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 June 30, 2001
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _____ to _______
Commission file number: 1-14128
EMERGING VISION, INC.
(Exact name of Registrant as specified in its Charter)
New York 11-3096941
------------------------ -------------------------------
(State of Incorporation) (IRS Employer Identification No.)
1500 Hempstead Turnpike
East Meadow, New York 11554
----------------------------------------------------------
(Address of Principal Executive Offices, including Zip Code)
(516) 390-2100
--------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of August 11, 2001, there were 27,004,972 shares outstanding of the
Registrant's Common Stock, par value $.01 per share.
Item 1. Financial Statements
EMERGING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
June 30, December 31,
2001 2000
----------- -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ................................................................ $ 1,927 $ 5,215
Franchise receivables, net of allowance of $2,400 and $3,521, respectively ............... 1,813 1,493
Other receivables, net of allowance of $250 and $323, respectively ....................... 1,063 1,997
Current portion of notes receivable from franchisees ..................................... 2,504 2,622
Inventories .............................................................................. 1,052 1,033
Prepaid expenses and other current assets ................................................ 374 475
--------- ---------
Total current assets ......................................................... 8,733 12,835
--------- ---------
Property and equipment, net ....................................................................... 2,797 2,995
Franchise notes and other receivables, net of allowance of $3,500 and $3,019, respectively ........ 2,241 3,926
Intangible assets, net ............................................................................ 1,439 1,534
Other assets ...................................................................................... 278 401
Net assets of discontinued operations ............................................................. 793 840
--------- ---------
Total assets ...................................................... $ 16,281 $ 22,531
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ........................................................ $ 193 $ 221
Accounts payable and accrued liabilities ................................................. 7,380 13,227
Net liabilities of discontinued operations ............................................... 1,599 3,006
--------- ---------
Total current liabilities .................................................... 9,172 16,454
--------- ---------
Long-term debt .................................................................................... 443 533
--------- ---------
Excess of fair value of assets acquired over cost ................................................. 143 317
--------- ---------
Franchise deposits and other liabilities .......................................................... 1,057 1,322
--------- ---------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value per share; 5,000,000 shares authorized:
Senior Convertible Preferred Stock, $100,000 liquidation preference per share;
3 shares issued and outstanding .......................................................... 287 287
Common stock, $.01 par value per share; 50,000,000 shares authorized; 26,187,309 and
25,559,231 shares issued, respectively; 26,004,972 and 25,382,230 shares
outstanding, respectively ................................................................ 262 256
Treasury stock, at cost, 182,337 and 177,001 shares, respectively ............................ (204) (203)
Additional paid-in capital ................................................................... 119,612 119,453
Accumulated deficit .......................................................................... (114,491) (115,888)
--------- ---------
Total shareholders' equity ...................................... 5,466 3,905
--------- ---------
Total liabilities and shareholders' equity ...................... $ 16,281 $ 22,531
========= =========
The accompanying notes are an integral part of these consolidated balance sheets.
2
EMERGING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In Thousands, Except Per Share Data)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2001 2000 2001 2000
---------- -------- -------- --------
Revenues:
Net sales ................................................... $ 2,900 $ 2,962 $ 5,740 $ 6,716
Franchise royalties ......................................... 2,098 2,289 4,330 4,666
Net gains and fees from the conveyance of franchise
and Company-owned store assets ......................... 34 33 122 47
Interest on franchise notes receivable ...................... 256 299 555 626
-------- -------- -------- --------
Total revenues ......................................... 5,288 5,583 10,747 12,055
-------- -------- -------- --------
Costs and expenses:
Cost of sales ............................................... 652 753 1,206 1,795
Selling, general and administrative expenses ................ 4,559 4,998 9,392 11,013
Loss from franchised stores operated under
management agreements .................................. 134 144 247 255
-------- -------- -------- --------
Total costs and expenses ............................... 5,345 5,895 10,845 13,063
-------- -------- -------- --------
Loss from continuing operations before provision for
income taxes ........................................... (57) (312) (98) (1,008)
Provision for income taxes .................................. - - - -
-------- -------- -------- --------
Loss from continuing operations ........................ (57) (312) (98) (1,008)
-------- -------- -------- --------
Discontinued operations: (Note 2)
Income (loss) from discontinued operations .................. 1,064 (3,819) 1,495 (5,098)
-------- -------- -------- --------
Net income (loss) ...................................... $ 1,007 $ (4,131) $ 1,397 $ (6,106)
======== ======== ======== ========
Per share information - basic and diluted: (Note 3)
Loss from continuing operations ............................. $ 0.00 $ (0.18) $ 0.00 $ (1.58)
Income (loss) from discontinued operations .................. 0.04 (0.16) 0.06 (0.23)
-------- -------- -------- --------
Net income (loss) per share ............................ $ 0.04 $ (0.34) $ 0.06 $ (1.81)
======== ======== ======== ========
Weighted-average number of common shares
outstanding - basic and diluted ............................. 25,556 24,784 25,469 21,794
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
3
EMERGING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In Thousands)
For the Six Months Ended
June 30,
2001 2000
---------- ----------
Cash flows from operating activities:
Net loss from continuing operations ..................................................... $ (98) $ (1,008)
Adjustments to reconcile net loss from continuing operations
to net cash provided by (used in) operating activities:
Depreciation and amortization .................................................... 669 513
Provision for doubtful accounts .................................................. 7 454
Non-cash compensation charges related to stock-based compensation ................ 165 47
Loss on disposal of fixed assets ................................................. 21 52
Changes in operating assets and liabilities:
Franchise receivables ............................................................ (558) 363
Inventories ...................................................................... (90) 91
Prepaid expenses and other current assets ........................................ 101 69
Other assets ..................................................................... 75 52
Accounts payable and accrued liabilities ......................................... (179) (3,172)
-------- --------
Net cash provided by (used in) operating activities .......................................... 113 (2,539)
-------- --------
Cash flows from investing activities:
Franchise notes receivable issued ....................................................... (231) (215)
Proceeds from franchise and other notes receivable ...................................... 1,018 981
Purchases of property and equipment ..................................................... (229) (297)
-------- --------
Net cash provided by investing activities .................................................... 558 469
-------- --------
Cash flows from financing activities:
Proceeds from the exercise of stock options and warrants ................................ - 7,692
Net proceeds from the issuance of Series B Convertible Preferred Stock .................. - 10,618
Proceeds from long-term debt ............................................................ - 500
Payments on long-term debt .............................................................. (118) (3,575)
Acquisition of treasury shares .......................................................... (1) -
-------- --------
Net cash (used in) provided by financing activities .......................................... (119) 15,235
-------- --------
Net cash provided by continuing operations ................................................... 552 13,165
-------- --------
Net cash used in discontinued operations ..................................................... (3,840) (1,445)
-------- --------
Net (decrease) increase in cash and cash equivalents ......................................... (3,288) 11,720
Cash and cash equivalents - beginning of period .............................................. 5,215 108
-------- --------
Cash and cash equivalents - end of period .................................................... $ 1,927 $ 11,828
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ............................................................................ $ 45 $ 315
======== ========
Taxes ............................................................................... $ 50 $ 44
======== ========
Non-cash investing and financing activities:
Net assets of franchise stores reacquired through exchange of receivables ........... $ 349 $ -
Issuance of common shares for consulting services and other ......................... 165 9,808
Extinguishment of related party debt ................................................ - 727
The accompanying notes are an integral part of these consolidated statements.
4
EMERGING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2001
(In Thousands, Except Share Data)
Treasury
Senior Convertible Stock, Additional Total
Preferred Stock Common Stock at cost Paid-In Accumulated Shareholders'
Shares Amount Shares Amount Shares Amount Capital Deficit Equity
------ ------ ---------- -------- ------ ------ ---------- ----------- ------------
BALANCE - DECEMBER 31, 2000 3 $ 287 25,559,231 $ 256 177,001 $(203) $119,453 $(115,888) $ 3,905
------ ------ ---------- -------- ------- ----- -------- --------- --------
Issuance of shares for
consulting services (Note 4) - - 628,078 6 - - 159 - 165
Acquisition of treasury shares - - - - 5,336 (1) - - (1)
Net income - - - - - - - 1,397 1,397
------ ------ ---------- -------- ------- ----- -------- --------- --------
BALANCE - JUNE 30, 2001 3 $ 287 26,187,309 $ 262 182,337 $(204) $119,612 $(114,491) $ 5,466
====== ====== ========== ======== ======= ===== ======== ========= ========
The accompanying notes are an integral part of this consolidated statement.
5
EMERGING VISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION:
The accompanying Consolidated Financial Statements of Emerging Vision, Inc.
(the "Registrant") and subsidiaries (collectively, the "Company") have been
prepared in accordance with generally accepted accounting principles for interim
financial statement presentation and in accordance with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statement presentation. In the opinion of
management, all adjustments for a fair statement of the Company's financial
position and results of operations for the interim periods presented have been
included. All such adjustments are of a normal recurring nature. This financial
information should be read in conjunction with the Consolidated Financial
Statements and Notes thereto included in the Registrant's Annual Report on Form
10-K for the Year Ended December 31, 2000, as supplemented by its Annual Report
on Form 10-K/A for such year. There have been no changes in significant
accounting policies since December 31, 2000.
Certain reclassifications have been made to prior year amounts to conform
to the current year presentation.
NOTE 2 - DISCONTINUED OPERATIONS:
On March 28, 2001, the Company announced its decision to discontinue
further development of its e-commerce division (the "Internet Division"), and
focus its efforts and resources on its franchise/retail optical store business
("Sterling Optical"). As of June 30, 2001, the Company had successfully
completed the discontinuance of the activities of its Internet Division, with
only a limited amount of accrued liabilities (associated with the Internet
Division) remaining. Additionally, in June 2000, the Company announced its
intention to sell its assets situated in the ambulatory surgery center located
in Garden City, New York (the "Ambulatory Center"), as well as the assets of its
66.5%-owned subsidiary, Insight Laser Centers, Inc. ("Insight Laser").
As a result of the foregoing, the net assets, operating results and cash
flows of the aforementioned segments of the Company's business (other than its
Sterling Optical division) have been presented as discontinued operations in the
accompanying Consolidated Financial Statements for all periods presented. As of
June 30, 2001 and December 31, 2000, net liabilities of discontinued operations
of $806,000 and $2,166,000, respectively, have been segregated on the
accompanying Consolidated Balance Sheets.
In connection with the foregoing, as of December 31, 2000, the Company had
accrued for $6,285,000 of costs associated with all such discontinued
operations. These accruals included the anticipated future operating losses of
these divisions, the expenses associated with the disposal of the net assets of
these divisions, and an estimate of loss upon disposition.
On May 31, 2001, the Company successfully disposed of the assets of the
Ambulatory Center at a price that resulted in a loss from disposition that was
lower than originally accrued. Additionally, the Company has successfully
settled certain claims related to its Internet Division for less than the
amounts originally accrued. As a result of the foregoing, the Company has
reevaluated its total accrual related to such discontinued operations and,
accordingly, during the six months ended June 30, 2001 reversed approximately
$1,497,000 of the accrual into earnings. This reversal is reflected in income
from discontinued operations on the accompanying Consolidated Statements of
Operations for 2001. As of June 30, 2001, $880,000 of this provision remains
accrued and is included in accounts payable and accrued liabilities on the
accompanying Consolidated Balance Sheet. At the present time, the Company is
evaluating an offer for the purchase of the assets of Insight Laser.
During the six months ended June 30, 2001, the Company utilized $3,908,000
of its accrual for discontinued operations. This included approximately $805,000
in severance payments to all of the Internet Division's personnel located in the
6
Dallas, Texas office, and approximately $1,203,000 of operating costs for the
Internet Division through June 30, 2001. Included in the severance payments were
payments of $277,000 and $205,000, respectively, to Mr. Gregory Cook, the
Company's former President and Chief Executive Officer, and Mr. James Ewer, the
Company's former Senior Vice-President of Operations.
On April 24, 2001, the Company and Ms. Sara V. Traberman, the former Chief
Financial Officer of the Company, settled her claim for severance benefits
(which, in accordance with the terms of her Employment Agreement with the
Company, called for a cash settlement in the approximate amount of $1,300,000,
and the immediate vesting of the 400,000 stock options previously granted to her
under the Agreement, all as a result of the failure of the Company to sell its
non-Internet related assets by March 1, 2001) for a lump sum payment of
$750,000, plus the issuance of fully-vested stock options to purchase 125,000
shares of the Company's Common Stock at an exercise price of $0.29 - the fair
market value on the date of grant.
On May 31, 2001, the Company and the owner/licensee of the Ambulatory
Center reached an agreement whereby the Company sold and transferred its assets
then located in the Ambulatory Center to a limited liability company owned, in
principal part, by the owner/licensee. In consideration of the sale and
transfer, the purchaser assumed the Ambulatory Center's liabilities (subject to
certain limitations), released the Company from its obligations under the lease
for the premises of the Ambulatory Center (except in limited circumstances),
agreed to the termination of the Administrative Services and Consulting
Agreement whereby the Company rendered services to the owner/licensee in
connection with the operation of the Ambulatory Center, and agreed to the
termination of the Purchase Agreement whereby an affiliate of the Company had
agreed to purchase the New York State License (Certificate of Need) for the
Ambulatory Center. As a result, the Company has reversed $887,000 of the
previously accrued $1,145,000 of liabilities relating to the Ambulatory Center.
For the six months ended June 30, 2001, the Ambulatory Center incurred net
operating losses of $258,000. These losses were charged against the previously
established accrual for discontinued operations related to the Ambulatory
Center.
On July 5, 2001, the Company and each of Rare Medium Group, Inc. and Rare
Medium, Inc. (collectively, "Rare") entered into a Settlement Agreement and
Mutual Release whereby the Company's dispute with Rare regarding their
respective obligations under the Company's various agreements with Rare
(pertaining to the development and implementation of the e-commerce business and
strategies of the Company's previously abandoned Internet Division) was settled,
and each of the parties was released from substantially all of its respective
obligations under the various agreements between the parties (Note 6).
NOTE 3 - PER SHARE INFORMATION:
The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share". Basic net income (loss) per
common share ("Basic EPS") is computed by dividing the net income (loss)
available (attributable) to common shareholders by the weighted-average number
of common shares outstanding. Diluted net income (loss) per common share
("Diluted EPS") is computed by dividing the net income (loss) available
(attributable) to common shareholders by the weighted-average number of common
shares and dilutive common share equivalents and convertible securities then
outstanding. SFAS No. 128 requires that the presentation of both Basic EPS and
Diluted EPS appear on the face of the Company's Consolidated Statements of
Operations. Common stock equivalents were excluded from the computation for all
periods presented as their impact would have been anti-dilutive.
7
The following table sets forth the computation of basic and diluted per
share information (in thousands, except per share data):
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2001 2000 2001 2000
--------- --------- --------- ---------
Numerator:
Loss from continuing operations ............................. $ (57) $ (312) $ (98) $ (1,008)
Induced conversion of Senior Convertible Preferred Stock .... - - - (21,707)
Accretion of dividends on Series B Convertible
Preferred Stock ....................................... - (4,248) - (11,743)
-------- -------- -------- --------
Numerator for basic and diluted per share
information - loss attributable to common
shareholders .......................................... (57) (4,560) (98) (34,458)
-------- -------- -------- --------
Basic and Diluted:
Loss attributable to common shareholders .................... (57) (4,560) (98) (34,458)
Income (loss) from discontinued operations .................. 1,064 (3,819) 1,495 (5,098)
-------- -------- -------- --------
Net income (loss) available (attributable) to
common shareholders ................................... $ 1,007 $ (8,379) $ 1,397 $(39,556)
======== ======== ======== ========
Denominator:
Denominator for basic and diluted per share
information - weighted-average number of
common shares outstanding ............................. 25,556 24,784 25,469 21,794
======== ======== ======== ========
Basic and Diluted Per Share Information:
Loss attributable to common shareholders .................... $ 0.00 $ (0.18) $ 0.00 $ (1.58)
Income (loss) from discontinued operations .................. 0.04 (0.16) 0.06 (0.23)
-------- -------- -------- --------
Net income (loss) available (attributable) to
common shareholders ................................... $ 0.04 $ (0.34) $ 0.06 $ (1.81)
======== ======== ======== ========
NOTE 4 - SHAREHOLDER'S EQUITY:
Issuance of Warrants for Consulting Services
On January 16, 2001, the Company entered into an agreement, as amended,
with Goldin Associates, L.L.C. ("Goldin") whereby Goldin agreed to provide
interim management services to the Company, for an initial six-month period,
with respect to its Sterling Optical, Insight Laser and Ambulatory Center
divisions (collectively, the "Divisions"), all at the direction of the Board of
Directors of the Company or its Chairman or other officers, pursuant to
delegated authority. In connection with the foregoing, Michael C. McGeeney was
initially appointed Chief Executive Officer of the Company's Sterling 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 was
$50,000 per month, plus an additional fee comprised of unregistered shares
totaling 1.65% of the outstanding Common Stock of the Company as of January 22,
2001, and warrants to purchase up to an aggregate of 3.35% of the outstanding
Common Stock of the Company. As a result, the Company issued 418,719
unregistered shares of its Common Stock (the fair value of which was
approximately $108,000) to Goldin, along with warrants to purchase up to an
additional 850,126 shares of Common Stock, all at an exercise price of $0.01,
subject to the Company achieving certain earnings targets (the "Incentive Fee").
In connection with the shares issued, Goldin was granted certain limited
piggy-back registration rights.
8
The terms of the Incentive Fee provide that the warrants may only be
exercised according to the following schedule: (1) warrants to purchase 279,146
shares of the Company's Common Stock immediately following a year in which the
Divisions shall realize earnings before interest, taxes, depreciation and
amortization ("EBITDA") of at least $1,000,000; (2) warrants to purchase an
additional 279,146 shares of the Company's Common Stock immediately following a
year in which the Divisions shall realize EBITDA of at least $2,000,000; and (3)
warrants to purchase an additional 291,834 shares of the Company's Common Stock
immediately following a year in which the Divisions shall realize EBITDA of at
least $3,000,000. These warrants become exercisable only if the applicable
EBITDA targets are achieved prior to December 31, 2004. Due to these
contingencies, the future valuation of these warrants, if and when they become
exercisable, will result in charges to the Company's results of operations in
future periods. Any warrants that vest shall expire on January 22, 2008.
On April 26, 2001, the Company's Board of Directors approved the terms of
an agreement, as amended, whereby it agreed to issue to Balfour Investors
Incorporated ("Balfour"), in exchange for certain advisory services rendered to
the Company's Board of Directors, 209,359 unregistered shares of its Common
Stock (the fair value of which was approximately $57,000), together with
warrants to purchase up to 425,063 shares of Common Stock at an exercise price
of $0.01. In connection with the shares issued, Balfour was granted certain
limited piggy-back registration rights. The warrants will become exercisable
according to the following schedule: (1) warrants to purchase 139,573 shares of
the Company's Common Stock immediately following a year in which the Divisions
shall realize EBITDA of at least $1,000,000; (2) warrants to purchase an
additional 139,573 shares of the Company's Common Stock immediately following a
year in which the Divisions shall realize EBITDA of at least $2,000,000; and (3)
warrants to purchase an additional 145,917 shares of the Company's Common Stock
immediately following a year in which the Divisions shall realize EBITDA of at
least $3,000,000. Further, these warrants become exercisable only if the
applicable EBITDA targets are achieved prior to December 31, 2004. Due to these
contingencies, the future valuation of these warrants, if and when they become
exercisable, will result in charges to the Company's results of operations in
future periods. Any warrants that vest shall expire on April 26, 2008.
NOTE 5 - FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amounts of cash and cash equivalents, franchise receivables
(net of allowances), other current assets, accounts payable and amounts included
in accruals meeting the definition of financial instruments approximate fair
value.
NOTE 6 - SUBSEQUENT EVENTS:
The Nasdaq Stock Market, Inc. ("Nasdaq") requires, among other items, as a
condition to the continued listing of the Company's Common Stock on the Nasdaq
National Market System ("Nasdaq-NMS"), a minimum bid price for its Common Stock
of $1.00 per share. Nasdaq also requires that the Company maintain a minimum of
$4,000,000 of net tangible assets to maintain such listing.
On April 9, 2001, the Company was notified by Nasdaq that it did not meet
the minimum bid price requirement 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 this requirement in order to avoid delisting. On July 6, 2001, the Company
received an additional notice from Nasdaq of its decision that its Common Stock
would be delisted on July 16, 2001 as a result of the Company's failure to meet
the minimum bid price requirement. The Company has appealed this decision based
upon its Board of Directors' authorization, subject to shareholder approval at
the Company's 2001 Annual Meeting of Shareholders to be held on September 12,
2001, of an amendment to the Company's Charter to effect a reverse stock split
of its issued and outstanding shares of Common Stock at a ratio of between 1 for
2 and 1 for 10, if at all, as may be determined by the Board, in its sole
discretion. The Company has been advised by Nasdaq that a hearing has been
scheduled for August 23, 2001, at which time Nasdaq will review the Company's
plan to meet the continued listing requirements. There can be no assurance,
however, that the Company's plan will be satisfactory to Nasdaq.
9
The Company's net tangible assets as of June 30, 2001 were $4,027,000.
Management anticipates that unless the Company's profitability improves during
the third quarter of 2001 and the Company is successful in completing its plan
of disposing of the assets of Insight Laser, it will be required to seek
alternative equity financing to comply with the Nasdaq-NMS net tangible assets
requirement. There can be no assurance, however, that the Company will be able
to improve profitability and dispose of such assets within the time period
required by Nasdaq, or that equity financing will be available to the Company
when necessary, or on terms that will be acceptable to the Company.
Effective June 29, 2001, Nasdaq changed the current net tangible assets
listing standard to an equity listing standard. This change requires an equity
maintenance standard of $10,000,000. Companies listed on Nasdaq as of June 29,
2001 have until November 1, 2002 to achieve compliance with the applicable new
standard. During that period, listed companies that do not meet the new equity
listing standard can continue to qualify under the net tangible assets listing
standard. There can be no assurance that the Company will be able to achieve the
minimum equity standard by November 1, 2002.
If the Company's Common Stock were delisted, the delisting could have an
adverse effect on the trading prices of the Company's Common Stock and could
adversely affect the liquidity of the shares of Common Stock held by the
Company's shareholders.
As discussed in Note 2, on July 5, 2001, the Company and Rare entered into
a Settlement Agreement and Mutual Release whereby the Company's dispute with
Rare regarding their respective obligations under the Company's various
agreements with Rare (pertaining to the development and implementation of the
Company's previously abandoned e-commerce business and strategies) was settled,
and each of the parties was released from substantially all of its respective
obligations under the various agreements between the parties (including, but not
limited to, the $3.00 price protection guarantee afforded Rare with respect to
the 1,000,000 shares of the Company's Common Stock previously issued to Rare
under the agreements (the "Existing Shares"), all in exchange for the Company's
payment to Rare of $375,000, the Company's issuance to Rare of an additional
1,000,000 shares of its Common Stock (which the Company will be required to
attempt to register for resale under the Securities Act of 1933, as amended (the
"Act")), and the Company's agreement not to impede Rare's ability to sell the
Existing Shares, all of which were previously registered under the Act.
Effective July 2, 2001, Mr. Robert Hillman was appointed as the Company's
President and Chief Executive Officer, and Chairman of the Board of Directors.
In connection therewith, the Company and Mr. Hillman entered into an Employment
Agreement having a term of three years.
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 are 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, but are not limited to: 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 of the Company's Common
Stock by the Nasdaq; and other risks described elsewhere herein. Should one or
more of these risks or uncertainties materialize, or should such 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.
10
The Company's historical financial information has been restated to report
the net assets, operating results and cash flows of the Internet Division,
Insight Laser and the Ambulatory Center segments (of the Company's business)
through June 30, 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 AND SIX MONTHS ENDED JUNE 30, 2001 AS COMPARED TO JUNE 30, 2000
Net sales for Company-owned stores, excluding revenues generated by the
Company's wholly-owned subsidiary, VisionCare of California ("VCC"), a
specialized health care maintenance organization licensed by the California
Department of Corporations, decreased by approximately $94,000 and $1,055,000,
or 4.3% and 20.5%, to $2,080,000 and $4,089,000 for the three and six month
periods ended June 30, 2001, as compared to $2,174,000 and $5,144,000 for the
comparable periods in 2000. Net sales for VCC increased by $32,000 and $79,000,
or 4.1% and 5.0%, to $820,000 and $1,651,000, for the three and six month
periods ended June 30, 2001, as compared to $788,000 and $1,572,000 for the
comparable periods in 2000. The decreases for the Company-owned stores were
principally due to a lower average number of stores in operation during the
three and six month periods ended June 30, 2001, as compared to the comparable
periods in 2000. On a same store basis (for stores that operated as a
Company-owned store during both of the three and six month periods ended June
30, 2001 and 2000), comparative net sales decreased by approximately $215,000
and $448,000, or 11.8% and 11.5%, to $1,614,000 and $3,440,000 for the three and
six month periods ended June 30, 2001, as compared to $1,829,000 and $3,888,000
for the comparable periods in 2000. As of June 30, 2001, there were 218 Sterling
Stores in operation, consisting of 38 Company-owned stores (including 12
Company-owned stores being managed by franchisees) and 180 franchised stores
(including 2 franchised stores being managed by the Company on behalf of the
franchisees), as compared to 244 Sterling Stores in operation for the comparable
period in 2000, consisting of 33 Company-owned stores (including 12
Company-owned stores being managed by franchisees) and 211 franchised stores
(including 5 franchised stores being managed by the Company on behalf of the
franchisees).
Franchise royalties decreased by approximately $191,000 and $336,000, or
8.3% and 7.2%, to $2,098,000 and $4,330,000 for the three and six month periods
ended June 30, 2001, as compared to $2,289,000 and $4,666,000 for the comparable
periods in 2000. These decreases were primarily due to the lower average number
of franchised stores in operation during the three and six month periods ended
June 30, 2001, as compared to the comparable periods in 2000. Additionally,
there were lower system-wide sales for comparable franchised stores in operation
throughout the three and six month periods ended June 30, 2001, as compared to
the same periods in 2000.
Net gains and fees from the conveyance of franchised and Company-owned
store assets, including renewal fees and the fees charged as a condition to the
transfer of ownership of the assets and franchise for a store from one
franchisee to another, increased by approximately $1,000 and $75,000, or 3.0%
and 159.6%, to $34,000 and $122,000 for the three and six month periods ended
June 30, 2001, as compared to $33,000 and $47,000 for the comparable periods in
2000. These increases were principally due to transfer fees collected on the
conveyance of the assets of 8 franchised stores during the six months ended June
30, 2001, as compared to the conveyance of the assets of 2 franchised stores for
the comparable period in 2000.
Interest on franchise notes receivable decreased by approximately $43,000
and $71,000, or 14.4% and 11.3%, to $256,000 and $555,000 for the three and six
month periods ended June 30, 2001, as compared to $299,000 and $626,000 for the
comparable periods in 2000. These decreases were principally due to reductions
of the principal balances of franchisee notes and fewer notes being generated
during the three and six month periods ended June 30, 2001, as compared to the
comparable periods in 2000.
The Company's gross profit margin from Company-owned store operations
increased by 3.3% and 5.4%, to 68.7% and 70.5% for the three and six month
periods ended June 30, 2001, as compared to 65.4% and 65.1% for the comparable
periods in 2000. These increases were due to a change in the mix of products
being sold in Company-owned stores and improved inventory management during the
three and six month periods ended June 30, 2001, as compared to the comparable
periods in 2000. In the future, the Company's gross profit margin may fluctuate
depending upon the extent and timing of changes in the product mix in
Company-owned stores, competition and promotional incentives.
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Selling, general and administrative expenses decreased by $439,000 and
$1,621,000, or 8.8% and 14.7%, to $4,559,000 and $9,392,000 for the three and
six month periods ended June 30, 2001, as compared to $4,998,000 and $11,013,000
for the comparable periods in 2000. These changes were primarily due to a
decrease of approximately $287,000 and $1,156,000 related to reductions (due in
part to the decrease in number of Company-owned stores) in operating and
administrative payroll related costs for the three and six month periods ended
June 30, 2001, respectively, as compared to the comparable periods in 2000. In
addition, there were decreases of approximately $226,000 and $454,000 in the
provision for doubtful accounts associated with accounts and notes receivable
due from franchisees during the three and six month periods ended June 30, 2001,
as compared to the comparable periods in 2000. The decreases in the provision
were mainly a result of senior management's decision to take back franchised
stores from various problem franchisees. The Company reacquired the assets of 10
franchised store locations during the six months ended June 30, 2001, and an
additional 3 franchised stores subsequent to June 30, 2001.
LIQUIDITY AND CAPITAL RESOURCES
For the six month period ended June 30, 2001, cash flows provided by
operating activities were $113,000, as compared to cash flows used in operating
activities of $(2,539,000) for the comparable period in 2000. Loss from
continuing operations for the six month period ended June 30, 2001 was
$(98,000), as compared to a loss from continuing operations of $(1,008,000) for
the comparable period in 2000.
For the six month period ended June 30, 2001, cash flows provided by
investing activities were $558,000, as compared to $469,000 for the comparable
period in 2000. This increase was principally due to an increase of
approximately $37,000, to $1,018,000, in proceeds from franchise and other notes
receivables, a decrease of approximately $(68,000) in capital expenditures, and
an increase of approximately $16,000 in notes issued by franchisees.
For the six month period ended June 30, 2001, cash flows used in financing
activities were $(119,000), principally due to payments on long-term debt, as
compared to $15,235,000 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 $3,075,000.
The Company's working capital deficit was $439,000 as of June 30, 2001.
This amount included accruals in the aggregate amount of approximately $880,000
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 lesser amounts (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; closure of non-profitable store locations; reduction of
administrative overhead expenses; new marketing programs; and seeking additional
equity financing, if available.
The Nasdaq Stock Market, Inc. ("Nasdaq") requires, among other items, as a
condition to the continued listing of the Company's Common Stock on the Nasdaq
National Market System ("Nasdaq-NMS"), a minimum bid price for its Common Stock
of $1.00 per share. Nasdaq also requires that the Company maintain a minimum of
$4,000,000 of net tangible assets to maintain such listing.
On April 9, 2001, the Company was notified by Nasdaq that it did not meet
the minimum bid price requirement 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 this requirement in order to avoid delisting. On July 6, 2001, the Company
received an additional notice from Nasdaq of its decision that its Common Stock
would be delisted on July 16, 2001 as a result of the Company's failure to meet
the minimum bid price requirement. The Company has appealed this decision based
upon its Board of Directors' authorization, subject to shareholder approval at
the Company's 2001 Annual Meeting of Shareholders to be held on September 12,
2001, of an amendment to the Company's Charter to effect a reverse stock split
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of its issued and outstanding shares of Common Stock at a ratio of between 1 for
2 and 1 for 10, if at all, as may be determined by the Board, in its sole
discretion. The Company has been advised by Nasdaq that a hearing has been
scheduled for August 23, 2001, at which time Nasdaq will review the Company's
plan to meet the continued listing requirements. There can be no assurance,
however, that the Company's plan will be satisfactory to Nasdaq.
The Company's net tangible assets as of June 30, 2001 were $4,027,000.
Management anticipates that unless the Company's profitability improves during
the third quarter of 2001 and the Company is successful in completing its plan
of disposing of the assets of Insight Laser, it will be required to seek
alternative equity financing to comply with the Nasdaq-NMS net tangible assets
requirement. There can be no assurance, however, that the Company will be able
to improve profitability and dispose of such assets within the time period
required by Nasdaq, or that equity financing will be available to the Company
when necessary, or on terms that will be acceptable to the Company.
If the Company's Common Stock were delisted, the delisting could have an
adverse effect on the trading prices of the Company's Common Stock and could
adversely affect the liquidity of the shares of Common Stock held by the
Company's shareholders.
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-owned stores.
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 second
quarter of 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 capital
requirements. If the Company cannot generate sufficient cash flows from
operations, it may be required to seek alternative equity financing. However,
there can be no assurance that such equity financing will be available to the
Company when necessary, or on terms that will be acceptable to the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company maintains certain equity instruments with beneficial conversion
terms that are indexed to the performance of the Company's Common Stock.
Accordingly, the Company may bear a financial risk in the form of future stock
payments made to equalize any stock price declines that are indexed to a
specific contractual stock price floor. 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.
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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 $35,000,000 of damages as a result of (1) the Company's
alleged breach of the respective Franchise Agreements whereby each of the
franchisees operates its Site for Sore Eyes Optical store(s), (2) fraud and
violations of California law, and (3) 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.
At the present time, 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 (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. A hearing on the
Company's damages took place in July 2001; and, in August 2001, the Court
granted the Company's claim for damages in the approximate amount of $800,000.
In addition, in March 2001, the Company filed an additional Motion for Summary
Judgment seeking dismissal of all of the 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. This appeal has not yet been decided.
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 has denied the defendants' counterclaims and has filed a
motion to dismiss all of the counterclaims. This 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 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. The Company is
seeking to enforce these judgments in the State of Missouri, where the
Guarantors both reside.
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ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
During the three months ended June 30, 2001, the Company issued an
aggregate of 418,719 unregistered shares of its Common Stock (the fair value of
which was approximately $108,000) to Goldin Associates, L.L.C. ("Goldin") in
exchange for Goldin providing interim management services to the Company
pursuant to a certain agreement, as amended. Goldin was also granted certain
limited "piggy-back" registration rights with respect to these shares.
Additionally, during the three months ended June 30, 2001, the Company
issued an aggregate of 209,359 unregistered shares of its Common Stock (the fair
value of which was approximately $57,000) to Balfour Investors Inc. ("Balfour")
in exchange for Balfour providing advisory services to the Company's Board of
Directors pursuant to a certain agreement, as amended. Balfour was also granted
certain limited "piggy-back" registration rights with respect to these shares.
The aforementioned shares were issued to both Goldin and Balfour pursuant
to an exemption under Section 4(2) of the Securities Act of 1933, as amended.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
A. Exhibits
10.117 Warrant Certificate and Agreement, dated as of January 16, 2001,
between Emerging Vision, Inc. and Goldin Associates, L.L.C.
10.118 Warrant Certificate and Agreement, dated as of April 26, 2001, between
Emerging Vision, Inc. and Balfour Investors Incorporated.
B. REPORTS ON FORM 8-K
1. On June 13, 2001, the Registrant filed a Current Report on Form 8-K
with respect to The Nasdaq Stock Market's possible delisting of its
Common Stock from the Nasdaq National Market System.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this Report to be signed on its behalf
by the undersigned thereunto duly authorized.
EMERGING VISION, INC.
BY: /s/ ROBERT S. HILLMAN
-------------------------------------
Robert S. Hillman
President and Chief Executive Officer
BY: /s/ GEORGE D. PAPADOPOULOS
-------------------------------------
George D. Papadopoulos
Senior Vice President and
Chief Financial Officer
Dated: August 14, 2001
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