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 March 31, 2002
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.)
100 Quentin Roosevelt Boulevard
Garden City, NY 11530
-- ----------------------
(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:
There were 29,004,972 shares outstanding of the Registrant's Common Stock,
par value $0.01 per share, as of May 13, 2002.
Item 1. Financial Statements
EMERGING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
March 31, December 31,
2002 2001
--------------- ---------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 808 $ 1,053
Franchise receivables, net of allowance of $2,110 and $3,095,
respectively 1,356 1,837
Other receivables, net of allowance of $133 and $171, respectively 819 739
Current portion of franchise notes receivable 2,901 2,993
Inventories, net 713 783
Prepaid expenses and other current assets 202 94
---------- ----------
Total current assets 6,799 7,499
---------- ----------
Property and equipment, net 980 1,075
Franchise notes and other receivables, net of allowance of $3,326 and $3,326,
respectively 825 862
Intangible assets, net 1,266 1,266
Other assets 403 355
---------- ----------
Total assets $ 10,273 $ 11,057
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 685 $ 186
Accounts payable and accrued liabilities 6,523 7,122
Accrual for store closings (Note 5) 758 964
Related party borrowings 150 750
Net liabilities of discontinued operations 218 235
---------- ----------
Total current liabilities 8,334 9,257
---------- ----------
Long-term debt, net (Note 9) 611 363
---------- ----------
Related party borrowings 138 -
---------- ----------
Franchise deposits and other liabilities 916 820
---------- ----------
Contingencies (Note 6)
Shareholders' equity
Preferred stock, $0.01 par value per share; authorized 5,000,000 shares:
Senior Convertible Preferred Stock, $100,000 liquidation preference
per share;
3 shares issued and outstanding 287 287
Common stock, $0.01 par value per share; authorized 50,000,000 shares;
issued 27,187,309; and 27,004,972 shares outstanding 272 272
Treasury stock, at cost, 182,337 shares (204) (204)
Additional paid-in capital 120,116 119,926
Accumulated deficit (120,197) (119,664)
----------- -----------
Total shareholders' equity 274 617
----------- -----------
Total liabilities and shareholders' equity $ 10,273 $ 11,057
=========== ===========
The accompanying notes are an integral part of these consolidated balance
sheets.
EMERGING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In Thousands, Except Per Share Data)
For the Three Months Ended
March 31,
-------------------------------
2002 2001
--------------- ---------------
Revenues:
Net sales $ 2,990 $ 2,840
Franchise royalties 1,697 2,232
Net gains and fees from the conveyance of Company-store assets to franchisees - 88
Interest on franchise notes 85 299
Other income 30 5
------------ ------------
Total revenues 4,802 5,464
------------ ------------
Costs and expenses:
Cost of sales 776 554
Selling, general and administrative expenses 4,520 4,516
Loss from franchised stores operated under management agreements - 113
Non-cash charges for issuance of warrants and induced conversion of warrants - 301
Interest expense 39 21
------------ ------------
Total costs and expenses 5,335 5,505
------------ ------------
Loss from continuing operations before provision for income taxes (533) (41)
Provision for income taxes - -
------------ ------------
Loss from continuing operations (533) (41)
------------ ------------
Discontinued operations (Note 3):
Income from discontinued operations - 431
------------ ------------
Net income (loss) $ (533) $ 390
============ ============
Per share information - basic and diluted (Note 4):
Loss from continuing operations $ (0.02) $ 0.00
Income from discontinued operations 0.00 0.02
------------ ------------
Net income (loss) $ (0.02) $ 0.02
============ ============
Weighted-average number of common shares outstanding - basic and diluted 26,409 25,381
============ ============
The accompanying notes are an integral part of these consolidated
statements.
EMERGING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
For the Three Months Ended
March 31,
---------------------------------
----------------- ---------------
2002 2001
----------------- ---------------
Cash flows from operating activities:
Net loss from continuing operations $ (533) $ (41)
Adjustments to reconcile net loss from continuing operations
to net cash (used in) provided by operating activities:
Depreciation and amortization 126 184
Provision for doubtful accounts 5 75
Non-cash charges related to options and warrants 18 301
Charges related to long-lived assets - 21
Changes in operating assets and liabilities:
Franchise and other receivables 304 125
Inventories 70 55
Prepaid expenses and other current assets (108) 53
Other assets (48) 2
Accounts payable and accrued liabilities (516) (502)
Franchise deposits and other liabilities 96 15
Accrual for store closings (206) -
----------- ------------
Net cash (used in) provided by operating activities (792) 288
----------- ------------
Cash flows from investing activities:
Franchise notes receivable issued (10) (301)
Proceeds from franchise and other notes receivable 231 592
Purchases of property and equipment (31) (25)
----------- ------------
Net cash provided by investing activities 190 266
----------- ------------
Cash flows from financing activities:
Proceeds from borrowings 1,300 -
Payments on borrowings (843) (62)
Acquisition of treasury shares - (1)
----------- ------------
Net cash provided by (used in) financing activities 457 (63)
----------- ------------
Net cash (used in) provided by continuing operations (145) 491
----------- ------------
Net cash used in discontinued operations (100) (1,826)
----------- ------------
Net decrease in cash and cash equivalents (245) (1,335)
Cash and cash equivalents - beginning of period 1,053 5,215
----------- ------------
Cash and cash equivalents - end of period $ 808 $ 3,880
=========== ============
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest $ 21 $ 18
=========== ============
Taxes $ 44 $ 29
=========== ============
Non-cash investing and financing activities:
Net assets of franchise stores reacquired through exchange of receivables $ - $ 304
The accompanying notes are an integral part of these consolidated
statements.
EMERGING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2002
(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, 2001 3 $ 287 27,187,309 $ 272 182,337 $(204) $119,926 $(119,664) $ 617
------ ------ ---------- -------- ------- ----- -------- --------- --------
Issuance of warrants in
connection with financing
arrangements (Note 9) - - - - - - 190 - 190
Net loss - - - - - - - (533) (533)
------ ------ ---------- -------- ------- ----- -------- --------- --------
BALANCE - MARCH 31, 2002 3 $ 287 27,187,309 $ 272 182,337 $(204) $120,116 $(120,197) $ 274
====== ====== ========== ======== ======= ===== ======== ========= ========
The accompanying notes are an integral part of this consolidated statement.
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.
and subsidiaries (collectively, the "Company") have been prepared in accordance
with accounting principles generally accepted 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 accounting principles generally accepted for complete
financial statement presentation. In the opinion of management, all adjustments
for a fair statement of the results of operations and financial position 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 Company's Annual Report on Form 10-K, as amended, for the
year-ended December 31, 2001. There have been no changes in significant
accounting policies since December 31, 2001.
NOTE 2 - MANAGEMENT'S LIQUIDITY PLANS
As of March 31, 2002, the Company had negative working capital of
$1,535,000 (an improvement from $1,758,000 as of December 31, 2001), and cash on
hand of $808,000. During the three months ended March 31, 2002, the Company used
approximately $792,000 of cash in its operating activities. This usage was in
line with management's plans and was mainly a result of $206,000 of costs
related to the Company's store closure plan (Note 5), $516,000 related to the
Company's settlement of certain accounts payable and accrued liabilities that
existed as of December 31, 2001, and $108,000 related to the prepayment of
certain other business expenses, offset in part by a $304,000 decrease in
franchise and other receivables. Management anticipates that it will continue to
incur significant costs in order to continue to close certain of its
non-profitable Company-owned stores in its effort to eliminate future cash flow
losses currently generated by such stores.
The Company plans to continue to attempt to improve its cash flows during
2002 by improving store profitability through increased monitoring of
store-by-store operations, closing non-profitable Company-owned stores,
implementing reductions of administrative overhead expenses, where necessary and
feasible, actively supporting development programs for franchisees, and seeking
additional financing, if necessary and available. Management believes that with
its plans to attempt to improve cash flows as discussed above, its existing
cash, the collection of outstanding receivables, and the availability under its
existing credit facility (Note 9), there will be sufficient liquidity available
to the Company to continue in operation until at least the end of the second
quarter of 2003. However, there can be no assurance that the Company will be
able to achieve the aforementioned plans, or that additional financing will be
available.
NOTE 3 - Discontinued Operations:
On March 28, 2001, the Board of Directors decided that the Company should
focus its efforts and resources on growing its retail optical business and, as a
result, approved a plan to discontinue all other operations then being conducted
by the Company. In connection with this decision, during 2001, the Company
completed its plan of disposal of substantially all of the net assets of Insight
Laser Centers, Inc. ("Insight Laser") - which operated three laser vision
correction centers in the New York metropolitan area, Insight Laser Centers
N.Y.I, Inc. (the "Ambulatory Center") - the owner of the assets of an ambulatory
surgery center located in Garden City, New York, and its Internet Division -
which was to provide a web-based portal being designed to take advantage of
business-to-business opportunities in the optical industry. As a result, the
remaining results of operations and cash flows of these divisions have been
reflected as discontinued operations in the accompanying Consolidated Financial
Statements.
As of March 31, 2002 and December 31, 2001, respectively, net liabilities
of $218,000 and $235,000 related to these discontinued operations were
segregated on the accompanying Consolidated Balance Sheets. In addition, as of
March 31, 2002 and December 31, 2001, approximately $58,000 and $141,000,
respectively, was accrued as part of accounts payable and accrued liabilities on
the accompanying Consolidated Balance Sheets, representing the remaining
estimated costs associated with the Company's original plan of disposal.
NOTE 4 - PER SHARE INFORMATION:
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share", basic net income (loss) per common share ("Basic
EPS") is computed by dividing net income (loss) 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) by the
weighted-average number of common shares and dilutive common share equivalents
and convertible securities then outstanding. SFAS No. 128 requires the
presentation of both Basic EPS and Diluted EPS 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 be
anti-dilutive.
The following table sets forth the computation of basic and diluted per
share information:
For the Three Months Ended
March 31,
(In thousands)
---------------------------------
2002 2001
--------------- --------------
Numerator:
Loss from continuing operations $ (533) $ (41)
Income from discontinued operations - 431
---------- ----------
Net (loss) income $ (533) $ 390
========== ==========
Denominator:
Denominator for basic and diluted per share information -
weighted average shares outstanding 26,409 25,381
========== ==========
Basic and Diluted Per Share Information:
Loss from continuing operations $ (0.02) $ 0.00
Income from discontinued operations 0.00 0.02
---------- ----------
Net (loss) income $ (0.02) $ 0.02
========== ==========
NOTE 5 - PROVISION FOR STORE CLOSINGS:
The Company follows the provisions of Emerging Issues Task Force Issue 94-3
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity," and in accordance therewith, provides for losses it
anticipates incurring with respect to those Company-owned stores that it has
identified for future closure, at the time that management makes a formal
commitment to any such plan of closure. The provision is recorded at the time
the determination is made to close a particular store and is based on the
expected net proceeds, if any, to be generated from the disposition of the
store's assets, as compared to the carrying value (after consideration of
impairment, if any) of such store's assets and the estimated costs (including
lease termination costs and other expenses) that are anticipated to be incurred
in the closing of the store in question. As of December 31, 2001, the Company
had accrued for 11 store closings totaling approximately $964,000 (comprised of
$766,000 in lease termination costs and $198,000 for other associated expenses).
During the three months ended March 31, 2002, the Company successfully closed 2
of such stores and, as of March 31, 2002, $758,000 remains accrued as accrual
for store closings on the accompanying Consolidated Balance Sheet. Additionally,
in April 2002, the Company closed 4 more of such non-profitable Company-owned
store locations. The Company anticipates completing its closure plan by the end
of 2002.
NOTE 6 - Contingencies:
In 1999, the Company commenced an action in the 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"). The Notes were issued by corporations owned by the defendants in
connection with their purchase of the assets of, and a Sterling Optical Center
Franchise for, an aggregate of four of the Company's retail optical stores and
an optical laboratory. The repayment of each of the Notes was personally
guaranteed by each of the defendants. In response, the defendants asserted
counterclaims in excess of $13,000,000 based upon the Company's alleged failure
to comply with the terms of an oral, month-to-month consulting agreement between
Dr. Joel and the Company, as well as to purchase the assets of various companies
owned by Dr. Joel, including Duling Optical and D & K Optical - notwithstanding
the fact that the parties failed to agree upon the terms of any such purchase,
the parties failed to enter into any written agreement memorializing such a
transaction, and the Company subsequently purchased such assets from Norwest
Bank (which held a first lien on substantially all of the assets as collateral
for various loans made to each of the entities, all of which were then in
default) in a private foreclosure sale. In March 2001, the Appellate Division
granted the Company's Motion for Summary Judgment on the issue of the
defendants' liability, as guarantors of each of such Notes; and, in August 2001,
the Court granted the Company's claim for damages in the approximate amount of
$800,000, which the Company is seeking to enforce. In November 2001, the
defendants each filed for protection under the U.S. Bankruptcy Code and, in
February 2002, received a discharge in such proceedings, which the Company is
presently attempting to overturn. In addition, in March 2001, the Company filed
an additional Motion for Summary Judgment seeking dismissal of all of the
defendants' counterclaims; and the defendant, Dr. Joel, thereafter filed a
cross-motion seeking a determination that the Company breached the
aforementioned oral, month-to-month consulting agreement and that he is,
accordingly, entitled to damages of approximately $13,000,000, each of which
motions were decided entirely in favor of the Company. Subsequently, on July 2,
2001, the defendants, without counsel, filed an appeal of this decision by the
Court, which appeal has not yet been decided. Furthermore, in 1999, Apryl
Robinson commenced an action in Kentucky against Larry Joel and the Company
seeking an unspecified amount of damages, and alleging a myriad of claims,
including fraud and misrepresentation. The Company is defending such action and
intends to file a motion to dismiss the same based on the decisions in the New
York action.
In February 2000, Essilor Laboratories of America, L.P. commenced an action
against the Company in the District Court of Dallas County, Texas seeking
damages of approximately $250,000, representing the alleged unpaid cost of
certain ophthalmic lenses previously purchased by the Company. In April 2002,
the Company settled this action for approximately $50,000.
In April 2000, the Company commenced an action in the Supreme Court of the
State of New Jersey against Preit-Rubin, Inc. and Cumberland Mall Associates,
the landlord of the former Sterling Optical Store located in Cumberland Mall,
Vineland, New Jersey, seeking damages of approximately $200,000 as a result of
the defendants alleged wrongful eviction of the Company from this location. In
response thereto, the defendants asserted counterclaims of approximately
$300,000 for lost rent and legal fees based upon the Company's alleged breach of
the lease pursuant to which it occupied such Store.
In January 2001, the Company commenced an action against Binns Optical,
Inc. ("BOI"), Michael Binns and Mary Ann Binns (collectively, the "Guarantors")
in the United States District Court for the Eastern District of Missouri,
seeking to prohibit the defendants from operating the Sterling Optical store
located in Ballwin, Missouri, under any name other than Sterling Optical, as
well as to require the defendants to return to the Company all patient records,
customer lists, furniture, fixtures and equipment removed by the defendants from
the six Sterling Optical stores previously franchised to, and ultimately
abandoned by, BOI. In February 2001, the defendants entered into a Stipulation
agreeing to the entry of a preliminary injunction whereby the defendants agreed
to substantially all of the relief requested by the Company; and in March 2001,
the defendants filed a counterclaim against the Company seeking damages in the
amount of $3,000,000, plus punitive damages, as a result of the Company's
alleged fraud in the inducement, negligent misrepresentation, breach of
fiduciary duty and claims stated in the alternative for breach of contract and
breach of oral agreement. The Company denied the defendants' counterclaims and
filed a motion to dismiss all such counterclaims, as well as a claim for its
legal fees and costs associated with the action. On March 29, 2002, this motion
was decided by the Court in favor of the Company and, in connection therewith,
the Company was awarded legal fees and costs in the approximate amount of
$40,000. In a related matter, in February 2001, the Company commenced a separate
action against the Guarantors in the New York State Supreme Court by filing a
Motion for Summary Judgment in Lieu of Complaint, seeking damages (under the
Guarantors' payment guarantee in favor of the Company) as a result of the
failure of BOI to comply with its obligations under a series of eight Negotiable
Promissory Notes made by BOI in its favor; and in April 2001 and July 2001, the
Court granted the Company's motion and awarded the Company judgments for
damages, in the aggregate approximate amount of $1,500,000, which the Company is
seeking to enforce in the State of Missouri, where the Guarantors both reside.
In February 2001, five of the Company's Site for Sore Eyes franchisees
(owning an aggregate of seven franchised Site for Sore Eyes stores) commenced an
action in the United States District Court for the Northern District of
California seeking $35,000,000 of damages as a result of the Company's alleged
breach of the respective Franchise Agreements whereby each franchisee/plaintiff
operates its Site for Sore Eyes Optical store(s), fraud and violations of
California law, as well as a declaratory judgment that each of the Franchise
Agreements had been modified to afford each plaintiff certain rights which are
in addition to those set forth in the applicable Franchise Agreements. On April
1, 2002, the parties entered into a Settlement Agreement, whereby the plaintiffs
dismissed the action, with prejudice, in exchange for the Company agreeing to
certain amendments to the Franchise Agreement pertaining to each of the
aforementioned seven Site for Sore Eyes Optical Centers, and the Company and
Site-Ncal Area Rep, LLC, a California limited liability company owned by the
plaintiffs ("NCAL"), entering into an Area Representation Agreement whereby NCAL
is authorized to solicit individuals that are interested in acquiring a
franchise for one or more new Site for Sore Eyes retail optical stores to be
opened in the San Francisco Bay area of California. Additionally, NCAL agreed to
provide certain services to each such new franchisee, all in consideration for
the Company's payment, to NCAL, of a portion of the initial franchise fees and
continuing royalty fees to become payable to the Company under each new
Franchise Agreement, as well as the Company's reimbursement of the estimated
administrative costs and expenses to be incurred by NCAL in connection
therewith.
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 of the Company's retail optical
stores then located in Ontario, Canada. In response, 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 transactions. The Company believes that it has a
meritorious defense to each counterclaim. As of the date hereof, these
proceedings were in the discovery stage.
In February 2002, Kaye Scholer, LLP, the law firm previously retained by
the Company as its outside counsel, commenced an action in the New York State
Supreme Court seeking unpaid legal fees in the amount of $122,500. As of the
date hereof, the Company has answered the Complaint in such action. The Company
believes that it has a meritorious defense to such claim.
In addition to the foregoing, the Company is a defendant in certain
lawsuits alleging various claims incurred in the ordinary course of business,
certain of which claims are covered by various insurance policies, subject to
certain deductible amounts and maximum policy limits. In the opinion of
management, the resolution of these claims should not have a material adverse
effect, individually or in the aggregate, upon the Company's business or
financial condition. Other than as set forth above, management believes that
there are no other legal proceedings pending or threatened to which the Company
is, or may be, a party, or to which any of its properties are or may be subject,
which, in the opinion of management, will have a material adverse effect on the
Company.
NOTE 7 - RELATED PARTY TRANSACTIONS:
On December 3, 2001 and December 20, 2001, respectively, the Company's
Board of Directors authorized the Company to borrow $150,000 and $300,000 from
Horizon Investors Corp. ("Horizon"), a New York corporation principally owned by
a director and principal shareholder of the Company. The loan was payable on
demand, together with interest calculated at the prime rate plus 1%. The Company
repaid these loans (which aggregated $450,000 as of December 31, 2001), in full,
on January 23, 2002 (Note 9).
On December 6, 2001, the Company's Board of Directors authorized the
Company to borrow $300,000 from Broadway Partners LLC, a partnership owned by
certain of the children of certain of the Company's principal shareholders and
directors. The loan was payable on demand, together with interest calculated at
the prime rate plus 1%. The Company repaid this loan ($300,000 as of December
31, 2001), in full, on January 23, 2002 (Note 9).
Until January 10, 2002, the Company subleased, from a limited liability
company owned by certain of the Company's principal shareholders and directors,
and shared with Cohen Fashion Optical, Inc. ("CFO"), a retail optical chain
owned by certain of the principal shareholders and directors of the Company, and
other tenants, an office building located in East Meadow, New York. Occupancy
costs were appropriately allocated based upon the applicable square footage
leased by the respective tenants of the building. For the year ended December
31, 2001, the Company paid approximately $440,000 for rent and related charges
for these offices. On January 10, 2002, the Company relocated to an office
building located in Garden City, New York, and entered into a sublease with CFO
for one of the two floors then being subleased to CFO. The Company estimates
that its new annual rent will be approximately $163,000. Occupancy costs are
being allocated between the Company and CFO based upon the respective square
footages being occupied. Management believes that such sublease is at fair
market value.
In April 2002, the Company sold to General Vision Services LLC, a retail
optical chain owned by certain of the principal shareholders and directors of
the Company, and members of their respective immediate families, for the sum of
$55,000, substantially all of the assets of one of its stores located in New
York City, together with all of the capital stock of its wholly-owned
subsidiary, Sterling Vision of 125th Street, Inc., which is the tenant under the
Master Lease for such store.
In the ordinary course of business, largely due to the fact that the
entities occupy office space in the same building, and in an effort to obtain
savings with respect to certain administrative costs, the Company and CFO will,
at times, share in the costs of minor expenses. Management believes that these
expenses have been appropriately accounted for herein.
In the opinion of management, all of the above transactions were conducted
at "arms-length."
NOTE 8 - SHAREHOLDERS' EQUITY:
Issuance of Warrants in Connection with Financing Arrangements
On January 23, 2002, in connection with obtaining its financing
arrangements (Note 9), the Company granted Horizon an aggregate of 2,500,000
warrants (1,750,000 of which were immediately exercisable, with the balance
vesting in quarterly increments of 250,000, beginning April 22, 2002, so long as
any amounts remain unpaid under the secured term note and/or credit facility).
Each warrant has a five-year term and provides for an exercise price of $0.01
per share. The fair value of the warrants issued (valued using the Black-Scholes
model) was approximately $234,000. On May 5, 2002, Horizon exercised 2,000,000
of such warrants.
NOTE 9 - FINANCING ARRANGEMENTS
On January 23, 2002, the Company secured two separate financing
arrangements as follows:
Secured Term Note. The Company entered into a secured term note for
$1,000,000 with an independent financial institution. This note is repayable in
24 equal monthly installments of $41,666, and bears interest as defined (4.95%
at the inception of the note, and subsequently amended on April 1, 2002 to
3.95%). The note is fully collateralized/guaranteed by a $1,000,000 certificate
of deposit posted by Horizon, a related party (Note 7), at the same financial
institution.
Credit Facility. The Company entered into an agreement with Horizon to
borrow up to a maximum of $1,000,000. This credit facility bears interest at the
prime rate plus 1% (5.5% as of the date of the loan agreement), provided for an
initial advance of $300,000, requires minimum incremental advances of $150,000,
matures on January 22, 2004, requires ratable monthly principal and interest
payments of each borrowing, amortizable through the maturity date of the
facility, is fully collateralized by the Company's qualifying franchise notes
(as referenced by a pledge agreement), and requires the payment of a facility
fee of 2% per annum, payable monthly, on the unused portion of the credit
facility. As of the date hereof, $700,000 remained available to the Company
under the credit facility.
Simultaneous with obtaining the above financing, the Company repaid its
outstanding related party borrowings totaling $750,000, plus interest (Note 7).
In consideration for providing access to the credit facility and guaranteeing
the term note, the Company granted Horizon an aggregate of 2,500,000 warrants,
the fair value of which was $234,000 (Note 8). The net proceeds received were
allocated based on the relative fair values of the debt and the warrants.
Accordingly, $810,000 was allocated to the debt, and $190,000 was allocated to
the warrants as a discount to the debt to be amortized as interest expense over
the term of the note (2 years). For the three months ended March 31, 2002,
approximately $18,000 of such discount was amortized and recognized as interest
expense in the accompanying Consolidated Statement of Operations.
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
This Report contains certain forward-looking statements and information
relating to the Company that is based on the beliefs of the Company's
management, as well as assumptions made by, and information currently available
to, the Company's management. When used in this Report, the words "anticipate",
"believe", "estimate", "expect", and similar expressions, as they relate to the
Company or the Company's management, are intended to identify forward-looking
statements. Such statements reflect the current view of the Company with respect
to future events, are not guarantees of future performance and are subject to
certain risks and uncertainties. These risks and uncertainties may include:
product demand and market acceptance risks; the effect of economic conditions;
the impact of competitive products, services and pricing; product development,
commercialization and technological difficulties; and the outcome of current and
future litigation. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those described herein as anticipated, believed,
estimated, or expected. The Company does not intend to update these
forward-looking statements.
Results of Operations
For the Three Months Ended March 31, 2002 compared to March 31, 2001
Net sales for Company-owned stores, including revenues generated by the
Company's wholly owned subsidiary, VisionCare of California ("VCC"), a
specialized health care maintenance organization licensed by the State of
California Department of Managed Health Care, increased by approximately
$150,000, or 5.3%, to $2,990,000 for the three months ended March 31, 2002, as
compared to $2,840,000 for the comparable period in 2001. While there was a
lower average number of Company-owned stores in operation during the three
months ended March 31, 2002, as compared to the same period in 2001, as
described below, the non-comparative stores in operation during the three months
ended March 31, 2002, outperformed the non-comparative stores in operation
during the comparable period in 2001. As of March 31, 2002, there were 199
Sterling Stores in operation, consisting of 33 Company-owned stores (including 8
Company-owned stores being managed by franchisees) and 166 franchised stores, as
compared to 223 Sterling Stores in operation for the comparable period in 2001,
consisting of 39 Company-owned stores (including 12 Company-owned stores being
managed by franchisees) and 184 franchised stores (including 3 stores being
managed by the Company on behalf of franchisees). On a same store basis (for
stores that operated as a Company-owned store during both of the three month
periods ended March 31, 2002 and 2001), comparative net sales decreased by
$203,000, or 10.6%, to $1,714,000 for the three months ended March 31, 2002, as
compared to $1,917,000 for the comparable period in 2001. Management believes
that this decline was a direct result of a general downturn in the economy that
carried from the end of 2001 into the beginning of 2002.
Franchise royalties decreased by $535,000, or 24.0%, to $1,697,000 for the
three months ended March 31, 2002, as compared to $2,232,000 for the comparable
period in 2001. This decrease was as a result of a lower average number of
franchised stores in operation during the three month period ended March 31,
2002, as compared to 2001, as described above.
For the three months ended March 31, 2002, there were no net gains and fees
from the conveyance of Company-owned store assets to franchisees (including
initial franchise fees). For the comparable period in 2001, the Company
recognized $88,000 of such gains and fees. This decrease was due to the fact
that the Company did not convey to franchisees (and thus did not realize a gain
on) any assets of Company-owned stores during the three months ended March 31,
2002.
Interest on franchise notes receivable decreased by $214,000, or 71.6%, to
$85,000 for the three months ended March 31, 2002, as compared to $299,000 for
the comparable period in 2001. This decrease was due to several franchise notes
maturing, a decrease in the principal balance of several franchisees notes and
fewer notes being generated during the three months ended March 31, 2002, as
compared to the comparable period in 2001.
Other income increased to $30,000 for the three months ended March 31,
2002, as compared to $5,000 for the comparable period in 2001, primarily due to
an increase in franchise fee income (related to renewals and/or transfers) of
$20,000 during the three months ended March 31, 2002.
The Company's gross profit margin decreased by 6.5% to 74.0% for the three
months ended March 31, 2002, as compared to 80.5% for the comparable period in
2001. In an effort to remain competitive with other retail optical chains in the
industry during the economic downturn, the Company reduced the selling prices on
many of its products by a substantial amount, thus causing profit margins to
decrease. Further, in the first quarter of 2001, the Company obtained better
discounts from certain of its vendors than in the comparable period in 2002. 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,
competitive pricing, and promotional incentives
Selling, general and administrative expenses remained relatively constant
during the three-month periods ended March 31, 2002 and 2001. Management
anticipates that it will reduce its selling, general and administrative expenses
during 2002 through closure of its non-profitable Company-owned stores,
implementing reductions of administrative overhead expenses where necessary and
feasible, and closer monitoring of store-by-store and corporate operations.
There were no non-cash charges for issuance of warrants and induced
conversion of warrants for the three months ended March 31, 2002. However, the
Company has certain outstanding contingent warrants that become exercisable upon
the achievement, by the Company, of certain predetermined EBITDA targets. Due to
these contingencies, the future valuation of the contingent warrants, if and
when they become exercisable, will result in charges to the Company's results of
operations in future periods. The significance of these charges, if any, will be
dependent upon the fair market value of the Company's common stock at the time
that the respective EBITDA targets are achieved.
Loss from the operation of franchised stores managed by the Company was
$113,000 for the three months ended March 31, 2001. There was no such loss for
the three months ended March 31, 2002, as there are no longer any franchised
stores being managed by the Company on behalf of franchisees.
Interest expense increased $18,000, to $39,000 for the three months ended
March 31, 2002 as compared to $21,000 for the comparable period in 2001. This
increase was primarily due to the amortization of the discount associated with
the related party debt financing obtained in January 2002 (Note 9).
Liquidity and Capital Resources
For the three months ended March 31, 2002, the Company used approximately
$792,000 of cash in its operating activities. This usage was in line with
management's plans and was mainly a result of $206,000 of costs related to the
Company's store closure plan (Note 5), $516,000 related to the Company's
settlement of certain accounts payable and accrued liabilities that existed as
of December 31, 2001, and $108,000 related to the prepayment of certain other
business expenses, offset in part by a $304,000 decrease in franchise and other
receivables.
For the three months ended March 31, 2002, cash flows provided by investing
activities were $190,000, as compared to $266,000 for the comparable period in
2001. This decrease was principally due to a decrease of approximately $361,000,
to $231,000, in proceeds from franchise and other notes receivables, and a
decrease of approximately $291,000 in notes issued by franchisees.
For the three months ended March 31, 2002, cash flows provided by financing
activities were $457,000, principally due to the $1,300,000 of financing the
Company received in January 2002 (Note 9), offset principally by the repayment
of $750,000 of related party borrowings.
As of March 31, 2002, the Company had negative working capital of
$1,535,000 (an improvement from $1,758,000 as of December 31, 2001), and cash on
hand of $808,000.
On January 23, 2002, the Company secured two separate financing
arrangements, as follows:
Secured Term Note. The Company entered into a secured term note for
$1,000,000 with an independent financial institution. This note is repayable in
24 equal monthly installments of $41,666, and bears interest as defined (4.95%
at the inception of the note, and subsequently amended on April 1, 2002 to
3.95%). The note is fully collateralized/guaranteed by a $1,000,000 certificate
of deposit posted by Horizon, a related party, at the same financial
institution.
Credit Facility. The Company entered into an agreement with Horizon to
borrow up to a maximum of $1,000,000. This credit facility bears interest at the
prime rate plus 1% (5.5% as of the date of the loan agreement), provided for an
initial advance of $300,000, requires minimum incremental advances of $150,000,
matures on January 22, 2004, requires ratable monthly principal and interest
payments of each borrowing, amortizable through the maturity date of the
facility, is fully collateralized by the Company's qualifying franchise notes
(as referenced by a pledge agreement), and requires the payment of a facility
fee of 2% per annum, payable monthly, on the unused portion of the credit
facility.
Simultaneous with obtaining the above financing, the Company repaid
outstanding related party borrowings due to Horizon and Broadway totaling
$750,000, plus interest. In consideration for providing access to the credit
facility and guaranteeing the term note, the Company granted Horizon an
aggregate of 2,500,000 warrants (1,750,000 of which were immediately
exercisable, with the balance vesting in quarterly increments of 250,000,
beginning April 22, 2002, so long as any amounts remain unpaid under the secured
term note and/or credit facility). Each warrant has a five-year term and
provides for an exercise price of $0.01. As of the date hereof, remaining
availability under the credit facility was approximately $700,000.
The Company plans to continue to attempt to improve its cash flows during
2002 by improving store profitability through increased monitoring of
store-by-store operations, closing non-profitable Company-owned stores,
implementing reductions of administrative overhead expenses, where necessary and
feasible, actively supporting development programs for franchisees, and by
seeking additional financing, if necessary and available. Management believes
that with its plans to attempt to improve cash flows as discussed above, its
existing cash, the collection of outstanding receivables, and the availability
under its existing credit facility (Note 9), there will be sufficient liquidity
available to the Company to continue in operation until at least the end of the
second quarter of 2003. However, there can be no assurance that the Company will
be able achieve the aforementioned plans, or that additional financing will be
available.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company presently has outstanding certain equity instruments with
beneficial conversion terms. Accordingly, the Company, in the future, could
incur non-cash charges to equity (as a result of the exercise of such beneficial
conversion terms), 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 borrowings under its credit facility. The Company believes that
the amount of risk as it relates to its investments and any such borrowings is
not material to the Company's financial condition or results of operations. The
Company does not expect to use interest rate swaps or other instruments to hedge
its borrowings under its credit facility.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In April 2000, the Company commenced an action in the Supreme Court of the
State of New Jersey against Preit-Rubin, Inc. and Cumberland Mall Associates,
the landlord of the former Sterling Optical Store located in Cumberland Mall,
Vineland, New Jersey, seeking damages of approximately $200,000 as a result of
the defendants alleged wrongful eviction of the Company from this location. In
response thereto, the defendants asserted counterclaims of approximately
$300,000 for lost rent and legal fees based upon the Company's alleged breach of
the lease pursuant to which it occupied such Store.
In February 2002, Kaye Scholer, LLP, the law firm previously retained by
the Company as its outside counsel, commenced an action in the New York State
Supreme Court seeking unpaid legal fees in the amount of $122,500. As of the
date hereof, the Company has answered the Complaint in such action. The Company
believes that it has a meritorious defense to such claim.
Item 2. Changes in Securities and Use of Proceeds.
On January 23, 2002, the Company issued warrants to Horizon to purchase an
aggregate of 2,500,000 shares of its Common Stock at an exercise price of $0.01
per share, in consideration for providing the Company access to a $1,000,000
credit facility and for guaranteeing a $1,000,000 term note made by the Company
in favor of an independent financial institution. The issuance of these
securities was exempt from registration requirements pursuant to an exemption
under Section 4(2) of the Securities Act of 1933, as amended.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits
Not applicable.
B. Reports on Form 8-K
On February 4, 2002, the Company filed a Report on Form 8-K regarding its
loan from North Fork Bank, and its credit facility from Horizon Investors Corp.
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 hereunto duly authorized.
EMERGING VISION, INC.
(Registrant)
BY: /s/ Robert S. Hillman
---------------------------------------------
Robert S. Hillman
President and Chief Executive Officer
(Principal Executive Officer)
BY: /s/ Christopher G. Payan
---------------------------------------------
Christopher G. Payan
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: May 15, 2002