377December 2003
    
    
    22,605January 2004
    
    
    20,964February 2004
    
    
    20,735
 We view remaining lease months as a proxy for the remaining cash flow
associated with the operations of our existing vision centers under our
agreement with Wal-Mart. We recognize, however, that there is no necessary
connection between remaining lease months and expected cash flow and that our
declining base of vision centers could make it more difficult for us to
maintain current levels of cash flow recorded by our existing vision centers
(see Risk Factors- Our declining base of vision centers in Wal-Mart stores
could make it more difficult for us to compete). In 2004, 58 leases are expected to close over the course of the year, 18 in the
first quarter, 13 in the second quarter, 17 in the third quarter, and 10 in the
fourth quarter. These stores represent annualized sales of approximately $30.6
million and annualized store-level operating income of approximately $4.0
million. Of the 58 Wal-Mart leases expected to close in 2004, we have elected
to close 13 locations prior to the end of their term due to store level
operating losses. Store-level operating income excludes corporate overhead and
other costs not specifically attributable to individual stores. The 13 leases
had an average of 68 months remaining, assuming all options were exercised. As of March 1, 2004, we have closed 10 Wal-Mart vision centers in fiscal 2004.
We have experienced sales declines of approximately 25% in the final month of
operations for stores that are closing. We also have incurred store closing
costs, including severance, that has averaged between $4,000 and $10,000 per
vision center. As of January 3, 2004, we had 124 vision centers that were operating in the
three-year extension period of the Wal-Mart lease. We exercised our option to
renew the leases for the three year extension period for 48 Wal-Mart vision
centers in 2003. The base term for 57 vision centers expires in 2004, and we
will need to determine which leases to extend. At this time, we have elected
to close 8 of these locations at the end of the original nine-year lease. We
expect to exercise the option for many of our leases. These decisions will be
based on various factors, including sales levels, anticipated future
profitability, increased minimum rental fees in the option period, and market
share. 22




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##### Table of Contents



Other Operations In July 2003, we amended our agreement with Fred Meyer. Our new agreement
provides an extension of the original lease term from December 31, 2003 to
December 31, 2006 and eliminates the five-year option to extend the agreement.
The amendment also revises the rent structure, beginning in 2004, to better
align rent obligations with individual store performance. Beginning in 2004,
we expect to realize rent cost savings on an annualized basis of approximately
$1 million, based on each vision centers sales levels in 2003. Changes in
these sales could have an impact on anticipated rent reductions. The amendment
also permitted the closure of 12 under-performing locations. Five of these
vision centers closed in the second quarter of 2003, and the remaining seven
were closed in the third quarter of 2003. Our agreement with Wal-Mart de Mexico provides that each party will not deal
with other parties to operate leased department vision centers in Mexico. This
agreement also permits each party to terminate the lease for each vision center
which fails to meet minimum sales requirements specified in the agreement.
Under our agreement with Wal-Mart de Mexico, we have two options for two-year
renewals and one option for an additional one-year renewal for each vision
center. As of January 3, 2004, three of our vision centers in Mexico are operating
beyond the original lease term, on a month-to month basis. We are currently
in negotiations with Wal-Mart de Mexico to amend our existing lease agreement
to allow Wal-Mart de Mexico to perform their own vision center tests for a
limited time. Should these negotiations be unsuccessful, we would likely close
the three locations which are operating beyond the original lease term and
continue to operate the remaining locations until such time that their lease
expires. The following table sets forth the number of our vision center leases that
expire each year, assuming that we exercise all available options to extend the
terms of the leases, excluding 8 such options we have declined or expect to
decline to renew as of March 1, 2004. This table includes 14 future Wal-Mart
supercenter conversions which are scheduled at this time. These 14 supercenter
conversions added an average of 118 months to each locations lease term. Leases Expiring in Fiscal Year Actual
    
    Projected2010 ANDHOST COMPANY
    
    2002
    
    2003
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    2009
    
    THEREAFTERWal-MartDomestic
    
    
    1
    
    
    
    40
    
    
    
    58
    
    
    
    36
    
    
    
    40
    
    
    
    42
    
    
    
    28
    
    
    
    39
    
    
    
    116Mexico
    
    
    
    
    
    
    
    
    
    
    12
    
    
    
    3
    
    
    
    5
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    9Fred Meyer
    
    
    
    
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47
    
    
    
    
    
    
    
    
    
    
    
    Military
    
    
    
    
    
    
    2
    
    
    
    6
    
    
    
    7
    
    
    
    6
    
    
    
    2
    
    
    
    4
    
    
    
    
    
    
    
    2Totals
    
    
    1
    
    
    
    54
    
    
    
    76
    
    
    
    46
    
    
    
    51
    
    
    
    99
    
    
    
    32
    
    
    
    39
    
    
    
    127
 We meet with representatives of our host companies on a regular basis and
periodically discuss proposed amendments to our master license agreements, as
well as expansion opportunities. We can provide no assurances that we will
enter into favorable amendments to these agreements or that we will have any
opportunities to expand our operations within any of our current host
environments. 23




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##### Table of Contents



OPERATING STRATEGIES During much of 2003, we focused heavily upon making changes that would improve
our operations and cash flows. The changes affected almost every aspect of our
base business, including our frame and lens selection, retail pricing and
in-store display, store scheduling, manager and associate incentive programs,
training and evaluation, and home office and field supervision staffing levels.
We expect these moves to begin to have a significant impact on operating
results in 2004, and we will also continue to test and refine other potential
improvements. We cannot provide any assurances as to whether such changes will
have a positive impact on our operating results or financial condition. We also tested two new business concepts in 2003, selling eyeglasses from
kiosks inside malls and adding a new hearing aid technology to the traditional
vision products offered in our optical stores. We tested the eyeglass kiosks
in one location and the hearing aid product in two optical stores in Wal-Mart.
Neither of these concepts warranted expansion and both were discontinued by the
end of the year. The combined cost of testing these two concepts was
approximately $145,000. In 2004, our focus will turn more toward developing a new business that could
potentially replace our declining base of stores inside Wal-Mart. We will
continue to seek avenues of growth within optics while also seeking new
businesses to grow within Wal-Mart. One new business upon which we are
presently focused is the home medical equipment (HME) business. The HME category includes wheelchairs, scooters, walkers, bathroom safety
seats, shower rails and many other aids to daily living. In our view, the HME
marketplace is similar to the optics marketplace of several years ago, when
there were no large, dominant national retailers serving the category. The
marketplace currently consists mostly of independent operators and we believe
it is poised for a gradual shift to larger national players. We believe that our expertise and experience in optical retailing will give us
certain advantages in the home medical equipment business. Both categories
benefit from an aging population and involve a quasi-medical sales consultation
with virtually every customer. Both require managed care expertise.
Importantly, both categories benefit greatly from the consumer awareness
generated by walk-by traffic in a Wal-Mart environment. In the second quarter of 2004, we expect to open HME test stores inside
Wal-Mart stores in Pennsylvania and Tennessee. In each of these locations,
the population demographics are favorable to an HME business. We anticipate
that, by early 2005, we will have sufficient information to determine whether
this concept should be expanded. We believe that other companies are testing
the sales of home medical equipment in Wal-Mart stores. The Note Indenture may
limit the expenditures we are able to make in businesses outside of optical.
(See Risk Factors  Our pursuit of other lines of business could be
constrained by the terms of our Indenture.) We have begun reviews of other potential businesses that could possibly benefit
from the type of traffic that Wal-Mart stores generate. None of these concepts
is as far advanced as the HME concept. As to our potential new businesses, including the HME concept, we cannot
presently predict whether any will be successful. We also cannot predict how
many locations we may receive in Wal-Mart stores or the terms of any such lease
arrangements. (See Risk Factors  Our operation of optometric vision centers
adjacent to Wal-Mart corporate vision centers in California creates financial
and regulatory risk). Within optics, in the first quarter of 2004 our HMO began opening optometric
offices in California Wal-Mart stores adjacent to a vision center operated by
Wal-Mart. At March 1, 2004, we have opened four such offices. Of these, three
were in Wal-Mart stores in which our leases had expired in 2003 and one was in
a recently opened Wal-Mart. In addition, we also opened an optometric office
in one California Sams Club location. We contract with optometrists to provide eye examinations in these locations
with doctor coverage running as much as 53 hours per week in the busier
locations. We estimate that an optometric office will provide less revenue
and income than an average vision center. Nonetheless, we consider this an
excellent opportunity to continue deriving a revenue stream from stores in
which we had previously operated a vision center while adding a revenue stream
for newly opened Wal-Mart and Sams locations. We expect to open additional
such offices in 2004 and 2005. (See Risk Factors  Our operation of
optometric vision centers adjacent to Wal-Mart corporate vision centers in
California creates financial and regulatory risk.). 24




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##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES Since emerging from bankruptcy on May 31, 2001, our operations have generated
cash flow in amounts sufficient to fund operating and interest expense, capital
expenditures of $12.5 million, mandatory principal redemptions of $14.0 million
and discounted debt repurchases costing $10.5 million. We maintain a revolving
credit line with Fleet Capital Corporation, a commercial lender, but have
generally made borrowings under the credit line for only brief periods of time,
near the end of our fiscal first quarter, when several large periodic payments
are made. We also utilize a portion of our line of credit on a year round basis to
support a letter of credit required by our workers compensation insurance
provider. As of March 1, 2004, our unused availability under our credit
facility with Fleet was approximately $5.0 million. At January 3, 2004, we had
no borrowings under our credit facility, and had letters of credit of $4.3
million outstanding. We believe that cash generated from operations will be
sufficient to satisfy our cash requirements throughout 2004. We expect that
funds available under our credit facility will be utilized only for short-term
liquidity needs, if at all. We intend to use available cash for our ongoing
operations, repurchase of Notes, and repayment of principal on our outstanding
debt. In December 2003, we amended our credit facility with Fleet Capital Corporation
(the Fleet Facility). The amendment extended the expiration date of the
Fleet Facility from May 30, 2004 to May 30, 2007 and eliminated the previous
limit of $3 million in expenditures for repurchases of our Senior Subordinated
Notes within each rolling 12 month period. The amendment enables us to
repurchase Notes upon meeting certain financial criteria both preceding and
following the repurchases. Additionally, the amendment increased availability
by approximately $3.0 million. Subsequent to the amendment, we repurchased our
Senior Subordinated Notes with a face value of $6.0 million for $3.7 million
resulting in a non-cash gain of $2.3 million. Our Fleet facility contains various restrictive covenants, including requirements that we  
    
    maintain minimum levels of EBITDA (as defined),
    
    maintain a minimum fixed charge coverage ratio (as defined) of 1.0 to 1.0, and
    
    limit our capital expenditures. We made mandatory principal redemption payments of $5.3 million on August 28,
2003 and $2.9 million on February 28, 2003. We also made a principal
redemption payment on the Notes of approximately $545,000 on February 27, 2004
to the trustee for Note holders of record on February 13, 2004. These
redemptions are based on the requirements of the indenture and are made at 100%
of par. Each principal redemption payment is based on the results for the
six-month period ending in June or December, respectively. In addition, we
made an interest payment of approximately $6.1 million from existing cash
balances on September 27, 2003. The next scheduled interest payment of
approximately $5.7 million was made on March 30, 2004. In May 2003, we began offering a twelve month extended warranty plan in our
Wal-Mart vision centers to provide for repair and replacement service during
the first year after purchase. The new warranty plan has gained considerable
consumer acceptance, and we now sell warranties with approximately 40% of all
eyeglass transactions. This revenue is deferred over the life of the warranty.
Our deferred warranty revenue at January 3, 2004 was approximately $2.0
million. In fiscal 2003, we received approximately $4.6 million in cash from
the sale of warranties. We expect to receive at least this amount in fiscal
2004. The Companys capital expenditures have historically been for store openings,
relocations, and remodeling, lensmaking and other optometric equipment. During
2004, we expect to open at least two Military stores and to relocate 15 to 20
vision centers within Wal-Mart that have converted to supercenters. These
store openings are subject to change depending upon construction schedules and
other constraints. For each new center, we expect to spend between $40,000 and
$60,000 for fixed assets and up to $15,000 for inventory. During 2004, we plan to test at least two home medical equipment centers inside
Wal-Mart stores. As with all of our test concepts, we plan to prudently invest
in this new idea, until we prove that this concept has the consumer acceptance
needed to become our next growth vehicle. We expect to invest approximately
$75,000 in fixed assets and inventory in each of our first two test locations
(See Risk Factors  Our pursuit of other lines of business could be
constrained by the terms of our indenture). Other new business concepts that
we might pursue could require substantial investments, but none of these
efforts are advanced enough at this time to predict what such expenditures
might be. 25




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##### Table of Contents



FUTURE COMMITMENTS As of January 3, 2004, we had no capital lease obligations or other
long-term liabilities except the Senior Subordinated Notes. The table below
sets forth our contractual obligations (amounts in thousands): Payments due by fiscal year2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    Thereafter
    
    TotalLong-term debt
obligations (a)
    
    $
    545
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    94,939
    
    
    $
    95,484Operating lease
obligations (b)
    
    $
    25,465
    
    
    $
    19,202
    
    
    $
    13,315
    
    
    $
    6,374
    
    
    $
    4,609
    
    
    $
    7,423
    
    
    $
    76,388Purchase
obligations (c)
    
    $
    567
    
    
    $
    69
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    636
   (a)
    
    Our senior subordinated debt agreement provides for semi-annual
principal repayments based on the results of operations for the six-month
periods ended in June and December. The timing of future principal repayments
is contingent upon future results. Accordingly, except for the payment that
was made on February 27, 2004, the total carrying value is presented as
long-term debt obligations, due upon maturity in 2009.(b)
    
    Our operating lease obligations represent minimum rent payments under our
Wal-Mart, Fred Meyer and various military agreements as well as miscellaneous
operating equipment leases.(c)
    
    Our purchase obligations represent minimum purchase requirements for local
phone and certain other data services including polling and internet
capability. INFLATION Although we cannot determine the precise effects of inflation, we do not
believe inflation has had a material effect on our domestic sales or results of
operations. We cannot determine whether inflation will have a material
long-term effect on our sales or results of operations. As a result of inflation in prior years, we have in the past adjusted our
retail pricing. Further pricing adjustments are contingent upon competitive
pricing levels in the marketplace. Management is monitoring the continuing
impact of these inflationary trends. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our consolidated financial statements, as discussed under Managements
Discussion and Analysis of Financial Condition and Results of Operations, have
been prepared in accordance with accounting principles generally accepted in
the United States. The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments and
incorporates any changes in such estimates and judgments into the accounting
records underlying our consolidated financial statements. Management bases its
estimates and judgments on historical experience and on various other factors
that are believed to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions. 26




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##### Table of Contents



We have identified the policies below as critical to our business operations
and the understanding of our results of operations. The impact and any
associated risks related to these policies on our business operations is
discussed throughout Managements Discussion and Analysis of Financial
Condition and Results of Operations where such policies affect our reported and
expected financial results. (For a detailed discussion on the application of
these and other accounting policies, see Note 2 in the Notes to the
Consolidated Financial Statements.) Revenue Recognition We defer revenue recognition until delivery of the product by estimating the
value of transactions in which final delivery to the customer has not occurred
at the end of the period presented. The amount of cash received at the time
the customers order is placed is recorded as a deposit liability and is
presented within accrued liabilities. These estimates are based on historical
trends and take into consideration current changes in our manufacturing and
distribution process. We currently sell separately priced extended warranty contracts, generally with
terms of twelve months. Revenues from the sale of these contracts are deferred
and amortized over the life of the contract on a straight-line basis. The
costs to service the warranty claims are expensed as incurred. These warranty
contracts currently generate a positive profit margin. However, if the
utilization rates of these warranties increased significantly, the repair and
replacement expense could exceed the sales price of these warranties. If that
became the case, we would record a future liability for anticipated warranty
claims at the time of sale, instead of expensing the warranty claims as
incurred. Premium revenue is earned from HMO memberships and services. Revenue from
premiums is recognized over the life of the policy, generally twelve months, as
the related services are rendered. We must make estimates of potential returns and replacements of all or part of
the eyewear sold to a customer. We analyze historical remake and warranty
activity, consider current economic trends and changes in customer demand and
acceptance of our products when evaluating the adequacy of our estimate of
these costs. If management made different judgments or utilized different
estimates, this would likely result in differences in the amount and timing of
revenue and related costs for any period. Allowance for Uncollectible Managed Care Receivables Managed care accounts receivable are recorded net of contractual allowances and
reduced by an allowance for amounts that may become uncollectible in the
future. A significant portion of our receivables are due from health care plans
or third-party administrators located throughout the United States.
Approximately 12% of our net sales relate to products sold to customers that
ultimately will be funded in full or in part through private insurance plans,
third party insurance administration programs or government reimbursement
programs such as Medicare and Medicaid. Any failure on our part to accurately
and timely file for reimbursement with these programs can have an adverse
effect on our collection results which, in turn, will have an adverse effect on
liquidity and profitability. Estimates of our allowance for uncollectible receivables are based on our
historical billing and collection experience. Changes in our billing and
collection processes, changes in funding policies by insurance plans and
changes in our sales mix within insurance plans may have a material effect on
the amount and timing of our estimated expense requirements. Inventory Valuation Our inventories are stated at the lower of weighted average cost or market. In most cases, the expected sales value (i.e., market value) of our inventory
is higher than its cost. However, as we progress through a selling season,
certain slow-moving merchandise may be removed from stores and returned to the
distribution center to be sold below cost in secondary markets. As a result,
there is a high degree of judgment and complexity in determining the market
value of such inventories. For inventory on hand, we estimate the future
selling price of our merchandise, given its current selling price and its
planned promotional activities, and provide a reserve for the difference
between cost and the expected selling price for all items expected to be sold
below cost. At the beginning of fiscal 2003, we adopted Emerging Issues Task Force Issue
No. 02-16, Accounting by a Customer for Certain Consideration Received from a
Vendor (EITF 02-16). As a result of the adoption of EITF 02-16, certain
vendor allowances are now presented as a reduction of inventory cost and
subsequently as a component of cost of goods sold. 27




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We conduct physical inventory counts for all of our store locations at least
twice per year and adjust our records to reflect the actual inventory counts.
Cycle counts are performed monthly for inventory in our distribution center and
all inventory in our distribution center is counted near the end of the fiscal
year. As all locations are not counted as of our reporting dates, we provide a
reserve for inventory shrinkage based principally on historical inventory
shrinkage experience. Fresh Start Accounting In accounting for the effects of the reorganization, we adopted fresh start
accounting principles as contained in the American Institute of Certified
Public Accountants Statement of Position 90-7, Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code (SOP 90-7). SOP 90-7
was applicable because pre-reorganization shareholders received none of our new
common stock and the reorganization value of the assets of the Successor
company was less than the total pre-petition liabilities allowed plus
post-petition liabilities. SOP 90-7 also required that, at the time of fresh
start accounting, we early-adopted all accounting principles that were
required to be adopted within twelve months following fresh start accounting. Fresh start accounting principles require that we determine the reorganization
value of the reorganized Company. Our reorganization value was developed by
management, the Official Committee of Unsecured Creditors and their respective
financial advisors. The reorganization value was based on a calculation of the
present value of the free cash flows under our financial projections, including
an assumption of a terminal value. Such projections were submitted to the
bankruptcy court and to creditors for review and objection as part of our
disclosure statement accompanying the Plan. Valuation of Long-Lived and Intangible Assets Our most significant intangible asset is the Intangible Value of Contractual
Rights, which was established as part of our adoption of fresh start accounting
in May 2001. This intangible asset, which has a value of $93.3 million at
January 3, 2004, represents the value of our lease agreement with Wal-Mart and
the business relationship therein created. In accordance with SFAS No. 142,
this intangible is an amortizable asset because it has a finite useful life.
However, the precise length of its life is not known due primarily to the
Wal-Mart supercenter conversions that automatically trigger extensions on the
contractual life of the asset. Based on our projections, our best estimate of
the useful life of this asset is fifteen years. Due to the uncertainty
involved in predicting the pattern of economic benefits realized from the
Wal-Mart relationship, we amortize this asset using the straight-line method. We assess the impairment of all identifiable intangibles and long-lived assets
on an annual basis and whenever events or changes in circumstances indicate
that the carrying value may not be recoverable. Factors we consider important,
which could trigger an impairment review, include (1) a significant
underperformance of vision center operations relative to expected historical or
projected future operating results; (2) significant changes in the manner of
our use of our assets or the strategy for our overall retail optical business;
(3) significant negative industry or economic trends; (4) a significant decline
or adverse change in the rate or geographic concentration of Wal-Mart host
store relocations or supercenter conversions; and (5) a permanent adverse
change in cash flows generated by an operation. Upon the existence of one or more of the above indicators of impairment, we
determine if the carrying value of intangibles or long-lived assets may not be
recoverable based on a projected cash flow model. If the projected cash flows
are not in excess of the book value of the related asset, we measure the
impairment based on a projected discounted cash flow method. Significant
management judgment is required regarding the existence of impairment
indicators as discussed above. Historically, we have operated our vision centers
to the maximum term of the lease, including the exercise of all available renewal options in most cases.
Our strategy was to maintain store operations, even if the store was under-performing and devote our attention
 to correcting the store's problems. In the fourth quarter of 2003, we revised our strategy to assess under-performing
 stores prior to the lease termination date, and potentially close the under-performing stores in order
to maximize operating profitability. As a result, we identified certain store locations with a
history of operating losses that we do not expect to become profitable without significant cost and effort.
We intend to close 13 of these locations in March and April of 2004. For the 13 locations that we expect to close prior to the lease termination
date, we reviewed the locations for potential impairment by comparing the future expected undiscounted
cash flows for these locations to the carrying value of their long-lived assets. The long-lived asset
carrying value for 12 locations exceeded the future expected undiscounted cash flows from the locations.
Therefore, impairment was determined to exist for these 12 locations. We also reviewed the remainder of store
locations for potential impairment and identified 30 additional vision centers in Wal-Mart, Wal-Mart de Mexico,
Fred Meyer and on military bases which were determined to be impaired given that the expected future
undiscounted cash flows from these locations are less than the carrying value of their assets. As a result,
we have recorded a non-cash impairment charge of $550,000 to write-down these long-lived assets to their fair
market value. Fair market value was determined using the expected discounted cash flows for each location. This
impairment was reflected for leasehold improvements, furniture, fixtures and equipment at these
42 locations. Future events could cause us to conclude that impairment indicators exist and
that long-lived assets or intangible assets are impaired. Any resulting
impairment loss could have a material adverse impact on our financial condition
and results of operations. Based on our review of our intangible assets as of
January 3, 2004, no impairment was determined to exist. 28




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Accounting For Income Taxes As part of the process of preparing our consolidated financial
 statements we
are required to estimate our income taxes in each of the jurisdictions in which
we operate. This process involves estimating our actual current tax exposure
together with assessing temporary differences resulting from differing
treatment of items, such as equipment depreciation, for tax and accounting
purposes. These differences result in deferred tax assets and liabilities,
which are included within our consolidated balance sheet. We must then assess
the likelihood that our deferred tax assets will be recovered from future
taxable income and to the extent we believe that recovery is not likely, we
must establish a valuation allowance. To the extent we establish a valuation
allowance or increase this allowance in a period, we must include an expense
within the tax provision in the statement of operations. We emerged from Chapter 11 Bankruptcy on May 31, 2001.
 As part of our plan of
reorganization, our capital structure was highly leveraged with $120 million of
Senior Subordinated Notes providing for interest at 12% per annum. Before,
during and after the bankruptcy process, we incurred significant net operating
losses (NOL) that resulted in tax loss carry-forwards. A portion of these
carry-forwards are subject to limitations under Section 382 of the Internal
Revenue Code. Generally accepted accounting principles require that we record a
 valuation
allowance against the deferred tax asset associated with this NOL if it is
more likely than not that we will not be able to utilize it to offset future
taxes. We have provided a full valuation allowance against this net deferred
tax asset because our high leverage will make it difficult for us to become
profitable, and our historical high leverage substantially contributed to our
failure to achieve profitability. We currently provide for income taxes only
to the extent that we expect to pay cash taxes for current income. It is possible, however, that we could be profitable in the
 future at levels
which cause management to conclude that it is more likely than not that we will
realize all or a portion of the NOL carry forward. Upon reaching such a
conclusion, we would immediately record the estimated net realizable value at a
rate equal to our combined federal and state effective rates. Subsequent
revisions to the estimated net realizable value of the deferred tax asset could
cause our provision for income taxes to vary significantly from period to
period, although our cash tax payments would remain unaffected until the
benefit of the NOL is utilized. Self-Insurance Accruals We self-insure estimated costs associated with workers
 compensation claims and
group medical liabilities, up to certain limits. Insurance reserves are
established based on actuarial estimates of the loss that we will ultimately
incur on reported claims, as well as estimates of claims that have been
incurred but not yet reported. Trends in actual experience are a significant
factor in the determination of such reserves. We believe our estimated
reserves for such claims are adequate, however actual experience in claim
frequency and/or severity could materially differ from our estimates and affect
our results of operations. Other Accounting Policies The above listing is not intended to be a comprehensive list of all
 of our
accounting policies. In many cases, the accounting treatment of a particular
transaction is specifically dictated by generally accepted accounting
principles. See our audited consolidated financial statements and notes
thereto which begin on page F-1 of this Annual Report on Form 10-K which
contain accounting policies and other disclosures required by generally
accepted accounting principles. Recent Accounting Pronouncements In November 2002, the FASB issued Interpretation (FIN)
 No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Other. FIN 45 requires footnote disclosure of
the guarantee or indemnification agreements a company issues. With certain
exceptions, these agreements will also require a company to prospectively
recognize an initial liability for the fair value, or market value, of the
obligations it assumes under that guarantee. The initial recognition and
initial measurement provisions of this Interpretation are applicable on a
prospective basis to guarantees, including product warranty liabilities, issued
or modified after December 31, 2002. Our adoption of FIN No. 45 on December 29, 2002
did not have a material impact on our consolidated
financial position, results of operations, or cash flows. 29




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In January 2003, the FASB issued FASB Interpretation No. 46 Consolidation of
Variable Interest Entities, an Interpretation of APB No. 50, (FIN 46). FIN
46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. Our adoption of FIN 46 does not currently have an impact on
our consolidated financial position, results of operations or cash flows. In May 2003, the FASB issued SFAS No. 150 Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity, which
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its
scope as a liability (or an asset in some circumstances). Many of those
instruments were previously classified as equity. This statement was effective
immediately for all financial instruments created or modified after May 31,
2003 and by the first interim period commencing after June 15, 2003 for
existing financial instruments. The adoption of SFAS No. 150 does not
currently affect our financial position or results of operations. RISK FACTORS This Form 10-K contains a number of statements about the future. It also
contains statements which involve assumptions about the future. All these
statements are forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements represent
our expectations or belief concerning future events, including any statements
regarding future sales levels, the continuation of historical trends, and our
liquidity. Without limiting the foregoing, the words believes, anticipates,
plans, expects, and similar expressions are intended to identify
forward-looking statements. In addition, we, through our senior management, from time to time make
forward-looking public statements concerning our expected future operations and
performance and other developments. These forward-looking statements are
necessarily estimates reflecting our best judgment based upon current
information and involve a number of risks and uncertainties. All subsequent written and oral forward-looking statements attributable to the
Company and persons acting on our behalf are qualified in their entirety by the
cautionary statements contained in this section and elsewhere in this report. We do not know whether all the forward-looking statements made in this report
or elsewhere will prove to be correct. We have tried to identify factors which
may cause such statements to be incorrect, but we may not have identified all
of them. These factors could also have a negative impact on our results. The
following is our non-exclusive list of these factors: Our substantial indebtedness could adversely affect our financial health and
prevent us from fulfilling our obligations under our Notes. As a result of the issuance of our 12% Notes due 2009, we are highly leveraged.
The Notes are subordinated to our credit facility. As of March 1, 2004, we had
outstanding:  
    
    total indebtedness of $94.9 million represented by the Notes, and
    
    total availability of $5.0 million under our credit facility, after letter of credit requirements. Our ability to pay or refinance our indebtedness, including our ability to
repay the Notes, or to fund capital expenditures will depend on our future
performance. To a certain extent, our performance is subject to general
economic, financial, competitive, legislative, regulatory and other factors
that are beyond our control. We cannot assure you that our business will generate sufficient cash flow from
operations, that revenue growth will be realized or that future borrowings will
be available under our credit facility in an amount sufficient to enable us to
pay our indebtedness, including the Notes, or to fund our other liquidity
needs. 30




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Our substantial indebtedness could have important consequences. For example, it
could:  
    
    make it more difficult for us to satisfy our obligations under the Notes, including our ability
to pay off the Notes at maturity;
    
    increase our vulnerability to general adverse economic and industry conditions;
    
    limit our ability to obtain additional financing to fund future working capital, capital
expenditures, new business opportunities, and other general corporate requirements;
    
    require us to dedicate a substantial portion of our cash flow from operations to the payment of
our indebtedness, thereby reducing the availability of our cash flow to fund working capital,
capital expenditures, new business opportunities, or other general corporate purposes;
    
    limit our flexibility in planning for, or reacting to, changes in our business and our industry;
    
    place us at a competitive disadvantage compared to competitors that have less debt; and
    
    limit, along with the financial and other restrictive covenants in our indenture and credit
facility, our ability to borrow additional funds. Our failure to comply with the covenants in the indenture under which our Notes
were issued or in our credit facility would result in an event of default
which, if not cured or waived, could have a material adverse effect on us. Our ability to continue to generate revenue and operating income depends on our
continued relationship with Wal-Mart. We are substantially dependent on Wal-Mart and its affiliates for our current
operations. The following chart shows, as of January 3, 2004, the number of our
vision centers that are in Wal-Mart stores and the total number of our vision
centers: Category
    
    NumberTotal Vision Centers
    
    
    468Domestic Wal-Mart Locations
    
    
    359Wal-Mart de Mexico
    
    
    37
 Our vision centers located in Wal-Mart stores accounted for substantially all
of our earnings before interest, taxes, depreciation and amortization for the
fiscal year ended January 3, 2004. Vision centers in Wal-Mart stores rely
largely on customer traffic generated by the Wal-Mart host store. Wal-Mart is under no obligation to provide us with additional vision center
leases. We have no basis to believe that Wal-Mart will offer us any additional
locations. We also have no basis to believe that Wal-Mart will offer to
extend any of our existing leases apart from instances where Wal-Mart is
obligated to do so pursuant to the terms of our master license agreement upon
the relocation or conversion of a store to a supercenter (see Managements
Discussion and Analysis of Financial Condition and Results of Operations -
Summary of Lease Agreements). We will therefore need to replace our sales and
operating earnings generated from our Wal-Mart vision centers with sales and
operating earnings generated from new business opportunities, which are subject
to significant risk and uncertainty (see Our new business opportunities are
unproven). 31




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Our lack of growth could adversely affect our ability to make payments on our
Notes. Average annual revenues in our domestic Wal-Mart vision centers were
approximately $580,000 in fiscal 2003. Average annual revenues in the other
vision centers that we continue to own were less than $300,000 in the same
period. The expiration of our leases with Wal-Mart will cause a reduction in
our revenues that we may not be able to replace with revenues generated by
other vision centers or by other lines of business we are exploring. We expect
that our expenses, however, will increase over time. A combination of lower
sales and higher expenses would adversely affect our ability to repay or
refinance our Notes, which could have an adverse effect on the price of our
common stock. In addition, in each of the next several years, the base terms of increasing
numbers of leases for vision centers under our Wal-Mart agreement will expire.
Our rental obligations to Wal-Mart will increase in the three-year option
period. We will need to continue to improve sales at these vision centers. If
we do not, our rent as a percent of sales will increase significantly during
the option period for each of these vision centers. Alternatively, we may
choose not to exercise the extension options. Our new business opportunities are unproven. Apart from opening optometric offices in California
(see Our operation of optometric vision centers adjacent to Wal-Mart
corporate vision centers in California creates financial and regulatory
risk), we are exploring optical concepts in hosts other than Wal-Mart and
non-optical concepts in Wal-Mart. There are risks associated with both types
of business opportunity, including risks that:  
    
    we will be unable to reach appropriate lease or other arrangements with the host licensor
    
    the lease or other arrangement will have high occupancy charges or other onerous terms and conditions
    
    we will have insufficient capital or otherwise be subject to
constraints that limit the investments we can make in these businesses
(see Our substantial indebtedness could adversely affect our financial
health and prevent us from fulfilling our obligations under our Notes
and "Our pursuit of other lines of business could be constrained by the
terms of our indenture)
    
    even if established, the businesses will fail to generate
sufficient profits to justify continued exploration or development of
the business concepts. The optical concepts will be subject to the general risks and uncertainties
applicable to our current core business in Wal-Mart. The non-optical concepts
will be subject to additional risks and uncertainties, including the risk that
we will lack sufficient experience and expertise to successfully manage the
businesses. The home medical equipment business, in particular, is subject to a
number of unique risk factors, including:  
    
    Intensive regulatory scrutiny under federal and state anti-kickback
and similar laws (see Federal and state governments extensively
regulate the health care and insurance industries)
    
    Complex regulations and requirements applicable to billing for
federal and state reimbursement
    
    The need for significant capital to fund any expansion or operating
losses during the time the concept is under development. Because of the anticipated run-off of our leases with Wal-Mart, we will need to
explore and develop these concepts in the shorter rather than the longer term.
There is also a risk that, in pursuing these concepts, management will devote
less attention to our core business of operating vision centers in Wal-Mart,
and that the core business will be adversely affected. In addition, other
companies are testing the sales of home medical equipment in Wal-Mart stores.
We can therefore provide no assurances that, even if we are successful in these
operations, Wal-Mart will offer us additional locations. 32




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Our pursuit of other lines of business could be constrained by
 the terms of our
indenture. The indenture governing our Senior Subordinated Notes limits our
 operations to
those which are the same, similar or reasonably related to the businesses in
which we were engaged as of the date we emerged from bankruptcy. We are in the
process of opening home medical equipment centers in Wal-Mart stores. We are
also investigating other concepts. Our indenture could limit our ability to
invest in these other lines of business and, generally, could limit our ability
to pursue these lines of business. In addition, certain holders of our Notes
have previously objected to our engaging in other lines of business. Although
we believe that we are in compliance with the indenture and intend to continue
to comply with the indenture, we can give no assurance that these holders might
not seek to declare a default arising out of our engaging in these lines of
business. Our financial performance may be adversely affected by sales
 recorded at vision
centers scheduled to close under the Wal-Mart agreement. We have observed sharp declines in sales levels as our vision
 centers come to
the end of their lease term under the Wal-Mart agreement. We expect to close
approximately 58 Wal-Mart vision centers in fiscal 2004 and 36 Wal-Mart vision
centers in fiscal 2005. In the months prior to their scheduled date of closure,
we expect these vision centers to record substantial sales declines. The
extent of the sales declines, coupled with the number of vision centers nearing
the end of their lease term, could have a negative impact on our sales and our
profitability. Our declining base of vision centers in Wal-Mart stores could
 make it more
difficult for us to compete. We expect that the number of our
vision centers in Wal-Mart stores will substantially decrease over the next
several years. A declining base of vision centers, coupled with a decline in
cash flow, could impair our ability  
    
    to attract and retain management
    
    to compete for managed care contracts
    
    to obtain favorable terms, such as discounts and rebates, from optical vendors
    
    to enter into other business arrangements
    
    to generate cash to fund other business opportunities. Because our optical laboratories and distribution center provide substantially
all the eyeglasses and related products we sell at our retail locations, we
depend on their regular and efficient operation, and any disruption could have
a severe adverse impact on our retail business. Our manufacturing and distribution center operations are subject to various
risks. Our manufacturing operations are located in Lawrenceville, Georgia and St.
Cloud, Minnesota. A fire, flood, earthquake, war, work stoppage, supply
shortage or disruption, adverse government action or other disaster or
condition at either location could result in a loss of production capabilities
and, accordingly, adversely affect our ability to service our retail
locations. We depend on a small number of suppliers for raw materials. Most of the raw
materials used in our products are readily available from a number of
suppliers at competitive prices, and we have not experienced any significant
shortages in obtaining raw materials. While there are currently multiple
suppliers of raw materials, we purchase over 50% of those materials from three
suppliers. The loss of any of these suppliers, or a significant decrease in
the supply of the raw materials, would require us to obtain these raw
materials elsewhere. If we were unable to obtain the materials from other
suppliers at acceptable prices, our gross margins and our ability to implement
our every day low price strategy could be adversely affected. In addition, a
third party processes our photochromic lenses using its proprietary
technology. We therefore rely on this party for our production of these
lenses. 33




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We may be adversely affected by environmental and safety regulations to which
we are subject.We must comply with environmental laws and regulations
concerning emissions to the air, waste water discharges and the generation,
handling, storage, transportation and disposal of hazardous wastes, and with
other federal, state and local laws and regulations. We believe that we
possess all material permits and licenses necessary for the continuing
operation of our business and believe that our operations are in substantial
compliance with the terms of all applicable environmental laws. We cannot
assure you that we will operate at all times in complete compliance with all
such requirements. We could be subject to potentially significant fines and
penalties for any noncompliance that may occur. We cannot predict accurately
the potential impact of these laws and regulations on us in the future. Our manufacturing operations depend in part on our ability to attract and
retain personnel with relevant industry experience. The loss of the services
of this personnel or the ability to retain such personnel in the future could
have an adverse impact on our manufacturing operations. The efficiency of our manufacturing operations is an essential component of
our everyday low price retail strategy. We must continually control our
product manufacturing costs and operating expenses. We may not be able to
continually control these costs and expenses. To the extent that we do not
control these costs and expenses, the ability of our retail locations to
compete may be adversely affected. Our operation of optometric vision centers adjacent to Wal-Mart corporate
vision centers in California creates financial and regulatory risk. Our HMO subsidiary in California has opened five optometric offices adjacent
to Wal-Mart in that State and expects to open more such locations in the
future. There are risks that:  
    
    These locations will be unprofitable and drain cash and management
resources
    
    Although we believe these locations operate in compliance with all
applicable regulatory and other requirements, regulatory and other
authorities will seek to challenge our operations. We do not know the number of offices our subsidiary will open pursuant to this
arrangement. The opening of offices in certain geographic locations could be
subject to regulatory approval, which could also increase costs and cause
delays. Increased military action abroad could have a negative impact on our
operations, particularly those on military bases. We operate 25 vision centers on military bases in the United States. Increased
military action abroad could have a negative impact on these vision centers. Our use of net operating loss carry-forwards may be subject to limitations. In conjunction with our historical results from operations, emergence from
Chapter 11 and the disposition of our free- standing operations, we incurred
significant net operating losses. These losses resulted in significant net
operating loss carry-forwards. Our ability to utilize our net operating losses
that were realized prior to our emergence from Chapter 11 is limited under
Section 382 of the Internal Revenue Code of 1986. If our net operating losses
realized after our emergence from Chapter 11 are subject to substantial
limitation because of a future change of control of the Company or for other
reasons, our cash tax costs would increase and have an adverse effect on our
ability to repay the Notes. If, after such a change of control, we determined
that we would be unable to utilize this tax asset, we could then be forced to
write down the asset and record a charge against our financial results. The right of holders of our Notes to receive payments will be junior to our
borrowings under our credit facility, which could adversely affect our ability
to pay off the Notes. Our indebtedness under our credit facility is secured by liens against
substantially all of our assets. In the event of a default on our secured
indebtedness, or a bankruptcy, liquidation or reorganization of the Company and
our subsidiaries, these assets will be available to satisfy obligations with
respect to the secured indebtedness before they can be used to satisfy our
obligations under our Notes. 34




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The terms of our credit facility and the indenture under which our Notes were
issued restrict our corporate activities. Our credit facility contains various restrictive covenants and requires us to
maintain specified financial ratios and satisfy financial tests, such as a:  
    
    minimum requirement of earnings before interest, taxes, depreciation
and amortization as defined in our credit facility of $19.6 million
for each rolling 12 month period ending on the last day of each fiscal
month for the remainder of the term of our credit facility, and
    
    minimum fixed charge coverage ratio of 1.0 to 1.0. Our ability to meet these financial ratios and tests may be affected by events
beyond our control, and we cannot assure you we will meet these tests. In
addition, our credit facility and our indenture limit our ability to take
action with respect to:  
    
    capital expenditures,
    
    investments,
    
    indebtedness,
    
    liens,
    
    dividends,
    
    loans,
    
    prepayments of other indebtedness,
    
    mergers, acquisitions or sales of assets,
    
    changes in business activities (see Our pursuit of other lines of
business could be constrained by the terms of our indenture),
    
    transactions with affiliates, and
    
    issuance of equity. Our breach of any of these covenants could result in an event of default under
our credit facility. If a default occurs, our lender can declare our
indebtedness, both principal and interest, immediately due and payable, and
could terminate its commitment to make future advances. In addition, a default
under the indenture could cause the principal and accrued interest on the Notes
to become due and payable. The restrictions in the indenture and the credit
facility will likely restrict our ability to obtain additional financing for
working capital, capital expenditures or general corporate purposes. We have
pledged substantially all of our assets under our credit facility and under the
indenture. If we fail to repay all amounts declared due and payable, our
lender and then the holders of our Notes could proceed against the collateral
granted to it to satisfy our obligations. It is likely that our assets would
be insufficient to repay in full that indebtedness and our other indebtedness,
including the Notes. We are required by our indenture to make mandatory redemptions of principal
owing on our Notes if we generate excess cash flow, which may have an adverse
impact on our common stock. The indenture requires mandatory redemptions of principal out of the excess
cash flow that we may generate biannually. There can be no assurances that we
will generate enough excess cash flow to make any mandatory redemptions.
Prepayments of principal on the Notes, if any, will prevent us from having
excess cash to reinvest in our business, and could adversely affect the price
of our common stock. The holders of our common stock may exercise significant control over us. Former holders of our old Senior Subordinated Notes due 2005 held a large
majority of our unsecured debt in bankruptcy, and thus were the initial holders
of a significant portion of our common stock. If holders of significant numbers
of shares of our common stock act as a group, these holders could be in a
position to control the outcome of corporate actions requiring shareholder
approval, including the election of directors. Certain of these holders have
already objected to our repurchase of notes and our pursuit of other business
opportunities. 35




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Holders of our common stock and our notes may elect to sell large blocks of
common stock or notes, which may have an adverse effect on the price of our
common stock and our notes. Our former unsecured creditors received our common stock and our notes in
exchange for their claims against us. Some or all of the holders of our common
stock and notes may prefer to liquidate their investment rather than hold the
securities on a long-term basis. The possibility that one or more of the
holders of significant numbers of shares of our common stock or a large
principal amount of our notes may determine to sell all or a large portion of
their shares of our common stock or their notes in a short period of time may
adversely affect the market price of the common stock or notes. Partially for
that reason, there can be no assurance as to the degree of price volatility in
any trading market that may develop for the common stock and the notes. As a
result, no assurance can be given that any holder of our common stock or our
notes will be able to sell them or at what price any sale may occur. No
assurance can be given as to the market price, if any, that will prevail for
our common stock in the future. If a market were to exist for our notes, they
may trade at prices higher or lower than their face value, depending upon many
factors, including, without limitation, the prevailing interest rates, markets
for similar securities, industry conditions and the performance of, and
investor expectations for us. Our common stock may be delisted from The American Stock Exchange, if we do not
meet certain listing standards. The rules of the American Stock Exchange (AMEX) allow the exchange to delist
securities if the AMEX determines that a companys securities fail to meet
guidelines with respect to corporate net worth, public float, number of
shareholders, the aggregate market value of shares, or price per share. We
cannot assure purchasers of our common stock or notes that we will continue to
meet the requirements of the AMEX. If we are unable to continue to satisfy
these criteria, the AMEX may begin procedures to remove our common stock or
notes from the exchange. If our common stock or notes are delisted, a trading
market may no longer exist, and the ability of shareholders to buy and sell
common stock or notes may be materially impaired. We have not declared dividends in the past, and do not anticipate doing so in
the near future, which may adversely affect the price of our common stock. Our credit facility and our indenture prohibit the payment of cash dividends
without the consent of the lender and the holders of the majority of
outstanding principal amounts under the Notes, respectively. We have never
declared or paid any dividend on our capital stock. We currently anticipate
that all of our earnings, if any, will be retained for payment of our
obligations under the Notes, and then for other corporate purposes, and do not
anticipate paying any cash dividends in the foreseeable future. The retail eyecare industry is extremely competitive. The retail eyecare industry is extremely competitive. We compete with national
companies, such as LensCrafters and Cole and with numerous regional and local
firms. In addition, optometrists, ophthalmologists, and opticians provide many
of the same goods and services we provide. The level and intensity of
competition can vary dramatically depending on the particular market. We
believe that we have numerous competitive advantages, such as our everyday low
pricing, product selection, and quality and consistency of service. We also compete for managed care business. Our competition for this business is
principally the larger national and regional optical firms. Competition for
this business is driven by size of provider network, quality and consistency of
service, and by pricing of vision care services. Successful renewals of certain
existing third-party contracts are integral to maintaining sales revenues. Several of our competitors have significantly greater financial resources than
we do. As a result, they may be able to engage in extensive and prolonged price
promotions which may adversely affect our business. They may also be able to
spend more than we do for advertising. If we are not able to maintain our
market share of the retail optical industry, our business will suffer. A
decline in our earnings could adversely affect the price of our common stock
and the notes, and our ability to repay the notes. Luxottica (the owner of Lenscrafters) and Cole have recently announced that
they have entered into a merger agreement pursuant to which Luxottica would
purchase Cole. The completion of this merger could have an adverse impact on
our ability to compete for managed care accounts and to participate as a
provider under managed care arrangements sponsored by the affiliates of
Luxottica or Cole. This merger, if consummated, could also have other effects
on our retail business which we cannot now predict. 36




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Federal and state governments extensively regulate the health care industries. Both federal and state governments extensively regulate the delivery of health
care, including relationships among health care providers such as optometrists
and eyewear providers like us. Many states prohibit business corporations from
practicing medicine or controlling the medical judgments or decisions of
physicians. States often prohibit various financial arrangements, such as
splitting fees with physicians. The fraud and abuse provisions of the Social Security Act and anti-kickback
laws and regulations adopted in many states prohibit soliciting, paying,
receiving or offering any compensation for making, or causing someone to make,
referrals of patients, items or services in some circumstances. The Social
Security Act also imposes significant penalties for false or improper Medicare
and Medicaid billings. Many states have adopted similar laws applicable to any
payor of health care services. We must also comply with federal laws such as
the Health Insurance Portability and Accountability Act of 1996 (which governs
our participation in managed care programs and which also requires that we
maintain the privacy of health information of our customers) and the Food and
Drug Administration Act (which regulates medical devices such as contact
lenses). In addition, the Stark Self-Referral Law restricts referrals for
Medicare or Medicaid covered services where the referring physician has a
financial relationship with the service provider. In some cases, the rental of
space constitutes a financial relationship under this law. Many states have
adopted similar self-referral laws which are not limited to Medicare or
Medicaid reimbursed services. Violations of these laws may result in
substantial civil or criminal penalties, including double and treble civil
monetary penalties, and in the case of federal laws, exclusion from the
Medicare and Medicaid programs. A ruling that we have violated these laws could, for example, result in:  
    
    censure,
    
    delicensing of optometrists,
    
    civil or criminal penalties, including large civil monetary penalties,
    
    invalidation or modification of our agreements with optometrists and opticians, or
    
    an order requiring us to change our business practices. These consequences could have an adverse effect on our business. Also, changes
in our relationships with independent optometrists and opticians could
adversely affect our relationship with Wal-Mart or our other host stores. We are subject to state and local regulation of the vision care industry. The practice of opticianry is regulated in most states in which we do business.
In addition, all states regulate the practice of optometry and many states
regulate the contracts and other arrangements between optical firms and
optometrists. Our failure to comply with these regulations can have severe
consequences, including the closure of retail outlets, possible breaches of our
license agreement with Wal-Mart, changes to our way of doing business, and the
imposition of fines and penalties. We are subject to increased regulatory risk in the state of California, where
in 2002 the California attorney general filed a lawsuit against one of our competitors,
alleging that their operations violated state law (see Legal
Proceedings). The case is expected to be argued in the California Supreme
Court later in 2004. In 2003, a Court of Appeal in the State of California held
that our method of doing business in the State of California complies with
applicable law. There is, however, a risk that, if the California Supreme Court
holds that the operations of our competitor violates state law, the California
attorney general could begin proceedings against us, notwithstanding our prior
successful result in the Court of Appeal. In addition, the regulatory and
litigation risk created by the pendency of the litigation by the attorney
general could have an adverse impact on our business. In California, optometrists who practice adjacent to our retail locations are
providers to and subtenants of a subsidiary, which is licensed as a
single-service Health Maintenance Organization (HMO). This subsidiary is
regulated by the Department of Managed Health Care. Although we believe that
our operations in California comply with applicable law, there are no
assurances that the Department of Managed Health Care, the attorney general, or
another state authority will not seek to challenge our manner of doing business
in the state. Such challenges could force us to change the way we do business,
to incur significant expense in litigation and compliance efforts, and could
have a material adverse impact on us. Local ordinances (such as zoning requirements) can also impose significant
burdens and costs of compliance. Frequently, our competitors sit on state and
local boards. Our risks and costs of compliance are often increased as a
result. All of these matters could cause our business to suffer, our ability to
repay the notes to be adversely affected, and the trading price of our common
stock and notes to decline. 37




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The departure of key executives could adversely affect our business. We depend on the continuing efforts of our executive officers and senior
management. The departure of these individuals in significant numbers could
adversely affect our business and prospects if we are unable to attract and
retain qualified replacements. The run-off of our vision centers could make it
more difficult for us to attract and retain management. We do not currently
have employment agreements with any personnel, including key executive officers
and management. However, we offer our executives and management bonus and
stock-based incentives related to our performance. Failure to have vision care professionals available in or near our vision
centers would adversely affect our ability to win managed care and host store
contracts, and could prevent us from operating in some states. Our business and marketing strategies emphasize the availability of independent
optometrists in close proximity to our vision centers. Typically, we contract
with at least one licensed optometrist to occupy space in or adjacent to each
of our stores. Additionally, our agreement with Wal-Mart contemplates that we
will make optometrists available at least 48 hours per week if permitted by
law. In some markets it may be difficult for us to attract and retain
optometrists if our vision centers generate low sales. Historically, if there
is no licensed optometrist available to give eye exams, our retail business has
suffered. In some markets, it can be difficult to hire or keep vision care professionals
on staff in our vision centers. Failure to maintain a staff of qualified vision
care professionals may cause our customers to go elsewhere to provide for their
optical needs, which would have an adverse effect on our business. Many states require that licensed opticians be present when eyeglasses or
contact lenses are fitted or dispensed. Any difficulties or delays in securing
the services of these professionals could adversely affect our business and our
relationship with our host stores. Consequences of difficulty or delay could
include termination of our host store licenses for those vision centers, and
imposition of legal sanctions against us, including closure of vision centers
without licensed professionals. Our success increasingly depends on our ability to develop and maintain
relationships with managed vision care companies. An increasing percentage of patients receive health care coverage through
managed care payors. As this trend continues, our success will increasingly
depend on our ability to negotiate contracts with health maintenance
organizations referred to as HMOs, employer groups and other private third
party payors. We cannot assure you that we will be able to establish or
maintain satisfactory relationships with managed care and other third party
payors. The run-off of our leases with Wal-Mart will make it more difficult for
us to establish and maintain these relationships. In addition, many managed
care payors have existing provider structures in place that they may be unable
or unwilling to change. The announced merger of our two largest competitors
could present additional challenges to our participation in managed care
programs (see The retail eyecare industry is extremely competitive). Our
inability to enter into arrangements with managed care payors in the future
could have a material adverse effect on our business. We have established a network of optometrists and other providers located in or
adjacent to our stores in order to enhance our ability to contract with managed
care payors for both professional services and retail eyewear supplies.
Currently, approximately 12% of our revenues are received from managed care
payors. We expect this percentage to increase in the future. Managed care
contracts include a variety of reimbursement methods, such as fee for service
or discounts. Our contracts with managed care companies on the one hand, and
with networks of optometrists and other providers on the other, are subject to
federal and state regulations, for example: Insurance Licensure. Most states impose strict licensure requirements on
companies that engage in the business of insurance, including health insurance
companies and HMOs. Many licensing laws mandate strict financial and other
requirements which we may not be able to meet, were we deemed to be engaging in
the business of insurance. Additionally, the licensure process can be lengthy
and time consuming. Antitrust Laws. A range of antitrust laws apply to us and our network of
optometrists. These laws prohibit anti-competitive conduct, including
price-fixing, concerted refusals to deal, and divisions of markets. We cannot
assure you that our operations will not be challenged on antitrust grounds in
the future. 38




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Proposed reforms may affect our earnings and may adversely affect our business. There have been numerous reform initiatives at the federal and state levels
relating to the payment for and availability of healthcare services. We believe
that these initiatives will continue for the foreseeable future. If adopted,
some of these reforms could adversely affect our financial results, and may
adversely affect our business. We rely on third parties to pay many of our customers costs. A significant portion of medical care in the United States is funded by
government and private insurance programs, such as Medicare, Medicaid and
company-sponsored health insurance plans. According to government projections,
more medical beneficiaries who are significant consumers of eye care services
will enroll in managed care organizations. Governmental and private third-party
payors try to contain medical costs by:  
    
    lowering reimbursements,
    
    imposing use restrictions and risk-based compensation arrangements,
    
    redesigning benefits, and
    
    exploring more cost-effective methods of health care delivery. These cost containment efforts may lead to limitations or reductions in
reimbursement for eye care services, which would adversely affect our future
sales. Additionally, some reimbursement programs require us to collect payment
from third party payors. Our inability to fully collect reimbursable amounts
could adversely affect cash flow generated from operations. We depend on reliable and timely reimbursement of claims we submit to third
party payors. There are risks we may not be paid on a timely basis, or that we
will be paid at all. Some plans have complex forms to complete. Sometimes our
staff may incorrectly complete forms, delaying our reimbursement. These delays
can hurt our cash flow and also force us to write-off more of these accounts
receivable. New advances may reduce the need for our products or allow other manufacturers
to produce eyewear at lower cost than we can. Technological advances in the eyecare industry, such as new surgical procedures
or medical devices, could reduce the demand for our products. Corneal
refractive surgery procedures such as laser surgery, radial-keratotomy and
photo-refractive keratectomy may reduce the demand for our products. The
development of new drugs may have a similar effect. Technological advances such
as wafer technology and lens casting may make our current lens manufacturing
method uncompetitive or obsolete. The number of individuals electing Lasik and
similar surgical procedures has increased each year, which could significantly
decrease demand for our goods and services. These and other medical and
technological advances may have a material adverse effect on our operations. A prolonged economic downturn could have an adverse impact on us. We believe that a weakening economy may cause an increase in the period of time
between repurchases of our retail products by the average consumer, since
customers may see replacement purchases of eyeglasses and contact lenses as
non-essential. An extension of the repurchase cycle for our retail products
would reduce the number of sales of our retail products. Lower sales of our
retail products would reduce our revenues. Operating in other countries presents special risks that may affect our results
of operations. Our Mexican operations face risks substantially similar to those we face in our
Wal-Mart stores, including dependence on the host store and limits on
expansion. We cannot assure you that our Mexican operations will be able to
attain profitability. Our foreign operations expose us to all of the risks of investing and operating
in foreign countries generally, including:  
    
    differing regulatory, political and governmental environments,
    
    currency fluctuations,
    
    high inflation,
    
    price controls,
    
    restrictions on profit repatriation,
    
    generally lower per capita income and spending levels,
    
    import duties and value-added taxes, and
    
    difficulties of cross-cultural marketing. 39




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Our Articles of Incorporation, By-Laws, Indenture, and the company shareholder
rights agreement contain provisions that make it more difficult to effect a
change in control of the company, which may adversely affect the price of our
common stock. Provisions of our Articles of Incorporation and By-Laws could discourage tender
offers or other transactions that would result in shareholders receiving a
premium over the market price for our common stock. These include provisions:  
    
    authorizing the issuance of preferred stock without shareholder approval,
    
    requiring a supermajority shareholder vote in various circumstances,
    
    restricting who may call a special meeting of shareholders,
    
    permitting our board of directors to consider constituencies in addition to the shareholders, and
    
    requiring shareholders to comply with various procedures in connection with any shareholder
proposals or director nominations. The Indenture governing our Senior Subordinated Notes provides that, upon a
Change of Control (as defined), the Company is obligated to offer to
repurchase all outstanding notes at par. A Change of Control is defined to
include, among other things, the acquisition by a group of 50% or more of our
common stock, and the election of a majority of directors who were not approved
by a majority of the prior directors. Our shareholder rights agreement provides
us with a defensive mechanism that decreases the risk that a hostile acquirer
will attempt to take control of us without negotiating directly with our board
of directors. It is meant to prevent an acquirer from gaining control of us by
paying an inadequate price or by using coercive techniques. The shareholder
rights agreement may discourage acquirers from attempting to purchase us, which
may adversely affect the price of our common stock. We may not have the ability to raise the funds necessary to finance the change
of control repurchase contemplated by our indenture. Upon some changes of control of the Company, holders of our notes have the
right to require us to repurchase all or a portion of the notes. If a change of
control occurs, we cannot assure you that we will have sufficient funds to
repurchase all of the notes tendered. Our failure to repurchase tendered notes would be an event of default under our
indenture. Changes of control are also restricted by, and constitute a default
under, our credit facility. If the lender under our credit facility were to
accelerate our obligations due to a default, it would have a priority claim to
the proceeds from the sale of our assets that secure the credit facility. Our adoption of fresh start accounting may make evaluating our financial
position and results of operations, as compared to prior periods, more
difficult. Due to our emergence from bankruptcy pursuant to our plan of reorganization, we
implemented fresh start accounting as of June 2, 2001. In accordance with
fresh start accounting, all assets and liabilities were restated to reflect
their respective fair values. As a result, the consolidated financial
statements for our reorganized company starting on and going forward from June
2, 2001 will not be comparable to our consolidated financial statements for the
periods prior to June 2, 2001. The change in our accounting principles may make
it more difficult to compare our operations to prior periods. 40




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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market Risk Market risk is the potential change in an instruments value
 caused by, for
example, fluctuations in interest and currency exchange rates. Our primary
market risk exposures are interest rate risk and the risk of unfavorable
movements in exchange rates between the U.S. dollar and the Mexican peso.
Monitoring and managing these risks is a continual process carried out by
senior management, which reviews and approves our risk management policies. We
manage market risk on the basis of an ongoing assessment of trends in interest
rates, foreign exchange rates, and economic developments, giving consideration
to possible effects on both total return and reported earnings. Our financial
advisors, both internal and external, provide ongoing advice regarding trends
that affect managements assessment. Our operations are not considered to give
rise to significant market risk. Interest Rate Risk We borrow long-term debt under our credit facility at variable
 interest rates.
(See Note 10 to Consolidated Financial Statements.) We therefore incur the risk
of increased interest costs if interest rates rise. At January 3, 2004, we had
no outstanding borrowings under our credit facility. Our interest cost under
our Senior Subordinated Notes is fixed at 12% through the expiration date of
the Senior Subordinated Notes, due 2009. Foreign Currency Risk Our division in Mexico operates in a functional currency other
 than the U.S.
dollar. The net assets of this division are exposed to foreign currency
translation gains and losses, which are included as a component of accumulated
other comprehensive loss in shareholders equity. Such translation resulted in
unrealized losses of approximately $141,000 in 2003 and unrealized losses of
$274,000 in 2002. Historically, we have not attempted to hedge this equity
risk. 
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Our Consolidated Financial Statements are included as a separate
 section of
this Report commencing on page F-1. 
 ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 
 ITEM 9A. CONTROLS AND PROCEDURES As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective as of the date of such
evaluation. Disclosure controls and procedures are controls and
procedures that are designed to ensure that information required to be
disclosed in Company reports filed or submitted under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commissions rules and forms. There were no changes in our internal control over
financial reporting that occurred during our fourth fiscal quarter that have
materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting. Since the evaluation date, there
have not been any significant changes in our internal controls, or in other
factors that could significantly affect these controls subsequent to the
evaluation date. 41




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PART III 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT We have in place a Code of Business Conduct and Ethics that applies to our
employees, directors and certain contractors. We have also adopted a Code of
Ethics that applies to our Chief Executive Officer, Chief Financial Officer,
and our Controller. We will provide a copy of this Code of Ethics to any
person without charge, upon written request sent to: Investor Relations,
National Vision, Inc., 296 Grayson Highway, Lawrenceville, Georgia 30045. With respect to the remaining
information called for by this item,
we incorporate by reference the section titled Election of Directors in our
Proxy Statement to be mailed to shareholders in connection with our 2004 annual meeting
of shareholders. 
 ITEM 11. EXECUTIVE COMPENSATION We incorporate by reference the section titled Compensation of Executive
Officers in our Proxy Statement to be mailed to shareholders in connection
with our 2004 annual meeting of shareholders. 
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT We incorporate by reference the section titled Common Stock Ownership of
Certain Beneficial Owners and Management in our Proxy Statement to be mailed
to shareholders in connection with our 2004 annual meeting of shareholders. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In 2003, Nelson Eye Associates, P.C., which is wholly owned by Dr. Marc Nelson,
paid us approximately $300,000 in occupancy fees related to the sub-occupancy
of nine of our retail optical locations. Dr. Nelson is a member of our Board
of Directors. 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES We incorporate by reference the section entitled Fees of Independent
Accountants in our Proxy Statement to be mailed to shareholders in connection
with our 2004 annual meeting of shareholders. 42




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PART IV 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1) and (2) The Consolidated Financial Statements and Schedule of the
Company and its subsidiaries are filed as a separate section of this Report
commencing on page F-1. (3) We have filed or furnished the following exhibits: Exhibit Number: Description: 2.1  First Amended Joint Plan of Reorganization Under Chapter 11, Title 11,
United States Code, filed by Vista Eyecare, Inc. and certain of its Debtor
Subsidiaries, dated April 13, 2001, incorporated by reference to Exhibit 2.1 to
our Current Report on Form 8-K filed with the Commission on June 1, 2001. 2.2  Modification to First Amended Joint Plan of Reorganization Under Chapter
11, Title 11, United States Code, filed by Vista Eyecare, Inc. and certain of
its Debtor Subsidiaries and First Amended Joint Plan of Reorganization Under
Chapter 11, Title 11, United States Code, filed by Frame-n-Lens Optical, Inc.;
Midwest Vision, Inc.; New West Eyeworks, Inc., and certain of their Debtor
Subsidiaries, dated May 17, 2001, incorporated by reference to Exhibit 2.2 to
our Current Report on Form 8-K filed with the Commission on June 1, 2001. 3.1  Amended and Restated Articles of Incorporation of the Company dated April
8, 1992 as amended, incorporated by reference to Exhibit 3.1 to our
Registration Statement on Form 8-A filed with the Commission on August 9, 2001. 3.2  Amended and Restated By-Laws of the Company, incorporated by reference
to our Registration Statement on Form S-1, registration number 33-46645, filed
with the Commission on March 25, 1992, and amendments thereto. 4.1  Form of Common Stock Certificate, incorporated by reference to Exhibit
4.1 to our Registration Statement on Form 8-A filed with the Commission on
August 9, 2001. 4.2  Rights Agreement dated as of January 17, 1997 between the Company and
Wachovia Bank of North Carolina, N.A., incorporated by reference to our
Registration Statement on Form 8-A filed with the Commission on January 17,
1997. 4.3  Amendment to Rights Agreement dated as of March 1, 1998 between the
Company and Wachovia Bank of North Carolina, N.A., incorporated by reference to
Exhibit 10.2 to our Registration Statement on Form 8-A filed with the
Commission on March 24, 1998. 4.4  Second Amendment to Rights Agreement dated as of June 1, 1999 between the
Company and First Union National Bank, as successor to Wachovia Bank, N.A.* 4.5  Indenture dated as of June 15, 2001 between the Company and State Street
Bank and Trust Company, as trustee, incorporated by reference to Exhibit 4.4 to
our Annual Report on Form 10-K for fiscal 2002. 4.6  First Amendment of Indenture dated as of July 6, 2001 between the Company
and State Street Bank and Trust Company, as trustee, incorporated by reference
to Exhibit 4.2 to our Registration Statement on Form 8-A filed with the
Commission on August 9, 2001. 4.7  Registration Rights Agreement dated as of May 31, 2001 among the Company
and the Holders (as defined therein) of registrable securities, incorporated by
reference to Exhibit 4.8 to our Amendment to Quarterly Report on Form 10-Q/A
filed with the Commission on August 22, 2001. 43




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4.8  Amendment to Registration Rights Agreement dated as of August 7, 2001
among the Company and the Holders (as defined therein) of registrable
securities, incorporated by reference to Exhibit 4.9 to our Amendment to
Quarterly Report on Form 10-Q/A filed with the Commission on August 22, 2001. 4.9  Lock-Up Agreement dated May 31, 2001 between Scudder High Yield Series 
Scudder High Yield Fund and the Company, incorporated by reference to Exhibit
4.8 to our Annual Report on Form 10-K for fiscal 2001. 4.10  Lock-Up Agreement dated May 31, 2001 between U.S. Bancorp Investments,
Inc. and the Company, incorporated by reference to Exhibit 4.9 to our Annual
Report on Form 10-K for fiscal 2001. 4.11  Second Amendment of Indenture dated as of December 7, 2001 between the
Company and State Street Bank and Trust Company, as trustee, incorporated by
reference to Exhibit 4.10 to our Annual Report on Form 10-K for fiscal 2001. 10.1  Vision Center Master License Agreement dated as of June 16, 1994 by and
between Wal-Mart Stores, Inc. and the Company, incorporated by reference to our
Quarterly Report on Form 10-Q for the quarterly period ended September 30,
1994, Commission File No. 0-20001. 10.2  Sublease Agreement dated December 16, 1991 by and between Wal-Mart
Stores, Inc. and the Company, incorporated by reference to our Registration
Statement on Form S-1, registration number 33-46645, filed with the Commission
on March 25, 1992, and amendments thereto. 10.3  Agreement dated as of November 23, 1995 by and between Mexican Vision
Associates Operadora, S. de R.L. de C.V. and Wal-Mart de Mexico, S.A. de C.V.
in original Spanish and an uncertified English translation, incorporated by
reference to our Form 10-K for the fiscal year ended December 30, 1995,
Commission File No. 0-20001. 10.4  Retail Lease Agreement dated as of March 1999 between Fred Meyer
Stores, Inc. and the Company. [Portions of Exhibit 10.4 have been omitted
pursuant to a request for confidential treatment filed with the Commission. The
omitted portions have been filed separately with the Commission.]* 10.5  Lease Extension and Modification Agreement dated as of July 1, 2003
between Fred Meyer Stores, Inc. and the Company. [Portions of Exhibit 10.5 have
been omitted pursuant to a request for confidential treatment filed with the
Commission. The omitted portions have been filed separately with the
Commission.]* 10.6  Restated Stock Option and Incentive Award Plan.*++ 10.7  Restated Non-Employee Director Stock Option Plan, incorporated by
reference to our Quarterly Report on Form 10-Q for the quarterly period ended
June 28, 1997, Commission File No. 0-20001.++ 10.8  Form Restricted Stock Award, incorporated by reference to our Quarterly
Report on Form 10-Q for the quarterly period ended March 29, 1997, Commission
File No. 0-20001.++ 10.9  Restricted Stock Award made as of April 11, 2002 by the Company to L.
Reade Fahs, incorporated by reference to our Quarterly Report on Form 10-Q for
the quarterly period ended June 29, 2002.++ 10.10  Form Performance Share Award Agreement, incorporated by reference to our
Quarterly Report on Form 10-Q for the quarterly period ended June 29, 2002.++ 10.11  Form Stock Option 2001 Grant for Employees, incorporated by reference
to our Quarterly Report on Form 10-Q for the quarterly period ended June 29,
2002.++ 10.12  Form Change in Control Agreement, incorporated by reference to our
Annual Report on Form 10-K for the fiscal year ended December 30, 2000.++ 44




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10.13  Form indemnification agreement for directors and executive officers of
the Company, incorporated by reference to our Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 2001. 10.14  Split Dollar Life Insurance Agreement dated as of November 3, 1994 among
the Company, A. Kimbrough Davis, as Trustee, and James W. Krause, incorporated
by reference to our Annual Report on Form 10-K for the fiscal year ended
December 31, 1994, Commission File No. 0-20001.++ 10.15  Management Incentive Plan.*++ 10.16  Executive Relocation Policy, incorporated by reference to our Quarterly
Report on Form 10-Q for the quarterly period ended March 30, 1996, Commission
File No. 0-20001.++ 10.17  Loan and Security Agreement dated as of May 30, 2001 between the
Company and Fleet Capital Corporation, incorporated by reference to our
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001. 10.18  First Amendment to Loan and Security Agreement dated as of December 21,
2001 between the Company and Fleet Capital Corporation.* 10.19  Letter Agreement dated June 30, 2002 between the Company and Fleet
Capital Corporation, incorporated by reference to our Quarterly Report on Form
10-Q for the quarterly period ended September 28, 2002. 10.20  Second Amendment to Loan and Security Agreement dated as of December 19,
2003 between the Company and Fleet Capital Corporation.* 10.21  Agreement and General Release dated as of December 27, 2002 between the
Company and James W. Krause, incorporated by reference to our Annual Report on
Form 10-K for the fiscal year ended December 28, 2002.++ 21  Subsidiaries of the Registrant.* 23.1  Consent of Deloitte & Touche LLP.* 31.1  Certification of Chief Executive Officer required by Rule 13a-14(a).* 31.2  Certification of Chief Financial Officer required by Rule 13a-14(a).* 32  Certifications of Chief Executive Officer and Chief Financial Officer
required by Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the
United States Code.*   *
    
    Filed with this Form 10-K.++
    
    Management contract or compensatory plan or arrangement in which a director
or named executive officer participates. 45




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(b) The following reports on Form 8-K have been filed during the last quarter
of the period covered by this report: Date of Report
    
    Item Reported
    
    Financial Statements FiledNovember 18, 2003
    
    Item 12
    
    3rd Quarter 2003December 3, 2003
    
    Item 9
    
    NoneDecember 29, 2003
    
    Item 5
    
    None
 46




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(NATIONAL VISION LOGO) NATIONAL VISION, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
FOR THE YEARS ENDED JANUARY 3, 2004 AND DECEMBER 28, 2002,
THE SEVEN MONTHS ENDED DECEMBER 29, 2001 AND
THE FIVE MONTHS ENDED JUNE 2, 2001,
TOGETHER WITH AUDITORS REPORT 
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE The following consolidated financial statements and schedule of the registrant
and its subsidiaries are submitted herewith in response to Item 8 and Item
14(a)1 and to Item 14(a)2, respectively. PageIndependent Auditors Report
    
    
    F-2Consolidated Balance Sheets as of January 3, 2004 and December 28, 2002
    
    
    F-3Consolidated Statements of Operations for the Years Ended January 3, 2004 and December 28, 2002,
the Seven Months Ended December 29, 2001 and the Five Months Ended June 2, 2001
    
    
    F-4Consolidated Statements of Shareholders Equity / (Deficit)
for the Years Ended January 3, 2004 and December 28, 2002,
the Seven Months Ended December 29, 2001 and the Five Months Ended June 2, 2001
    
    
    F-5Consolidated Statements of Cash Flows for the Years Ended January 3, 2004 and December 28, 2002,
the Seven Months Ended December 29, 2001 and the Five Months Ended June 2, 2001
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-7Schedule II, Valuation and Qualifying Accounts
    
    
    S-1
 All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions, are inapplicable, or have been disclosed in the notes
to consolidated financial statements and, therefore, have been omitted. F-1




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##### Table of Contents



INDEPENDENT AUDITORS REPORT Board of Directors and Shareholders
National Vision, Inc.
Lawrenceville, Georgia We have audited the accompanying consolidated balance sheets of National
Vision, Inc. and subsidiaries as of January 3, 2004 and December 28, 2002
(Successor Company balance sheets), and the related consolidated statements of
operations, shareholders equity, and cash flows for each of the two years in
the period ended January 3, 2004 (Successor Company operations), the seven
months ended December 29, 2001 (Successor Company operations), and the five
months ended June 2, 2001 (Predecessor Company operations). Our audits also
included the financial statement schedule listed in the Index at page S-1.
These financial statements and financial statement schedule are the
responsibility of the Companys management. Our responsibility is to express
an opinion on the financial statements and financial statement schedule based
on our audits. We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. In our opinion, the Successor Company consolidated financial statements present
fairly, in all material respects, the financial position of National Vision,
Inc. and subsidiaries as of January 3, 2004 and December 28, 2002, and the
results of their operations and their cash flows for each of the two years in
the period ended January 3, 2004, and the period from June 3, 2001 to December
29, 2001, in conformity with accounting principles generally accepted in the
United States of America. Further, in our opinion, the Predecessor Company
financial statements referred to above present fairly, in all material
respects, the Predecessor Companys results of their operations and their cash
flows for the period from December 31, 2000 to June 2, 2001, in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP Atlanta, Georgia
April 2, 2004 F-2




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##### Table of Contents



NATIONAL VISION, INC.
CONSOLIDATED BALANCE SHEETS
January 3, 2004 and December 28, 2002
(in thousands, except share information) January 3, 2004
    
    December 28, 2002ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    3,545
    
    
    $
    9,020Accounts receivable (net of allowance: 2003 - $769; 2002 - $1,031)
    
    
    3,078
    
    
    
    2,164Inventories
    
    
    17,387
    
    
    
    17,928Other current assets
    
    
    1,278
    
    
    
    1,305Deferred income tax asset
    
    
    7,305
    
    
    
    3,428Total current assets
    
    
    32,593
    
    
    
    33,845PROPERTY AND EQUIPMENT:Equipment
    
    
    20,383
    
    
    
    19,876Furniture and fixtures
    
    
    7,785
    
    
    
    7,833Leasehold improvements
    
    
    6,556
    
    
    
    6,709Construction in progress
    
    
    1,750
    
    
    
    1,36036,474
    
    
    
    35,778Less accumulated depreciation
    
    
    (22,855
    )
    
    
    (17,786
    )Net property and equipment
    
    
    13,619
    
    
    
    17,992OTHER ASSETS AND DEFERRED COSTS(net of accumulated amortization: 2003 - $964; 2002 - $658)
    
    
    806
    
    
    
    1,004INTANGIBLE VALUE OF CONTRACTUAL RIGHTS(net of accumulated amortization: 2003 - $19,466; 2002 - $11,944)
    
    
    93,279
    
    
    
    100,960$
    140,297
    
    
    $
    153,801LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    3,506
    
    
    $
    3,445Accrued expenses and other current liabilities
    
    
    25,132
    
    
    
    24,393Current portion of long-term debt
    
    
    545
    
    
    
    3,824Total current liabilities
    
    
    29,183
    
    
    
    31,662DEFERRED INCOME TAX LIABILITY
    
    
    7,305
    
    
    
    3,428SENIOR SUBORDINATED NOTES
    
    
    94,939
    
    
    
    105,882COMMITMENTS AND CONTINGENCIES (Note 11)SHAREHOLDERS EQUITY:Preferred stock, $1 par value; 5,000,000 shares authorized; none issued
Common stock, $0.01 par value; 10,000,000 shares authorized, 5,243,047
and 5,084,400 shares issued and outstanding at January 3, 2004
and December 28, 2002, respectively
    
    
    52
    
    
    
    50Additional paid-in capital
    
    
    25,129
    
    
    
    25,097Deferred stock compensation
    
    
    (108
    )
    
    
    (124
    )Retained deficit
    
    
    (15,932
    )
    
    
    (12,064
    )Accumulated other comprehensive loss
    
    
    (271
    )
    
    
    (130
    )Total shareholders equity
    
    
    8,870
    
    
    
    12,829$
    140,297
    
    
    $
    153,801
 The accompanying notes are an integral part of these consolidated financial
statements. F-3




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##### Table of Contents



National Vision, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended January 3, 2004 and December 28, 2002,
the seven months ended December 29, 2001
and the five months ended June 2, 2001
(in thousands, except per share information) Successor
    
    
    PredecessorSeven Months
    

    Five MonthsYear Ended
    
    Year Ended
    
    Ended
    

    EndedJanuary 3, 2004
    
    December 28, 2002
    
    December 29, 2001
    

    June 2, 2001(53 weeks)
    
    (52 weeks)Retail sales, net
    
    $
    236,125
    
    
    $
    222,156
    
    
    $
    122,525
    
    

    $
    110,417Premium revenue
    
    
    6,347
    
    
    
    2,041
    
    
    
    
    
    

    
    Other revenue
    
    
    877
    
    
    
    
    
    
    
    
    
    

    
    Total net revenue
    
    
    243,349
    
    
    
    224,197
    
    
    
    122,525
    
    

    
    110,417Cost of goods sold
    
    
    110,907
    
    
    
    100,699
    
    
    
    54,837
    
    

    
    52,293Gross profit
    
    
    132,442
    
    
    
    123,498
    
    
    
    67,688
    
    

    
    58,124Operating expenses:Selling, general & administrative expense
    
    
    123,713
    
    
    
    119,451
    
    
    
    66,190
    
    

    
    64,253Impairment of long-lived assets
    
    
    550
    
    
    
    
    
    
    
    
    
    

    
    Restructuring expense
    
    
    484
    
    
    
    
    
    
    
    
    
    

    
    Total operating expense
    
    
    124,747
    
    
    
    119,451
    
    
    
    66,190
    
    

    
    64,253Operating income (loss)
    
    
    7,695
    
    
    
    4,047
    
    
    
    1,498
    
    

    
    (6,129
    )Other expense, net:Interest expense
    
    
    (12,913
    )
    
    
    (14,099
    )
    
    
    (8,459
    )
    

    
    (1,154
    )Gain on repurchase of Notes
    
    
    2,321
    
    
    
    1,566
    
    
    
    
    
    

    
    Other income, net
    
    
    50
    
    
    
    470
    
    
    
    70
    
    

    
    4Loss before reorganization items, taxes, discontinued
operations and cumulative effect of a change in
accounting principle
    
    
    (2,847
    )
    
    
    (8,016
    )
    
    
    (6,891
    )
    

    
    (7,279
    )Reorganization gain
    
    
    
    
    
    
    
    
    
    
    
    
    

    
    102,515Gain on restructuring of debt
    
    
    
    
    
    
    
    
    
    
    
    
    

    
    17,182Earnings (loss) before taxes, discontinued
operations and cumulative effect of a change in
accounting principle
    
    
    (2,847
    )
    
    
    (8,016
    )
    
    
    (6,891
    )
    

    
    112,418Income tax expense
    
    
    (198
    )
    
    
    
    
    
    
    
    
    

    
    Net earnings (loss) before discontinued
operations and cumulative effect of a change in
accounting principle
    
    
    (3,045
    )
    
    
    (8,016
    )
    
    
    (6,891
    )
    

    
    112,418Discontinued Operations:Operating income (loss) from discontinued
operations
    
    
    (200
    )
    
    
    1,862
    
    
    
    1,031
    
    

    
    905Loss on disposal
    
    
    (59
    )
    
    
    (50
    )
    
    
    
    
    

    
    Income (loss) from discontinued operations
    
    
    (259
    )
    
    
    1,812
    
    
    
    1,031
    
    

    
    905Earnings (loss) before cumulative effect of a change in
accounting principle
    
    
    (3,304
    )
    
    
    (6,204
    )
    
    
    (5,860
    )
    

    
    113,323Cumulative effect of a change in accounting
principle
    
    
    (564
    )
    
    
    
    
    
    
    
    
    

    
    Net earnings (loss)
    
    $
    (3,868
    )
    
    $
    (6,204
    )
    
    $
    (5,860
    )
    

    $
    113,323Basic and diluted earnings (loss) per share:Income (loss) from continuing operations
    
    $
    (0.61
    )
    
    $
    (1.60
    )
    
    $
    (1.38
    )
    

    $
    5.31Income (loss) from discontinued operations
    
    
    (0.05
    )
    
    
    0.36
    
    
    
    0.21
    
    

    
    0.04Earnings (loss) before extraordinary items and
cumulative effect
    
    
    (0.66
    )
    
    
    (1.24
    )
    
    
    (1.17
    )
    

    
    5.35Cumulative effect, net
    
    
    (0.11
    )
    
    
    
    
    
    
    
    
    

    
    Net earnings (loss) per share
    
    $
    (0.77
    )
    
    $
    (1.24
    )
    
    $
    (1.17
    )
    

    $
    5.35
 The accompanying notes are an integral part of these consolidated financial
statements F-4




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##### Table of Contents



National Vision, Inc.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY/(DEFICIT)
For the years ended January 3, 2004 and December 28, 2002,
the seven months ended December 29, 2001
and the five months ended June 2, 2001
(in thousands) Total
    
    Common Stock
    
    Additional
    
    Deferred
    
    Retained
    
    AccumulatedOtherShareholders
    
    
    
    
    
    
    
    
    
    Paid-in
    
    Stock
    
    Earnings/
    
    Comprehensive
    
    ComprehensiveEquity
    
    Shares
    
    Amount
    
    Capital
    
    Compensation
    
    (Deficit)
    
    Income/(loss)
    
    Income/(loss)Predecessor Company:Balance at December 30, 2000
    
    $
    (113,323
    )
    
    
    21,169
    
    
    $
    211
    
    
    $
    47,387
    
    
    $
    
    
    
    $
    (156,848
    )
    
    $
    (4,073
    )
    
    $
    Net income
through June 2, 2001
    
    
    113,323
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    113,323
    
    
    
    
    
    
    
    113,323Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    113,323Elimination of prior equity
    
    
    
    
    
    
    (21,169
    )
    
    
    (211
    )
    
    
    (47,387
    )
    
    
    
    
    
    
    43,525
    
    
    
    4,073Balance at June 2, 2001
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Successor Company:Distribution of new
common shares 
June 2, 2001
    
    $
    25,000
    
    
    
    5,000
    
    
    $
    50
    
    
    $
    24,950
    
    
    $
    
    
    
    $
    
    
    
    $
    Stock issuance costs
    
    
    (10
    )
    
    
    
    
    
    
    
    
    
    
    (10
    )Net loss, June 3 through
December 29, 2001
    
    
    (5,860
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,860
    )
    
    
    
    
    
    $
    (5,860
    )Cumulative translation
adjustment
    
    
    144
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    144
    
    
    
    144Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (5,716
    )Balance at Dec 29, 2001
    
    $
    19,274
    
    
    
    5,000
    
    
    $
    50
    
    
    $
    24,940
    
    
    $
    
    
    
    $
    (5,860
    )
    
    $
    144Net loss
    
    
    (6,204
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,204
    )
    
    
    
    
    
    $
    (6,204
    )Cumulative translation
adjustment
    
    
    (274
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (274
    )
    
    
    (274
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (6,478
    )Restrict stock awards
    
    
    
    
    
    
    84
    
    
    
    
    
    
    
    157
    
    
    
    (157
    )Amortization of
deferred compensation
    
    
    33
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33Balance at Dec 28, 2002
    
    $
    12,829
    
    
    
    5,084
    
    
    $
    50
    
    
    $
    25,097
    
    
    $
    (124
    )
    
    $
    (12,064
    )
    
    $
    (130
    )Net loss
    
    
    (3,868
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,868
    )
    
    
    
    
    
    $
    (3,868
    )Cumulative translation
adjustment
    
    
    (141
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (141
    )
    
    
    (141
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (4,009
    )Stock incentive awards
    
    
    5
    
    
    
    14
    
    
    
    
    
    
    
    5Restricted stock awards
    
    
    
    
    
    
    145
    
    
    
    2
    
    
    
    27
    
    
    
    (29
    )Amortization of
deferred compensation
    
    
    45
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45Balance at January 3, 2004
    
    $
    8,870
    
    
    
    5,243
    
    
    $
    52
    
    
    $
    25,129
    
    
    $
    (108
    )
    
    $
    (15,932
    )
    
    $
    (271
    )
 The accompanying notes are an integral part of these consolidated financial
statements. F-5




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##### Table of Contents



National Vision, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended January 3, 2004 and December 28, 2002,
the seven months ended December 29, 2001
and the five months ended June 2, 2001
(in thousands) Successor
    
    
    PredecessorSeven Months
    
    
    Five MonthsYear Ended
    
    Year Ended
    
    Ended
    
    
    EndedJanuary 3, 2004
    
    December 28, 2002
    
    December 29, 2001
    
    
    June 2, 2001(53 weeks)
    
    (52 weeks)Cash flow from operating activities:Net income (loss)
    
    $
    (3,868
    )
    
    $
    (6,204
    )
    
    $
    (5,860
    )
    
    
    $
    113,323Adjustments to reconcile cash to net
income (loss):Depreciation & amortization
    
    
    15,962
    
    
    
    18,999
    
    
    
    11,425
    
    
    
    
    4,808Impairment of long-lived assets
    
    
    550
    
    
    
    
    
    
    
    
    
    
    
    
    Reorganization items
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,748Cumulative effect of a change in accounting
principle
    
    
    564
    
    
    
    
    
    
    
    
    
    
    
    
    Fresh start adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (114,263
    )Gain on extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,182
    )Gain on repurchase of subordinated notes
    
    
    (2,321
    )
    
    
    (1,566
    )
    
    
    
    
    
    
    
    Gain on disposal of equipment
    
    
    (21
    )
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    46
    
    
    
    627
    
    
    
    256
    
    
    
    
    (259
    )Changes in operating assets & liabilities:Accounts receivable
    
    
    (914
    )
    
    
    1,744
    
    
    
    636
    
    
    
    
    5,177Inventories
    
    
    (23
    )
    
    
    693
    
    
    
    1,245
    
    
    
    
    4,083Other current assets
    
    
    27
    
    
    
    396
    
    
    
    142
    
    
    
    
    597Accounts payable
    
    
    61
    
    
    
    (490
    )
    
    
    2,187
    
    
    
    
    1,210Accrued expenses and other current liabilities
    
    
    739
    
    
    
    (1,075
    )
    
    
    (5,218
    )
    
    
    
    322Net cash provided by operating activities
    
    
    10,802
    
    
    
    13,124
    
    
    
    4,813
    
    
    
    
    9,564Cash flow from investing activities:Purchase of property & equipment
    
    
    (4,517
    )
    
    
    (5,209
    )
    
    
    (2,750
    )
    
    
    
    (2,084
    )Proceeds from sale of property &
equipment
    
    
    253
    
    
    
    
    
    
    
    
    
    
    
    
    5,656Net cash provided (used) by investing activities
    
    
    (4,264
    )
    
    
    (5,209
    )
    
    
    (2,750
    )
    
    
    
    3,572Cash flow from financing activities:Advances on revolver
    
    
    1,904
    
    
    
    7,378
    
    
    
    112,855
    
    
    
    
    125,063Payments on revolver
    
    
    (1,904
    )
    
    
    (7,378
    )
    
    
    (115,855
    )
    
    
    
    (134,975
    )Principal payments on subordinated debt
    
    
    (8,161
    )
    
    
    (5,796
    )
    
    
    
    
    
    
    
    Repurchases of subordinated debt
    
    
    (3,702
    )
    
    
    (2,932
    )
    
    
    
    
    
    
    
    Deferred financing costs
    
    
    (150
    )
    
    
    
    
    
    
    (286
    )
    
    
    
    (125
    )Stock issuance costs
    
    
    
    
    
    
    
    
    
    
    (10
    )
    
    
    
    Principal payments on other long-term debt
    
    
    
    
    
    
    (13
    )
    
    
    (86
    )
    
    
    
    Net cash used by financing activities
    
    
    (12,013
    )
    
    
    (8,741
    )
    
    
    (3,382
    )
    
    
    
    (10,037
    )Net (decrease) increase in cash
    
    
    (5,475
    )
    
    
    (826
    )
    
    
    (1,319
    )
    
    
    
    3,099Cash, beginning of period
    
    
    9,020
    
    
    
    9,846
    
    
    
    11,165
    
    
    
    
    8,066Cash, end of period
    
    $
    3,545
    
    
    $
    9,020
    
    
    $
    9,846
    
    
    
    $
    11,165
 The accompanying notes are an integral part of these consolidated financial
statements. F-6




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##### Table of Contents



NATIONAL VISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND OPERATIONS National Vision, Inc. (the Company) is engaged in the retail sale of optical
goods and services. We are largely dependent on Wal-Mart Stores, Inc.
(Wal-Mart) for continued operation of vision centers which generate a
significant portion of our revenues. See Note 8 Wal-Mart Master License
Agreement and Other Agreements. We emerged from Chapter 11 on May 31, 2001
and adopted fresh start accounting. See Note 6  Bankruptcy Proceedings
and Fresh Start Adjustments. 2. SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include our accounts as well as our
subsidiaries accounts. All significant inter-company balances and transactions
have been eliminated in consolidation. Fiscal Year Our fiscal year ends on the Saturday closest to December 31. Pursuant to such
calendar, fiscal 2003 was a 53-week period ended January 3, 2004, and fiscal
2002 and 2001 were 52-week periods. Due to various statutory and other
considerations, international operations do not operate on this 52/53 week
calendar. To allow for more timely consolidation and reporting, international
operations (approximately 2% of net revenues) are reported using a twelve-month
period ending November 30. Reclassifications As a result of our 2003 adoption of Financial Accounting Standard Board
Statement No. 145, we have reclassified the prior period gain on the purchase
of debt from extraordinary income to income from continuing operations in the
Consolidated Statements of Operations. Certain other amounts in the prior year
financial statements have been reclassified to conform to the current year
presentation. Discontinued Operations During 2003, we closed 54 vision centers. Forty-two closings were the result
of Wal-Mart or military lease expirations. The remaining twelve closures were
under-performing Fred Meyer vision centers closed prior to their scheduled
lease expiration. Historical operating results for these closed vision centers
have been reclassified as discontinued operations and shown separately for all
periods presented. Condensed information for these closed stores is presented
below (in thousands): Year Ended
    
    Year Ended
    
    Seven Months Ended
    
    
    Five Months EndedJanuary 3, 2004
    
    December 28, 2002
    
    December 29, 2001
    
    
    June 2, 2001Total net sales
    
    $
    9,798
    
    
    $
    22,823
    
    
    $
    13,018
    
    
    
    $
    10,140Operating income (loss)
    
    $
    (200
    )
    
    $
    1,862
    
    
    $
    1,031
    
    
    
    $
    905Loss on disposal
    
    $
    (59
    )
    
    $
    (50
    )
    
    $
    
    
    
    
    $
    
 Fresh Start Accounting Upon emergence from bankruptcy, we adopted fresh start accounting in
accordance with AICPA Statement of Position 90-7. As a result, all assets and
liabilities were restated to reflect their respective fair values. The
consolidated financial statements after emergence are those of a new reporting
entity (the Successor) and are not comparable to the financial statements of
the pre-confirmation company (the Predecessor). A black line has been drawn
in the financial statements to distinguish Predecessor and Successor Company
results. (See Note 6  Bankruptcy Proceedings and Fresh Start Adjustments.) Revenue Recognition Our retail customers generally pay for their eyewear products at the time they
place an order. We defer revenue recognition until delivery of the product by
estimating the value of transactions in which final delivery to the customer
has not occurred at the end of the period presented. Payments received prior
to final delivery of the product are reflected as deposit liabilities within
accrued liabilities. These estimates are based on historical trends and take
into consideration current changes in our manufacturing and distribution
processes. F-7




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In May 2003, we began to offer a separately priced extended warranty which
provides for repair and replacement service during the first year after
purchase. We had previously provided this same service free of charge.
Revenues from the sale of extended warranty contracts are deferred and
amortized over the life of the contract on a straight-line basis. A reconciliation of the
changes in deferred revenue from the sale of warranty contracts is as follows (in thousands): Year endedJanuary 3, 2004Deferred
warranty revenue:Beginning balance
    
    $
    Warranty contracts sold
    
    
    4,603Amortization of deferred revenue
    
    
    (1,923
    )Ending balance
    
    $
    2,680
 Premium revenue is earned from HMO memberships and services. Revenue from
premiums is recognized over the life of the policy as the related services are
rendered. Cost of Goods Sold We recognize cost of product sold to retail customers when the sales
transaction is complete and revenue is recognized. Periodically, we receive
purchase discounts or reduced pricing on inventory purchases. These reductions
in the normal purchase price are accounted for in the weighted average cost of
inventory. Cash and Cash Equivalents We consider cash on hand and short-term cash investments to be cash and cash
equivalents. Our policy is to maintain uninvested cash at minimal levels. Cash
includes cash equivalents, which represent highly liquid investments with a
maturity of one month or less. We restrict investments of temporary cash
investments to financial institutions with high credit standings. Managed Care Accounts Receivable Managed care accounts receivable are recorded net of contractual allowances and
are reduced by an allowance for amounts that may become uncollectible. A
significant portion of our receivables is due from health care plans and
programs located throughout the United States. Estimates of our allowance for
uncollectible receivables are based on our historical collection experience and
historical and current operating, billing and collection trends. Inventory Our inventories are stated at the lower of weighted average cost or market. In most cases, the expected sales value (i.e., market value) of our inventory
is higher than our cost. However, as we progress through a selling season,
certain slow-moving merchandise may be removed from stores and returned to our
distribution center to be sold below cost in secondary markets. As a result,
there is a high degree of judgment and complexity in determining the market
value of such inventories. For inventory on hand, we estimate the future
selling price of our merchandise, given our current selling price and our
planned promotional activities, and provide a reserve for the difference
between cost and the expected selling price for all items expected to be sold
below cost. We conduct physical inventory counts for a selection of store locations near
the end of each fiscal quarter and adjust our records to reflect the actual
inventory counts. Our distribution center is counted near the end of the
fiscal year. As all locations are not counted as of our reporting dates, we
provide a reserve for inventory shrinkage based principally on historical
inventory shrinkage experience. F-8




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Property and Equipment Property and equipment are stated at cost. For financial reporting purposes,
depreciation is computed using the straight-line method over the assets
estimated useful lives or terms of the related leases, whichever is shorter.
Accelerated depreciation methods are used for income tax reporting purposes.
For financial reporting purposes, depreciation periods range from five to ten
years for equipment, three to nine years for furniture and fixtures, three to
six years for hardware and software related to information systems processing,
and five to nine years for leasehold improvements. At the time property and
equipment are retired, the cost and related accumulated depreciation are
removed from the accounts and any gain or loss is credited or charged to
income. Maintenance and repairs are charged to expense as incurred.
Replacements and improvements are capitalized. Balance Sheet Financial Instruments: Fair Values The carrying amounts reported in the consolidated balance sheets for cash and
cash equivalents, accounts receivable, accounts payable, accrued liabilities
and current portion of long-term debt approximate fair value because of the
immediate or short-term maturity of these financial instruments. The fair value of our long-term debt is determined using the weighted average
price of the most recent trades made during the last quarters of the fiscal
years ending January 3, 2004 and December 28, 2002 (in thousands): Carrying Value
    
    Fair ValueLong-term debt at January 3, 2004
    
    $
    94,939
    
    
    $
    57,934Long term debt at December 28, 2002
    
    $
    105,882
    
    
    $
    53,805
 Financial instruments which potentially subject us to concentrations of credit
risk consist principally of trade accounts receivable. The credit risk is
limited due to the large number of individuals and entities comprising our
customer base. Intangible Value Of Contractual Rights Our most significant intangible asset is the Intangible Value of Contractual
Rights, which was established as part of our adoption of fresh start
accounting in May 2001. This intangible asset represents the value of the
Companys lease agreement with Wal-Mart and the business relationship therein
created. In accordance with SFAS No. 142, Goodwill and Other Intangible
Assets, this intangible is an amortizable asset because it has a finite useful
life. However, the precise length of its life is not known due primarily to
the Wal-Mart supercenter conversions that automatically trigger extensions on
the contractual life of the asset. Based on projections made at the time
fresh start accounting was adopted, our best estimate of the useful life of
this asset was 15 years. At January 3, 2004, the remaining life of this asset
is 12 years and 5 months. Due to the uncertainty involved in predicting the
pattern of economic benefits realized from the Wal-Mart relationship, we
amortize this asset using the straight-line method. F-9




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Amortization expense on the Intangible Value of Contractual Rights was $7.5
million and $7.6 million for the years ended January 3, 2004 and December 28,
2002, respectively. Future amortization expense for each of the five
succeeding years is as follows (amounts in thousands): 2004
    
    $
    7,5082005
    
    $
    7,5082006
    
    $
    7,5082007
    
    $
    7,5082008
    
    $
    7,508
 As described in Note 6, we emerged from Bankruptcy on June 2, 2001. During
2003 and 2002, we realized net income tax benefits of $159,000 and $712,000,
respectively, generated by the Predecessor. In accordance with the provisions
of SOP 90-7, these net benefits have been recorded as a reduction in the value
of the Intangible Value of Contractual Rights. We assess the impairment of all identifiable intangibles and long-lived assets
on an annual basis and whenever events or changes in circumstances indicate
that the carrying value may not be recoverable. Factors we consider important,
which could trigger an impairment review, include (1) a significant
underperformance of vision center operations relative to expected historical or
projected future operating results; (2) significant changes in the manner of
our use of our assets or the strategy for our overall retail optical business;
(3) significant negative industry or economic trends; (4) significant decline
or adverse change in the rate or geographic concentration of Wal-Mart host
store relocations or supercenter conversions; and (5) a permanent adverse
change in cash flows generated by an operation. Based upon the existence of one or more of the above indicators of impairment,
we determine if the carrying value of intangibles or long-lived assets may not
be recoverable based on a projected cash flow model. If the projected
undiscounted cash flows are not in excess of the book value of the related
asset, we adjust the carrying value of the long-term assets to their fair
market value. Significant management judgment is required regarding the
existence of impairment indicators as discussed above. Income Taxes Deferred income taxes are recorded using enacted tax rates in effect for the
year in which the differences are expected to reverse. Deferred income taxes
are provided for depreciation and amortization, inventory basis differences,
and accrued expenses where there is a temporary difference in recording such
items for financial reporting and income tax reporting purposes. Before,
during and after the bankruptcy process, we incurred significant net operating
losses (NOL) that result in tax loss carry-forwards. A portion of these
carry-forwards is subject to limitations under Section 382 of the Internal
Revenue Code. A valuation allowance is recorded against any net deferred tax assets if it is
more likely than not that we will not be able to utilize it to offset future
taxes. Due to the size of the NOL carry-forward in relation to our history of
unprofitable operations and the continuing uncertainties surrounding the
profitability of our ongoing retail businesses, we provide a full valuation
allowance for the net deferred tax asset. We currently provide for income tax
only to the extent that we expect to pay taxes. Accounting for Stock Options We apply the disclosure provisions of SFAS No. 123, Accounting for
Stock-Based Compensation. Stock Option awards continue to be accounted for in
accordance with APB Opinion No. 25. The number of shares to be issued and the
per share strike price are not subject to uncertainty; accordingly our stock
option grants qualify for fixed accounting treatment. As a result, we do not
record compensation expense in connection with the granting of these stock
options. F-10




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Had compensation cost for the employee and non-employee director stock options
been determined based on the fair value at the grant date for awards in 2003,
2002 and 2001 consistent with the provisions of SFAS No. 123, our net earnings
and earnings per share would have been reduced to the pro forma amounts
indicated below (amounts in thousands except per share information): Successor
    

    
    PredecessorSeven Months
    

    

    Five MonthsYear Ended
    
    Year Ended
    
    Ended
    

    

    EndedJanuary 3, 2004
    
    December 28, 2002
    
    December 29, 2001
    

    

    June 2, 2001(53 weeks)
    
    (52 weeks)As reported:Net earnings (loss)
    
    $
    (3,868
    )
    
    $
    (6,204
    )
    
    $
    (5,680
    )
    

    

    $
    113,323Pro Forma:Compensation expense (income)
    
    
    68
    
    
    
    53
    
    
    
    4
    
    

    

    
    (4,312
    )Pro Forma:Net earnings (loss)
    
    $
    (3,936
    )
    
    $
    (6,257
    )
    
    $
    (5,864
    )
    

    

    $
    117,635As reported:Earnings (loss) per share*
    
    $
    (0.77
    )
    
    $
    (1.24
    )
    
    $
    (1.17
    )
    
    
    
    $
    5.35Pro Forma compensation
expense per share
    
    
    (0.02
    )
    
    
    (0.01
    )
    
    
    
    
    

    

    
    0.21Pro Forma earnings (loss)
per share
    
    $
    (0.79
    )
    
    $
    (1.25
    )
    
    $
    (1.17
    )
    

    

    $
    5.56
 *Basic and diluted earnings per share are the same for each period presented. The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model. The following weighted average assumptions
were used in the model: Successor
    

    PredecessorSeven Months
    

    Five MonthsYear Ended
    
    Year Ended
    
    Ended
    

    EndedJanuary 3, 2004
    
    December 28, 2002
    
    December 29, 2001
    

    June 2, 2001Dividend yield
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    

    
    (a
    )Expected volatility
    
    
    410
    %
    
    
    172
    %
    
    
    217
    %
    

    
    (a
    )Risk free interest rates
    
    
    2.60
    %
    
    
    3.00
    %
    
    
    4.50
    %
    

    
    (a
    )Expected lives (years)
    
    
    5.0
    
    
    
    3.4
    
    
    
    6.7
    
    

    
    (a
    )
   (a)
    
    No options were granted during this period. F-11




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Other Assets and Deferred Costs Other assets and deferred costs include capitalized financing costs which are
being amortized using a method that approximates the effective interest yield
method over periods from one to seven years to correspond with the terms of the
underlying debt. Self-Insurance Accruals We self-insure estimated costs associated with workers compensation claims and
group medical liabilities, up to certain limits. Insurance reserves are
established based on actuarial estimates of the loss that we will ultimately
incur on reported claims, as well as estimates of claims that have been
incurred but not yet reported. Trends in actual experience are a significant
factor in the determination of such reserves. We believe our estimated
reserves for such claims are adequate, however actual experience in claim
frequency and/or severity could materially differ from our estimates and affect
our results of operations. Advertising and Promotion Expense Production costs of future media advertising and related promotion campaigns
are deferred until the advertising events occur. All other advertising and
promotion costs are expensed over the course of the year in which they are
incurred. Advertising expense for the years ended January 3, 2004 and December
28, 2002, the seven months ended December 29, 2001, and the five months ended
June 2, 2001, was approximately $3.5 million, $3.2 million, $2.8 million, and
$3.6 million, respectively. Advertising expense for periods
prior to fiscal 2003 are shown net of cooperative advertising
allowances received. Other Expense, Net Other expense includes interest expense, purchase discounts on invoice
payments, the amortization of finance fees and the amortization of the discount
on the subordinated debt. Cumulative Effect of a Change in Accounting Principle We adopted Emerging Issues Task Force Issue No. 02  16, Accounting by a
Customer for Certain Consideration Received from a Vendor (EITF 02-16) at
the beginning of 2003. This Issue addresses the method by which retailers
account for vendor allowances. Prior to fiscal 2003, vendor allowances
received under co-op advertising agreements were classified in the income
statement as a reduction in advertising expense. As a result of the adoption
of EITF 02-16, certain vendor allowances are now presented as a reduction of
inventory cost and subsequently as a component of cost of goods sold. On the
first day of fiscal 2003, we recorded additional expense of $564,000 as the
cumulative effect of this change in accounting principle. This amount
reflects the portion of vendor allowances that would have reduced inventory
costs had this new accounting pronouncement been in effect in 2002. Foreign Currency Translation Assets and liabilities of our foreign operations are translated into U.S.
dollars using year-end exchange rates; income and expenses are translated using
the average exchange rates for the reporting period. Translation gains or
losses are deferred in accumulated other comprehensive income, a separate
component of shareholders equity. Other Comprehensive Income Other comprehensive income is defined as net income and other changes in
stockholders equity from transactions other than those involving stockholders
and net income. Our only source of other comprehensive income is the
cumulative translation adjustment from our operations in Mexico. The
Predecessors cumulative other comprehensive income was eliminated as part of
fresh start accounting on June 2, 2001. F-12




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Use of Estimates The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments and
incorporates any changes in such estimates and judgments into the accounting
records underlying our consolidated financial statements. Management bases its
estimates and judgments on historical experience and on various other factors
that are believed to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions. 3. RECENT ACCOUNTING PRONOUNCEMENTS In November 2002, the FASB issued Interpretation (FIN) No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Other. FIN 45 requires footnote disclosure of
the guarantee or indemnification agreements a company issues. With certain
exceptions, these agreements will also require a company to prospectively
recognize an initial liability for the fair value, or market value, of the
obligations it assumes under that guarantee. The initial recognition and
initial measurement provisions of this Interpretation are applicable on a
prospective basis to guarantees, including product warranty liabilities, issued
or modified after December 31, 2002. Our adoption of FIN No. 45 does not
currently have a material impact on our consolidated financial position,
results of operations, or cash flows. Notes 2 and 14 to the Consolidated
Financial Statements include the additional disclosure requirements of FIN No.
45 as required by companies which provide product warranties. In January 2003, the FASB issued FASB Interpretation No. 46 Consolidation of
Variable Interest Entities, an Interpretation of APB No. 50, (FIN 46). FIN
46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. Our adoption of FIN 46 does not currently have an impact on
our consolidated financial position, results of operations or cash flows. In May 2003, the FASB issued SFAS No. 150 Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity, which
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its
scope as a liability (or an asset in some circumstances). Many of those
instruments were previously classified as equity. This statement was effective
immediately for all financial instruments created or modified after May 31,
2003 and by the first interim period commencing after June 15, 2003 for
existing financial instruments. The adoption of SFAS No. 150 does not
currently affect our financial position or results of operations. F-13




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4. IMPAIRMENT OF LONG LIVED ASSETS Historically, we have
operated our vision centers to the maximum term of the lease,
including the exercise of all available renewal options in most
cases. Our strategy was to maintain store operations, even if the
store was under-performing and devote our attention to correcting the
stores problems. In the fourth quarter of 2003, we revised our
strategy to assess under-performing stores prior to the
lease-termination date, and potentially close the under-performing
stores in order to maximize operating profitability. As a result, we
identified certain store locations with a history of operating losses
that we do not expect to become profitable without significant cost
and effort. We intend to close 13 of these locations in March and
April of 2004. For the 13 locations that we
expect to close prior to the lease termination date, we reviewed the
locations for potential impairment by comparing the future expected
undiscounted cash flows for these locations to the carrying value of
their long-lived assets. The long-lived asset carrying value for 12
of the locations exceeded the future expected undiscounted cash flows
from the locations. Therefore, impairment was determined to exist for
these 12 locations. We also reviewed the remainder of store locations
for potential impairment and identified 30 additional vision centers
in Wal-Mart, Wal-Mart de Mexico, Fred Meyer and on military bases
which were determined to be impaired given that the expected future
undiscounted cash flows from these locations are less than the
carrying value of their assets. As a result, we have recorded a
non-cash impairment charge of $550,000 to write-down these long-lived
assets to their fair market value. Fair market value was determined
using the expected discounted cash flows for each location. This
impairment was reflected for leasehold improvements, furniture,
fixtures and equipment at these 42 locations. 5. RESTRUCTURING EXPENSE During August 2003, as a result of the declining store base, we initiated and
completed a restructuring of the retail field and home office retail support
center. The process resulted in a reduction in headcount approximating 15% of
both the retail field management organization and the home office retail
support center organization. Involuntary termination benefits and
outplacement costs accrued were
$484,000, of which $306,000 has been paid as of January 3, 2004. The remaining
$178,000 of accrued costs are expected to be completely paid by the end of the
fourth quarter of 2004. 6. BANKRUPTCY PROCEEDINGS AND FRESH START ADJUSTMENTS On April 5, 2000, we and ten of our subsidiaries (collectively, the Debtors)
filed voluntary petitions for reorganization under Chapter 11 (the Chapter 11
Cases). In March 2001, the Debtors filed a plan of reorganization (the
Plan) for the Chapter 11 Cases. The Plan was confirmed by the Bankruptcy
court and on May 31, 2001, after securing a new revolving credit facility with
Fleet Capital Corporation, we emerged from bankruptcy. The Plan provided for the conversion of our pre-petition unsecured claims into
new secured notes and common stock. The secured notes have a face value of
$120 million, provide for the payment of interest of 12% twice a year at the
end of March and September, and are subordinated to debt under our Fleet credit
facility. The notes are payable semi-annually on February 28, and August 31
over eight years with principal repayments based on excess cash flow for the
preceding six month periods ending in fiscal December and fiscal June. Any
remaining unpaid principal will become due on March 31, 2009. Five million
shares of new common stock, par value $0.01, were issued based on our
reorganization value. Under the Plan, former shareholders received no value
for their interests, and all Predecessor common stock securities were
cancelled. The gain on cancellation of indebtedness aggregated $17.2 million and has been
reflected as a gain on extinguishment of debt in the accompanying Condensed
Consolidated Statements of Operations for the period ended June 2, 2001. In accounting for the effects of the reorganization, we adopted fresh start
accounting principles as contained in the American Institute of Certified
Public Accountants Statement of Position 90-7, Financial Reporting by Entities
in Reorganization Under the Bankruptcy Code (SOP 90-7). SOP 90-7 was
applicable because pre-reorganization shareholders received none of our new
common stock and the reorganization value of the assets of the Successor
company was less than the total pre-petition liabilities allowed plus
post-petition liabilities. SOP 90-7 also required the early adoption of any
new accounting principles that otherwise became effective within twelve months
of fresh start accounting. Fresh start accounting principles required that we determine the reorganization
value of the reorganized Company. Our reorganization value was developed by
the Company, the Official Committee of Unsecured Creditors and their respective
financial advisors. The reorganization value was based on a calculation of the
present value of the free cash flows under our financial projections, including
an assumption of a terminal value. Such projections were submitted to the
bankruptcy court and to creditors for review and objection as part of our
disclosure statement accompanying the Plan. F-14




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In the allocation of the reorganization value, our tangible and intangible
assets were recorded at their assumed fair value. Intangible Value of
Contractual Rights, approximating $113.6 million, was established as part of
fresh start accounting and is amortized over 15 years using the straight-line
method. This intangible asset represents the value of our lease agreement and
the business relationship developed with Wal-Mart. In accordance with SFAS
142, Goodwill and Other Intangible Assets, this intangible is an amortizable
asset because it has a finite useful life. However, the precise length of its
life is not known due primarily to the Wal-Mart supercenter conversions that
automatically trigger extensions on the contractual life of the asset. Based
on our projections, our best estimate of the useful life of this asset is 15
years. At January 3, 2004, the remaining life of this asset is 12 years and 5
months. Due to the uncertainty involved in predicting the pattern of economic
benefits realized from the Wal-Mart relationship, we amortize this asset using
the straight-line method. Changes to the fair value of our identifiable assets totaled $114.3 million.
This amount was recognized as a gain in the Predecessors statement of
operations and is detailed below (amounts in thousands): Increase/(Decrease)Inventory
    
    $
    (700
    )Property, plant and equipment, net
    
    
    1,942Other assets
    
    
    (586
    )Intangible value of contractual rights
    
    
    113,607Total fair value adjustments
    
    $
    114,263
 F-15




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The application of fresh start accounting on the Predecessor companys June 2,
2001 balance sheet is as follows (amounts in thousands):



|                                           |  |              |          |                |  |              |          |             |  |               |         |     |  |             |         |           |  |   |         | 
|------------------------------------------ |  | ------------ | -------- | -------------- |  | ------------ | -------- | ----------- |  | ------------- | ------- | --- |  | ----------- | ------- | --------- |  | - | ------- | 
|                                           |  | Predecessor  |          |                |  |              |          |             |  |               |         |     |  |             |         | Successor
|                                           |  | Before       |          |                |  |              |          | New         |  |               |         |     |  | Reorganized
|                                           |  | Fresh Start  |          | Extinguishment |  | issuance     |          | Fair value  |  | Balance Sheet
|                                           |  | June 2, 2001 |          | of debt        |  | Notes /Stock |          | adjustments |  | June 2, 2001 
|Cash & cash equivalents                    |  | $            | 11,165   |                |  | $            |          |             |  | $             |         |     |  | $           |         |           |  | $ | 11,165  | 
|Accounts receivable                        |  |              | 4,544    |                |  |              |          |             |  |               |         |     |  |             |         |           |  |   | 4,544   | 
|Inventory                                  |  |              | 20,566   |                |  |              |          |             |  |               |         |     |  |             | (700    | )(e)      |  |   | 19,866  | 
|Deferred tax asset                         |  |              |         |                |  |              |          |             |  |               |         |     |  |             | 7,199   | (j)       |  |   | 7,199   | 
|Other current assets                       |  |              | 778      |                |  |              |          |             |  |               |         |     |  |             |         |           |  |   | 778     | 
|                                           |  |              |          |                |  |              |          |             |  |               |         |     |  |             |         |           |  |   |         | 
|Total current assets                       |  |              | 37,053   |                |  |              |         |             |  |               |        |     |  |             | 6,499   |           |  |   | 43,552  | 
|Property and
equipment                     |  |              |          |                |  |              |          |             |  |               |         |     |  |             |         |           |  |   |         | 
|Gross property and equipment               |  |              | 88,191   |                |  |              |          |             |  |               |         |     |  |             | (60,323 | )         |  |   | 27,868  | 
|Accumulated depreciation                   |  |              | (62,265  | )              |  |              |          |             |  |               |         |     |  |             | 62,265  |           |  |   |        | 
|                                           |  |              |          |                |  |              |          |             |  |               |         |     |  |             |         |           |  |   |         | 
|Property and equipment, net                |  |              | 25,926   |                |  |              |         |             |  |               |        |     |  |             | 1,942   | (f)       |  |   | 27,868  | 
|Other assets and deferred costs            |  |              | 9,310    |                |  |              | (7,063   | )(a)        |  |               |         |     |  |             | (586    | )(g)      |  |   | 1,661   | 
|Deferred tax asset                         |  |              | 385      |                |  |              |          |             |  |               |         |     |  |             | (385    | )(j)      |  |   |        | 
|Intangible value of contractual rights     |  |              |         |                |  |              |          |             |  |               |         |     |  |             | 113,607 | (h)       |  |   | 113,607 | 
|                                           |  |              |          |                |  |              |          |             |  |               |         |     |  |             |         |           |  |   |         | 
|Total assets                               |  | $            | 72,674   |                |  | $            | (7,063   | )           |  | $             |        |     |  | $           | 121,077 |           |  | $ | 186,688 | 
|                                           |  |              |          |                |  |              |          |             |  |               |         |     |  |             |         |           |  |   |         | 
|Liabilities not subject to compromise:     |  |              |          |                |  |              |          |             |  |               |         |     |  |             |         |           |  |   |         | 
|Current
liabilities                        |  |              |          |                |  |              |          |             |  |               |         |     |  |             |         |           |  |   |         | 
|Accounts
payable                           |  | $            | 1,858    |                |  | $            |          |             |  | $             |         |     |  | $           |         |           |  | $ | 1,858   | 
|Accrued expenses                           |  |              | 27,619   |                |  |              | 2,300    | (b)         |  |               |         |     |  |             |         |           |  |   | 29,919  | 
|                                           |  |              |          |                |  |              |          |             |  |               |         |     |  |             |         |           |  |   |         | 
|Total current liabilities                  |  |              | 29,477   |                |  |              | 2,300    |             |  |               |        |     |  |             |        |           |  |   | 31,777  | 
|Revolving credit facility                  |  |              | 3,000    |                |  |              |          |             |  |               |         |     |  |             |         |           |  |   | 3,000   | 
|Senior Subordinated Notes                  |  |              |         |                |  |              |          |             |  |               | 120,000 | (d) |  |             |         |           |  |   | 120,000 | 
|Other debt                                 |  |              |         |                |  |              | 97       | (b)         |  |               |         |     |  |             |         |           |  |   | 97      | 
|Deferred tax liability                     |  |              |          |                |  |              |          |             |  |               |         |     |  |             | 6,814   | (j)       |  |   | 6,814   | 
|Liabilities subject to compromise          |  |              | 171,642  |                |  |              | (171,642 | )(b)        |  |               |         |     |  |             |         |           |  |   |         | 
|Shareholders equity/(deficit)             |  |              |          |                |  |              |          |             |  |               |         |     |  |             |         |           |  |   |         | 
|Common stock                               |  |              | 211      |                |  |              |          |             |  |               | 50      | (d) |  |             | (211    | )(i)      |  |   | 50      | 
|Additional paid-in capital                 |  |              | 47,387   |                |  |              |          |             |  |               | 24,950  | (d) |  |             | (47,387 | )(i)      |  |   | 24,950  | 
|Retained earnings/(deficit)                |  |              | (174,970 | )              |  |              | 17,182   | (c)         |  |               |         |     |  |             | 157,788 | (i)       |  |   |        | 
|Cumulative translation adjustment          |  |              | (4,073   | )              |  |              |          |             |  |               |         |     |  |             | 4,073   | (i)       |  |   |        | 
|                                           |  |              |          |                |  |              |          |             |  |               |         |     |  |             |         |           |  |   |         | 
|Total shareholders equity / (loss)        |  |              | (131,445 | )              |  |              | 17,182   |             |  |               | 25,000  |     |  |             | 114,263 |           |  |   | 25,000  | 
|                                           |  |              |          |                |  |              |          |             |  |               |         |     |  |             |         |           |  |   |         | 
|Total liabilities and shareholders equity |  | $            | 72,674   |                |  | $            | (152,063 | )           |  | $             | 145,000 |     |  | $           | 121,077 |           |  | $ | 186,688 | 
|                                           |  |              |          |                |  |              |          |             |  |               |         |     |  |             |         |           |  |   |         | 

F-16




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##### Table of Contents



(a)
    
    Elimination of deferred financing costs associated with the Senior Subordinated Notes
being cancelled as part of the plan of reorganization.(b)
    
    Elimination of pre-petition liabilities. Cash claims of $2.3 million were accrued as
well as assumed capital leases totaling $97,000.(c)
    
    Gain on extinguishment of debt is calculated as follows (amounts in thousands): Net liabilities subject to compromise
    
    $
    169,245Deferred financing costs related to cancelled Senior Subordinated Notes
    
    
    (7,063
    )Net liabilities extinguished
    
    
    162,182Less: Reorganized value
    
    
    145,000Gain on extinguishment of debt
    
    $
    17,182
 Contractual interest for the five months ended June 2, 2001 was $8.1 million.  (d)
    
    Issuance of new Senior Subordinated Notes, totaling $120 million, and the issuance of 5,000,000 shares of new common stock with par value of $0.01. The reorganization value was derived from a
recovery analysis filed in the bankruptcy court in connection with the Plan. The components of the
reorganized value are shown below (amounts in thousands): Reorganized value:New Debt
    
    $
    120,000New Equity
    
    
    25,000Reorganization value
    
    $
    145,000
  (e)
    
    Reduction of inventory for a change in accounting policy related to the
capitalization of certain freight costs incurred for transfers of inventory between
Company locations and certain business supplies.(f)
    
    Net increase in fixed assets is the result of fair value adjustments increasing
equipment by approximately $3.4 million and decreasing certain leaseholds and
furniture and fixtures by $1.5 million.(g)
    
    Elimination of all intangibles with the exception of the California HMO license.(h)
    
    Establishment of Intangible value of contractual rights to be amortized over 15 years
using the straight-line method. This intangible asset represents the value of our
lease agreement and the business relationship developed with Wal-Mart.(i)
    
    Elimination of Predecessor Company equity.(j)
    
    Deferred tax effects of fair value adjustments. F-17




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##### Table of Contents



7. REORGANIZATION GAIN In accordance with SOP 90-7, the Predecessor recorded all transactions incurred
as a result of the Chapter 11 Cases as reorganization items. The table below
summarizes these items (amounts in thousands): (Predecessor)Five MonthsEndedJune 2, 2001Fresh start adjustments
    
    $
    114,263Impairment of goodwill
    
    
    Impairment of fixed assets
    
    
    (33
    )Provision for rejected leases
    
    
    (1,592
    )Loss on sale of freestanding division
    
    
    (3,645
    )Other store closing costs
    
    
    (532
    )Professional fees
    
    
    (2,008
    )Retention plan
    
    
    (3,231
    )Interest income
    
    
    127Letter of credit reserve on DIP Facility
    
    
    (197
    )Other reorganization items
    
    
    (637
    )Total reorganization gain
    
    $
    102,515
 The following represents
activity in the reorganization provisions for the years ended
January 3, 2004, December 28, 2002, the seven months ended
December 29, 2001 and the five months ended June 2,
2001 (amounts in thousands): January 3, 2004
    
    December 28, 2002
    
    Seven MonthsEndedDecember 29, 2001
    

    Five
MonthsEndedJune 2, 2001Beginning balance
    
    $
    248
    
    
    $
    1,225
    
    
    $
    9,231
    
    

    $
    4,727Charged to expense
    
    
    
    
    
    
    
    
    
    
    
    
    

    
    5,847Paid
    
    
    (248
    )
    
    
    (605
    )
    
    
    (8,383
    )
    

    
    (1,343
    )Other
adjustments (a)
    
    
    
    
    
    
    (372
    )
    
    
    377
    
    

    
    Ending balance
    
    $
    
    
    
    $
    248
    
    
    $
    1,225
    
    

    $
    9,231
  (a)
  
  Other adjustments consist of an increase to reflect additional
cash claims accrued in 2001 post-emergence from bankruptcy. These
cash claims were subsequently deemed to be invalid claims, resulting
in the 2002 reversal of substantially all of the previous increase.
The adjustments to this provision subsequent to our emergence from
bankruptcy were not reflected as adjustments to reorganization
expense. F-18




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##### Table of Contents



8. WAL-MART MASTER LICENSE AGREEMENT AND OTHER AGREEMENTS At January 3, 2004, we operated 359 vision centers in domestic Wal-Mart stores,
pursuant to a master license agreement. These units generated approximately
89% of our revenue in 2003 and represent the most profitable of our host retail
operations. In 1994, the Company and Wal-Mart replaced their original
agreement with a new master license agreement (the Wal-Mart Agreement), which
increased minimum and percentage license fees payable by the Company and also
gave us the right to open up to 400 vision centers in existing and future
Wal-Mart stores. We opened our 400th vision center pursuant to the agreement
in 2001. Each vision center covered by the Wal-Mart agreement has a separate
license. Pursuant to the Wal-Mart agreement, the term of each such license is
nine years with a renewable option for one additional three-year term.
Percentage license fees remain the same over the nine-year base term and three-year option term, whereas minimum license fees increase during the three-year
option term. In 1994, we opened our first 8 vision centers in stores owned and operated by
Wal-Mart de Mexico, S.A. de C.V. (Wal-Mart de Mexico). We completed the
negotiation of a master license agreement governing these vision centers in
1995. Pursuant to this agreement, each vision center has an individual base
term of five years from the date of opening, followed by two options (each for
two years), and one option for one year. Each party has the right to terminate
a location which fails to meet specified sales levels. The agreement provides
for annual fees based on a percentage of sales. The agreement also gives us a
right of first refusal to open vision centers in all stores in Mexico owned by
Wal-Mart de Mexico. As of January 3, 2004, we operated 37 vision centers in
Wal-Mart de Mexico stores. We operate 47 leased vision centers in stores owned by Fred Meyer, all of which
operate pursuant to a master license agreement. The agreement provides for base
and percentage rent and other customary terms and conditions. The term of the
agreement was amended in 2003 and now expires in December 2006. We operate 25 leased vision centers on military bases, each of which operates
pursuant to a separate lease agreement. These agreements provide for
percentage rent and other customary terms and conditions. F-19




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##### Table of Contents



9. INVENTORY We classify inventory as finished goods if such inventory is readily available
for sale to customers without assembly or value added processing. Finished
goods include contact lenses, over the counter sunglasses and accessories. We
classify inventory as raw materials if such inventory requires assembly or
value added processing. This would include grinding a lens blank, cutting the
lens in accordance with a prescription from an optometrist, and fitting the
lens in a frame. Frames and uncut lens are considered raw materials. Work in
progress includes spectacle orders that are being processed in either of our
centralized lab facilities. On average, a custom pair of spectacles will be
classified as work in progress for less than two days. Inventory balances, by classification, are summarized as follows (amounts in
thousands): 2003
    
    2002Raw materials and work in progress
    
    $
    9,941
    
    
    $
    10,024Finished goods
    
    
    6,961
    
    
    
    7,344Supplies
    
    
    485
    
    
    
    560$
    17,387
    
    
    $
    17,928
 10. LONG-TERM DEBT Fleet Facility In December 2003, we amended our credit facility with Fleet Capital Corporation
(the Fleet Facility). This amendment extended the term of the previous
credit facility from an expiration date of May 30, 2004 to an expiration date
of May 30, 2007. The amendment also effectively increased availability by
approximately $3.5 million and allowed us to repurchase Notes within certain
limitations. The Fleet Facility bears interest at the prime rate plus 0.75%
per annum or at LIBOR plus 3.0%, and provides availability of an estimated $10
million, subject to borrowing base limitations and inclusive of letter of
credit requirements. At January 3, 2004, we had $5.2 million of unused
availability under the Fleet Facility. Any borrowings under the Fleet Facility are secured by
substantially all of our assets. The Fleet Facility contains various
restrictive covenants and requires us to maintain minimum levels of EBITDA (as
defined) and a minimum fixed charge coverage ratio (as defined) of 1.0 to 1.0
and limits the amount of our capital expenditures. Our weighted average
interest rate under the Fleet Facility was 4.87%, and 5.43% for the years ended
January 3, 2004 and December 28, 2002. During 2001, our weighted average
interest rate under the revolving line of credit for the seven months ended
December 29, 2001 was 6.78%. For the five months ended June 2, 2001, our
credit facility with Foothill Capital, was comprised of a term loan and a
revolving line of credit. The weighted average interest rate under the term
loan was 15.00% and 10.19% under the revolving line of credit. We paid
$150,000 in commitment fees related to the Fleet Facility in December 2003. At
January 3, 2004 and at December 28, 2002, we had no outstanding borrowings
under the Fleet Facility. Senior Subordinated Notes As part of our Plan of Reorganization, the Predecessor Companys $125 million
unsecured Notes were converted into new Successor Company Notes and
common stock. The Successor Company Notes have a face value of $120 million,
provide for the payment of interest of 12% twice a year at the end of March and
September, are subordinated to debt under our credit facility and are
secured by substantially all of the Companys assets. The Senior
Subordinated Notes contain various restrictive covenants including prohibition
from paying dividends. These Notes are due in 2009; however, principal
repayments (Excess Cash Repayments) are required semi-annually at the end of
February and August based on excess cash flow (as defined) for the prior six
month periods, ended June and December, beginning with December 2001. For the
six months ended January 3, 2004, we made an Excess Cash Repayment of
approximately $545,000 on February 27, 2004 to the trustee for Note holders of
record on February 13, 2004. This amount is classified as current at January
3, 2004. As future principal repayments are contingent upon future cash flows,
the only portion reflected as a current liability is the repayment that is
based on financial results reported herein. F-20




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##### Table of Contents



Long-Term Debt Balances Long-term debt obligations at January 3, 2004 and December 28, 2002 consisted
of the following (amounts in thousands): 2003
    
    200212% Senior Subordinated Notes due 2009
    
    $
    95,484
    
    
    $
    109,706Less current portion
    
    
    545
    
    
    
    3,824Total long-term debt
    
    $
    94,939
    
    
    $
    105,882
 We are party to letters of credit totaling $4.3 million and $4.4 million at
January 3, 2004 and December 28, 2002, respectively. Virtually no claims have
historically been made against these financial instruments. Management does not
expect any material losses to result from these off-balance-sheet instruments
because performance is not expected to be required. See Note 2 Significant Accounting Policies  Balance Sheet Financial
Instruments: Fair Values for the fair value estimate of the long-term debt at
January 3, 2004. F-21




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##### Table of Contents



11. COMMITMENTS AND CONTINGENCIES Non-Cancelable Operating Lease and License Agreements As of January 3, 2004, we are a lessee under non-cancelable operating lease
agreements for certain equipment which expire at various dates through 2005.
Additionally, we are required to pay minimum and percentage license fees
pursuant to certain commercial leases and pursuant to agreements with our host
store companies. Our headquarters in
Lawrenceville, Georgia includes a distribution center
and lens laboratory. The building is leased through January 2009. We paid
approximately $215,000 annually in rents in 2003, 2002, and 2001. In connection with our acquisition of Midwest Vision, Inc., we entered into a
ten-year lease for administrative headquarters and an optical laboratory
located in St. Cloud, Minnesota. The facility is leased from the former owner
of Midwest Vision. Lease expense on the headquarters and laboratory was
approximately $80,000 per year in 2003, 2002 and 2001. Aggregate future minimum payments under the license and lease arrangements are
as follows (amounts in thousands): OperatingFiscal Year
    
    Leases2004
    
    $
    25,4652005
    
    
    19,2022006
    
    
    13,3152007
    
    
    6,3742008
    
    
    4,609Thereafter
    
    
    7,423Total minimum lease payments
    
    $
    76,388
 Total rental expenses related to cancelable and non-cancelable operating leases
were approximately $34.1 million, $34.0 million, $18.1 million and $16.6
million for the years ended January 3, 2004, December 28, 2002, and for the
seven months ended December 29, 2001 and the five months ended June 2, 2001 and
respectively. Total rental expense includes contingent rental expense of
approximately $8.0 million, $6.9 million, $3.9 million and $3.6 million in
fiscal 2003, 2002, the seven months ended December 29, 2001 and the five months
ended June 2, 2001, respectively. Legal Proceedings On September 3, 2003, the Second Appellate District of the California Court of
Appeal affirmed a prior judgment of the Los Angeles County Superior Court (Case
No. BC 274257) dismissing litigation that had been instituted against us on May
20, 2002 by Consumer Cause, Inc. alleging that our business model in California
failed to comply with applicable legal requirements. The complaint sought
attorney fees and an injunction prohibiting us from continuing the alleged
violations. We are involved in certain other litigation and claims arising in the normal
course of business. In the opinion of management, the resolution of these
matters will not have a material adverse effect on our financial position or
results of operations. F-22




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##### Table of Contents



12. INCOME TAXES The components of the net deferred tax assets are as follows (amounts in
thousands): January 3, 2004
    
    December 28, 2002Total deferred tax assets
    
    $
    39,698
    
    
    $
    41,077Total deferred tax liabilities
    
    
    (35,462
    )
    
    
    (38,383
    )Valuation allowance
    
    
    (4,236
    )
    
    
    (2,694
    )Net deferred tax asset
    
    $
    
    
    
    $
    
 Each years valuation allowance was recorded due to the uncertainty of the
realizability of the net operating losses and other deferred tax assets. F-23




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##### Table of Contents



The sources of the difference between the financial accounting and tax basis of
our liabilities and assets which give rise to the deferred tax liabilities and
deferred tax assets and the tax effects of each are as follows (amounts in
thousands): As of January 3, 2004
    
    As of December 28, 2002Current
    
    Non-current
    
    Current
    
    Non-currentDepreciation
    
    $
    
    
    
    $
    3,114
    
    
    $
    
    
    
    $
    2,170Accrued expenses and reserves
    
    
    2,485
    
    
    
    
    
    
    
    3,054
    
    
    
    71Inventory
    
    
    181
    
    
    
    
    
    
    
    612Net operating loss carry-forwards
    
    
    3,836
    
    
    
    26,345
    
    
    
    
    
    
    
    32,997Intangible value of contract rights
    
    
    
    
    
    
    (35,446
    )
    
    
    
    
    
    
    (38,365
    )Other
    
    
    1,678
    
    
    
    2,044
    
    
    
    3
    
    
    
    2,152Valuation allowance
    
    
    (875
    )
    
    
    (3,362
    )
    
    
    (241
    )
    
    
    (2,453
    )Deferred tax asset / (liability)
    
    $
    7,305
    
    
    $
    (7,305
    )
    
    $
    3,428
    
    
    $
    (3,428
    )
 F-24




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##### Table of Contents



The tax expense differs from the amounts resulting from multiplying income
before income taxes by the statutory federal income tax rate for the following
reasons (amounts in thousands): Successor
    
    PredecessorYear ended
    
    Year ended
    
    Seven months ended
    
    Five months endedJanuary 3, 2004
    
    December 28, 2002
    
    December 29, 2001
    
    June 2, 2001Federal income tax/(benefit) provision at statutory rate
    
    $
    (1,315
    )
    
    $
    (2,357
    )
    
    $
    (2,051
    )
    
    $
    39,663State income taxes, net of federal income tax benefit
    
    
    (27
    )
    
    
    (186
    )
    
    
    (176
    )
    
    
    3,400Loss on disposed subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,912
    )Professional fees
    
    
    
    
    
    
    
    
    
    
    344
    
    
    
    573Change in deferred tax asset valuation allowance
    
    
    1,543
    
    
    
    1,557
    
    
    
    1,137
    
    
    
    (17,335
    )Other, net
    
    
    (3
    )
    
    
    986
    
    
    
    746
    
    
    
    611$
    198
    
    
    $
    
    
    
    $
    
    
    
    $
    
 At January 3, 2004, we had U.S. regular tax net operating loss carry-forwards
of approximately $79 million that can reduce future federal income taxes. If
not utilized, these carry-forwards will expire beginning in 2007. Utilization
of our net operating loss carry-forwards could be limited in the event of a
greater than 50% change in our stock ownership. The limitation would be based
on the stock value and the Federal exempt tax rate on the date of ownership
change. These limitations could create a cap on the amount of the NOLs that
would be deductible each year going forward until the amount is depleted or the
time limitation on the NOLs expires. In Mexico, the location of our foreign operations, we pay the greater of our
income tax or an asset tax. Because we have operating losses in Mexico, we pay
no income tax, but are subject to the asset tax. Therefore, no provision for
income taxes has been made for our operations in Mexico. F-25




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##### Table of Contents



13. EARNINGS PER COMMON SHARE Basic earnings per common share are computed by dividing net income by the
weighted average number of common shares outstanding during the year. Diluted
earnings per common share are computed as basic earnings per common share,
adjusted for the effect of all potential common stock equivalent shares. The
computation for basic and diluted earnings per share are summarized as follows
(amounts in thousands except per share information): Seven Months
    
    
    Five MonthsYear ended
    
    Year ended
    
    ended
    
    
    endedJanuary 3, 2004
    
    December 28, 2002
    
    December 29, 2001
    
    
    June 2, 2001Basic and diluted earnings per share:Net income (loss) from continuing operations
    
    $
    (3,045
    )
    
    $
    (8,016
    )
    
    $
    (6,891
    )
    
    
    $
    112,418Net income (loss) from discontinued operations
    
    
    (259
    )
    
    
    1,812
    
    
    
    1,031
    
    
    
    
    905Earnings (loss) before
cumulative effect
    
    
    (3,304
    )
    
    
    (6,204
    )
    
    
    (5,860
    )
    
    
    
    113,323Cumulative effect, net
    
    
    (564
    )Net earnings (loss)
    
    $
    (3,868
    )
    
    $
    (6,204
    )
    
    $
    (5,860
    )
    
    
    $
    113,323Weighted shares outstanding
    
    
    5,169
    
    
    
    5,084
    
    
    
    5,000
    
    
    
    
    21,169Less: Unvested restricted stock
    
    
    (137
    )
    
    
    (84
    )Weighted shares for basic earnings per share
    
    
    5,032
    
    
    
    5,000
    
    
    
    5,000
    
    
    
    
    21,169Basic earnings (loss) per share:Income (loss) from continuing operations
    
    $
    (0.61
    )
    
    $
    (1.60
    )
    
    $
    (1.38
    )
    
    
    $
    5.31Income (loss) from discontinued operations
    
    
    (0.05
    )
    
    
    0.36
    
    
    
    0.21
    
    
    
    
    0.04Earnings (loss) before
cumulative effect
    
    
    (0.66
    )
    
    
    (1.24
    )
    
    
    (1.17
    )
    
    
    
    5.35Cumulative effect, net
    
    
    (0.11
    )Net earnings (loss) per basic and diluted share
    
    $
    (0.77
    )
    
    $
    (1.24
    )
    
    $
    (1.17
    )
    
    
    $
    5.35
 For the years ended January 3, 2004, December 28, 2002 and for the seven months
ended December 29, 2001 and for the Predecessor five months ended June 2, 2001,
stock options and unvested restricted shares in the amounts of 129,189,
214,370, 7,327, and 0 are excluded from the calculation of diluted earnings per
common share due to their anti-dilutive effect. F-26




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##### Table of Contents



14. SUPPLEMENTAL DISCLOSURE INFORMATION Supplemental disclosure information is as follows (amounts in thousands):  (i)
    
    Supplemental Cash Flow Information Successor
    
    PredecessorYear Ended
    
    Year Ended
    
    Seven Months Ended
    
    Five Months EndedJanuary 3, 2004
    
    December 28, 2002
    
    December 29, 2001
    
    June 2, 2001Cash paid for (received)
Interest
    
    $
    13,292
    
    
    $
    14,257
    
    
    $
    4,906
    
    
    $
    860Income taxes
    
    $
    (204
    )
    
    $
    (1,243
    )
    
    $
    433
    
    
    $
    167
  (ii)
    
    Supplemental Balance Sheet InformationSignificant components of accrued expenses and other current liabilities
are summarized as follows: Balance at
    
    Balance atJanuary 3, 2004
    
    December 28, 2002Accrued employee compensation and benefits
    
    $
    4,529
    
    
    $
    5,736Provision for self -insured liabilities
    
    $
    3,785
    
    
    $
    2,814Accrued rent expense
    
    $
    5,612
    
    
    $
    5,914Customer deposit liability
    
    $
    2,231
    
    
    $
    2,158Accrued interest expense
    
    $
    2,986
    
    
    $
    3,297Deferred revenue
    
    $
    2,965
    
    
    $
    48
  (iii)
    
    Product Warranty LiabilityThe following table details the activity in our product warranty
liabilities for the years ended January 3, 2004 and December 28, 2002.
This represents our liability for certain product warranty services
provided free of charge (amounts in thousands): January 3, 2004
    
    December 28, 2002Beginning of
year balance
    
    $
    1,120
    
    
    $
    79Charged to expense
    
    
    6,846
    
    
    
    8,773Paid
    
    
    (7,250
    )
    
    
    (7,732
    )End of year balance
    
    $
    716
    
    
    $
    1,120
 F-27




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##### Table of Contents



15. SHAREHOLDERS EQUITY Employee Stock Options and Incentive Award Plan Under our Stock Option and Incentive Award Plan (the Plan), incentive stock
options qualifying under Section 422A of the Internal Revenue Code and
nonqualified stock options may be granted to key employees. The Plan also
provides for the issuance of other equity awards, such as grants of restricted
stock and of performance awards, which may be paid in cash and common stock.
The Compensation Committee of our Board of Directors has the authority to
determine the persons receiving options, option prices, dates of grants and
vesting periods, although no option may have a term exceeding ten years. All
options outstanding at our emergence from bankruptcy in 2001 were cancelled.
The total number of shares authorized for issuance under the Plan is 720,000.
After giving effect to outstanding options and performance stock grants, there
were, at January 3, 2004, 113,753 remaining unissued shares under the Plan. In 2001, the Compensation Committee granted to employees 288,750 options to
purchase shares of our common stock at the stated market value on the date of
grant. These options vest 100% at the end of seven years. Vesting, however,
can be accelerated if we achieve certain financial goals prior to the end of
the seven-year period. Unexercised options expire ten years from the date of
grant. These options vested 25% on April 1, 2003. In 2002, the Compensation Committee granted to employees 183,600 options to
purchase shares of our common stock at the stated market value on the date of
grant. These options vest one-third each year over the subsequent three years
of continued employment. Unexercised options expire ten years from the date of
grant. In April 2002, the Compensation Committee issued 84,400 shares of restricted
stock under the Plan to our President and Chief Executive Officer. The shares
vest one-third each year over the subsequent three years of continued
employment. Unamortized deferred compensation expense with respect to the
restricted stock amounted to approximately $19,600 at January 3, 2004 and is
being amortized over the three-year vesting period. In July 2003, the Compensation Committee granted 168,000 shares of restricted
stock to certain employees. Of these shares, 23,625 were cancelled prior to year
end in connection with employee terminations. The shares vest one-third each
year over the subsequent three years of continued employment. Unamortized
deferred compensation expense with respect to the restricted stock amounted to
approximately $88,400 at January 3, 2004 and is being amortized over the three
year vesting period. In October 2001, the
Compensation Committee (the Committee) granted performance awards to
certain officers of the Company. In April 2002, the Committee granted a
performance award to our chief executive officer. The
performance awards provide for the issuance of award units on the basis of the
determination by the Committee that the Company has attained defined financial
results. Under the terms of the performance awards, there are three performance
periods: fiscal 2002, fiscal 2002-2003, and fiscal 2002-2004. Award units are
payable two-thirds in cash and one-third in common stock. The cash portion is
payable at the greater of $5.00 per unit or the closing trading price of common
stock as of the last day of the performance period. We accrue
compensation expense for the awards over the related service period.
We recorded compensation expense of $201,000 and $143,000 for the
years ended January 3, 2004 and December 28, 2002,
respectively. In 2003, we paid a
total of approximately $143,000 to the holders of the performance awards and
issued a total of 14,272 shares of common stock to such holders for
the 2002 performance period. F-28




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##### Table of Contents



Directors Stock Option Plan Under our Non-Employee Director Stock Option Plan (the Directors Plan), we may
grant stock options for up to 180,000 shares of Common Stock to non-employee
directors. In October 2001, the Committee made a one-time grant, to each
eligible non-employee director of options to purchase 15,000 shares. Each
non-employee director also receives automatic grants of options to purchase
10,000 shares as of the date of each annual meeting of shareholders. Each grant
is at an exercise price equal to the market value on the date of grant. Under
the option grant, 50% of the shares vest on the second anniversary of the grant
date, 25% on the third anniversary and 25% on the fourth anniversary. All
option grants are exercisable for a ten-year period. The remaining shares
available for grant under the Directors Plan totaled 45,000 at January 3,
2004. All Stock Option Plans In 2003, 2002, and 2001, all exercise prices for options granted represent the
estimated fair value of the Common Stock on the date of grant as determined by
the Board of Directors. Stock option transactions during the three years ended
January 3, 2004 were as follows: Successor
    
    PredecessorSeven Months
    
    Five MonthsYear Ended
    
    Year Ended
    
    Ended
    
    EndedJanuary 3, 2004
    
    December 28, 2002
    
    December 29, 2001
    
    June 2, 2001Options outstanding beginning of
period
    
    
    539,450
    
    
    
    348,750
    
    
    
    
    
    
    
    2,739,642Options granted
    
    
    50,000
    
    
    
    223,600
    
    
    
    348,750
    
    
    
    Options cancelled
    
    
    (91,250
    )
    
    
    (32,900
    )
    
    
    
    
    
    
    (2,739,642
    )Options outstanding end of period
    
    
    498,200
    
    
    
    539,450
    
    
    
    348,750
    
    
    
    Options exercisable end of period
    
    
    129,393
    
    
    
    
    
    
    
    
    
    
    
    Weighted average option prices
per
share:Granted
    
    $
    0.760
    
    
    $
    0.830
    
    
    $
    0.400
    
    
    $
    Cancelled
    
    $
    0.400
    
    
    $
    0.400
    
    
    $
    
    
    
    $
    4.409Outstanding at year end
    
    $
    0.615
    
    
    $
    0.580
    
    
    $
    0.400
    
    
    $
    Options exercisable end of period
    
$
    0.568
    
    
    $
    
    
    
$
    
    
    
$
    
 No options were exercised in any of the periods presented. F-29




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##### Table of Contents



The following table shows the options outstanding and the options exercisable
with pertinent data related to each at January 3, 2004: Options Outstanding
    
    Options ExercisableWeightedAverage
    
    Weighted
    
    
    
    
    
    WeightedRemaining
    
    Average
    
    
    
    
    
    AverageRange of
    
    Number
    
    Contractual
    
    Exercise
    
    Number
    
    ExerciseExercise Prices
    
    Outstanding
    
    Life
    
    Price
    
    Exercisable
    
    Price$0.40 - $0.40
    
    
    224,600
    
    
    
    7.81
    
    
    $
    0.400
    
    
    
    68,193
    
    
    $
    0.400$0.60 - $0.76
    
    
    224,600
    
    
    
    8.59
    
    
    $
    0.746
    
    
    
    58,200
    
    
    $
    0.742$1.00 - $1.00
    
    
    9,000
    
    
    
    8.64
    
    
    $
    1.000
    
    
    
    3,000
    
    
    $
    1.000$1.18 - $1.18
    
    
    40,000
    
    
    
    8.39
    
    
    $
    1.180
    
    
    
    0
    
    
    $
    0.000$0.40 - $1.18
    
    
    498,200
    
    
    
    8.22
    
    
    $
    0.630
    
    
    
    129,393
    
    
    $
    0.568
 Preferred Stock We are authorized to issue up to 5,000,000 shares of preferred stock, par value
$1 per share, with such terms, characteristics and designations as may be
determined by the Board of Directors. No such shares are issued and
outstanding. Shareholders Rights Plan In January of 1997, our Board of Directors approved a Shareholders Rights Plan
(the Rights Plan). The Rights Plan provides for the distribution of one Right
for each outstanding share of our Common Stock held of record as of the close
of business on January 27, 1997 or that thereafter becomes outstanding prior to
the earlier of the final expiration date of the Rights or the first date upon
which the Rights become exercisable. Each Right entitles the registered holder
to purchase from us one one hundredth of a share of Series A Participating
Cumulative Preferred Stock, par value $0.01 per share, at a price of $40.00
(the Purchase Price), subject to adjustment. The Rights are not exercisable
until ten calendar days after a person or group (an Acquiring Person) buys or
announces a tender offer for 15% or more of our Common Stock, or if any person
or group has acquired such an interest, the acquisition by that person or group
of an additional 2% of our Common Stock. In the event the Rights become
exercisable, then each Right will entitle the holder to receive that number of
shares of Common Stock (or, under certain circumstances, an economically
equivalent security or securities of the Company) having a market value equal
to the Purchase Price. If, after any person has become an Acquiring Person
(other than through a tender offer approved by qualifying members of the Board
of Directors), we are involved in a merger or other business combination where
we are not the surviving corporation, or we sell 50% or more of our assets,
operating income, or cash flow, then each Right will entitle the holder to
purchase, for the Purchase Price, that number of shares of common or other
capital stock of the acquiring entity which at the time of such transaction
have a market value of twice the Purchase Price. The Rights will expire on
January 26, 2007, unless extended, unless the Rights are earlier exchanged, or
unless the Rights are earlier redeemed by us in whole, but not in part, at a
price of $0.001 per Right. In February 1998, our Board of Directors amended the
Rights Plan effective March 1, 1998 to provide that Rights under this plan can
be redeemed and certain amendments to this plan can be effected only with the
approval of the Continuing Directors, which are defined in the Rights Plan as
the current directors and any future directors that are approved or recommended
by Continuing Directors. We amended the Rights Plan in March 2004 in connection with the appointment of
a new rights agent under the Rights Plan (see Note 18). F-30




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##### Table of Contents



16.
    
    SELECTED QUARTERLY FINANCIAL DATA (Unaudited)Selected quarterly data for our fiscal years ended January 3, 2004 and December
28, 2002 is as follows (in thousands, exclusive of per share information): Quarter
    
    Quarter
    
    Quarter
    
    QuarterEnding
    
    Ending
    
    Ending
    
    EndingFiscal 2003
    
    March 29
    
    June 28
    
    September 27
    
    January 3Total net revenue
    
    $
    59,058
    
    
    $
    58,267
    
    
    $
    63,470
    
    
    $
    62,554Gross profit
    
    $
    32,736
    
    
    $
    31,746
    
    
    $
    33,884
    
    
    $
    34,076Net earnings (loss) before discontinued operations and
cumulative effect of a change in accounting principle
    
    $
    (1,386
    )
    
    $
    (2,506
    )
    
    $
    355
    
    
    $
    492Income (loss) from discontinued operations
    
    $
    (98
    )
    
    $
    (215
    )
    
    $
    7
    
    
    $
    47Cumulative effect of a change in accounting principle
    
    $
    (564
    )
    
    $
    
    
    
    $
    
    
    
    $
    Net earnings (loss)
    
    $
    (2,048
    )
    
    $
    (2,721
    )
    
    $
    362
    
    
    $
    539Earnings (loss) per basic share:Continuing operations
    
    $
    (0.28
    )
    
    $
    (0.50
    )
    
    $
    0.07
    
    
    $
    0.10Discontinued operations
    
    
    (0.02
    )
    
    
    (0.04
    )
    
    
    0.00
    
    
    
    0.01Cumulative effect of a change in accounting principle
    
    
    (0.11
    )Net earnings (loss) per basic share
    
    $
    (0.41
    )
    
    $
    (0.54
    )
    
    $
    0.07
    
    
    $
    0.11Earnings (loss) per diluted share:Continuing operations
    
    $
    (0.28
    )
    
    $
    (0.50
    )
    
    $
    0.07
    
    
    $
    0.09Discontinued operations
    
    
    (0.02
    )
    
    
    (0.04
    )
    
    
    0.00
    
    
    
    0.01Cumulative effect of a change in accounting principle
    
    
    (0.11
    )Net earnings (loss) per diluted share
    
    $
    (0.41
    )
    
    $
    (0.54
    )
    
    $
    0.07
    
    
    $
    0.10
 F-31




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##### Table of Contents



Quarter
    
    Quarter
    
    Quarter
    
    QuarterEnding
    
    Ending
    
    Ending
    
    EndingFiscal 2002
    
    March 30
    
    June 29
    
    September 28
    
    December 28Total net revenue
    
    $
    56,085
    
    
    $
    56,166
    
    
    $
    56,119
    
    
    $
    55,827Gross profit
    
    $
    32,028
    
    
    $
    31,372
    
    
    $
    31,636
    
    
    $
    28,462Net loss before discontinued operations
    
    $
    (1,878
    )
    
    $
    (2,098
    )
    
    $
    (1,159
    )
    
    $
    (2,881
    )Income from discontinued operations
    
    $
    458
    
    
    $
    543
    
    
    $
    405
    
    
    $
    406Net loss
    
    $
    (1,420
    )
    
    $
    (1,555
    )
    
    $
    (754
    )
    
    $
    (2,475
    )Earnings (loss) per basic and diluted share:Continuing operations
    
    $
    (0.38
    )
    
    $
    (0.42
    )
    
    $
    (0.23
    )
    
    $
    (0.58
    )Discontinued operations
    
    
    0.10
    
    
    
    0.11
    
    
    
    0.08
    
    
    
    0.07Net loss per basic and diluted share
    
    $
    (0.28
    )
    
    $
    (0.31
    )
    
    $
    (0.15
    )
    
    $
    (0.51
    )
 F-32




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##### Table of Contents



17. RELATED PARTY TRANSACTIONS In 2003, 2002 and 2001, we made rent payments of approximately $80,000 per year
for the St. Cloud laboratory/distribution facility, which is owned by Myrel
Neumann, a former director of the Company. Mr. Neumann was a director of the
Company through May 2002. Nelson Eye Associates, P.C., which is wholly owned
by Dr. Marc Nelson, a current member of our Board of Directors, paid us
approximately $300,000 in each of 2002 and 2003 for rent related to the
sub-occupancy of ten retail optical locations which we own. 18. SUBSEQUENT EVENTS From January 4, 2004 through March 1, 2004, we have closed ten Wal-Mart vision
centers that had annualized sales of $4.8 million and store operating income of
$0.5 million. In February 2004, we authorized our trustee to make final distribution of our
Senior Subordinated Notes under our plan of reorganization. In March 2004, we
authorized our stock transfer agent to make final distribution of our common
stock under our plan of reorganization. Distribution of the Notes and common
stock is expected to occur during the second calendar quarter of 2004. At that
time, all bankruptcy claims will be resolved and settled, and we would expect
to receive the final dismissal order by the bankruptcy court. In March 2004, we amended our Shareholder Rights Plan to, among other matters,
provide that Continuing Directors, as defined in the Rights Plan, consist of
the directors of the Company as of July 1, 2001 and any future directors that
are approved or recommended by the Continuing Directors. In the first quarter of 2004, we amended our credit facility with Fleet Capital
Corporation to, among other matters, permit us to invest up to $500,000 in the
home medical equipment business we are exploring. F-33




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##### Table of Contents



SCHEDULE II NATIONAL VISION, INC.
VALUATION AND QUALIFYING ACCOUNTS
January 3, 2004, December 28, 2002, and December 29, 2001 (In thousands) AdditionsBalance at Beginning
    
    Charged to
    
    Charged to
    
    
    
    
    
    Balance atDescription
    
    of Period
    
    Cash and Expenses
    
    Other Accounts
    
    Deductions
    
    End of PeriodPredecessor:Five months ended
June 2, 2001Allowance for uncollectible
managed care accounts receivable
    
    $
    4,340
    
    
    $
    6,195
    
    
    $
    
    
    
    $
    7,706
    
    
    $
    2,829Successor:Seven months ended
December 29, 2001Allowance for uncollectible
managed care accounts receivable
    
    $
    2,829
    
    
    $
    320
    
    
    $
    
    
    
    $
    1,360
    
    
    $
    1,789Year ended
December 28, 2002Allowance for uncollectible
managed care accounts receivable
    
    $
    1,789
    
    
    $
    50
    
    
    $
    
    
    
    $
    983
    
    
    $
    856Year ended
January 3, 2004Allowance for uncollectible
managed care accounts receivable
    
    $
    856
    
    
    $
    78
    
    
    $
    89
    
    
    $
    390
    
    
    $
    633
 S-1




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized. NATIONAL VISION, INC.By:
    /s/  Reade FahsReade FahsApril 2, 2004
    
    President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on April 2, 2004 by the following persons on
behalf of the registrant, in the capacities indicated. Signature
    
    TitleBy:  /s/  Reade Fahs
Reade Fahs
    
    Chief Executive Officer and PresidentBy:  /s/  Paul A. Criscillis, Jr.
Paul A. Criscillis, Jr.
    
    Senior Vice President, Chief Financial OfficerBy:  /s/  S. Lynn Butler
S. Lynn Butler
    
    Vice President, Principal Accounting OfficerBy:  /s/  Robert Floum
Robert Floum
    
    DirectorBy:  /s/  James W. Krause
James W. Krause
    
    DirectorBy:  /s/  Marc B. Nelson
Marc B. Nelson
    
    DirectorBy:  /s/  Jeffrey Snow
Jeffrey Snow
    
    DirectorBy:  /s/  Peter T. Socha
Peter T. Socha
    
    Director