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, 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:
There were 25,376,894 shares outstanding of the Registrant's Common
Stock, par value $.01 per share, as of May 11, 2001.
Item 1. Financial Statements
EMERGING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands, Except Share Data)
March 31, December 31,
2001 2000
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 3,880 $ 5,215
Franchise receivables, net of allowance of $2,792 and $3,521, respectively 1,405 1,493
Other receivables, net of allowance for doubtful account of $316 and $323, respectively 843 1,997
Current portion of notes receivable from franchisees 2,717 2,622
Inventories 978 1,033
Prepaid expenses and other current assets 422 475
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Total current assets 10,245 12,835
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Property and equipment, net 2,994 2,995
Franchise notes and other receivables, net of allowance of $3,746 and $3,019, respectively 2,879 3,926
Intangible assets, net 1,511 1,534
Other assets 351 401
Net assets of discontinued operations 859 840
--------- ---------
Total assets $ 18,839 $ 22,531
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 188 $ 221
Accounts payable and accrued liabilities 10,169 13,227
Net liabilities of discontinued operations 1,846 3,006
--------- ---------
Total current liabilities 12,203 16,822
--------- ---------
Long-term debt 504 533
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Excess of fair value of assets acquired over cost 230 317
--------- ---------
Franchise deposits and other liabilities 1,307 1,322
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Commitments and contingencies (Note 4)
Shareholders' equity
Preferred stock, $.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, $.01 par value per share; authorized 50,000,000 shares; issued 25,559,231;
and 25,376,894 and 25,382,230 shares outstanding, respectively 256 256
Treasury stock, at cost, 182,337 and 177,001 shares, respectively (204) (203)
Additional paid-in capital 119,754 119,453
Accumulated deficit (115,498) (115,888)
--------- ---------
Total shareholders' equity 4,595 3,905
--------- ---------
Total liabilities and shareholders' equity $ 18,839 $ 22,531
========= =========
The accompanying Notes are an integral part of these Consolidated Condensed Financial Statements.
2
EMERGING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
For the Three Months Ended
March 31,
-------------------------------
2001 2000
--------------- ---------------
(Unaudited)
Revenues:
Net sales $ 2,840 $ 3,754
Franchise royalties 2,232 2,377
Net transfer fees from the conveyance of franchise-owned store assets 88 14
Interest on franchise notes receivable 299 327
Other income 5 61
------ -------
Total revenues 5,464 6,533
------ -------
Costs and expenses:
Cost of sales 554 1,042
Selling, general and administrative expenses 4,516 5,616
Loss from franchised stores operated under management agreements 113 111
Non-cash charges for issuance of warrants 301 272
Interest expense 21 188
------ -------
Total costs and expenses 5,505 7,229
------ -------
Loss from continuing operations before provision for income taxes (41) (696)
Provision for income taxes - -
------ -------
Loss from continuing operations (41) (696)
------ -------
Discontinued operations: (Note 2)
Income (loss) from discontinued operations 431 (1,279)
------ -------
Net income (loss) $ 390 $(1,975)
====== =======
Per share information - basic and diluted: (Note 3)
Loss from continuing operations $ 0.00 $ (1.60)
Income (loss) from discontinued operations 0.02 (0.07)
------ -------
Net income (loss) per share $ 0.02 $ (1.67)
====== =======
Weighted-average number of common shares outstanding - basic and diluted 25,381 18,714
====== ======
The accompanying Notes are an integral part of these Consolidated Condensed Financial Statements.
3
EMERGING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Thousands)
For the Three Months Ended
March 31,
----------------------------
2001 2000
----------------------------
(Unaudited)
Cash flows from operating activities:
Net loss from continuing operations $ (41) $ (696)
Adjustments to reconcile net loss from continuing operations
to net cash provided by (used in) operating activities:
Depreciation and amortization 184 263
Provision for doubtful accounts 75 226
Accrued interest - 18
Non-cash compensation charges related to options and warrants 301 -
Impairment of long-lived assets 21 -
Changes in operating assets and liabilities:
Franchise receivables 125 (242)
Inventories 55 71
Prepaid expenses and other current assets 53 184
Other assets 2 (109)
Accounts payable and accrued liabilities (502) (2,375)
Franchise deposits and other liabilities 15 23
Deferred franchise income - (3)
Accrual for store closings - (38)
------- -------
Net cash provided by (used in) operating activities 288 (2,678)
------- -------
Cash flows from investing activities:
Franchise notes receivable issued (301) (197)
Proceeds from franchise and other notes receivable 592 498
Purchases of property and equipment (25) (149)
------- -------
Net cash provided by investing activities 266 152
------- -------
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 - 939
Payments on long-term debt (62) (2,147)
Acquisition of treasury shares (1) -
------- -------
Net cash (used in) provided by financing activities (63) 17,102
------- -------
Net cash provided by continuing operations 491 14,576
------- -------
Net cash used in discontinued operations (1,826) (718)
------- -------
Net (decrease) increase in cash and cash equivalents (1,335) 13,858
Cash and cash equivalents - beginning of period 5,215 108
------- -------
Cash and cash equivalents - end of period $ 3,880 $13,966
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 18 $ 219
====== ======
Taxes $ 29 $ 29
====== ======
Non-cash investing and financing activities:
Net assets of franchise stores reacquired through exchange of receivables $ 304 $ -
Issuance of common shares for consulting services and other - 9,808
Extinguishment of related party debt - 727
The accompanying Notes are an integral part of these Consolidated Condensed Financial Statements.
4
EMERGING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 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 warrants for
consulting services (Note 5) - - - - - - 301 - 301
Acquisition of treasury shares - - - - 5,336 (1) - - (1)
Net income - - - - - - - 390 390
------ ------ ---------- -------- ------- ----- -------- --------- --------
BALANCE - MARCH 31, 2001 3 $ 287 25,559,231 $ 256 182,337 $(204) $119,754 $(115,498) $ 4,595
====== ====== ========== ======== ======= ===== ======== ========= ========
The accompanying notes are an integral part of these consolidated statements.
5
EMERGING VISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION:
The accompanying Consolidated Condensed Financial Statements of Emerging
Vision, Inc. (formerly known as Sterling Vision, Inc.; (hereinafter, 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 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 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 the prior period's financial
statements to conform to the current presentation.
NOTE 2 - DISCONTINUED OPERATIONS:
On March 28, 2001, the Company announced its Board of Directors' decision
to discontinue further development of its Internet Division and focus its
efforts and resources on its franchise/retail optical store business, Sterling
Optical. The Company continues to adhere to its previously announced formalized
plan to sell the assets of its 66.5% owned subsidiary, Insight Laser Centers,
Inc. ("Insight Laser"), as well as the Company's assets located in the
Ambulatory Surgery Center (the "Ambulatory Center") situated in Garden City, New
York. Accordingly, all of the net assets, operating results and cash flows of
these segments of the Company's business have been presented as discontinued
operations in the accompanying Consolidated Condensed Financial Statements for
all periods presented. As of March 31, 2001 and December 31, 2000, net
liabilities of discontinued operations of $(987,000) and $(2,166,000),
respectively, have been segregated on the accompanying Consolidated Condensed
Balance Sheets. The Company expects to substantially complete its plan of
disposal of the assets of such discontinued segments of its business by the end
of the second quarter of 2001.
In connection with the foregoing, the Company had reserved approximately
$5,608,000 for such discontinued operations at December 31, 2000, which reserves
included anticipated future operating losses of these divisions, the expenses
associated with the disposal of the assets of these divisions, and an estimate
of loss upon disposition. The Company has, since December 31, 2000, successfully
settled certain liabilities related to its Internet Division for less than the
amounts initially recorded at December 31, 2000. In addition, the Company has
since reevaluated its reserve for discontinued operations and, accordingly, had
reversed approximately $400,000 of such reserves as of March 31, 2001. At March
31, 2001, $3,150,000 of this provision remained accrued as part of accounts
payable and accrued liabilities on the accompanying Consolidated Condensed
Balance Sheet.
During the three months ended March 31, 2001, the Company utilized
approximately $2,058,000 of its reserve for discontinued operations. This
included approximately $805,000 in severance payments to all of its Internet
Division's personnel located in its Dallas, Texas office, and approximately
$1,253,000 of operating costs for such division through March 31, 2001. Included
in such total severance costs were payments of $277,000 and $205,000 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,
respectively.
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 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
6
under her then existing Employment 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 Registrant's Common Stock at an exercise price
equal to the composite per share closing price ($0.29) of the Registrant's
Common Stock, as quoted on the Nasdaq National Market System ("Nasdaq-NMS") on
such date.
On May 4, 2001, the Company and the owner/licensee of the Ambulatory Center
reached an agreement in principle pursuant to which the Company will sell and
transfer, to a limited liability owned, in principal part, by such owner, its
assets located at the Center in exchange for: (i) the purchaser's assumption of
the Center's liabilities (subject to certain limitations); (ii) the release of
the Company from its obligation under the Lease pursuant to which the Company
leases the premises of the Center (except in limited circumstances); (iii) the
termination of the Administrative Services and Consulting Agreement pursuant to
which the Company renders services to such owner/licensee in connection with its
operation of the Center; and (iv) the termination of the Purchase Agreement
pursuant to which the Company agreed to purchase the New York State License
(Certificate of Need) for the Center. If the Company, however, is unsuccessful
in consummating the terms of such agreement, it will, in all likelihood, close
such facility, whereupon it will be in default in performing its obligations
under such Consulting Agreement, Lease, and Purchase Agreement. As of March 31,
2001, $1,145,000 of reserves relating to the aforementioned future obligations
remained accrued (as part of accounts payable and accrued liabilities) on the
accompanying Consolidated Condensed Balance Sheet. During the three months ended
March 31, 2001, the net operating results of the Ambulatory Center was $0;
therefore no costs were charged against the previously established reserve for
discontinued operations related to the center.
The Company continues to pursue a sale of the assets of Insight Laser.
Subsequent to March 31, 2001, the Company received an offer to purchase such
assets, which the Company is currently evaluating. During the three months ended
March 31, 2001, Insight Laser's results from operations generated net income of
$31,000.
Summarized financial information for these discontinued operations is as
follows (in thousands):
As of and for the Three Months Ended March 31:
Internet Insight Ambulatory
Division Laser Center Total
-------- ------- ---------- --------
2001
Net revenues $ - $ 416 $ 77 $ 493
Income before income taxes $ - $ 31 $ - $ 31
Gain on disposal of discontinued operations $ 400 $ - $ - $ 400
Net income $ 400 $ 31 $ - $ 431
Current assets $ - $ 164 $ 104 $ 268
Total assets $ - $1,023 $ 104 $ 1,127
Current liabilities $ 404 $1,696 $ 14 $ 2,114
Net (liabilities) assets $ (404) $ (673) $ 90 $ 987
2000
Net revenues $ - $ 862 $ 185 $ 1,047
Loss before income taxes $(1,212) $ (66) $ (1) $(1,279)
Net loss $(1,212) $ (66) $ (1) $(1,279)
Current assets $ - $ 376 $ 131 $ 507
Total assets $ 1,020 $2,552 $2,540 $ 6,112
Current liabilities $ 76 $1,302 $ 47 $ 1,425
Net assets $ 944 $ 545 $2,493 $ 3,982
7
NOTE 3 - PER SHARE INFORMATION:
The Company follows the provisions of SFAS No. 128, "Earnings Per Share".
Basic net loss per common share ("Basic EPS") is computed by dividing the net
loss attributable to common shareholders by the weighted-average number of
common shares outstanding. Diluted net loss per common share ("Diluted EPS") is
computed by dividing the net loss 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 the
presentation of both Basic EPS and Diluted EPS appear on the Company's
Consolidated Condensed 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 (in thousands, except per share data):
For the Three Months Ended
March 31,
---------------------------------
2001 2000
---- ----
Numerator:
Loss from continuing operations $(41) $ (696)
Induced conversion of Senior Convertible Preferred Stock - (21,707)
Accretion of dividends on Series B Convertible Preferred Stock - (7,495)
---- --------
Numerator for basic and diluted loss per share -
Loss attributable to common shareholders (41) (29,898)
---- --------
Basic and Diluted:
Loss attributable to common shareholders (41) (29,898)
Income (loss) from discontinued operations 31 (1,279)
Gain on disposal of discontinued operations 400 -
---- --------
Net income (loss) attributable to common shareholders $390 $(31,177)
==== ========
Denominator:
Denominator for basic and diluted per share information -
weighted average shares outstanding 25,381 18,714
====== ======
Basic and Diluted Per Share Information:
Loss attributable to common shareholders $ 0.00 $ (1.60)
Income (loss) from discontinued operations 0.00 (0.07)
Gain on disposal of discontinued operations 0.02 -
------ -------
Net income (loss) attributable to common shareholders $ 0.02 $ (1.67)
====== =======
NOTE 4 - CONTINGENCIES:
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: (i) $35,000,000 of damages as a result of the Company's
alleged breach of the respective Franchise Agreements pursuant to which each
such Franchisee operates its Site for Sore Eyes Optical Center, fraud and
violations of California law; and (ii) a declaratory judgment that each such
8
Franchise Agreement had been modified to afford each plaintiff certain rights
which are in addition to those set forth in the applicable Franchise Agreements.
As of the date hereof, the Company and the plaintiffs are attempting to reach an
amicable settlement of this dispute.
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 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 which Notes was personally guaranteed by each of the defendants. In
response thereto, 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: (i) the parties failed
to agree upon the terms of any such purchase; (ii) the parties failed to enter
into any written agreement memorializing such transaction; and (iii) the Company
subsequently purchased such assets from Norwest Bank (which held a first lien on
substantially all of said assets as collateral for various loans made to each of
said 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, a hearing on damages having been scheduled for June 2001. In
addition, in March 2001, the Company filed an additional Motion for Summary
Judgment seeking dismissal of all of such counterclaims; and the defendant, Dr.
Joel, thereafter filed a cross-motion seeking a determination that the Company
breached such oral, month-to-month consulting agreement and that he is,
accordingly, entitled to damages of approximately $13,000,000, both of which
motions have not yet been decided by the Court.
Pursuant to the terms of the Company's Professional Services Master
Agreement (the "Agreement") with Rare Medium, Inc. ("Rare"), the Company paid
Rare the cash sum of $1,000,000 and, on February 29, 2000, issued to Rare
1,000,000 shares of the Registrant's Common Stock (valued at $9,750,000), all in
exchange for Rare's agreement to provide services to the Company in connection
with the development and implementation of its previously proposed, web-based
business strategy. In addition, the terms of the Agreement afforded Rare a
price-protection guarantee on any such shares (which have since been registered
by the Company under the Securities Act of 1933, as amended; (the "Act")) sold
in the open market at a price of less than $3.00 per share, and contained
certain "lock-up" provisions regarding Rare's ability to sell such shares prior
to certain dates, which Agreement was subsequently terminated by the Company
based upon its opinion that Rare was unable to provide the services required of
it pursuant to the Agreement. In November 2000, Rare notified the Company that
it was allegedly in default of the terms of the Agreement entered into between
the Company and Rare in February 2000, as a result of the Company's refusal to
permit the transfer of the 1,000,000 shares of its Common Stock previously
issued to Rare in partial consideration of the services to be rendered to the
Company pursuant to such Agreement; and in February 2001, Rare additionally
claimed that there was due and owing to it the additional approximate sum of
$840,000 for rent for office space utilized by the Company, in both Dallas,
Texas and New York City, pending the opening of the Company's corporate offices
in each such city, and for additional services rendered to the Company by
certain of its employees, all of which, the Company believes, were to be
provided to it without additional cost. The Company thereupon advised
representatives of Rare that, in its opinion, Rare was not able to provide the
services required of it pursuant to such Agreement, which necessitated the
Company to terminate such Agreement. As of the date hereof, the Company and Rare
are attempting to reach an amicable settlement of this dispute.
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 Center 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 defendants from the six
Sterling Optical Centers 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 pursuant to which the defendants agreed to
substantially all of the relief requested by the Company. 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 has denied defendants' counterclaims and has filed a
9
motion to dismiss all such counterclaims, which motion has not yet been decided
by the Court. 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 guaranty 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 on April 17, 2001, the
Court granted the Company's motion and awarded the Company a judgment in the
approximate sum of $1,300,000, which the Company will seek to enforce in the
State of Missouri, where the Guarantors both reside.
In addition to the foregoing, the Company is a defendant in certain
lawsuits alleging various claims incurred in the ordinary course of business.
These claims are generally covered by various insurance policies, subject to
certain deductible amounts and maximum policy limits. In the opinion of
management, the resolution of such additional, existing lawsuits 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 are likely to have a material adverse effect on the
Company.
NOTE 5 - SHAREHOLDER'S EQUITY:
SERIES B CONVERTIBLE PREFERRED STOCK
During the first quarter of 2000, the Company completed a private placement
pursuant to which it sold an aggregate of 1,677,570 units (the "Units"), each
Unit consisting of one share of the Company's Series B Convertible Preferred
Stock, par value $.01 per share, with a liquidation preference of $7.00 per
share (the "Series B Preferred Stock"), and one warrant (the "Series B Warrant")
to purchase one-half share of Series B Preferred Stock at an exercise price, per
one-half share, of $7.5875, exercisable from and after the expiration of the
six-month period following the date of the first issuance of such Series B
Warrants, for a period of 5 years thereafter.
Each share of Series B Preferred Stock was automatically converted into two
shares of the Company's Common Stock upon the Company's filing of an amendment
to its Certificate of Incorporation (the "Amendment") increasing its authorized
Common Stock from 28,000,000 to 50,000,000 shares. Each Series B Warrant was
initially exercisable for one-half share of Series B Preferred Stock; however,
upon the automatic conversion of the Series B Preferred Stock into Common Stock,
the Series B Warrants (to the extent not previously exercised) became
exercisable, at the same exercise price of $7.5875, for one share of Common
Stock.
In accordance with EITF Issue 98-05, "Accounting for Convertible Securities
with Beneficial Conversion Features or Contingently Adjustable Conversion
Ratios," the net proceeds received in the private placement (approximately
$10,618,000) were allocated based on the relative fair values of the Series B
Preferred Stock and the Series B Warrants. Accordingly, approximately $6,239,000
was allocated to the Series B Preferred Stock and $4,379,000 was allocated to
the Series B Warrants. The approximately $11,743,000 liquidation value of the
1,677,570 shares of Series B Preferred Stock was recorded net of issuance costs
of approximately $1,125,000, and net of a full discount, of which approximately
$4,379,000 was attributable to the fair value of the Series B Warrants issued in
connection therewith, and approximately $6,239,000 was attributable to the
beneficial conversion feature embodied in the Series B Preferred Stock. This
discount was accreted in its entirety as preferred dividends through April 17,
2000, the date on which all of the Series B Preferred Stock automatically
converted into shares of the Company's Common Stock (as described above) at a
ratio of 1 to 2. In connection with the private placement, the Company issued to
the placement agents 500,000 warrants to purchase shares of the Company's Common
Stock at an exercise price of $7.59, which warrants will expire on February 13,
2005. The fair value of these warrants was treated as part of the issuance
costs.
ISSUANCE OF WARRANTS FOR CONSULTING SERVICES
On January 16, 2001, the Company entered into an agreement with Goldin
Associates, L.L.C. ("Goldin") pursuant to which Goldin agreed to provide interim
management services to the Company, for an initial six-month period, with
respect to its retail optical, Insight Laser and Ambulatory Center divisions
(collectively, the "Divisions") at the direction of the Board of Directors of
10
the Company or its Chairman or other officers, pursuant to delegated authority.
In connection with the foregoing, Michael C. McGeeney was initially appointed
Chief Executive Officer of the retail optical division and, subsequently, on
March 28, 2001, replaced Gregory T. Cook as the Company's President and Chief
Executive Officer. The fee for such services is $50,000 per month plus an
Incentive Fee, comprised, in the aggregate, of warrants (at an exercise price of
$0.01 each) to purchase up to an aggregate of 5% (subject to customary
anti-dilution provisions) of the outstanding Common Stock of the Company as of
January 22, 2001. The Incentive Fee is to be provided to Goldin in increments
according to the following schedule: (1) warrants to purchase 422,272 of such
outstanding Common Stock on January 22, 2001 (the fair value of this portion of
the total warrants issued to Goldin were valued using the Black Scholes model,
which amounted to approximately $301,000, and recorded, as a non-cash charge to
compensation expense, in the first quarter of fiscal year 2001); (2) warrants to
purchase an additional 1.11% of such outstanding Common Stock immediately
following a year in which the Divisions shall realize earnings before interest,
depreciation, taxes and amortization (EBIDTA) of $1,000,000; (3) warrants to
purchase an additional 1.11% of such outstanding Common Stock immediately
following a year in which the Divisions shall realize EBIDTA of $2,000,000; and
(4) warrants to purchase an additional 1.12% of such outstanding Common Stock
immediately following a year in which the Divisions shall realize EBIDTA of
$3,000,000. These warrants, except for the warrants referred to in clause (1)
above (which became exercisable immediately), may be exercised only if the
applicable EBITDA targets are achieved prior to January 12, 2005; and, due to
these contingencies, will result in charges to the Company's results of
operations in future periods, if and when achieved. All warrants expire seven
years after their issuance date.
NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS:
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash, cash equivalents and accounts
receivable. Cash and cash equivalents are deposited with high quality financial
institutions. All highly liquid investments with an original maturity from date
of purchase of three months or less are considered to be cash equivalents. The
Company's cash and cash equivalents are invested in various investment-grade
money market accounts and are recorded on the accompanying Consolidated
Condensed Balance Sheet, as of March 31, 2001, at $3,880,000.
NOTE 7 - SUBSEQUENT EVENTS:
The Nasdaq requires, among other items, that the Company maintain a minimum
of $4,000,000 of net tangible assets to maintain the listing of the Registrant's
shares of Common Stock on the Nasdaq-NMS. The Company's net tangible assets as
of March 31, 2001 was $3,084,000. Accordingly, the Company anticipates that
unless: (i) the Company's profitability continues to improve during the second
quarter of 2001; and (ii) the Company is successful in completing its plan for
disposing of the assets of its Internet, Insight Laser and Ambulatory Center
divisions, it will require additional funds (in the form of an equity
investment) to comply with the Nasdaq-NMS net tangible assets requirement; and
there can be no assurance that the Company will be able to improve such
profitability and dispose of such assets within the time period required by
Nasdaq, or that funds will be available from equity financings or, that if
available, any such financings will be available on terms and conditions
acceptable to the Company. The Nasdaq also requires, as a condition to the
continued listing of such Common Stock on the Nasdaq-NMS, a minimum bid price
for the Registrant's Common Stock of $1.00 per share. On April 9, 2001, the
Company was notified by Nasdaq that it did not meet the minimum bid price of
$1.00 for continued listing of its shares on the Nasdaq-NMS and that the Company
had until July 5, 2001 to comply with such rule in order to avoid delisting.
Additionally, on April 11, 2001, Nasdaq notified the Company that it did not
meet the aforementioned net tangible assets requirement. The Company responded
to Nasdaq on April 30, 2001 by providing Nasdaq with its anticipated plans by
which the Company believes it will meet such requirement. Nasdaq is reviewing
these plans as of the date of this Report. If the Registrant's Common Stock were
delisted, such delisting would have an adverse affect on the trading prices of
the Registrant's Common Stock and would, in all likelihood, adversely affect the
liquidity of the shares of Common Stock held by the Company's stockholders.
11
On April 26, 2001, the Company's Board of Directors approved the terms of
an agreement pursuant to which it will issue to Balfour Investors Incorporated
("Balfour"), in exchange for its advisory services to be rendered to the
Company's Board of Directors, warrants to purchase up to an aggregate of 2.5%
(subject to customary anti-dilution provisions) of the Registrant's outstanding
Common Stock as of April 26, 2001, 190,327 of which warrants will be immediately
exercisable and will be valued, using the Black Scholes model, at approximately
$62,000. The balance of such aggregate number of warrants to be issued to
Balfour will become exercisable according to the following schedule: (1)
warrants to purchase an additional 0.58% of such outstanding Common Stock
immediately following a year in which the Divisions shall realize EBIDTA of $1
million or more; (2) warrants to purchase an additional 0.58% of such
outstanding Common Stock immediately following a year in which the Divisions
shall realize EBIDTA of $2,000,000; and (3) warrants to purchase an additional
0.59% of such outstanding Common Stock immediately following a year in which the
Divisions shall realize EBIDTA of $3,000,000. These warrants, except for the
warrants which became exercisable immediately, may be exercised only if the
applicable EBITDA targets are achieved prior to April 26, 2005 and, due to these
contingencies, will result in charges to the Company's results of operations in
future periods, if and when achieved. All warrants expire seven years after
their issuance date.
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 within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. 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; success of transactions with third parties; the
impact of competitive products, services and pricing; product development,
commercialization and technological difficulties; the outcome of current and
future litigation; delisting by Nasdaq-NMS; and other risks described elsewhere
herein. 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.
The Company's historical financial information has been restated to report
the operating results, net assets and cash flows of the Internet Division,
Insight Laser and Ambulatory Center through March 31, 2001 as discontinued
operations for all periods presented. The following discussion and analysis
focuses on continuing operations, as restated, unless otherwise noted.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO MARCH 31, 2000
Net sales for Company-owned stores, as well as revenues generated by the
Registrant's wholly owned subsidiary, VisionCare of California ("VCC"), a
specialized health care maintenance organization licensed by the California
Department of Corporations, decreased by approximately $914,000, or 24.3%, to
$2,840,000 for the three months ended March 31, 2001, as compared to $3,754,000
for the comparable period in 2000. This decrease was principally due to a lower
average number of stores in operation during the three months ended March 31,
2001, as compared to the comparable period in 2000, as described below. At March
31, 2001, there were 223 Sterling Stores in operation, consisting of 39
Company-owned stores (including 12 Company-owned stores being managed by
franchisees) and 184 franchised stores (including 3 franchised stores being
managed by the Company on behalf of franchisees), as compared to 251 Sterling
Stores in operation for the comparable period in 2000, consisting of 37
Company-owned stores (including 12 Company-owned stores being managed by
franchisees) and 214 franchised stores (including 5 stores being managed by the
12
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, 2001 and 2000), comparative net sales decreased by $220,000, or 10.7%,
to $1,830,000 for the three months ended March 31, 2001, as compared to
$2,050,000 for the comparable period in 2000.
Franchise royalties decreased by $145,000, or 6.1%, to $2,232,000 for the
three months ended March 31, 2001, as compared to $2,377,000 for the comparable
period in 2000. This decrease was as a result of a fewer number of franchised
stores in operation throughout the three month period ended March 31, 2001, as
compared to 2000.
Net gains and fees from the conveyance of Company-owned store assets to
franchisees, 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, increased by $74,000, or 528.6%, to $88,000 for the three
months ended March 31, 2001, as compared to $14,000 for the comparable period in
2000. This increase was principally due to transfer fees collected on the
conveyance of the assets of 8 franchise-owned stores during the three months
ended March 31, 2001, as compared to the conveyance of the assets of 2
franchise-owned stores for the comparable period in 2000. There were no
conveyances of the assets of Company-owned store locations to franchisees during
either of the three months ended March 31, 2001 and 2000.
Interest on franchise notes receivable decreased by $28,000, or 8.6%, to
$299,000 for the three months ended March 31, 2001, as compared to $327,000 for
the comparable period in 2000. This decrease was principally due to reductions
of the principal balance of several franchisees notes and fewer notes being
generated during the three months ended March 31, 2001, as compared to the
comparable period in 2000.
Other income (primarily initial franchise fees) decreased by $56,000, or
91.8%, to $5,000 for the three months ended March 31, 2001, as compared to
$61,000 for the comparable period in 2000, due to fewer stores being franchised
during the three months ended March 31, 2001.
The Company's gross profit margin increased by 8.3% to 80.5% for the three
months ended March 31, 2001, as compared to 72.2% for the comparable period in
2000, due to the mix of products being sold in Company operated stores during
each respective period. 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.
Selling, general and administrative expenses decreased by $1,100,000, or
19.6%, to $4,516,000 for the three months ended March 31, 2001, as compared to
$5,616,000 for the comparable period in 2000. This change was primarily due to a
decrease of approximately $949,000 related to reductions in operating and
administrative payroll related costs for the three months ended March 31, 2001,
as compared to the comparable period in 2000. In addition, there was a decrease
of approximately $151,000 in the provision for doubtful accounts associated with
accounts and notes receivable due from franchisees during the three months ended
March 31, 2001, as compared to the comparable period in 2000. As a result of a
change in management philosophy, policy, direction, and related courses of
action resulting from a change in the Company's senior management personnel
during the first quarter of fiscal year 2001, (e.g., to take back franchised
stores from various problem franchisees), the Company reacquired the assets of 8
franchised store locations during the three months ended March 31, 2001, and an
additional 2 franchised stores subsequent to March 31, 2001.
Warrant issuance and induced conversion costs increased by $29,000, or
10.7%, to $301,000 for the three months ended March 31, 2001, from $272,000 for
the comparable period in 2000, as a result of the Company's issuance of warrants
to Goldin Associates, L.L.C.
Loss from the operation of franchised stores managed by the Company
increased by approximately $2,000, or 1.8%, to approximately $(113,000) for the
three months ended March 31, 2001, as compared to approximately $(111,000) for
the comparable period in 2000.
Interest expense decreased by $167,000, or 88.8%, to $21,000 for the three
months ended March 31, 2001, as compared to $188,000 for the comparable period
in 2000. This decrease resulted from a reduction in the principal balances of
13
the Company's long-term debt during the three months ended March 31, 2001, as
compared to the comparable period in 2000.
The Company incurred a net loss from continuing operations of $(41,000) for
the three months ended March 31, 2001, as compared to a net loss of $(696,000)
for the comparable period in 2000. These losses were a result of the financial
effects of the items discussed above.
Income from discontinued operations represents the operating results of the
Company's Internet Division, Insight Laser and Ambulatory Center of $0, $31,000,
and $0, respectively. For the three months ended March 31, 2001, the Internet
Division had actual operating losses of approximately $2,058,000, which were
charged to the discontinued operations accrual at March 31, 2001. In addition,
the Company reversed approximately $400,000 of liabilities previously recorded
in connection with its disposal of discontinued operations. This reversal was a
result of the Company settling certain liabilities for less than the amounts
initially recorded.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended March 31, 2001, cash flows provided by operating
activities were $288,000, as compared to cash flows used in operating activities
of $(2,678,000) for the three months ended March 31, 2000. Net loss from
continuing operations for the three months ended March 31, 2001 was ($41,000),
as compared to a loss from continuing operations of ($696,000) for the
comparable period in 2000. During the three months ended March 31, 2001, the
Company made significant payments to its vendors from proceeds generated from
the exercise of stock options.
For the three months ended March 31, 2001, cash flows provided by investing
activities were $266,000, as compared to $152,000 for the comparable period in
2000. This increase was principally due to an increase of approximately $94,000,
to $592,000, in proceeds from franchise and other notes receivables, a decrease
of approximately $(124,000) in capital expenditures, and an increase of
approximately $104,000 in notes issued by franchisees.
For the three months ended March 31, 2001, cash flows used in financing
activities were $(63,000), principally due to payments on, reductions of,
long-term debt, as compared to $17,102,000 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 $1,208,000.
The Company's working capital deficit was $(1,963,000) at March 31, 2001.
This amount included reserves in the aggregate amount of approximately
$2,000,000 related to anticipated liabilities to be incurred in connection with
potential settlements related to the Company's discontinued operations. These
liabilities reflect a range of possible settlements, which the Company will seek
to resolve for a lesser amount (although there can be no assurance that it will
be able to do so). The Company believes that it will improve cash flows during
2001 by improving store profitability through increased monitoring of
store-by-store operations and actual results as compared to expected results; a
reduction of administrative overhead expenses, if necessary; new marketing
programs for franchisees; and seeking additional financing, if available.
The Nasdaq requires, among other items, that the Company maintain a minimum
of $4,000,000 of net tangible assets to maintain the listing of the Registrant's
shares of Common Stock on the Nasdaq-NMS. The Company's net tangible assets as
of March 31, 2001 was $3,084,000. Accordingly, the Company anticipates that
unless: (i) the Company's profitability continues to improve during the second
quarter of 2001; and (ii) the Company is successful in completing its plan for
disposing of the assets of its Internet, Insight Laser and Ambulatory Center
divisions, it will require additional funds (in the form of an equity
investment) to comply with the Nasdaq-NMS net tangible assets requirement; and
there can be no assurance that the Company will be able to improve such
profitability and dispose of such assets within the time period required by
Nasdaq, or that funds will be available from equity financings or, that if
available, any such financings will be available on terms and conditions
14
acceptable to the Company. The Nasdaq also requires, as a condition to the
continued listing of such Common Stock on the Nasdaq-NMS, a minimum bid price
for the Registrant's Common Stock of $1.00 per share. On April 9, 2001, the
Company was notified by Nasdaq that it did not meet the minimum bid price of
$1.00 for the continued listing of its shares on the Nasdaq-NMS and that the
Company had until July 5, 2001 to comply with such rule in order to avoid
delisting. Additionally, on April 11, 2001, Nasdaq notified the Company that it
did not meet the aforementioned net tangible assets requirement. The Company
responded to Nasdaq on April 30, 2001 by providing Nasdaq with its anticipated
plans by which the Company believes it will meet such requirement. Nasdaq is
reviewing these plans as of the date of this Report. If the Registrant's Common
Stock were delisted, such delisting would have an adverse affect on the trading
prices of the Registrant's Common Stock and would, in all likelihood, adversely
affect the liquidity of the shares of Common Stock held by the Company's
stockholders.
The Company believes that, in the furtherance of its business strategies,
the Company's future capital requirements will include: (i) renovating and
remodeling Company-owned stores; (ii) acquiring retail optical stores, subject
to the availability of qualified opportunities; and (iii) continued upgrading of
management information systems for Company operated stores. Additionally, the
Company may provide financing of sales of Company-owned store assets to
franchisees, which is likely to defer the inflow of cash related to the sales of
such assets.
The Company believes that, based on its current cash position and the
implementation of the plans described above, sufficient resources will be
available for the Company to continue in operation through the end of the first
quarter of fiscal year 2002. 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 plans. If the Company cannot generate sufficient cash flows from
operations, it may be required to seek alternative debt and/or equity financing.
However, there can be no assurance that such debt and/or equity financing will
be available to the Company when necessary, or on terms that are acceptable to
the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company maintains certain equity instruments with beneficial conversion
terms and certain contractual price-protection provisions 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 cash or stock payments made to equalize
any stock price declines that are indexed to a specific contractual stock price
floor. Additionally, as a result of the above, 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. 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 because the Company does not use derivative financial instruments in
its investments.
15
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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: (i) $35,000,000 of damages as a result of the Company's
alleged breach of the respective Franchise Agreements pursuant to which each
such Franchisee operates its Site for Sore Eyes Optical Center, fraud and
violations of California law; and (ii) a declaratory judgment that each such
Franchise Agreement had been modified to afford each plaintiff certain rights
which are in addition to those set forth in the applicable Franchise Agreements.
As of the date hereof, the Company and the plaintiffs are attempting to reach an
amicable settlement of this dispute.
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 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 which Notes was personally guaranteed by each of the defendants. In
response thereto, 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: (i) the parties failed
to agree upon the terms of any such purchase; (ii) the parties failed to enter
into any written agreement memorializing such transaction; and (iii) the Company
subsequently purchased such assets from Norwest Bank (which held a first lien on
substantially all of said assets as collateral for various loans made to each of
said 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, a hearing on damages having been scheduled for June 2001. In
addition, in March 2001, the Company filed an additional Motion for Summary
Judgment seeking dismissal of all of such counterclaims; and the defendant, Dr.
Joel, thereafter filed a cross-motion seeking a determination that the Company
breached such oral, month-to-month consulting agreement and that he is,
accordingly, entitled to damages of approximately $13,000,000, both of which
motions have not yet been decided by the Court.
In January 2001, the Company commenced an action against Binns Optical,
Inc. ("BOI") and 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
Center 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 defendants
from the six Sterling Optical Centers 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 pursuant to which the
defendants agreed to substantially all of the relief requested by the Company.
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 has denied defendants' counterclaims
and has filed a motion to dismiss all such counterclaims, which motion has not
yet been decided by the Court. 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 guaranty 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 on April 17,
2001, the Court granted the Company's motion and awarded the Company a judgment
in the approximate sum of $1,300,000, which the Company will seek to enforce in
the State of Missouri, where the Guarantors both reside.
16
In addition to the foregoing, the Company is a defendant in certain
lawsuits alleging various claims incurred in the ordinary course of business.
These claims are generally covered by various insurance policies, subject to
certain deductible amounts and maximum policy limits. In the opinion of
management, the resolution of such additional, existing lawsuits 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 are likely to have a material adverse effect on the
Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not applicable.
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.
The Nasdaq requires, among other items, that the Company maintain a minimum
of $4,000,000 of net tangible assets to maintain the listing of the Registrant's
shares of Common Stock on the Nasdaq-NMS. The Company's net tangible assets as
of March 31, 2001 was $3,084,000. Accordingly, the Company anticipates that
unless: (i) the Company's profitability continues to improve during the second
quarter of 2001; and (ii) the Company is successful in completing its plan for
disposing of the assets of its Internet, Insight Laser and Ambulatory Center
divisions, it will require additional funds (in the form of an equity
investment) to comply with the Nasdaq-NMS net tangible assets requirement; and
there can be no assurance that the Company will be able to improve such
profitability and dispose of such assets within the time period required by
Nasdaq, or that funds will be available from equity financings or, that if
available, any such financings will be available on terms and conditions
acceptable to the Company. The Nasdaq also requires, as a condition to the
continued listing of such Common Stock on the Nasdaq-NMS, a minimum bid price
for the Registrant's Common Stock of $1.00 per share. On April 9, 2001, the
Company was notified by Nasdaq that it did not meet the minimum bid price of
$1.00 for the continued listing of its shares on the Nasdaq-NMS and that the
Company had until July 5, 2001 to comply with such rule in order to avoid
delisting. Additionally, on April 11, 2001, Nasdaq notified the Company that it
did not meet the aforementioned net tangible assets requirement. The Company
responded to Nasdaq on April 30, 2001 by providing Nasdaq with its anticipated
plans by which the Company believes it will meet such requirement. Nasdaq is
reviewing these plans as of the date of this Report. If the Registrant's Common
Stock were delisted, such delisting would have an adverse affect on the trading
prices of the Registrant's Common Stock and would, in all likelihood, adversely
affect the liquidity of the shares of Common Stock held by the Company's
stockholders.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
A. Exhibits
10.113 Form of Settlement Agreement, dated as of April 24, 2001, between
Emerging Vision, Inc. and Sara V. Traberman.
B. Reports on Form 8-K
Not applicable.
17
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/ Michael C. McGeeney
-----------------------------------------
Michael C. McGeeney
President and Chief Executive Officer
BY: /s/ George D. Papadopoulos
-----------------------------------------
George D. Papadopoulos
Senior Vice President and
Chief Financial Officer
Dated: May 15, 2001
18