10-K 1 w60096e10-k.txt FORM 10-K U. S. VISION, INC. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM 10-K (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 31, 2002 OR __ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NO. 0-23397 U. S. VISION, INC. (Exact name of registrant as specified in its charter) DELAWARE 22-3032948 (State or other jurisdiction of (I.R.S. employer identification no.) incorporation or organization) 1 HARMON DRIVE GLEN OAKS INDUSTRIAL PARK GLENDORA, NEW JERSEY 08029 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (856) 228-1000 Securities registered pursuant to Section 12(b) of the Act: NONE Securities Registered Pursuant to Section 12(g) of the Act: ~~COMMON STOCK, PAR VALUE $.01 PER SHARE 7,802,942 (Title of class) (Number of Shares Outstanding as of April 19, 2002)~~

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO _ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting stock held by nonaffiliates of the registrant is approximately $4,886,063. This amount was calculated by reducing the total number of shares of the registrant's common stock outstanding by the total number of shares of common stock held by officers, directors, and stockholders owning in excess of 10% of the registrant's common stock, and multiplying the remainder by the average of the bid and asked price for the registrant's common stock on April 19, 2002, as reported on the National Association of Securities Dealers, Inc. Automated Quotation System. The information provided shall in no way be construed as an admission that any officer, director, or more than 10% stockholder of the registrant may be deemed an affiliate of the registrant or that such person is the beneficial owner of the shares reported as being held by such person, and any such inference is hereby disclaimed. PART I ITEM 1. BUSINESS. OVERVIEW U.S. Vision, Inc. ("we," "us," "our," or the "company") is a retailer of optical products and services through retail optical departments licensed to operate within national and regional department stores and through a limited number of freestanding retail locations. As of January 31, 2002, we operated 603 locations in 47 states and Canada, consisting of 577 licensed departments and 26 freestanding stores. We currently operate 406 retail optical departments in J.C. Penney's and are their primary optical licensee. In addition, we operate 66 Sears retail optical departments and 105 retail optical departments in regional department stores. Our freestanding stores are located in malls and shopping centers. Our retail optical departments are full-service retail vision care stores that offer a wide selection of designer brands and private label prescription eyewear, contact lenses, sunglasses, ready made readers and accessories. Also, an on-premises, independent doctor of optometry performs complete eye examinations and prescribes eyeglasses and contact lenses. Our wide selection of designer and private label branded eyewear allows us to tailor our merchandise selection to meet the needs of our host store customers. See "Business -- Products and Services -- Merchandise Selection" and "Store Operations." We operate a single, modern optical laboratory, distribution and lens grinding facility at which we fill customer orders for prescription eyewear and maintain a central inventory of frames. Customer orders are placed at the retail stores and are transmitted into the central optical laboratory daily, where the lenses are ground, cut, finished and custom fitted to optical frames in the size and style selected by the customer. The finished eyewear is then shipped to the retail store for delivery to the customer within a few working days and can be completed overnight if requested by the customer. See "Business -- Optical Laboratory." Since 1991, we have been a national provider of managed vision care benefits through our participation in programs, which offer comprehensive eyewear benefits to plan participants. In fiscal 2001, approximately 33% of our revenues were attributable to purchases by participants in managed vision care programs. See "Business -- Managed Vision Care." Our corporate headquarters are located at 1 Harmon Drive, Glen Oaks Industrial Park, Glendora, New Jersey 08029 and our telephone number is (856) 228-1000. PRODUCTS AND SERVICES Merchandise Selection. We carry a full selection of men's, women's and children's eyeglass frames, a complete line of contact lenses, sunglasses, ready made readers, and ancillary products for eyeglasses and contact lenses. Prescription eyewear and accessories accounted for 90% of our sales during fiscal 2001. We offer a wide selection of designer and private label branded eyewear. Designer eyeglass frames offered include Guess, Revlon, Halston and Eddie Bauer, among others and, at certain stores, Giorgio Armani, Kenneth Cole, Calvin Klein and Polo by Ralph Lauren. We also offer private label branded eyeglass frames such as Arizona, Ashley Stewart, Joneswear, Oliver Winston, City Slickers and Rascals, among others. U.S. Vision also offers a wide variety of value-added eyewear features and services on which we realize a higher gross margin. These eyewear features and services include lightweight, virtually unbreakable polycarbonate lenses, including progressive lenses and photochromic lenses, as well as scratch resistant and anti-reflective coatings. In addition, we carry a complete line of contact lenses by major contact lens manufacturers such as Bausch & Lomb, Ciba Vision, and Johnson & 2 Johnson, including daily wear and extended wear soft contact lenses and cosmetic tinted lenses. During fiscal 2001, contact lenses accounted for approximately 10% of the company's sales. Pricing. U.S. Vision maintains a promotional pricing strategy, which stresses a quality product delivered at a competitive price. Our frames and lenses are generally competitively priced, with prices varying based on market locations. While we earn a higher gross margin on our private-label lines, designer frames generally command premium prices, resulting in higher gross profit dollars per transaction. Full Customer Service. We strive to provide our customers with exceptional care and value by combining the personal service typically associated with a private optometrist with the broad product selection and competitive prices of a large optical retailer. Management believes that providing superior customer service from knowledgeable and courteous employees complements the customer-oriented policies of our department store hosts. MANAGED VISION CARE Since 1991, we have been a participating provider of managed vision care benefits primarily through Vision One, a national vision care program which offers comprehensive eyewear and eyecare benefits to over 94 million covered lives through a network of over 2,000 optical locations. Managed care programs are marketed directly to employers, employee benefit plan sponsors and insurance companies such as General Motors, Metropolitan Life, Aetna, Cigna, AARP, Prudential and Blue Cross/Blue Shield. Managed care programs give employers the opportunity to offer their employees a group discount at retail optical locations of participating providers with minimal direct cost to the employer. The discounts vary under the plans from fixed percentage discounts to fixed dollar amounts with the balance paid by the subscriber. As a result of these benefits, management believes that many managed care participants have vision examinations on a regular basis and may become more frequent customers of the company. In addition, managed care participants frequently apply their discounts and allowances toward the purchase of premium eyeglass products and related accessories. Under the terms of our contract with Cole National, a competitor of the company and the owner of the Vision One program, we pay an administrative fee for each Vision One member transaction. Our contract with Cole National expires on December 31, 2002. Management has already commenced negotiations for a new long-term agreement with Cole National and hopes to have signed a new agreement prior to the expiration of the current agreement. We retain the right, though we have not exercised it in the past, to refuse to participate in particular Vision One programs under which we cannot profitably provide goods and services, and to participate in other managed care vision plans under certain conditions. Approximately 33% of our revenues are generated from our participation in various managed vision care programs. STORE OPERATIONS Location and Layout. We operate most of our stores on the premises of national and regional department stores in the United States and Canada. These stores generally operate under names such as "J.C. Penney Optical Center" and "Sears Optical," which associate the departments with the host store. Our retail optical departments generally operate under a lease or license arrangement through which the host store collects the sales receipts, retains rent computed as an agreed upon percentage of sales and remits the remainder to us on a regular basis. Our leased retail optical departments typically average in size from 500 to 800 square feet. Our retail optical departments are often located within the host department store near the host store's other licensed departments such as the beauty salon and photography studio. Management believes that the location of our retail optical departments within a host store influences our ability to take full advantage of the host store's customer traffic. 3 Each of our stores follows a standard merchandise layout plan which is designed to emphasize fashion, invite customer browsing and enhance the customer's shopping experience. All of our stores are similar in appearance and are operated under certain uniform standards and procedures. We have developed a new store prototype design and all of our new and remodeled retail optical departments are designed in accordance with this prototype. Our freestanding stores operate under various trade names such as Royal Optical, Service Optical and Wall & Ochs and are located in malls and shopping centers. Our freestanding stores generally range in size from 900 to 1,400 square feet. Store Management. Our store management structure consists of field managers and store managers. The store managers, along with two to three associates known as Optechs, are responsible for the day-to-day operations of each of our retail optical departments. Optechs undertake a training program that familiarizes them with the company's product lines, customer services, store procedures and automated systems. Our field managers are each assigned responsibility for the sales, customer relations and daily operation for a number of stores in their geographic area. Management believes that providing knowledgeable and responsive customer service is an important element of our success and, accordingly, has developed and implemented a variety of employee training and incentive programs. On-Site Independent Optometrist. We have made arrangements with licensed optometrists to provide eye examination services at or adjacent to our retail locations in those states where it is permitted. See "Government Regulations." The independent optometrists sublease space and equipment from us or from the host store. We and the optometrists do not share in each other's revenues. We believe the presence of the optometrists at the stores helps to generate eyeglass sales, leads to repeat customers and reinforces the quality and professionalism of each store. RELATIONSHIP WITH HOST STORES Most of our stores operate as licensed optical departments within a host department store such as J.C. Penney, Sears, Hudson's Bay, Marshall Field's and Boscov's, among others. Management believes that our relationships with our host stores provide several competitive advantages such as: o lower operating expenses; o lower initial capital investment; o loyal host store customer base; o established host store advertising and marketing programs; o one-stop shopping convenience; and o access to the host store's private label credit card. Management believes its hosts' reputation of quality, trust and value further enhances our customer relations. Management believes the company has developed excellent relationships with the host stores in which it operates. We routinely consult with the host stores about the size and placement of our optical departments within newly opened or remodeled host stores. Although management strives to continue to enhance these relationships, the loss of one of our major host stores, such as J.C. Penney or Sears, could cause a significant decrease in our sales and have a materially adverse effect on our results of operations. 4 Our retail optical departments within J.C. Penney stores are subject to a master lease that expires in December 2003. Management has already commenced negotiations for a new long-term agreement with J.C. Penney and hopes to have signed a new agreement prior to the expiration of the current agreement. On January 31, 2002, we had 406 locations within J.C. Penney. Our master lease with J.C. Penney provides that only a limited number of our J.C. Penney optical centers may be closed by J.C. Penney in any calendar year without cause. This limitation, however, does not apply if J.C. Penney closes an entire J.C. Penney department store, either temporarily or permanently. The lease also provides that J.C. Penney will reimburse us for certain costs relating to the closed department. Our optical departments within Sears stores are each subject to a lease which provides for a year-to-year term, subject to early termination by either party, without cause, on thirty-days prior written notice. Our retail optical departments located within other department stores are subject to lease arrangements which contain short notice lease termination provisions. These leases provide for monthly lease payments based upon a percentage of our sales at each location. In January 1999, as part of our objective to diversify our host store base, we signed a lease agreement with Hudson's Bay Company, the operator of over 450 retail locations in Canada. In March 1999, we opened 15 retail optical departments within The Bay, a traditional department store division of Hudson's Bay. At January 31, 2002, we were operating in 42 Hudson's Bay vision centers under the names The Bay and Zellers. MARKETING AND ADVERTISING We engage in a variety of marketing and promotional efforts to maintain and strengthen our customer base. Our advertising program is targeted at the department store consumer and is designed to convey a message of value, fashion, convenience and trust to our customer base. We work with each of our host stores to design advertising programs that convey this message in a manner consistent with that of the host store, targeted at their specific customer base. For example, we work with J.C. Penney to develop targeted catalog inserts which advertise our J.C. Penney optical departments. These advertising promotions generally mention the availability of on-site professional eye examinations and our acceptance, as a participating provider of managed vision care benefits, of the discounts and allowances offered by managed vision care plans. These targeted inserts are mailed to selected customers based on previous spending patterns at the host store. We augment these programs by providing local advertising in individual geographic markets. We have an in-house advertising department which permits us to respond quickly to fashion trends, competitor advertising and promotional initiatives. OPTICAL LABORATORY We operate a 60,000 square foot modern optical laboratory and lens grinding facility adjacent to our headquarters in Glendora, New Jersey. Customer orders for prescription eyewear, sunglasses and contact lenses are transmitted daily from each of our store locations to our central laboratory. Customer orders generally are processed and shipped to stores within a few working days and can be completed overnight if requested by the customer. Most prescription lenses are completed from semi-finished polycarbonate or plastic lenses obtained from third-party suppliers. These lenses are finished in a highly technical process that grinds the surface of the lens to fit the prescription utilizing modern grinding equipment, much of it computer-guided. The lenses are then custom fitted to optical frames in the size and style selected by the customer. Other prescriptions, including many standard prescriptions, can be manufactured by cutting and edging a prefinished lens, also purchased from a third-party supplier, to fit the frames selected. Contact lenses, accessories and non-prescription sunglass orders are filled from available stock and shipped to our retail optical departments. 5 Our laboratory is furnished with machinery capable of custom grinding, polishing, cutting, edging, tinting and coating prescription lenses. Management believes it has the manufacturing capacity in our laboratory to accommodate all of our projected growth for the foreseeable future. PURCHASING Our relationship with our vendors has enabled us to gain access to a wide array of brand name product offerings. As a leading retailer of eyewear in the United States, we purchase significant quantities of frames, lenses and contact lenses from our suppliers. In fiscal 2001, Sola, Vistakon, and Bausch & Lomb, our largest suppliers, accounted for approximately 22%, 8%, and 7%, respectively, of our total merchandise purchases. Our frames and lenses are available from numerous suppliers. Historically, we manufactured, imported and distributed optical frames and sunglasses principally for sale in our retail optical stores and, to a lesser extent, for sale to other optical distributors and retailers through our Styl-Rite Optical subsidiary. During fiscal 1999, we decided it was more cost effective to import optical frames and sunglasses rather than manufacture these products. Accordingly in July 2000, management closed our manufacturing operations at Styl-Rite and consolidated our importing and distribution functions with our other centralized operations at our corporate headquarters in Glendora, New Jersey. See "Management's Discussion and Analysis of Financial Condition and Results of Operation." MANAGEMENT INFORMATION SYSTEMS Currently, customer prescription orders for our optical products are prepared by the stores on order forms and the details of each order are transmitted daily to our centralized laboratory. These orders are then entered into the laboratory's computerized order entry system, which, for lenses, also makes the necessary optical calculations to grind and finish the lenses to the correct prescription and shape them to the dimensions of the frame selected by the customer. The present laboratory order entry system also tracks each order through every step of the finishing process until the finished product is shipped to the retail optical department. In fiscal 2000, we completed the design of an integrated management information system, which includes an automated order entry system at each of our optical stores, and new manufacturing and financial systems at our corporate headquarters. This new integrated system is designed to facilitate the transmission of the order to the laboratory and provide our stores with improved order pricing and costing capability. This new system is also designed to provide our stores with the capability to capture sales and customer information, including prescription data, enhancing our ability to monitor sales and merchandise trends and to improve customer service after the sale. In addition, the automated order entry system is designed to enable the stores to validate, at the time of sale, whether a particular frame selected by the customer is in stock and whether the combination of the customer's prescription, selected lenses and frame is within manufacturing tolerances. The integrated information system is expected to enhance our operating efficiencies by permitting all orders to be electronically transmitted from the stores to the laboratory. As of January 31, 2002, sixty-one of our stores have successfully implemented this system and the rollout of eighty more stores commenced in April 2002. Management expects to continue to bring the remainder of its stores on-line in an orderly fashion throughout the next twelve to eighteen months. 6 COMPETITION We compete with other national, regional, and local retail optical chains and independent optical retailers. Most optical retailers generally serve individual or local markets, and, as a result, competition is fragmented and varies substantially among locations and geographic areas. Although the retail optical industry is highly competitive, management believes none of our competitors has more than an 8% market share based on revenue. The principal competitive factors affecting our retail operations are merchandise selection, quality and consistency of products and services, price, location within the host store, convenience, availability of on-site professional eye examinations and access to a host store's private label credit card. The retail optical industry engages in price-related promotions as a standard marketing practice. Several of our competitors have greater financial and other resources than us, which may enable competitors to pursue more aggressive pricing and promotional strategies at the expense of profits for longer periods of time than we can. Our ability to achieve our growth strategy by opening new retail optical departments in existing and new host stores is dependent on our ability to obtain suitable optical locations within existing and new host stores. Management does not believe our growth strategy will be adversely affected by the fact that some competitors operate more retail optical departments in host stores than we do. Additionally, we face competition from advances in vision correction technologies, including laser surgery and other surgical vision correction procedures. This could result in decreased demand for eyeglasses and contact lenses. To the extent our customers may not be covered by our eye care benefit plans, we may compete with other vision care benefit plans and retailers who provide alternative vision care plans. As the number of national and regional managed vision care programs increase, competition for customers will intensify among the various vision care programs. EMPLOYEES As of January 31, 2002, we had approximately 2,350 full-time and part-time employees, of which approximately 1,900 were employed in our retail outlets, 350 were employed in manufacturing and distribution in our laboratory in Glendora, New Jersey, and 100 were employed in administrative, marketing and managerial positions at the company's headquarters in Glendora. GOVERNMENT REGULATIONS We are subject to a variety of federal, state and local laws, rules and regulations affecting the health care industry and the delivery of health care services. State and local legal requirements vary widely among jurisdictions and are subject to frequent change. Federal legal requirements are also subject to change. Relationships between the company and independent optometrists and ophthalmologists are subject to federal, state and local laws and regulations. State laws generally prohibit the practice of medicine and optometry by unlicensed practitioners. In addition, many states prohibit medical practitioners and optometrists from splitting fees with business corporations such as the company and prohibit the practice of medicine and optometry by corporate entities. Some states have enacted laws governing the ability of ophthalmologists and optometrists to enter into contracts to provide professional services with business corporations or lay persons. Some states prohibit the company from computing our fee for rent, equipment leases and management services provided by us based on a percentage of the gross revenue of the ophthalmologists and the optometrists. Such requirements are particularly comprehensive in California and Texas, where we operate a significant number of stores. Further, some 7 states restrict the location of optometric offices in relation to optical stores, such as ours, and regulate advertising and the solicitation of prospective patients. Relationships between us and independent ophthalmologists and optometrists are also subject to the fraud and abuse provisions of the federal Social Security Act which include the "anti-kickback" laws. The anti-kickback laws prohibit the offering, payment, solicitation or receipt of any direct or indirect remuneration for the referral of Medicare or Medicaid patients or for the ordering or providing of Medicare or Medicaid covered services, items or equipment. Violations of these laws may result in substantial civil or criminal penalties for individuals or entities and exclusion from participation in the Medicare and Medicaid programs. Several states, including states in which we operate, have adopted similar laws that cover patients with private health insurance coverage as well as those covered by government programs. Although management believes it is not in violation of the anti-kickback laws, the applicability of these provisions has been subject to only limited judicial and regulatory interpretation. In addition, certain of our products must comply with standards set by the United States Food and Drug Administration. We, as well as the independent optometrists providing services in or adjacent to our stores, from time to time receive inquiries from regulatory bodies regarding our compliance with applicable state and local regulations. If our relationships with ophthalmologists and optometrists are challenged, we may be required to alter the manner in which we conduct our business. There can be no assurance that a review of our business by courts or regulatory authorities will not result in determinations that could adversely affect operations or that new laws, regulations or interpretations of current laws and regulations will not have a material adverse effect on our business, financial condition or results of operations. ITEM 2. PROPERTIES We own a 20,000 square foot facility in Glendora, New Jersey, which serves as our corporate headquarters, a neighboring 24,000 square foot distribution facility, and a neighboring 60,000 square foot optical laboratory. The real property on which these facilities are located, as well as the buildings and certain equipment located therein, other than the distribution facility, secure the company's obligations under the DRPA Term Loans. See Note 4 to Notes to Consolidated Financial Statements. The real property on which the distribution facility is located secures the company's obligations under a mortgage loan agreement. See "Management's Discussion and Analysis of Financial Conditions and Results of Operations--Liquidity and Capital Resources." Our freestanding store locations are subject to lease arrangements which contain varying terms and are not subject to short notice lease termination provisions. The leases provide for monthly base lease payments plus, under certain circumstances, include an additional rent provision based on a percentage of the company's sales at each location. ITEM 3. LEGAL PROCEEDINGS. We are subject to various pending and threatened litigation from time to time in the ordinary course of our business. Although all litigation involves some degree of uncertainty, in the opinion of management, liabilities, if any, arising from such litigation or threat thereof are not expected to have a material adverse effect on the financial position, results of operations, or cash flows of the company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 8 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Our stock is traded on Nasdaq National Market under the symbol "USVI." For the periods indicated below, the following table sets forth the high and low bid information of our stock as reported on Nasdaq.

As of April 19, 2002, there were approximately 55 record holders of our stock. We have not declared or paid any cash dividends on our stock since our organization. Under the terms of our revolving bank line of credit, our ability to pay cash dividends to our shareholders is restricted. 9 ITEM 6. SELECTED FINANCIAL DATA. The selected consolidated financial information regarding the company's financial position and operating results set forth below for the fiscal years ended January 31, 2002, 2001, 2000, 1999 and 1998 has been derived from our audited consolidated financial statements. The selected consolidated financial data set forth below should be read in conjunction with our consolidated financial statements and related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this report.

Footnotes on following page. 10

------------------------- (1) See Note 10 to Notes to Consolidated Financial Statements. (2) As a result of favorable settlements on terminated leases, the company realized a gain in fiscal 1997 related to the closing and disposal of stores during fiscal 1992 through 1995. (3) Net income per share has been computed using the weighted average number of shares outstanding after giving effect for all periods presented to the 64-for-1 stock dividend and the conversion of all outstanding Series A Preferred Stock and Series C Preferred Stock into common stock upon the closing of the company's initial public offering in December 1997. Cash dividends on preferred stock of $217,000 were deducted from net income in computing net income per share for the fiscal year ended January 31, 1998. (4) Net income per share -- assuming dilution has been computed using the weighted average number of shares outstanding after giving effect to the 64-for-1 stock dividend and the conversion of all outstanding Series A Preferred Stock and Series C Preferred Stock into common stock upon the closing of the company's initial public offering in December 1997. In addition, common share equivalents such as warrants and options are included in the computation for the years ended January 31, 2001, 1999 and 1998, respectively. Cash dividends on preferred stock of $217,000 were deducted from net income in computing net income per share - assuming dilution for the fiscal year ended January 31, 1998. (5) Net income per share -- pro forma is calculated by dividing net income after adjustment for applicable interest expense, net of tax ($2,208,000) by the adjusted number of weighted average shares outstanding after giving effect to the 2,500,000 shares that were sold at the initial public offering price to repay $20,375,000 of debt. (6) Comparable-store sales reflect existing stores that have been open over twelve months. 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL OVERVIEW Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of the assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our net sales consist primarily of retail sales of prescription eyewear and contact lenses, net of refunds and allowances for customer returns. The company's sales are influenced by customer traffic in our host department stores, the successful implementation of our promotional programs and our participation in various managed vision care plans. The principal components of our cost of sales include the cost of materials, including eyeglass frames and lenses, as well as manufacturing, assembly, labor and overhead costs associated with operating our centralized optical laboratory. Prices of frames vary widely, from inexpensive to high-end designer brands. Our selling, general and administrative expenses include primarily labor-related expenses at the store level, rent and occupancy costs, managed vision care costs, advertising and administrative expenses. The rent we pay to our host stores is calculated as a percentage of net sales within each retail optical department. Freestanding store rent is generally a fixed monthly payment plus, in many cases, a percentage of net sales above certain revenue levels. Flat fees per transaction are paid by us to vision care plans in which we participate. Our fiscal year ends on January 31. Accordingly, references herein to "fiscal 2001," "fiscal 2000," and "fiscal 1999" refer to the company's fiscal years ended January 31, 2002, January 31, 2001, and January 31, 2000, respectively. RESULTS OF OPERATIONS The following table sets forth selected statements of operations items expressed as a percentage of net sales for the periods indicated:

12 Operating income (loss)................. 0.6 3.7 (0.9) Interest expense, net................... 0.8 0.3 0.3 ----- ----- ----- Income (loss) before income tax provision (0.2) 3.4 (1.2) Income tax provision ................... 0.1 0.2 0.0 ----- ----- ----- Net income (loss) ...................... (0.3)% 3.2% (1.2)% ===== ===== =====

FISCAL 2001 COMPARED TO FISCAL 2000 Net sales decreased $12.8 million, or 8.7%, from $147.6 million for fiscal 2000 to $134.8 million for fiscal 2001. The closure of 129 unproductive stores, net of 46 openings, during the two year period, accounted for $8.6 million of the decrease in net sales. The remaining decrease in net sales was primarily attributable to a 2.1% decrease in comparable-store sales. Cost of sales, as a percentage of net sales, remained relatively constant at 30.2% and 30.1% for the fiscal years ended 2000 and 2001. Selling, general and administrative expenses ("SG&A") as a percentage of net sales, increased by 3.2%, from 62.4% for fiscal 2000 to 65.6% for fiscal 2001 due to the lower sales volume. SG&A expenses decreased $3.6 million, from $92.1 million in fiscal 2000 to $88.5 million in fiscal 2001. The reduction in SG&A expense was principally due to lower rent expenses based on the lower sales volume and an overall decrease in operating expenses from the closing of unproductive stores. As of February 1, 2001, the Company completed the development stage of its point of sale system. Prior to that date, the Company capitalized all costs (including interest and salaries) incurred in connection with the development of the point of sale system. During fiscal 2001, no costs were capitalized related to the point of sale system. Excluding the impact of those additional expenses, SG&A expense for fiscal 2001 would have decreased $4.4 million compared to fiscal 2000. Interest expense increased $586,000, from $456,000 for fiscal 2000 to $1,042,000 for fiscal 2001. The increase in interest expense is primarily due to the effect of capitalizing interest expense incurred in connection with the development of the point of sale system during fiscal 2000. During fiscal 2001, no interest was capitalized. The increase in interest expense was partially offset by the impact of a lower outstanding balance and a lower rate of interest on the Company's revolving line of credit. Unusual items for fiscal 2001 included the one time write-off of approximately $0.2 million related to the closing of 42 unprofitable stores and a net gain of $0.5 million for the sale of the frame manufacturing buildings in Florida. FISCAL 2000 COMPARED TO FISCAL 1999 Net sales increased $4.2 million, or 2.9%, from $143.4 million for fiscal 1999 to $147.6 million for fiscal 2000. A 3.3% increase in comparable-store sales accounted for nearly all of the increase in net sales. The increase in comparable store sales was mostly the result of an increase in the number of eyeglasses sold. Cost of sales decreased by $0.9 million, or 1.9%, from $45.5 million in fiscal 1999 to $44.6 million in fiscal 2000. The decrease was due principally to a reduction in labor costs including the closing of the frame manufacturing plant in Miami, Florida in July 2000. As a percentage of net sales, cost of sales decreased from 31.7% in fiscal 1999 to 30.2% in fiscal 2000. The decrease was due to a reduction in material costs and labor costs. 13 SG&A increased by $0.3 million, or 0.4%, from $91.7 million in fiscal 1999 to $92.1 million in fiscal 2000. As a percentage of net sales, SG&A decreased from 63.9% in fiscal 1999 to 62.4% in fiscal 2000. The decrease was principally due to cost savings implemented by management, a reduction in advertising expenditures, closing of unprofitable locations and leverage created by the comparable store sales increase. Unusual items for fiscal 2000 included the one time write-off of approximately $0.8 million related to the closing of 87 unprofitable stores. QUARTERLY FLUCTUATIONS Our financial position and results of operations are slightly affected by seasonal fluctuations in sales and operating profits. Our sales and operating profits are generally lower in the fourth quarter, due to the Christmas season, which has historically been a period of reduced sales of prescription optical products. This trend has been mitigated somewhat by the increase in vision care sales under plans which are on a calendar year basis and require participants to use or lose their benefits annually. Quarterly sales can also be affected by the timing and amount of sales contributed by new stores. Accordingly, the results of operations for interim periods are not necessarily indicative of results for the entire fiscal year. The following tables set forth certain unaudited financial data for the quarters indicated:

The Company's operating results for the fiscal year ended January 31, 2002, were significantly impacted by the downturn in the U.S. economy and an overall weakness in the optical industry. The Company's operating results, for the first quarter, were positively impacted by the $493,000 net gain realized by the Company on the sale of its manufacturing facility. The Company's operating results for the third quarter were significantly impacted by the events of September 11th. Comparable store sales fell over 7% in the month of September alone. While comparable store sales began to recover in October, operating income in the fourth quarter was negatively impacted due to seasonally lower net sales and a $204,000 write off due to store closings. The decrease in operating income in the fourth quarter of fiscal 2000 was due to seasonally lower net sales and a $752,000 write-off due to store closings. 14 INCOME TAXES As of January 31, 2002, we had federal and state net operating loss carry forwards of approximately $16,900,000, which will begin to expire in the year 2006. Approximately $9,500,000 of these carry forwards are available to offset future taxable income without limitation and approximately $7,400,000 of these carry forwards (the "Restricted NOLs") are significantly limited due to ownership changes. Approximately $780,000 of the Restricted NOLs will become available for use each year through the year 2008. Approximately $3,400,000 of the Restricted NOLs are expected to expire unutilized. A valuation allowance has been established to fully reserve the future benefit of all the net operating loss carry forwards. LIQUIDITY AND CAPITAL RESOURCES Our primary cash sources for fiscal 2001 were from operations. Our working capital requirements are seasonal and traditionally peak at the end of the fourth quarter and the beginning of the first quarter. Cash and working capital at January 31, 2002 were $357,000 and $20.0 million, respectively, compared to $240,000 and $20.5 million, respectively, at January 31, 2001. For the year ended January 31, 2002, cash provided by operating activities was $4.5 million compared to cash provided by operating activities of $9.5 million for the year ended January 31, 2001. The $5.0 million decrease resulted primarily from a decrease in net income. Cash used in investing activities was $1.8 million in fiscal 2001 compared to $6.3 million in fiscal 2000. Investing activities in fiscal 2001 consisted of expenditures of $3.1 million primarily for new store openings and refurbishments of existing stores partially offset by the proceeds of $1.3 million from the sale of our frame manufacturing facility. The decrease in cash used in investing activities from the prior year is a result of reduced expenditures on the Company's point of sale system and fewer new store openings and refurbishments. In fiscal 2002, we expect to spend approximately $3.1 million on capital expenditures for new store openings, the integrated management information system and other capital expenditures. Historically, we have funded capital expenditures through a revolving line of credit, debt financing activities, including capital leases and operating cash flow. Our principal external source of liquidity is our $20.0 million revolving line of credit with Commerce Bank, N.A. The revolving line of credit facility bears interest at the lower of the prime rate as published in the Wall Street Journal or the ninety (90) day rate for United States Treasury Bills plus 250 basis points and matures in July 2003. As of January 31, 2002, we had $10,951,000 outstanding under our revolving line of credit and $9,049,000 of availability. The loan agreement prohibits the payment of dividends to shareholders and contains customary covenants. We must also maintain certain financial ratios, including a specified net worth level, current ratio, and a fixed charge ratio. As of January 31, 2002, the Company was in compliance with all the financial covenants. We do not believe that the financial covenants set forth in our revolving line of credit will have an adverse impact on our operations or future plans. We have commitments from Commerce BankLease, a unit of Commerce Bank, N.A., for a $2,000,000 five-year equipment lease financing facility. As of January 31, 2002, we have approximately $700,000 available on this facility. Based upon our current operating and new store opening plans, we believe we can fund our working capital and capital expenditure needs for the foreseeable future through borrowings under the revolving line of credit and cash generated from operations. 15 EFFECTS OF INFLATION We believe that the effects of inflation on our operations have not been material during the past three years. PENDING ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets arising from business combinations completed after June 30, 2001. SFAS No. 142 prohibits the amortization of goodwill and intangible assets with indefinite useful lives. SFAS No. 142 requires that these assets be reviewed for impairment as least annually. Intangible assets with finite lives will continue to be amortized over their estimated useful lives. The Company will apply SFAS No. 142 beginning in the first quarter of 2002. Application of the nonamortization provisions of SFAS No. 142 is expected to result in an increase in net income of $349,000 ($0.05 per share) in 2002. The Company will test goodwill for impairment using the two-step process prescribed in SFAS No. 142. The first step is a screen for potential impairment, while the second step measures the amount of the impairment, if any. The Company expects to perform the first of the required impairment tests of goodwill and indefinite-lived intangible assets as of February 1, 2002 in the second quarter of fiscal 2002. If an impairment charge were to result from these transitional impairment tests, it would be reflected as the cumulative effect of a change in accounting principle in the first quarter of 2002. The Company has not yet determined what the effect, if any, of these tests will be on the earnings and financial position of the Company. In 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This statement supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and provides a single accounting model for long-lived assets to be disposed and broadens the presentation of discontinued operations to include more disposal transactions. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, with early application encouraged. The Company adopted this statement on February 1, 2002, and the effect of the adoption was not material to the Company. CAUTION REGARDING FORWARD-LOOKING STATEMENTS We occasionally make forward-looking statements concerning our plans, goals, product and service offerings, store openings and closings and anticipated financial performance. These forward-looking statements may generally be identified by introductions such as "outlook" for an upcoming period of time, or words and phrases such as "should", "expect", "hope", "plans", "projected", "believes", "forward-looking" (or variants of those words and phrases) or similar language indicating the expression of an opinion or view concerning the future. These forward-looking statements are subject to risks and uncertainties based on a number of factors and actual results or events may differ materially from those anticipated by such forward-looking statements. These factors include, but are not limited to the following: 16 Risks Relating to Host Store Relationships and Short-Term Leases For the fiscal year ended January 31, 2002, 95% of our net sales were derived from sales in optical centers located within department stores. For the same period, sales attributable to optical centers located within J.C. Penney Company, Inc. stores represented approximately 68% of our sales. We are indirectly dependent on the operations and financial success of our host department stores. A decline in the sales, customer traffic or overall financial performance of one or more of our host department stores could have a material adverse effect on our business. In addition, our future expansion plans depend, to a large extent, on the expansion or renewal plans of our host department stores, primarily J.C. Penney. A substantial change in J.C. Penney's expansion or remodeling plans could have a material adverse effect on our planned growth strategy and future financial performance and results of operations. We anticipate that we will continue to rely upon several host stores for a significant portion of our revenues and as a part of our business strategy we intend to increase the number of leased departments we operate within J.C. Penney. However, we cannot assure you that we will be able to maintain our relationships with our host stores on favorable terms, if at all. Our optical centers within J.C. Penney stores are subject to a master lease that expires in December 2003. The master lease may be terminated early, but no more than 40 of our J.C. Penney optical centers may be closed by J.C. Penney in any calendar year for any reason. This limitation does not apply, however, if J.C. Penney closes an entire J.C. Penney department store, either temporarily or permanently. Each of our retail optical departments within Sears stores is subject to an individual lease that provides for a year-to-year term. Each of our leases with Sears may be terminated early by either us or Sears for any reason, on 30 days prior written notice. One of our principal competitors operates most of the Sears optical departments. Our retail optical departments located within other department stores are subject to lease arrangements that contain short notice lease termination provisions. There can be no assurance that any lease between us and a host store will not be terminated or its terms adversely changed. A substantial change in our relationship with one or more of our host department stores resulting in the termination or change of optical center leases could have a material adverse effect on our business, financial condition or results of operations. Competition The optical retail business is highly competitive, and several of our competitors have more resources than we have. These additional resources may enable competitors to pursue more aggressive pricing and promotional strategies at the expense of profits for longer periods of time than we can and may enable them to pursue these strategies through an extended downturn in the optical market. We compete with other national, regional, and local retail optical chains and independent optical retailers. Optical retailers generally serve individual or local markets and, as a result, competition is fragmented and varies substantially among locations and geographic areas. The principal competitive factors affecting our retail operations are merchandise selection, quality and consistency of products and services, price, location within the host store, convenience, availability of on-site professional eye examinations and access to a host store's private label credit card. The retail optical industry engages in price-related promotional offers as a standard marketing practice. We cannot assure you that periods of intense price competition resulting from those offers will not materially affect our profitability. Additionally, we face competition from advances in vision correction technologies, including laser surgery and other surgical vision correction procedures. This could result in decreased demand for eyeglasses and contact lenses, which could have a material adverse effect on our business, financial condition or results of operations. 17 To the extent our customers may not be covered by our eye care benefit plans, we may compete with other vision care benefit plans and retailers who provide alternative vision care plans. As the number of national and regional managed vision care programs increase, competition for customers will intensify among the various vision care programs. Growth Strategy; Dependence on Host Stores for Growth We intend to pursue a strategy of growth through internal expansion and acquisitions as opportunities arise. This strategy is likely to place significant demands on our capital, operational and management resources and may expose us to a variety of risks, including the risk that we will be unable to retain personnel or acquire other resources necessary to adequately service our growth. Our expansion strategy will be predominantly dependent upon our expansion within our current host stores, particularly J.C. Penney. Because we have a strong relationship with our existing host stores and many of our hosts have numerous locations that do not yet contain optical departments, we believe a significant portion of our future growth will come from existing host stores. Although as a part of our growth strategy we anticipate the opening of a significant number of new retail optical departments, we are under no obligation to do so and we cannot assure you that we will open these locations. None of our agreements with our host department stores require the host stores to offer us additional optical center leases. If we do not open new stores as we anticipate our future results of operations may be materially and adversely affected. Dependence on Single Managed Vision Care Provider Since 1991, we have been a national provider of managed vision care through Vision One. Vision One is a third-party vision care plan owned by Cole National Corporation. Cole is one of our principal competitors. For the fiscal year ended January 31, 2002, approximately 33% of our revenues were generated from sales to members of Vision One and other vision care benefit plans, and we anticipate that this percentage will increase over the next several years. Our contract with Cole National expires in December 2002. Our contract with Cole National may be terminated earlier under certain circumstances. We cannot assure you that we will be able to maintain our relationship with Cole National. A substantial change in our relationship with Cole National could have a material adverse effect on our business, financial condition or results of operations. Dependence on Key Personnel We are highly dependent on certain members of our management team, particularly William A. Schwartz, Jr., the Company's Chairman, President and Chief Executive Officer. The loss of his services could have a material adverse effect on our business, financial condition and results of operations. See "Executive Compensation - Employment Agreements." Risks Related to Government Regulation The field of optical retailing is regulated by many of the states in which we do business. Certain states require the presence of licensed opticians in vision centers where eyeglasses or contact lenses are fitted or dispensed. Any difficulties or delays in securing the services of such optical professionals could adversely affect our business and our relationship with our host stores. We are subject to a variety of federal, state and local laws, rules and regulations affecting the health care industry and the delivery of health care services. State and local legal requirements vary widely among jurisdictions and are subject to change, as are federal legal requirements. 18 The legality of our relationships with opticians and optometrists in the states in which we operate may be challenged in the future, and if challenged, we may be required to alter the manner in which we conduct our business. Any such alteration could adversely affect our business and our relationships with our host stores. Failure to comply with existing laws and regulations or the adoption of new laws and regulations could have a material adverse effect on our business, financial condition and results of operations. Dependence on Centralized Laboratory Facility We finish 100% of our merchandise at our main optical laboratory, distribution and lens grinding facility. An interruption in production at the facility could have a material adverse effect on the Company's business, financial condition or results of operations. Other Factors Affecting Future Operating Performance Our future quarterly results may be materially affected by a variety of factors, some of which may be beyond our control. Some of these factors include, but are not limited to: o our ability to select and stock merchandise attractive to customers; o our ability to efficiently fill customer orders; o the mix of products sold, pricing and other competitive factors; o the seasonality of our business; o weather factors affecting retail operations; and o general economic cycles affecting consumer spending. Accordingly, results of operations for any particular quarter may not be indicative of results of operations for future periods. In addition, forward-looking statements concerning our expected revenue or earnings levels are subject to many additional uncertainties applicable to competitors generally and to general economic conditions over which we have no control, such as the performance of our host stores. We do not plan in general to publicly update prior forward-looking statements for unanticipated events or otherwise and, accordingly, prior forward-looking statements should not be considered to be "fresh" simply because we have not made additional comments on those forward-looking statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Our earnings are affected by changes in interest rates due to the impact those changes have on the interest expense payable by us under our variable rate debt revolving line of credit, for which the outstanding balance was $10,951,000 as of January 31, 2002. A 1.0% change in the underlying prime rate or the ninety (90) day rate for United States Treasury Bills would result in an $110,000 change in the annual amount of interest on such debt. This amount is determined by considering the impact of the hypothetical interest rates on our revolving line of credit outstanding as of January 31, 2002. 19 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Financial Statements together with the report thereon of Ernst & Young LLP, independent auditors, are included in this report commencing at Page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 20 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Set forth below is biographical and other information about the persons who make up the Board of Directors and are expected to be nominated for election at the company's 2002 annual meeting: RICHARD K. MCDONALD Mr. McDonald is currently a director of USV. Since 1989, Age: 55 Mr. McDonald has served as the President and Director of Director since 1994 Constitution Capital Corporation, a general partner of M&M Executive, Audit and Compensation General Partnership and a general partner of RKM Investment Committees Company, the general partner of Constitution Partners I, L.P. G. KENNETH MACRAE Mr. Macrae is currently a director of USV. He is a Age: 73 consultant to Keystone Venture Capital Management Co., a Director since 1990 venture capital firm in Philadelphia, Pennsylvania. Prior Compensation, Executive to serving as a consultant, Mr. Macrae was from 1983 to 1997 and Stock Option Committees the President of Keystone Venture Capital Management Co. and the President and Director of KVM IV MCGP, Inc., the general partner of Keystone Venture IV Management Company, L.P. and Keystone IV, L.P. GEORGE E. NORCROSS III Mr. Norcross is currently a director of USV. He is the AGE: 46 Chairman and Chief Executive Officer of Commerce National Director since 2002 Insurance Services, the insurance unit of Commerce Bancorp. Mr. Norcross has served in that position, or in similar positions with predecessor companies, since 1979. Mr. Norcross also serves on the board of directors of Commerce Bancorp (NYSE: CBH). JOSEPH J. ROBERTS Mr. Roberts is currently a director of USV. Since 1987 he AGE: 49 has served as a Member of the General Assembly of the State Director since 2002 of New Jersey, where he is currently serving as Majority Leader. Mr. Roberts, a self-employed businessman, is President of Jersey Shore Hospitality, LLC, which owns and operates three restaurants in Cape May County, New Jersey. WILLIAM A. SCHWARTZ, JR. Mr. Schwartz serves as USV's President, Chief Executive Age: 60 Officer and Chairman of the Board and has served in that Director since 1967 capacity for the Company and its predecessors since 1967. Executive Committee Mr. Schwartz also serves on the board of directors of Commerce Bancorp (NYSE: CBH). Mr. Schwartz is married to Gayle E. Schmidt.

21 DENNIS J. SHAUGHNESSY Mr. Shaughnessy is currently a director of USV. Since 1989, Age: 54 Mr. Shaughnessy has served as the Managing Director, Director since 1994 Treasurer and Director of Grotech Capital Group, Inc., the Audit, Compensation and Stock Option general partner of Grotech Partners III, L.P., Grotech III Committees Companion Fund, L.P. and Grotech III Pennsylvania Fund, L.P. and Managing Director, Treasurer and Director of Grotech Capital Group IV, Inc., the general partner of Grotech Partners IV, L.P. Mr. Shaughnessy also serves on the board of directors of Polk Audio Inc. (NASDAQ: PKAU) and FTI Consulting, Inc. (AMEX: FCN). J. ROGER SULLIVAN, JR. Mr. Sullivan is currently a director of USV. Since March Age: 59 1994, Mr. Sullivan has served as a vice president of Grotech Director since 1994 Capital Group, Inc., the general partner of Grotech Partners Audit Committee III, L.P. and Grotech Capital IV, Inc., the general partner of Grotech Partners IV, L.P. PETER M. TROUP Mr. Troup is currently a director of USV. Since 1996, Mr. Age: 58 Troup has served as a management consultant to the retail Director since 1997 industry.

22 INFORMATION CONCERNING EXECUTIVE OFFICERS Background information about the Company's executive officers, is set forth below. GAYLE E. SCHMIDT Ms. Schmidt has served as USV's Executive Vice Age: 49 President and Chief Operating Officer since April 2000. From 1990 to March 2000, she served as the company's Executive Vice President, Manufacturing. GEORGE T. GORMAN Mr. Gorman has served as USV's President, Retail Age: 50 since February 1998. From September 1996 to January 1998, he served as the Executive Vice President, Retail of the Company. CARMEN J. NEPA, III Mr. Nepa has served as USV's Senior Vice President, Age: 36 Chief Financial Officer and Secretary since November 2001. From 1995 to October 2001, Mr. Nepa was a senior manager with Ernst & Young, LLP.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Exchange Act of 1934, as amended, requires the company's executive officers and directors and persons who own more than ten percent of a registered class of the company's equity securities (collectively, the "Reporting Persons") to file reports of ownership and changes in ownership with the Securities and Exchange Commission and to furnish the company with copies of these reports. The company believes that all filings required to be made by the Reporting Persons during the fiscal year ended January 31, 2002 were made on a timely basis, except for the initial statement of beneficial ownership of Mr. Nepa, which was not filed until April 2002, reporting no securities owned of USV by Mr. Nepa. 23 ITEM 11. EXECUTIVE COMPENSATION. SUMMARY COMPENSATION TABLE The following table summarizes the total compensation, for each of the last three fiscal years, earned by the Named Executive Officers--the Chief Executive Officer and the three other most highly compensated executive officers of USV who earned over $100,000 and who were serving in such capacities as of January 31, 2002. The information presented below represents all compensation earned by the Named Executive Officers for all services performed for the company or any of its subsidiaries.

------------------------------------ (1) Includes the value of the Company's contributions to the Company-sponsored 401(k) plan and the amount paid by the Company for term life insurance coverage under health and welfare plans. (2) Mr. Nepa joined the Company in November 2001. (3) Mr. McHenry resigned from his position with the Company in November 2001. 24 STOCK OPTIONS The following table sets forth certain information about the number of unexercised stock options and the value of any in-the-money options that are held by the Named Executive Officers. All of these options are transferable to family members under specified conditions. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES

(1) Amounts were calculated using the closing price of the common stock on the last trading day of the fiscal year ($2.75). EMPLOYMENT AGREEMENTS We entered into an employment agreement in 1998 with William A. Schwartz, Jr., President and Chief Executive Officer. The employment agreement provides for a guaranteed base salary and the right to be considered for such bonus programs as are adopted by the board. The initial term of Mr. Schwartz's employment agreement was for three years and automatically renews annually for successive three-year terms if not terminated by either party. Under the terms of Mr. Schwartz's agreement, he is entitled to salary continuation of the balance of the term of his employment agreement, but not less than one year, if his employment is terminated by us other than for cause or if he resigns for good reason under the terms of the agreement. The severance payable to Mr. Schwartz will depend on his monthly salary at that time. His current monthly salary is $25,417. If all or substantially all of the assets of the company are sold, or a merger or sale of all or substantially all of the stock of the company occurs while Mr. Schwartz is employed by the company, he will receive a bonus payment of $750,000. We also entered into salary continuation agreements in 1998 with George T. Gorman, President-Retail, and Gayle E. Schmidt, Executive Vice President and Chief Operating Officer. Under the terms of each of these agreements, the executive is entitled to salary continuation for one year if the executive's employment is terminated by us other than for cause, or if the executive resigns with good reason under the terms of the agreement. The severance due to each executive depends on the executive's monthly salary at that time. The current monthly salary for each executive is as follows: Mr. Gorman -- $16,158; and Ms. Schmidt -- $16,183. Each executive has also agreed not to compete with the Company for a period of six months following the termination of the executive's employment with the company. In October 2001, we entered into an employment agreement with Carmen Nepa, our Chief Financial Officer. The employment agreement provides for a guaranteed base salary and the right to be considered for such bonus programs as are adopted by the board. The initial term of Mr. Nepa's employment agreement is for 2 years and automatically renews for successive one year periods thereafter if not terminated by either party. Under the terms of Mr. Nepa's agreement, he is entitled to salary continuation for a period of 12 months if his employment is terminated by the Company other than for cause or if Mr. Nepa resigns for good reason under the terms of the agreement. The severance payable to Mr. Nepa, if any, will depend on his monthly salary at that time. 25 OTHER BENEFITS 401(k) Retirement Plan. The company maintains a 401(k) retirement savings plan that is available to substantially all employees. Under the terms of the plan, the company matches 25% of each participant's voluntary contributions up to 3% of the participant's compensation. A participant vests ratably in the matching contributions over the first five years of employment (20% per year). DIRECTOR COMPENSATION Mr. Schwartz, who is the only director that is also an employee, does not receive any additional compensation for serving on the Board of Directors. Annual Retainer Fee. Historically, each director of the company who is not an employee of the company or any of its subsidiaries receives an annual retainer payable in either cash or shares of company stock. Each current director, who is not an employee of the Company, received a cash payment of $15,000 for serving as a director during fiscal 2001. The form and amount of the annual retainer to be paid by the company to eligible directors in fiscal 2002 has not yet been determined. Other Benefits. We reimburse directors for the reasonable expenses associated with attending Board meetings and provide them with liability insurance coverage for their activities as directors of the company. MEETINGS AND COMMITTEES OF THE BOARD The Board met five times during fiscal 2001. During fiscal 2001, all then incumbent directors attended at least 75% of the meetings of the Board and the Board committees on which they served. The Board has four standing committees: the Audit Committee, the Compensation Committee, the Executive Committee and the Stock Option Committee. The Board does not have a nominating committee. The functions customarily attributable to a nominating committee are performed by the Board as a whole. Audit Committee. The Audit Committee of the Board of Directors, currently consisting of Messrs. McDonald, Shaughnessy and Sullivan, is authorized to recommend to the Board of Directors independent certified public accounting firms for selection as auditors of the company, make recommendations to the Board of Directors on auditing matters, examine and make recommendations to the Board of Directors concerning the scope of audits, and review and approve the terms of transactions between or among the company and related parties. None of the members of the Audit Committee is an employee of the company. Mr. McDonald is the Chairman of the Audit Committee. The Audit Committee met four times during fiscal 2001. Compensation Committee. The Compensation Committee of the Board of Directors, currently consisting of Messrs. Shaughnessy, Macrae and McDonald, is authorized to exercise all of the powers of the Board of Directors with respect to matters pertaining to compensation and benefits, including, but not limited to, salary matters, incentive/bonus plans, investment programs and insurance plans. The Compensation Committee is also authorized to exercise all of the powers of the Board of Directors in matters pertaining to employee promotions and the designation or revision of employee positions and job titles. None of the members of the Compensation Committee is an employee of the company. Mr. Shaughnessy is Chairman of the Compensation Committee. The Compensation Committee met once during 2001. Executive Committee. The Executive Committee of the Board of Directors, currently consisting of Messrs. Macrae, McDonald and Schwartz, is authorized to exercise substantially all of the powers of the board in the management and business affairs of the company, except it does not have the authority to 26 declare dividends, authorize the issuance of shares of our common stock, modify the company's certificate of incorporation or bylaws, adopt any agreement of merger or consolidation or recommend to the shareholders the sale, lease or exchange of all or substantially all of the company's assets or the dissolution of the company. Regularly scheduled meetings of the board are held periodically each year and special meetings are held from time to time. As a consequence, the occasions on which this committee is required to take action are limited. The committee did not meet during fiscal 2001. Stock Option Committee. The Stock Option Committee of the Board of Directors, currently consisting of Messrs. Shaughnessy and Macrae, is authorized to administer the company's existing stock option plan. The committee did not meet separately from the board during fiscal 2001. AUDIT COMMITTEE REPORT The audit functions of the Audit Committee are focused on three areas: o the adequacy of the company's internal controls and financial reporting process and the reliability of the company's financial statements; o the independence and performance of the company's independent auditors; and o the company's compliance with legal and regulatory requirements. We meet with management periodically to consider the adequacy of the company's internal controls and the objectivity of its financial reporting. We discuss these matters with the company's independent auditors and with appropriate company financial personnel. We regularly meet privately with the independent auditors who have unrestricted access to the Audit Committee. We also recommend to the Board the appointment of the independent auditors and review periodically their performance and independence from management. In addition, the Audit Committee reviews the company's financing plans and reports recommendations to the full Board for approval and to authorize action. The Directors who serve on the committee are all "Independent" for purposes of the Nasdaq listing standards. That is, the Board of Directors has determined that none of us has a relationship with USV that may interfere with our independence from USV and its management. The Board has adopted a written charter setting out the audit related functions the committee is to perform. Management has primary responsibility for the company's financial statements and the overall reporting process, including the company's system of internal controls. The independent auditors audit the annual financial statements prepared by management, express an opinion as to whether those financial statements fairly present the financial position, results of operations and cash flows of the company in conformity with accounting principles generally accepted in the United States and discuss with us any issues they believe should be raised with us. We reviewed the company's audited financial statements for the fiscal year ended January 31, 2002, with both management and Ernst & Young, the company's independent auditors, to discuss those financial statements. Management represented to us that the financial statements were prepared in accordance with generally accepted accounting principles. We received from and discussed with Ernst & Young the written disclosure and the letter required by Independence Standards Board Standard No. 1, (Independence Discussions with Audit Committees). These items relate to that firm's independence from the company. We also discussed with Ernst & Young any matters required to be discussed by Statement on Auditing Standards No. 61 (Communication with Audit Committees). Based on these reviews and discussions, we recommended to the Board that the company's audited financial statements for the fiscal year ended January 31, 2002, be included in its Annual Report on Form 10-K for filing with the Securities and Exchange Commission. The Committee also 27 recommended the reappointment, subject to shareholder approval, of the independent auditors, and the Board of Directors concurred in such recommendation. Submitted by the Audit Committee of the company's Board of Directors. Richard K. McDonald (Chairman) Dennis J. Shaughnessy J. Roger Sullivan, Jr. COMPENSATION COMMITTEE REPORT The company's executive compensation program is philosophically designed to reward exceptional performance and to align the financial interests of the company's senior executives with those of the equity owners of the company. To achieve this end, the Committee has developed and implemented a compensation program designed to attract and retain highly skilled executives with the business experience and acumen necessary for achievement of the company's long-term business objectives. The Compensation Committee uses compensation surveys to provide information and data to assist it in developing compensation programs that are competitive with other similarly-situated companies. The company's executive compensation consists of three components: base salary; an annual performance-based bonus; and stock-based compensation. The general guidelines used by the company to determine these components are described below. Subject to these guidelines, bonus awards and option grants are awarded on a discretionary rather than a formulaic basis. BASE SALARY The base salaries paid to the company's executive officers are based upon recommendations of senior management, and require approval of the Compensation Committee. Management takes into account a variety of factors in determining base salary, including: o competitive salaries for comparable officers at comparable companies; o individual performance and an assessment of the value of the individual's services to USV; o the fairness of individual executive officers' salaries relative to their responsibilities; o the salaries of other executive officers; and o the company's financial performance. At different times, depending upon prevailing circumstances, the Compensation Committee gives these criteria varying degrees of weight. ANNUAL BONUS The company uses annual incentive bonuses to recognize individual performance and reward exceptional contributions to the company's business. Bonuses are determined as follows. At the end of each fiscal year, a bonus pool is proposed by senior management and reviewed with the Compensation Committee. The bonus pool, which includes amounts to be paid to the Chief Executive Officer and the three other most highly compensated officers in the company, is allocable based on: 28 o the company's EBITDA growth rate for the year (taking into account long-term investment); o each individual's contribution to the whole; and o the prior year's bonus pool. Although these factors are considered, bonus pools are allocated on a discretionary, rather than a formulaic basis. Once the bonus pool is established, senior USV management are responsible for making recommendations to the Compensation Committee regarding allocation to executives other than the three most highly compensated officers of the company based on a subjective assessment of individual performance. The Compensation Committee is responsible for determining the CEO's bonus and the CEO makes recommendations to the Compensation Committee regarding allocation of the bonus pool to the four other most highly compensated executive officers of the company, which the Compensation Committee then approves or disapproves. Subject to certain guidelines based on salary levels, bonuses are entirely discretionary, with exceptional efforts and results rewarded disproportionately. STOCK OPTIONS The Committee believes that its stock option program appropriately links executive interest to stockholder value. The company makes annual option grants to eligible employees based on performance and issues options to certain employees upon initial employment and (promotion) and in connection with entering into certain new employment arrangements. The number of options available for grant each year and the allocation of options is determined as described below. At the end of the year, an aggregate option pool available for grant to company executives is proposed by senior management and reviewed with and approved by the Compensation Committee and the Stock Option Committee. As is the case with bonuses, once the option pool is established, senior USV management are responsible for making recommendations to the Compensation Committee regarding allocation to executives other than the five most highly compensated executive officers. As is the case with bonuses, the CEO makes recommendations to the Compensation Committee regarding option grants to the four most highly compensated executive officers other than the CEO and the Compensation Committee determines the number of options to be granted to the CEO. Subject to certain guidelines based on salary levels, option grants from the established pool are discretionary. In addition, a certain number of options are set aside each year for extraordinary grants to new hires, renewals or other grants that fall outside the annual grant program. All grants are reviewed and approved by the Compensation Committee and the Stock Option Committee, and the vast majority of the options granted vest over a three-year period. SUMMARY The Compensation Committee believes that the company's executive compensation program must continually provide executives with a strong incentive to focus on and achieve the company's business objectives and link a significant portion of long-term remuneration directly to stock price appreciation realized by all of the company's shareholders. By assuring that executives are appropriately compensated and therefore motivated, the long-term interests of shareholders will be best served. The actions taken by the Compensation Committee in 2001 were consistent with this focus and the principles outlined above. Submitted by the Compensation Committee of the company's Board of Directors Dennis J. Shaughnessy (Chairman) 29 G. Kenneth Macrae Richard K. McDonald COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Neither Messrs. Shaughnessy, Macrae or McDonald is an officer or employee, or former officer or employee, of the company or any of its subsidiaries. No interlocking relationship exists between the members of the company's Board or Compensation Committee and the board of directors or compensation committee of any other company, nor has any such interlocking relationship existed in the past. PERFORMANCE GRAPH The following Performance Graph compares, for the period that our Peer Group common stock has been publicly traded (since December 2, 1997), the cumulative total stockholder return for the company, The Nasdaq Stock Market (U.S. Compares) Index (the "Nasdaq Market Index"), and The Peer Group Index (the "Peer Group Index"). The Peer Group Index consists of the company and the following companies which are engaged primarily in the retail optical business: Cole National Corporation; Luxottica; National Vision, Inc. f/k/a Vista Eyecare, Inc.; and Emerging Vision, Inc. The Performance Graph assumes that $100 was invested beginning on the date of our initial public offering in each of USV and the indexes. Total return performance for the Nasdaq Market Index and the Peer Group Index is weighted based on the market capitalization of the companies included in each index and assumes that dividends are reinvested. In fiscal 2001, we did not declare or pay any dividends on our common stock. Immediately following the Performance Graph is a chart of the numerical plot-points that support the graph. We caution that the stock price performance shown in the graph below should not be considered indicative of potential future stock price performance. TOTAL RETURN TO STOCKHOLDERS (Assumes $100 Investment on 12/2/97)

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. STOCK OWNERSHIP The following table sets forth, as of January 31, 2002, certain information regarding the beneficial ownership of our common stock by: o Each person or entity who is known by us to own beneficially 5% or more of our outstanding common stock; o each director of the company; o each of our Named Executive Officers; and o all of our directors and executive officers as a group. 30

------------------------------ * Represents less than 1% (1) Beneficial ownership is determined in accordance with the rules of the Commission and generally includes voting or investment power with respect to securities. Except as otherwise indicated by footnote, and subject to community property laws where applicable, the persons named in the table above have sole voting and investment power with respect to all shares of Class A common stock shown as beneficially owned by them. (2) The address of Messrs. Schwartz, Gorman and Nepa, and Ms. Schmidt is c/o U.S. Vision, Inc., One Harmon Drive, Glendora, NJ 08029. (3) The shares of stock listed in Mr. Shaughnessy's and Mr. Sullivan's name are owned by Grotech Partners IV, L.P., Grotech Partners III, L.P., Grotech III Companion Fund, L.P. and Grotech III Pennsylvania Fund, L.P., each a limited partnership in which Mr. Shaughnessy and Mr. Sullivan serve as directors or officers of the respective general partners. Grotech Capital Group, Inc., the general partner of Grotech Partners III, L.P., Grotech III Companion Fund, L.P. and Grotech III Pennsylvania Fund, L.P., is the holder of 1,295 of these shares. Grotech Capital Group IV, LLC, the general partner of Grotech Partners IV, L.P., is the holder of 3,166 of these shares. Messrs. Shaughnessy and Sullivan disclaim beneficial ownership of these shares for all purposes. (4) A portion of these shares of stock held in Mr. McDonald's name are owned by M&M General Partnership and Constitution Partners I, L.P., each a limited partnership in which Mr. McDonald serves as a director or officer of the respective general partners. Mr. McDonald disclaims beneficial ownership of these shares, except to the extent of his pecuniary interest therein. (5) The shares of stock listed in Mr. Norcross' and Mr. Roberts' name are owned by the Norcross Roberts Group. 31 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS Since 1990, we have leased a retail store, office and administrative space located in a 7,000 square foot building in Philadelphia, Pennsylvania, from a limited partnership in which William A. Schwartz, Jr. and Gayle E. Schmidt, each of whom is an executive officer of the company and a 10% limited partner of the partnership. Mr. Schwartz is also the general partner of the partnership. We made payments to the partnership of $154,000, $153,000, and $149,000 in fiscal 2001, 2000, and 1999, respectively. Management believes that the lease terms are comparable to those that could have been obtained pursuant to an arm's length transaction with unaffiliated partners. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. FINANCIAL STATEMENTS The following financial statements of the Company are filed as a part of this report:

All financial statement schedules have been omitted because they are not applicable or the required information is shown in the consolidated financial statements and notes thereto. Reports on Form 8-K On November 29, 2001, U. S. Vision furnished information under Item 5 of Form 8-K regarding its earnings for the third quarter ended October 31, 2001, and the termination by the Norcross Roberts Group of the previously announced merger agreement pursuant to which the Norcross Roberts Group would have acquired U. S. Vision at a price of $4.25 per share. 32 EXHIBITS The following exhibits are filed as a part of this report:

* Previously filed as an exhibit to the Form S-1 (Reg. No. 333-35819) filed with the Commission on September 17, 1997. ** Previously filed as an exhibit to Amendment No. 1 to the Form S-1 (Reg. No. 333-35819) filed with the Commission on October 29, 1997. *** Previously filed as an exhibit to the Company's report on Form 10-K for the fiscal year ended January 31, 1998, which was filed with the Securities and Exchange Commission on April 30, 1999. *v Previously filed as an exhibit to the Company's report on Form 10-Q for the quarter ended July 31, 2000, which was filed with the Securities and Exchange Commission on September 13, 2000. v Previously filed as an exhibit to the Company's report on Form 10-K for the fiscal year ended January 31, 2001, which was filed with the Securities and Exchange Commission on April 30, 2001. + Filed herewith. 33 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. U. S. VISION, INC. May 1, 2002 By: /s/ William A. Schwartz, Jr. -------------------------------- William A. Schwartz, Jr., President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on May 1, 2002.

REPORT OF INDEPENDENT AUDITORS Board of Directors and Shareholders U.S. Vision, Inc. We have audited the accompanying consolidated balance sheets of U.S. Vision, Inc. as of January 31, 2002 and 2001, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for each of the three years in the period ended January 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of U.S. Vision, Inc. at January 31, 2002 and 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended January 31, 2002, in conformity with accounting principles generally accepted in the United States. /s/Ernst & Young LLP Philadelphia, Pennsylvania April 12, 2002 F-1 U.S. Vision, Inc. Consolidated Balance Sheets (Dollars in thousands, except per share amounts)

See accompanying notes to consolidated financial statements. F-2 U.S. Vision, Inc. Consolidated Statements of Operations (Dollars in thousands, except per share amounts)

See accompanying notes to consolidated financial statements. F-3 U.S. Vision, Inc. Consolidated Statements of Changes in Shareholders' Equity (In thousands, except share data)

See accompanying notes to consolidated financial statements. F-4 U.S. Vision, Inc. Consolidated Statements of Cash Flows (In thousands)

See accompanying notes to consolidated financial statements. F-5 U.S. Vision, Inc. Notes to Consolidated Financial Statements 1. ORGANIZATION U.S. Vision, Inc. is a retailer of optical products and services through retail optical departments licensed to operate within national and regional department stores and through a limited number of freestanding retail locations. Our retail optical departments are full-service retail vision care stores that offer an extensive selection of designer brands and private label prescription eyewear, contact lenses, sunglasses, ready-made readers and accessories. As of January 31, 2002, we operated 603 locations in 47 states and Canada, consisting of 577 licensed departments and 26 freestanding stores. 2. SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and all of its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ significantly from those estimates. REVENUE RECOGNITION Revenue is recognized when merchandise is delivered or shipped to the customer. ADVERTISING The Company expenses advertising costs as incurred. Advertising expense was $9,325,000, $8,950,000, and $9,764,000 in fiscal 2001, 2000, and 1999, respectively. INVENTORY Inventory, consisting principally of frames and lenses, is valued at the lower of cost or market, determined by the first-in, first-out method. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment are stated at cost. Depreciation, which includes assets under capital leases, is computed using the straight-line method. The general range of useful lives is 10 to 30 years for buildings and improvements, and 3 to 10 years for automobiles, machinery and equipment, computer equipment, and furniture and fixtures. Depreciation expense totaled $4,847,000, $4,342,000, and $4,349,000 in fiscal 2001, 2000, and 1999, respectively. F-6 U.S. Vision, Inc. Notes to Consolidated Financial Statements (continued) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ACCOUNTING FOR INTERNAL USE SOFTWARE The Company capitalizes certain costs incurred with developing or obtaining internal-use software in accordance with the provisions of AICPA Statement of Position 98-1. Total costs capitalized for the years ended January 31, 2001 and 2000 included capitalized interest expense of $999,000, and $739,000, respectively. LONG-LIVED ASSETS Long-lived assets, which principally includes property, plant, and equipment, and goodwill arising from business acquisitions, are amortized on a straight-line basis over the expected period to be benefited from 15 to 40 years. In accordance with FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the Company periodically evaluates the realizability of long-lived assets as events or circumstances indicate a possible inability to recover their carrying amounts. Long-lived assets are grouped and evaluated on a per store basis by applying various analyses, including undiscounted cash flows and profitability projections. STORE OPENINGS AND CLOSINGS The noncapital expenditures incurred in opening new stores or remodeling existing stores are expensed as incurred. When a store is closed, the remaining investment in leasehold improvements and the amount estimated to terminate the lease are expensed. RECLASSIFICATION Certain prior-year amounts have been reclassified to conform with the current-year presentation. PENDING ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets arising from business combinations completed after June 30, 2001. SFAS No. 142 prohibits the amortization of goodwill and intangible assets with indefinite useful lives. SFAS No. 142 requires that these assets be reviewed for impairment as least annually. Intangible assets with finite lives will continue to be amortized over their estimated useful lives. The Company will apply SFAS No. 142 beginning in the first quarter of 2002. Application of the nonamortization provisions of SFAS No. 142 is expected to result in an increase in net income of $349,000 ($0.05 per share) in 2002. The Company will test goodwill for impairment using the two-step process prescribed in SFAS No. 142. The first step is a screen for potential impairment, while the second step measures the amount of the impairment, if any. The Company expects to perform the first of the F-7 U.S. Vision, Inc. Notes to Consolidated Financial Statements (continued) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) required impairment tests of goodwill and indefinite-lived intangible assets as of February 1, 2002 in the second quarter of 2002. If an impairment charge were to result from these transitional impairment tests, it would be reflected as the cumulative effect of a change in accounting principle in the first quarter of 2002. The Company has not yet determined what the effect, if any, of these tests will be on the earnings and financial position of the Company. In 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This statement supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and provides a single accounting model for long-lived assets to be disposed and broadens the presentation of discontinued operations to include more disposal transactions. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, with early application encouraged. The Company adopted this statement on February 1, 2002, and the effect of the adoption was not material to the Company. 3. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment is as follows (In thousands):

4. LONG-TERM DEBT Long-term debt is as follows (In thousands):

F-8 U.S. Vision, Inc. Notes to Consolidated Financial Statements (continued) 4. LONG-TERM DEBT (CONTINUED) DRPA Term Loan due February 1, 2010. Requires quarterly payments of $13,322, which includes principal and interest at 2%. Final payment of $702,434 is due on January 31, 2010. The term loan is secured by the land and building of the Corporate headquarters. 989 1,022 DRPA Term Loan due February 1, 2010. Requires quarterly payments of $25,313, which includes principal and interest at 2%. Final payment of $1,334,625 is due on January 31, 2010. The term loan is secured by the land and building of the New Jersey manufacturing facility. 1,879 1,942 DRPA Term Loan due on June 7, 2005. Requires quarterly payments of $33,175, which includes principal and interest at 2%. The term loan is secured by certain equipment located in the New Jersey manufacturing facility. 416 539 Mortgage loan payable due October 2004. Requires monthly payments of $5,121, which includes principal and interest at 8.5%. Final payment of $413,000 is due on October 2004. The loan is secured by the land and building of the New Jersey distribution facility. 477 497 Note payable to stockholder, which was repaid in full on July 7, 2001. Required quarterly payments of $41,666 plus simple interest based on the prime rate at the first day of each calendar quarter. - 83 Other 313 446 ----------- ------- 15,025 16,562 Less current portion 367 450 ----------- ------- $ 14,658 $16,112 =========== =======

The revolving credit agreement contains various financial covenants including maintaining a specified net worth level, current ratio, and a fixed charge ratio. The revolving credit agreement also prohibits the payment of dividends to common shareholders. As of January 31, 2002, the Company was in compliance with the all the financial covenants. The carrying amounts of the Company's debt approximate their fair values. F-9 U.S. Vision, Inc. Notes to Consolidated Financial Statements (continued) 4. LONG-TERM DEBT (CONTINUED) Maturities of long-term debt for each of the next five years and thereafter are as follows (In thousands):

5. LEASE COMMITMENTS Capital lease obligations are machinery and equipment leases which expire on various dates through 2005. Assets under capital leases at January 31, 2002 and 2001, were $3,161,000 and $3,389,000, net of accumulated amortization of $1,721,000 and $1,211,000, respectively, and are included as a component of property, plant, and equipment in the consolidated balance sheets. Future minimum payments required under capital leases and noncancellable operating leases with lease terms in excess of one year as of January 31, 2002, are as follows (In thousands):

The Company has commitments from Commerce Bank Lease, a unit of Commerce Bank, N.A., for a $2,000,000 five-year equipment lease financing facility. The facility expires on July 31, 2003 and provides the Company with a number of leasing alternatives. At January 31, 2002 approximately $700,000 was available on this facility. F-10 U.S. Vision, Inc. Notes to Consolidated Financial Statements (continued) 5. LEASE COMMITMENTS (CONTINUED) At January 31, 2002, the Company operated 26 of its retail stores under operating leases with varying terms. The leases expire at various dates from fiscal 2002 to fiscal 2006, and many have renewal options for up to five additional years. The leases provide for minimum lease payments and, in many cases, require payment of additional rents if sales exceed stipulated levels. These additional rents are not significant. The leases also require, in most cases, payment of taxes and common area expenses such as maintenance, security, and other expenses. The Company also operated 577 licensed optical departments under leases with expiration dates ranging from 60-days to 5-years. These leases provide for monthly lease payments calculated as a percentage of sales. Rent expense under these leases was $16,646,000, $18,215,000, and $17,378,000 in fiscal 2001, 2000, and 1999, respectively. Approximately 70% of these leases are with one large national retailer. The Company's master lease provides that only a limited number of the Company's optical centers with this retailer may be closed in any calendar year without cause. The Company also operates other facilities under operating leases. Rent expense for all operating leases, including those on its retail stores and licensed optical departments described above, was $18,120,000, $20,323,000, and $19,867,000 in fiscal 2001, 2000, and 1999, respectively. 6. INCOME TAXES The components of the income tax provision are as follows (In thousands):

F-11 U.S. Vision, Inc. Notes to Consolidated Financial Statements (continued) 6. INCOME TAXES (CONTINUED) Deferred income tax liabilities and assets result from differences in the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements. Significant components of the Company's deferred income taxes are as follows (In thousands):

The deferred tax valuation reserve decreased by $150,000 and $1,481,000 for fiscal 2001 and 2000, respectively. The valuation reserve has been established to eliminate the benefit of all net deferred tax assets except for the credit on the Alternative Minimum Tax. A reconciliation of the income tax provision with amounts determined by applying the U.S. Statutory rate to income before income tax is as follows (in thousands):

F-12 U.S.Vision, Inc. Notes to Consolidated Financial Statements (continued) 6. INCOME TAXES (CONTINUED) As of January 31, 2002, the Company had federal and state net operating loss carry forwards of approximately $16,900,000 which will begin to expire in the year 2006. Approximately $9,500,000 of these carry forwards are available to offset future taxable income without limitation and approximately $7,400,000 of these carry forwards (the "Restricted NOLs") are significantly limited due to ownership changes. Approximately $780,000 of the Restricted NOLs will become available for use each year through the year 2008. Approximately $3,400,000 of the Restricted NOLs are expected to expire unutilized. 7. NET INCOME PER SHARE The following table (In thousands except per share data) presents the calculation of earnings per share for the periods indicated.

For the years ended January 31, 2002, 2001 and 2000, respectively, options and warrants to purchase 1,653,920 shares of common stock at prices ranging from $2.88 to $12.00 per share, 952,443 shares of common stock at prices ranging from $7.69 to $12.00 per share, and 1,010,473 shares of common stock at prices ranging from $7.69 to $12.00 per share were not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market price of the common shares and in 2002 and 2000 the shares were anti-dilutive. 8. COMMITMENTS AND CONTINGENCIES The Company is subject to various pending and threatened litigation from time to time in the ordinary course of our business. Although all litigation involves some degree of uncertainty, in the opinion of management, liabilities, if any, arising from such litigation or threat thereof are not expected to have a material adverse effect on the Company. 9. ACQUISITIONS On July 31, 1999, the Company acquired ten licensed optical retail stores located within The Bay and Zeller's full line stores in the Quebec province. On September 20, 1999, the Company acquired all of the assets and inventory of twenty-four licensed optical departments from a regional department store retailer. Both acquisitions were accounted for under the purchase method of accounting. The operating results of these acquisitions are included in the consolidated financial statements since the date of the acquisitions. The total cost of these acquisitions was $1.5 million, and the excess of the purchase price over the fair market value of the acquired assets and liabilities assumed has been recorded as goodwill. F-13 U.S. Vision, Inc. Notes to Consolidated Financial Statements (continued) 9. ACQUISITIONS (CONTINUED) The total goodwill recorded on these acquisitions was $1.2 million, which is being amortized on a straight- line basis from the respective date of each acquisition. Pro forma results of operations have not been included for these acquisitions as the effect is not material. 10. UNUSUAL ITEMS In fiscal 1999 the Company's Board of Directors approved a plan to close its plastic frame manufacturing facility located in Florida. The Company relocated the importing and distribution of frames, previously manufactured or imported in Florida, to its Glendora, NJ distribution facility. In connection with this plan, the company recorded a charge of $2,835,000, which was comprised of $2,224,000 in write-offs of inventory used solely in the manufacturing process, $161,000 in machinery and equipment, $250,000 in buildings and $200,000 for uncollectible receivables. The write-offs associated with the buildings and machinery and equipment were intended to reduce their carrying costs to their estimated net realizable value. In fiscal 2000 the Company closed approximately 80 under-performing stores and recorded a charge of $752,000 for lease termination charges and the write-off of furniture and fixtures and leasehold improvements. In fiscal 2001, we sold the frame manufacturing building located in Florida and realized a net gain of $493,000. This gain was offset by a charge of $204,000 for the write-off of furniture and fixtures and leasehold improvements in connection with the closure of approximately 40 under-performing stores. 11. SEGMENT INFORMATION The Company operates exclusively in the business of marketing, distribution, and production of optical products through retail optical stores. On January 31, 2002, the Company operated in 47 states and in Canada. Approximately 68%, 66% and 66% of the Company's sales were in licensed departments of one retailer for fiscal 2001, 2000 and 1999. Sales in licensed departments of another retailer were approximately 13%, 12% and 12% for fiscal 2001, 2000 and 1999. A termination of either of these licenses could cause a significant loss of sales, which would affect operating results adversely. The Company's sales to customers, operating income and net property, plant and equipment are summarized below by geographical areas. Sales to customers are attributed to the geographical areas based on the point of sale.

F-14 U.S. Vision, Inc. Notes to Consolidated Financial Statements (continued) 12. STOCK BASED COMPENSATION PLANS In February 1996, the Board of Directors authorized the formation of an employee incentive stock option plan. The number of shares of Common Stock for which options could be granted under this plan cannot exceed in the aggregate 1,300,000 shares. The price at which shares may be purchased pursuant to options granted under the plan may not be less than the fair market value of the shares of Common Stock on the date the option is granted. In June 2000, the Board of Directors amended the employee incentive stock option plan to increase the aggregate number of shares subject to issuance by 700,000 shares from 1,300,000 shares to 2,000,000 shares. The following table summarizes the Company's stock option activity:

In June 2000, 105,500 warrants were issued to various directors with an exercise price of $2.88 per share (fair market value on date of grant). These warrants vested immediately upon grant and expire in June 2005. The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations in accounting for its employee stock options because the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation," requires use of option valuation models that were not developed for use in valuing employee stock options. If the Company had recognized compensation costs based upon the fair value of the stock options at the date of the grant, as prescribed by FAS 123, the Company's pro forma results would have been: F-15 U.S. Vision, Inc. Notes to Consolidated Financial Statements (continued) 12. STOCK BASED COMPENSATION PLANS (CONTINUED)

The fair value of options granted in fiscal 2000 was $1.07. The fair value of the options was estimated at the date of the grant using a Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 5.75%, dividend yield of 0%, expected volatility of the market price of the common stock of 63.8% and weighted average expected life of the options of 2 years. The estimated fair value of the options was amortized to expense over the vesting period of the options for the purposes of determining pro forma net income and pro forma net income per share. The effects of applying FAS 123 for purposes of providing pro forma disclosures are not likely to be representative of the effects on reported net income in future years. 13. EMPLOYEE BENEFIT PLAN The Company implemented an employee savings plan (the "plan") during fiscal 1995 pursuant to Section 401(k) of the Internal Revenue Code. All employees who have been credited with at least 250 hours of service within three consecutive months are eligible to participate in the plan. Employees may elect to contribute to the plan through payroll deductions in an amount not to exceed the amount permitted under the Internal Revenue Code. The Company has the discretion to make matching contributions on behalf of the participants. Employees are fully vested in their contributions. Company contributions vest at a rate of 20% on each participant's anniversary date in the plan provided that the participant has completed 1,000 hours of service with the Company as of such date. During fiscal 2001, 2000 and 1999, the Company contributed $110,000, $140,000, and $135,000, respectively to the plan. F-16 EXHIBIT INDEX

U S VISION INC 10-K