UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 2001
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _____ to _______
Commission file number: 1-14128
EMERGING VISION, INC.
(Exact name of Registrant as specified in its Charter)
New York 11-3096941
------------------------ -------------------------------
(State of Incorporation) (IRS Employer Identification No.)
1500 Hempstead Turnpike
East Meadow, New York 11554
----------------------------------------------------------
(Address of Principal Executive Offices, including Zip Code)
(516) 390-2100
--------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
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
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of November 13, 2001, there were 27,004,972 shares outstanding of the
Registrant's Common Stock, par value $.01 per share.
Item 1. FINANCIAL STATEMENTS
EMERGING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
September 30, December 31,
2001 2000
----------- -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ................................................................ $ 974 $ 5,215
Franchise receivables, net of allowance of $2,431 and $3,521, respectively ............... 1,814 1,493
Other receivables, net of allowance of $425 and $323, respectively ....................... 960 1,997
Current portion of notes receivable from franchisees ..................................... 1,398 2,622
Inventories .............................................................................. 817 1,033
Prepaid expenses and other current assets ................................................ 419 475
--------- ---------
Total current assets ......................................................... 6,382 12,835
--------- ---------
Property and equipment, net ....................................................................... 2,021 2,995
Franchise notes and other receivables, net of allowance of $3,487 and $3,019, respectively ........ 2,885 3,926
Intangible assets, net ............................................................................ 1,368 1,534
Other assets ...................................................................................... 284 401
Net assets of discontinued operations ............................................................. 718 840
--------- ---------
Total assets ...................................................... $ 13,658 $ 22,531
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ........................................................ $ 197 $ 221
Accounts payable and accrued liabilities ................................................. 7,109 13,227
Net liabilities of discontinued operations ............................................... 1,671 3,006
--------- ---------
Total current liabilities .................................................... 8,977 16,454
--------- ---------
Long-term debt .................................................................................... 409 533
Excess of fair value of assets acquired over cost ................................................. 85 317
Franchise deposits and other liabilities .......................................................... 996 1,322
--------- ---------
Total liabilities.................................................. $ 10,467 $ 18,626
--------- ---------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value per share; 5,000,000 shares authorized:
Senior Convertible Preferred Stock, $100,000 liquidation preference per
share;
3 shares issued and outstanding .......................................................... 287 287
Common stock, $.01 par value per share; 50,000,000 shares authorized; 27,187,309 and
25,559,231 shares issued, respectively; 27,004,972 and 25,382,230 shares
outstanding, respectively ................................................................ 272 256
Treasury stock, at cost, 182,337 and 177,001 shares, respectively ............................ (204) (203)
Additional paid-in capital ................................................................... 119,926 119,453
Accumulated deficit .......................................................................... (117,090) (115,888)
--------- ---------
Total shareholders' equity ...................................... 3,191 3,905
--------- ---------
Total liabilities and shareholders' equity ...................... $ 13,658 $ 22,531
========= =========
The accompanying notes are an integral part of these consolidated balance sheets.
2
EMERGING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In Thousands, Except Per Share Data)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2001 2000 2001 2000
---------- -------- -------- --------
Revenues:
Net sales ................................................... $ 2,855 $ 2,646 $ 8,595 $ 9,362
Franchise royalties ......................................... 1,938 2,381 6,268 7,047
Net gains and fees from the conveyance of franchise
and Company-owned store assets ......................... 10 73 132 120
Interest on franchise notes receivable ...................... 203 308 758 934
-------- -------- -------- --------
Total revenues ......................................... 5,006 5,408 15,753 17,463
-------- -------- -------- --------
Costs and expenses:
Cost of sales ............................................... 767 900 1,973 2,695
Selling, general and administrative expenses ................ 6,084 4,341 15,476 15,354
Loss from franchised stores operated under
management agreements .................................. 97 143 344 398
-------- -------- -------- --------
Total costs and expenses ............................... 6,948 5,384 17,793 18,447
-------- -------- -------- --------
Income (loss) from continuing operations before provision for
income taxes ........................................... (1,942) 24 (2,040) (984)
Provision for income taxes .................................. - - - -
-------- -------- -------- --------
Income (loss) from continuing operations ............... (1,942) 24 (2,040) (984)
-------- -------- -------- --------
Discontinued operations: (Note 2)
Income (loss) from discontinued operations .................. (657) (2,009) 838 (7,107)
-------- -------- -------- --------
Net loss ............................................... $ (2,599) $ (1,985) $ (1,202) $ (8,091)
======== ======== ======== ========
Per share information (Note 3):
Basic:
Income (loss) from continuing operations .................... $ (0.08) $ - $ (0.08) $ (1.49)
Income (loss) from discontinued operations .................. (0.02) (0.08) 0.03 (0.31)
-------- -------- -------- --------
Net loss per share ..................................... $ (0.10) $ (0.08) $ (0.05) $ (1.80)
======== ======== ======== ========
Diluted:
Loss from continuing operations ............................. $ (0.08) $ (0.03) $ (0.08) $ (1.56)
Income (loss) from discontinued operations .................. (0.02) (0.08) 0.03 (0.31)
-------- -------- -------- --------
Net loss per share ..................................... $ (0.10) $ (0.11) $ (0.05) $ (1.87)
======== ======== ======== ========
Weighted-average number of common shares outstanding:
Basic ....................................................... 26,951 25,559 25,492 23,068
======== ======== ======== ========
Diluted ..................................................... 27,334 25,942 25,875 23,451
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
3
EMERGING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In Thousands)
For the Nine Months Ended
September 30,
2001 2000
---------- ----------
Cash flows from operating activities:
Net loss from continuing operations ..................................................... $ (2,040) $ (984)
Adjustments to reconcile net loss from continuing operations to net
cash provided by (used in) operating activities:
Depreciation and amortization .................................................... 865 983
Provision for doubtful accounts .................................................. 60 679
Provision for inventory .......................................................... 100 -
Non-cash compensation charges related to stock-based compensation ................ 165 47
Loss on disposal of fixed assets ................................................. 372 44
Changes in operating assets and liabilities:
Franchise receivables ............................................................ (213) (902)
Inventories ...................................................................... (105) 306
Prepaid expenses and other current assets ........................................ 56 49
Accrual for store closures ...................................................... 435 -
Other assets ..................................................................... 68 53
Accounts payable and accrued liabilities ......................................... (528) (3,117)
-------- --------
Net cash used in operating activities ........................................................ (765) (2,842)
-------- --------
Cash flows from investing activities:
Franchise notes receivable issued ....................................................... (328) (376)
Proceeds from franchise and other notes receivable ...................................... 1,543 1,453
Purchases of property and equipment ..................................................... (344) (387)
-------- --------
Net cash provided by investing activities .................................................... 871 690
-------- --------
Cash flows from financing activities:
Proceeds from the exercise of stock options and warrants ................................ - 7,692
Net proceeds from the issuance of Series B Convertible Preferred Stock .................. - 10,618
Proceeds from long-term debt ............................................................ - 500
Payments on long-term debt .............................................................. (148) (5,230)
Acquisition of treasury shares .......................................................... (1) -
-------- --------
Net cash (used in) provided by financing activities .......................................... (149) 13,580
-------- --------
Net cash (used in) provided by continuing operations ......................................... (43) 11,428
-------- --------
Net cash (used in) discontinued operations ................................................... (4,198) (3,221)
-------- --------
Net (decrease) increase in cash and cash equivalents ......................................... (4,241) 8,207
Cash and cash equivalents - beginning of period .............................................. 5,215 108
-------- --------
Cash and cash equivalents - end of period .................................................... $ 974 $ 8,315
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ............................................................................ $ 60 $ 372
======== ========
Taxes ............................................................................... $ 63 $ 54
======== ========
Non-cash investing and financing activities:
Net assets of franchise stores reacquired through exchange of receivables ........... $ 372 $ -
Issuance of common shares for consulting services and other ......................... 165 9,808
Issuance of common shares to settle vendor payable related to discontinued operations 325 -
Extinguishment of related party debt ................................................ - 727
The accompanying notes are an integral part of these consolidated statements.
4
EMERGING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(In Thousands, Except Share Data)
Treasury
Senior Convertible Stock, Additional Total
Preferred Stock Common Stock at cost Paid-In Accumulated Shareholders'
Shares Amount Shares Amount Shares Amount Capital Deficit Equity
------ ------ ---------- -------- ------ ------ ---------- ----------- ------------
BALANCE - DECEMBER 31, 2000 3 $ 287 25,559,231 $ 256 177,001 $(203) $119,453 $(115,888) $ 3,905
------ ------ ---------- -------- ------- ----- -------- --------- --------
Issuance of shares for
consulting services (Note 4) - - 1,628,078 16 - - 473 - 489
Acquisition of treasury shares - - - - 5,336 (1) - - (1)
Net income - - - - - - - (1,202) (1,202)
------ ------ ---------- -------- ------- ----- -------- --------- --------
BALANCE - SEPTEMBER 30, 2001 3 $ 287 27,187,309 $ 272 182,337 $(204) $119,926 $(117,090) $ 3,191
====== ====== ========== ======== ======= ===== ======== ========= ========
The accompanying notes are an integral part of this consolidated statement.
5
EMERGING VISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION:
The accompanying Consolidated Financial Statements of Emerging Vision, Inc.
(the "Registrant") and subsidiaries (collectively, the "Company") have been
prepared in accordance with generally accepted accounting principles for interim
financial statement presentation and in accordance with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statement presentation. In the opinion of
management, all adjustments for a fair statement of the Company's financial
position and results of operations for the interim periods presented have been
included. All such adjustments are of a normal recurring nature. This financial
information should be read in conjunction with the Consolidated Financial
Statements and Notes thereto included in the Registrant's Annual Report on Form
10-K for the Year Ended December 31, 2000, as supplemented by its Annual Report
on Form 10-K/A for such year. There have been no changes in significant
accounting policies since December 31, 2000.
Certain reclassifications have been made to prior year amounts to conform
to the current year presentation.
NOTE 2 - DISCONTINUED OPERATIONS:
On March 28, 2001, the Company announced its decision to discontinue
further development of its e-commerce division (the "Internet Division"), and
focus its efforts and resources on its franchise/retail optical store business
("Sterling Optical"). The Company has successfully completed the discontinuance
of the activities of its Internet Division. Additionally, in June 2000, the
Company announced its intention to discontinue the operations of, and sell its
assets situated in the ambulatory surgery center located in Garden City, New
York (the "Ambulatory Center"), as well as to sell the business and assets of
its 66.5%-owned subsidiary, Insight Laser Centers, Inc. ("Insight Laser").
In connection with the foregoing, as of December 31, 2000, the Company had
accrued for $6,285,000 of costs associated with all such discontinued
operations. These accruals included the anticipated future operating losses of
these divisions, the expenses associated with the disposal of the net assets of
these divisions, and an estimate of loss upon disposition. In addition, during
the three months ended September 30, 2001, the Company accrued an additional
$380,000 related to the discontinuance of the operations of Insight Laser. The
Company was unsuccessful in its attempts to sell the business and assets of
Insight Laser, and therefore has made a decision to cease all such entity's
operations, effective as of November 30, 2001, and attempt to settle all of its
liabilities in connection therewith (such liabilities to include lease
termination costs and employee related severance costs), as well as to
thereafter liquidate the assets thereof, which liquidation is anticipated to
take place on or before December 31, 2001. As of September 30, 2001, a provision
for discontinued operations of $465,000 remains accrued and is included in
accounts payable and accrued liabilities on the accompanying Consolidated
Balance Sheet.
As a result of the foregoing, the net assets, operating results and cash
flows of the aforementioned segments of the Company's business (other than its
Sterling Optical division) have been presented as discontinued operations in the
accompanying Consolidated Financial Statements for all periods presented. As of
September 30, 2001 and December 31, 2000, net liabilities of discontinued
operations of $953,000 and $2,166,000, respectively, have been segregated on the
accompanying Consolidated Balance Sheets.
On May 31, 2001, the Company successfully disposed of the assets of the
Ambulatory Center, resulting in a loss from disposition that was lower than that
originally accrued. Additionally, the Company successfully settled certain
claims related to its Internet Division for less than the amounts originally
accrued. As a result of the foregoing, the Company had reevaluated its total
accrual related to such discontinued operations and, accordingly, during the six
months ended June 30, 2001, reversed approximately $1,497,000 of such accrual
into earnings. This amount, offset by the aforementioned additional accrual of
approximately $380,000 for Insight Laser during the three months ended September
30, 2001 (resulting from the Company's decision to close, rather than sell, the
business and assets of Insight Laser), is reflected in income from discontinued
operations on the accompanying Consolidated Statements of Operations for the
three and nine month periods ended September 30, 2001.
6
During the nine months ended September 30, 2001, the Company utilized
$4,703,000 of its accrual for discontinued operations. This included
approximately $805,000 in severance payments to all of the Internet Division's
personnel located in the Dallas, Texas office, and approximately $1,298,000 of
operating costs for the Internet Division through September 30, 2001. Included
in the severance payments were payments of $277,000 and $205,000, respectively,
to Mr. Gregory Cook, the Company's former President and Chief Executive Officer,
and Mr. James Ewer, the Company's former Senior Vice-President of Operations.
On April 24, 2001, the Company and Ms. Sara V. Traberman, the former Chief
Financial Officer of the Company, settled her claim for severance benefits
(which, in accordance with the terms of her Employment Agreement with the
Company, called for a cash settlement in the approximate amount of $1,300,000,
and the immediate vesting of the 400,000 stock options previously granted to her
under the Agreement, all as a result of the failure of the Company to sell its
non-Internet related assets by March 1, 2001) for a lump sum payment of
$750,000, plus the issuance of fully-vested stock options to purchase 125,000
shares of the Company's Common Stock at an exercise price of $0.29, their fair
market value on the date of grant.
On May 31, 2001, the Company and the owner/licensee of the Ambulatory
Center reached an agreement whereby the Company sold and transferred its assets
then located in the Ambulatory Center to a limited liability company owned, in
principal part, by the owner/licensee thereof. In consideration of such sale and
transfer, the purchaser assumed the Ambulatory Center's liabilities (subject to
certain limitations), released the Company from its obligations under the lease
for the premises of the Ambulatory Center (except in limited circumstances),
agreed to the termination of the Administrative Services and Consulting
Agreement whereby the Company rendered services to such owner/licensee in
connection with the operation of the Ambulatory Center, and agreed to the
termination of the Purchase Agreement whereby an affiliate of the Company had
agreed to purchase the New York State License (Certificate of Need) for the
Ambulatory Center. As a result, the Company reversed $887,000 of the previously
accrued $1,145,000 of liabilities related to the Ambulatory Center.
On July 5, 2001, the Company and each of Rare Medium Group, Inc. and Rare
Medium, Inc. (collectively, "Rare") entered into a Settlement Agreement and
Mutual Release whereby the Company's dispute with Rare regarding their
respective obligations under the Company's various agreements with Rare
(pertaining to the development and implementation of the e-commerce business and
strategies of the Company's previously abandoned Internet Division) was settled,
and each of the parties was released from substantially all of its respective
obligations under the various agreements between the parties (including, but not
limited to, the $3.00 price protection guarantee afforded Rare with respect to
the 1,000,000 shares of the Company's Common Stock previously issued to Rare
under the agreements (the "Existing Shares"), all in exchange for the Company's
payment to Rare of $375,000, the Company's issuance to Rare of an additional
1,000,000 shares of its Common Stock (which the Company is required to attempt
to register for resale under the Securities Act of 1933, as amended (the
"Act")), and the Company's agreement not to impede Rare's ability to sell the
Existing Shares, all of which were previously registered under the Act.
7
NOTE 3 - PER SHARE INFORMATION:
The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share". Basic net income (loss) per
common share ("Basic EPS") is computed by dividing the net income (loss)
available (attributable) to common shareholders by the weighted-average number
of common shares outstanding. Diluted net income (loss) per common share
("Diluted EPS") is computed by dividing the net income (loss) available
(attributable) to common shareholders by the weighted-average number of common
shares and dilutive common share equivalents and convertible securities then
outstanding. SFAS No. 128 requires that the presentation of both Basic EPS and
Diluted EPS appear on the face of the Company's Consolidated Statements of
Operations. Common stock equivalents were excluded from the computation for all
periods presented as their impact would have been anti-dilutive.
The following table sets forth the computation of basic and diluted per
share information (in thousands, except per share data):
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2001 2000 2001 2000
--------- --------- --------- ---------
Numerator:
Income (loss) from continuing operations .................... $ (1,942) $ 24 $ (2,040) $ (984)
Induced conversion of Senior Convertible Preferred Stock .... - - - (21,707)
Accretion of dividends on Series B Convertible
Preferred Stock ....................................... - - - (11,743)
-------- -------- -------- --------
Numerator for basic per share information -
Income (loss) available (attributable) to common
shareholders .......................................... (1,942) 24 (2,040) (34,434)
-------- -------- -------- --------
Effect of assumed conversion of Senior Convertible
Preferred Stock ....................................... (117) (773) (122) (2,196)
Numerator for diluted per share information -
Loss attributable to common shareholders .. ........... (2,059) (749) (2,162) (36,630)
-------- -------- -------- --------
Basic:
Income (loss) available (attributable) to common shareholders (1,942) 24 (2,040) (34,434)
Income (loss) from discontinued operations .................. (657) (2,009) 838 (7,107)
-------- -------- -------- --------
Net loss attributable to common shareholders .......... $ (2,599) $ (1,985) $ (1,202) $(41,541)
======== ======== ======== ========
Diluted:
Loss attributable to common shareholders .................... (2,059) (749) (2,162) (36,630)
Income (loss) from discontinued operations .................. (657) (2,009) 838 (7,017)
-------- -------- -------- --------
Net loss attributable to common shareholders .......... $ (2,716) $ (2,758) $ (1,324) $(43,737)
======== ======== ======== ========
Denominator:
Denominator for basic per share information -
weighted-average number of common shares outstanding .. 26,951 25,559 25,492 23,068
======== ======== ======== ========
Effect of assumed conversion of Senior Convertible
Preferred Stock ....................................... 383 383 383 383
Denominator for diluted per share information -
weighted-average number of common shares outstanding .. 27,334 25,942 25,875 23,451
======== ======== ======== ========
Basic Per Share Information:
Income (loss) available (attributable) to common shareholders $ (0.08) $ - $ (0.08) $ (1.49)
Income (loss) from discontinued operations .................. (0.02) (0.08) 0.03 (0.31)
-------- -------- -------- --------
Net loss attributable to common shareholders .......... $ (0.10) $ (0.08) $ (0.05) $ (1.80)
======== ======== ======== ========
Diluted Per Share Information:
Loss attributable to common shareholders .................... $ (0.08) $ (0.03) $ (0.08) $ (1.56)
Income (loss) from discontinued operations .................. (0.02) (0.08) 0.03 (0.31)
-------- -------- -------- --------
Net loss attributable to common shareholders .......... $ (0.10) $ (0.11) $ (0.05) $ (1.87)
======== ======== ======== ========
8
NOTE 4 - SHAREHOLDER'S EQUITY:
ISSUANCE OF SECURITIES FOR CONSULTING SERVICES
On January 16, 2001, the Company entered into an agreement, as amended,
with Goldin Associates, L.L.C. ("Goldin") whereby Goldin agreed to provide
interim management services to the Company, for an initial six-month period,
with respect to its Sterling Optical, Insight Laser and Ambulatory Center
divisions (collectively, the "Divisions"), all at the direction of the Board of
Directors of the Company or its Chairman or other officers, pursuant to
delegated authority. The fee for such services was $50,000 per month, plus an
additional fee comprised of unregistered shares totaling 1.65% of the
outstanding Common Stock of the Company as of January 22, 2001, and warrants to
purchase up to an aggregate of 3.35% of the outstanding Common Stock of the
Company. As a result, the Company issued 418,719 unregistered shares of its
Common Stock (the fair value of which was approximately $108,000) to Goldin,
along with warrants to purchase up to an additional 850,126 shares of Common
Stock, all at an exercise price of $0.01, subject to the Company achieving
certain earnings targets (the "Incentive Fee"). In connection with the shares
issued, Goldin was granted certain limited piggy-back registration rights.
The terms of the Incentive Fee provide that the warrants may only be
exercised according to the following schedule: (1) warrants to purchase 279,146
shares of the Company's Common Stock immediately following a year in which the
Divisions shall realize earnings before interest, taxes, depreciation and
amortization ("EBITDA") of at least $1,000,000; (2) warrants to purchase an
additional 279,146 shares of the Company's Common Stock immediately following a
year in which the Divisions shall realize EBITDA of at least $2,000,000; and (3)
warrants to purchase an additional 291,834 shares of the Company's Common Stock
immediately following a year in which the Divisions shall realize EBITDA of at
least $3,000,000. These warrants become exercisable only if the applicable
EBITDA targets are achieved prior to December 31, 2004. Due to these
contingencies, the future valuation of these warrants, if and when they become
exercisable, will result in charges to the Company's results of operations in
future periods. Any warrants that vest shall expire on January 22, 2008.
On April 26, 2001, the Company's Board of Directors approved the terms of
an agreement, as amended, whereby it agreed to issue to Balfour Investors
Incorporated ("Balfour"), in exchange for certain advisory services rendered to
the Company's Board of Directors, 209,359 unregistered shares of its Common
Stock (the fair value of which was approximately $57,000), together with
warrants to purchase up to 425,063 shares of Common Stock at an exercise price
of $0.01. In connection with the shares issued, Balfour was granted certain
limited piggy-back registration rights. The warrants will become exercisable
according to the following schedule: (1) warrants to purchase 139,573 shares of
the Company's Common Stock immediately following a year in which the Divisions
shall realize EBITDA of at least $1,000,000; (2) warrants to purchase an
additional 139,573 shares of the Company's Common Stock immediately following a
year in which the Divisions shall realize EBITDA of at least $2,000,000; and (3)
warrants to purchase an additional 145,917 shares of the Company's Common Stock
immediately following a year in which the Divisions shall realize EBITDA of at
least $3,000,000. Further, these warrants become exercisable only if the
applicable EBITDA targets are achieved prior to December 31, 2004. Due to these
contingencies, the future valuation of these warrants, if and when they become
exercisable, will result in charges to the Company's results of operations in
future periods. Any warrants that vest shall expire on April 26, 2008.
On July 5, 2001, the Company issued 1,000,000 unregistered shares of its
Common Stock (the fair value of which was approximately $325,000) to Rare as
part of a settlement whereby the Company's dispute with Rare, regarding their
respective obligations under the Company's various agreements with Rare, was
settled (Note 2).
DELISTING OF COMMON STOCK
On August 23, 2001, the Company notified The Nasdaq Stock Market, Inc.
("Nasdaq") of its Board of Directors' intention not to effect, in the near
future, the previously announced reverse stock split of its outstanding shares
of Common Stock. In response to this decision, on August 24, 2001, Nasdaq
delisted the Company's Common Stock from the Nasdaq National Market System
("Nasdaq-NMS"), pursuant to Marketplace Rule No. 4310(c)(8)(B), due to its
failure to comply with the minimum bid price ($1.00) requirement for the
continued listing of its shares of Common Stock on the Nasdaq-NMS, all set forth
in Nasdaq's Marketplace Rule No. 4450(a)(5). As a result, the Company's Common
Stock now trades on the OTC Bulletin Board under the symbol ISEE.OB.
NOTE 5 - SUBSEQUENT EVENT:
On November 14, 2001 the Company received a commitment for financing in the
form of a $1.1 million term loan for a two-year period and a revolving credit
facility for $1.0 million to be used at the Company's discretion over the same
two-year period of the term loan. The Company and the lender are in the process
of finalizing the terms of such financing arrangements.
9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Certain information contained in this Management's Discussion and Analysis
of Financial Condition and Results of Operations for the three and nine months
ended September 30, 2001, as compared to the three and nine months ended
September 30, 2000, are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. The words "anticipates," "believes,"
"estimates," "expects," "intends," "plans," "seeks," variations of such words
and similar expressions, are intended to identify forward-looking statements.
Management has based these forward-looking statements on their current
expectations, estimates and projections about the Company's business and
industry, their beliefs and certain assumptions made by management. Investors
are cautioned that matters subject to forward-looking statements involve risks
and uncertainties, including economic, competitive, governmental, technological
and other factors that may affect the Company's business and prospects. These
statements are not guarantees of future performance and are subject to certain
risks, uncertainties and assumptions that are difficult to predict. In order to
obtain the benefits of these "safe harbor" provisions for any such
forward-looking statements, management cautions investors and prospective
investors about the following significant factors, which, among others, have, in
some cases, affected the Company's actual results and may, in the future, be
likely to affect its actual results, which could cause such actual results to
differ materially from those expressed in any such forward-looking statements.
These factors include declines in same store (Company-operated) sales, financial
and operational difficulties of franchisees, inability of the Company to obtain
additional capital, dependence on certain executive officers and key employees
and substantial fluctuations in annual and quarterly results of operations.
RESULTS OF OPERATIONS
The Company's historical financial information has been restated to report
the net assets, operating results and cash flows of the Internet Division,
Insight Laser and the Ambulatory Center segments (of the Company's business)
through September 30, 2001 as discontinued operations for all periods presented.
The following discussion and analysis focuses on continuing operations, unless
otherwise noted.
10
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AS COMPARED TO
SEPTEMBER 30, 2000
Net sales for Company-owned stores, excluding revenues generated by the
Company's wholly-owned subsidiary, VisionCare of California ("VCC"), a
specialized health care maintenance organization licensed by the California
Department of Corporations, decreased by approximately $1,000 and $1,056,000, or
0.0% and 14.6%, to $2,090,000 and $6,180,000 for the three and nine month
periods ended September 30, 2001, as compared to $2,091,000 and $7,236,000 for
the comparable periods in 2000. Net sales for VCC increased by $210,000 and
$289,000, or 37.8% and 13.6%, to $764,000 and $2,415,000, for the three and nine
month periods ended September 30, 2001, as compared to $555,000 and $2,126,000
for the comparable periods in 2000. The decreases in sales of Company-operated
stores were principally due to a lower average number of stores in operation
during the three and nine-month periods ended September 30, 2001, as compared to
the comparable periods in 2000. On a same store basis (for stores that operated
as a Company-operated store during both of the three and nine month periods
ended September 30, 2001 and 2000), comparative net sales decreased by
approximately $236,000 and $302,000, or 12.9% and 5.4%, to $1,593,000 and
$5,296,000 for the three and nine month periods ended September 30, 2001, as
compared to $1,829,000 and $5,598,000 for the comparable periods in 2000. As of
September 30, 2001, there were 210 Sterling Stores in operation, consisting of
38 Company-operated stores (including 7 Company-owned stores being managed by
franchisees) and 172 franchised stores (including 2 franchised stores being
managed by the Company on behalf of the franchisees), as compared to 238
Sterling Stores in operation as of September 30, 2000, consisting of 32
Company-operated stores (including 12 Company-owned stores being managed by
franchisees) and 202 franchised stores (including 3 franchised stores being
managed by the Company on behalf of the franchisees).
Franchise royalties decreased by approximately $443,000 and $779,000, or
18.6% and 11.1%, to $1,938,000 and $6,268,000 for the three and nine-month
periods ended September 30, 2001, as compared to $2,381,000 and $7,047,000 for
the comparable periods in 2000. These decreases were due to the lower average
number of franchised stores in operation during the three and nine-month periods
ended September 30, 2001, as compared to the comparable periods in 2000.
Additionally, there was a decrease in the sales generated by the franchised
stores in operation throughout the three and nine-month periods ended September
30, 2001, as compared to the same periods in 2000.
Net gains and fees from the conveyance of franchised and Company-owned
store assets, including renewal fees and the fees charged as a condition to the
transfer of ownership of the assets and franchise for a store from one
franchisee to another, decreased by approximately $63,000 and increased by
$12,000, or 86.3% and 10.0%, to $10,000 and $132,000 for the three and nine
month periods ended September 30, 2001, as compared to $73,000 and $120,000 for
the comparable periods in 2000. These increases were principally due to transfer
fees collected on the conveyance of the assets of 8 franchised stores during the
nine month period ended September 30, 2001, as compared to the conveyance of the
assets of 2 franchised stores for the comparable period in 2000.
Interest on franchise notes receivable decreased by approximately $105,000
and $176,000, or 34.1% and 18.8%, to $203,000 and $758,000 for the three and
nine-month periods ended September 30, 2001, as compared to $308,000 and
$934,000 for the comparable periods in 2000. These decreases were principally
due to reductions of the principal balances of franchisee notes receivable and
fewer notes being generated during the three and nine-month periods ended
September 30, 2001, as compared to the comparable periods in 2000.
The Company's gross profit margin from Company-operated stores increased by
6.3% and 5.3%, to 63.3% and 68.1% for the three and nine month periods ended
September 30, 2001, as compared to 57.0% and 62.8% for the comparable periods in
2000. These increases were due to a change in the mix of products being sold in
Company-operated stores and improved inventory management during the three and
nine-month periods ended September 30, 2001, as compared to the comparable
periods in 2000. In the future, the Company's gross profit margin may fluctuate
depending upon the extent and timing of changes in the product mix in
Company-owned stores, competition and promotional incentives.
11
Selling, general and administrative expenses increased by $1,743,000 and
$122,000, or 40.2% and 1.0%, to $6,084,000 and $15,476,000 for the three and
nine-month periods ended September 30, 2001, as compared to $4,341,000 and
$15,354,000 for the comparable periods in 2000. Such increase for the three
month period ended September 30, 2001, as compared to the comparable period in
2000, is primarily due to the following: (1) an increase in payroll and rent
expense of approximately $625,000 due to a greater number of Company-operated
stores in operation during the three month period ended September 30, 2001, as
compared to the three month period ended September 30, 2000; (2) a provision
related to the anticipated closure of 12 Company-operated stores, for which the
Company recorded a charge of approximately $800,000, related to anticipated
lease termination costs and write-offs of assets; (3) general increases of
employee related administrative costs of $180,000; and (4) approximately
$165,000 related to the estimated legal fees and costs related to the Company's
ongoing litigation. During the nine month period ended September 30, 2001, such
increase of $122,000 was primarily a result of the items previously discussed
above and the following additional items: (1) a decrease in bad debt expense of
approximately $620,000; period ended September 30, 2001; (2) a decrease in
interest expense of approximately $175,000, due to a substantial repayment of
debt in December 2000; (3) the exclusion of $154,000 of non-cash expenses
related to the issuance of warrants during fiscal year 2000; and (4) a reduction
of corporate overhead and salaries, of approximately $250,000.
LIQUIDITY AND CAPITAL RESOURCES
For the nine month period ended September 30, 2001, net cash flows used in
operating activities were $(765,000), as compared to cash flows used in
operating activities of $(2,842,000) for the comparable period in 2000. Loss
from continuing operations for the nine-month period ended September 30, 2001
was $(2,040,000), as compared to a loss from continuing operations of $(984,000)
for the comparable period in 2000.
For the nine-month period ended September 30, 2001, cash flows provided by
investing activities were $871,000, as compared to $690,000 for the comparable
period in 2000. This increase was principally due to an increase of
approximately $90,000, to $1,543,000, in proceeds from franchise and other notes
receivables, a decrease of approximately $43,000 in capital expenditures, and a
decrease of approximately $48,000 in notes issued by franchisees.
For the nine month period ended September 30, 2001, cash flows used in
financing activities were $(149,000), principally due to payments on long-term
debt, as compared to $13,580,000 of cash provided from financing activities for
the comparable period in 2000. During the first quarter of 2000, the Company
received proceeds from the Company's private placement, completed in March 2000,
of approximately $10,618,000, and proceeds from the exercise of stock options
and warrants of approximately $7,692,000, in each case offset by net payments on
long-term debt of approximately $5,230,000.
The Company's working capital deficit was $2,595,000 as of September 30,
2001. This amount includes accruals in the aggregate amount of approximately
$465,000, pertaining to anticipated liabilities to be incurred in connection
with potential settlements related to the Company's discontinued operations, and
the net liabilities of discontinued operations of $1,671,000, which liabilities
reflect a range of possible settlements, which the Company will seek to resolve
for lesser amounts (although there can be no assurance that it will be able to
do so). Excluding the liabilities associated with the Company's discontinued
operations, the Company's working capital deficit, as of September 30, 2001 was
$459,000, including accruals for the anticipated costs associated with the
closure of Company-operated stores of $435,000. The Company believes that it
will improve cash flows during 2002 by, among other things: improving store
profitability through increased monitoring of store-by-store operations; closing
non-profitable, Company-operated store locations; reducing administrative
overhead expenses; implementing new marketing programs; and seeking additional
debt or equity financing, if available.
12
On November 14, 2001 the Company received a commitment for financing in the
form of a $1.1 million term loan for a two-year period and a revolving credit
facility for $1.0 million to be used at the Company's discretion over the same
two-year period of the term loan. The Company and the lender are in the process
of finalizing the terms of such financing arrangements.
On August 23, 2001, the Company notified The Nasdaq Stock Market, Inc.
("Nasdaq") of its Board of Directors' intention not to effect, in the near
future, the previously announced reverse stock split of its outstanding shares
of Common Stock. In response to this decision, on August 24, 2001, Nasdaq
delisted the Company's Common Stock from the Nasdaq National Market System
("Nasdaq-NMS"), pursuant to Marketplace Rule No. 4310(c)(8)(B), due to its
failure to comply with the minimum bid price ($1.00) requirement for the
continued listening of its shares of Common Stock on the Nasdaq-NMS, all set
forth in Nasdaq's Marketplace Rule No. 4450(a)(5). As a result, the Company's
Common Stock now trades on the OTC Bulletin Board under the symbol ISEE.OB.
The Company believes that, in the furtherance of its business strategies,
the Company's future capital requirements will include: (i) renovating and
remodeling certain of its Company-operated stores; (ii) acquiring retail optical
stores, subject to the availability of qualified opportunities; and (iii)
continued upgrading of management information systems for Company-owned stores.
If successful in obtaining the aforementioned financing and implementing
its business plans described above, combined with its current cash position,
management believes that sufficient resources will be available for the Company
to continue in operation through the end of the third quarter of 2002. The
achievement of the Company's business plan is critical to maintaining adequate
liquidity. However, there can be no assurance that the Company will be able to
generate positive cash flows and, even if it does, that such cash flows will be
sufficient to adequately fund its ongoing operations and future capital
requirements. If the Company cannot generate sufficient cash flows from
operations, it may be required to seek alternative equity or debt financing.
However, there can be no assurance that such equity or debt financing will be
available to the Company when necessary, or on terms that will be acceptable to
the Company.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company maintains certain equity instruments with beneficial conversion
terms that are indexed to the performance of the Company's Common Stock.
Accordingly, the Company may bear a financial risk in the form of future stock
payments made to equalize any stock price declines that are indexed to a
specific contractual stock price floor. As a result of the foregoing, the
Company could incur non-cash charges to equity, which would have a negative
impact on future per share calculations.
The Company is exposed to market risks from potential changes in interest
rates as they relate to the Company's investments in highly liquid, marketable
securities, and from any future financing arrangements. These investments are
deposited with high quality financial institutions. The Company believes that
the amount of risk as it relates to its investments, is not material to the
Company's financial condition or results of operations.
13
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In the Company's action in Supreme Court of the State of New York against
Dr. Larry Joel and Apryl Robinson for amounts claimed due by the Company on a
series of five separate Negotiable Promissory Notes (the "Notes"), in August
2001, the Court granted the Company's claim for damages in the approximate
amount of $800,000, which judgment the Company is seeking to enforce. On July 2,
2001, the defendants, without counsel, filed an appeal of the decision by the
Court dismissing their counter-claims and dismissing their claims that the
Company had breached an oral, month-to-month consulting agreement, which appeal
has not yet been decided.
In the Company's action against Michael Binns and Mary Ann Binns, (the
"Guarantors") in the New York State Supreme Court seeking damages (under the
Guarantors' payment guarantees in favor of the Company) as a result of the
failure of Binns Optical, Inc. ("BOI") to comply with its obligations under a
series of eight Negotiable Promissory Notes made by BOI in its favor, in July
2001, the Court awarded the Company judgment for damages, in the aggregate
approximate amount of $1,500,000, which judgment the Company is seeking to
enforce in the State of Missouri, where the Guarantors both reside.
In July 2001, the Company commenced an Arbitration Proceeding in the
Ontario Superior Court of Justice, against Eye-Site, Inc. and Eye Site
(Ontario), Ltd., as the makers of two promissory notes (in the aggregate
original principal amount of $600,000), made by one or more of the makers in
favor of the Company, as well as against Mohammed Ali, as the guarantor of the
obligations of each maker under each note. The notes were issued by the makers
in connection with their acquisition of a Master Franchise Agreement for the
Province of Ontario, Canada, as well as their purchase of the assets of, and a
Sterling Optical Center Franchise for, four (4) of the Company's retail optical
stores located in Ontario, Canada. In response thereto, the defendants
counterclaimed for damages, in the amount of $1,500,000, based upon, among other
items, alleged misrepresentations made by representatives of the Company in
connection with these transaction. The Company believes that it has a
meritorious defense to each such counterclaim. As of the date hereof, these
proceedings were in the discovery stage.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On July 5, 2001, the Company issued 1,000,000 unregistered shares of its
Common Stock to Rare as part of a settlement whereby the Company's dispute with
Rare regarding their respective obligations under the Company's various
agreements with Rare, was settled. These shares were issued pursuant to an
exemption under Section 4(2)of the Securities Act of 1933, as amended.
Item 3. DEFAULTS UPON SENIOR SECURITIES.
None.
14
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On September 12, 2001, the Company held its Annual Meeting of Shareholders.
The purpose of the meeting was to (i) elect three Class 2 directors to the
Company's Board of Directors to hold office until the 2003 annual meeting of
shareholders, (ii) ratify the selection of Arthur Andersen LLP as the auditors
of the Company for the 2001 fiscal year and (iii) consider and act upon an
amendment to the Company's Certificate of Incorporation to effect a reverse
stock split of the outstanding shares of the Company's common stock, at a ratio
between one-for-two and one-for-ten, as determined by the Board of Directors.
The results of the shareholders' vote were as follows:
Votes Votes Broker
Matter Votes For Against Withheld Abstentions Non Votes
-------------------------------- ---------- ---------- --------- ----------- ---------
Robert Cohen 15,459,469 1,253,617 - - -
Alan Cohen 15,465,985 1,247,101 - - -
Joel Gold 15,651,610 1,061,476 - - -
Ratification of Auditors 16,563,491 104,075 - 45,520 -
Reverse Stock Split 15,862,582 828,645 - 21,859 -
Although the shareholders approved the reverse stock split, the Board of
Directors determined not to effect the reverse stock split in the immediate
future.
Item 5. OTHER INFORMATION.
On August 23, 2001, the Company notified The Nasdaq Stock Market, Inc.
("Nasdaq") of its Board of Directors' intention not to effect, in the near
future, the previously announced reverse stock split of its outstanding shares
of Common Stock. In response to this decision, on August 24, 2001, Nasdaq
delisted the Company's Common Stock from the Nasdaq National Market System
("Nasdaq-NMS"), pursuant to Marketplace Rule No. 4310(c)(8)(B), due to its
failure to comply with the minimum bid price ($1.00) requirement for the
continued listing of its shares of Common Stock on the Nasdaq-NMS, all set forth
in Nasdaq's Marketplace Rule No. 4450(a)(5). As a result, the Company's Common
Stock now trades on the OTC Bulletin Board under the symbol ISEE.OB.
15
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
A. Exhibits
None.
B. Reports on Form 8-K
1. On July 12, 2001, the Registrant filed a Current Report on Form 8-K
with respect to The Nasdaq Stock Market's delisting of its Common
Stock from the Nasdaq National Market System, the appointment of Mr.
Robert Hillman as Chairman of the Company's Board of Directors,
President and Chief Executive Officer and the settlement of certain
litigation with Rare Medium Group, Inc. and Rare Medium, Inc.
2. On August 29, 2001, the Registrant filed a Current Report on Form 8-K
with respect to The Nasdaq Stock Market's delisting of its Common
Stock from the Nasdaq National Market System and the appointment of
Mr. Jerry Novack to the Company's Board of Directors.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this Report to be signed on its behalf
by the undersigned thereunto duly authorized.
EMERGING VISION, INC.
BY: /s/ Robert S. Hillman
-----------------------------
Robert S. Hillman
President and Chief Executive Officer
BY: /s/ George D. Papadopoulos
-----------------------------
George D. Papadopoulos
Senior Vice President and
Chief Financial Officer
Dated: November 14, 2001
17