<PAGE>
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, 1997.
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
STERLING 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, NY 11554
(Address of Principal Executive Offices, including Zip Code)
(516) 390-2100
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
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 ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
There were 12,693,282 shares outstanding of the Registrant's Common Stock,
par value $.01 per share, as of May 8, 1997.
<PAGE>
Item 1. Financial Statements
STERLING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
(Unaudited)
-------- --------
<S> <C> <C>
A S S E T S
Current assets:
Cash and cash equivalents $ 2,410 $ 868
Accounts receivable - net of allowance for
doubtful accounts of $637 and $557, respectively 8,674 7,911
Franchise and other notes receivable - current 3,437 3,375
Inventories 3,438 3,678
Due from related parties - current 123 124
Prepaid expenses and other current assets 946 883
-------- --------
Total current assets 19,028 16,839
Property and equipment - net of accumulated depreciation 10,315 10,818
Franchise and other notes receivable - net of allowance
for doubtful accounts of $562 16,480 16,089
Other assets 2,461 2,523
-------- --------
$ 48,284 $ 46,269
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 7,633 $ 9,151
Notes Payable - Shareholders and Directors 1,000 2,000
Accounts payable and accrued liabilities 5,482 8,267
Franchise related obligations - current 1,075 1,224
Deferred income taxes payable - current -- --
-------- --------
Total current liabilities 15,190 20,642
Long-term debt 3,850 4,033
Deferred franchise income 228 328
Excess of fair value of assets acquired over cost 1,612 1,709
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value per share;
authorized 5,000,000 shares -- --
Common stock, $.01 par value per share; authorized
28,000,000 shares; issued 12,387,535 124 124
Common Stock to be issued - net of costs of issuance
of $480 7,520 --
Additional paid-in capital 24,982 24,982
(Deficit) (5,222) (5,549)
-------- --------
27,404 19,557
-------- --------
$ 48,284 $ 46,269
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
2
<PAGE>
STERLING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
1997 1996
------- -------
<S> <C> <C>
Systemwide sales $36,658 $30,885
======= =======
Revenues:
Net sales - Company-owned stores $ 6,004 $ 7,273
Franchise royalties 2,113 1,830
Net gains and fees from the conveyance of Company-owned
assets to franchisees 810 534
Other income 547 390
------- -------
Total Revenue 9,474 10,027
------- -------
Costs and expenses:
Cost of sales 1,621 1,891
Selling expenses 3,849 4,817
General and administrative expenses 3,344 2,736
Interest expense 334 320
------- -------
Total Costs and Expenses 9,148 9,764
------- -------
Net income before provision for income taxes 326 263
Provision for income taxes -- 105
------- -------
Net income $ 326 $ 158
======= =======
Weighted average number of common shares and
common share equivalents outstanding 13,239 12,381
======= =======
Earnings per common shares and common share equivalents $ .02 $ .01
======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
STERLING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
1997 1996
--------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net $ 326 $ 158
cash (used in) operating activities:
Depreciation and amortization 408 317
Allowance for doubtful accounts 91 --
Net gain from the conveyance
of Company-owned assets
to franchisees (700) (465)
Deferred income taxes payable -- 69
Accrued interest 21 --
Amortization of fair value of assets acquired over cost (97) --
Changes in assets and liabilities:
Accounts receivable (825) (951)
Inventories 240 91
Prepaid expenses and other
current assets (63) (27)
Other assets 21 (277)
Accounts payable and accrued liabilities (2,785) (988)
Franchise related obligations (149) 18
Deferred franchise income (100) --
------- -------
Net cash (used in) operating activities (3,612) (2,055)
------- -------
Cash flows from investing activities:
Franchise notes receivable issued (982) (955)
Repayment of franchise and other notes receivable 502 450
Purchase of property and equipment (205) (594)
Conveyance of property and equipment 1,041 664
------- -------
Net cash provided by (used in) investing activities 356 (435)
------- -------
</TABLE>
Continued on next page
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
STERLING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
1997 1996
-------- --------
<S> <C> <C>
Cash flows from financing activities:
Sale of common stock and other
capital contributions 7,520 625
Repayments of term loans (498) (498)
Borrowings on revolving credit note -- 225
Repayment of revolving credit note (1,000) --
Payments on other debt (1,224) (61)
Borrowings of other debt --
Distributions to shareholders -- --
-------- --------
Net cash provided by financing activities: 4,798 291
-------- --------
Net increase (decrease) in cash and
cash equivalents 1,542 (2,199)
Cash and cash equivalents -
beginning of period 868 15,493
-------- --------
Cash and cash equivalents -
end of period $ 2,410 $ 13,294
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 334 $ 314
======== ========
Taxes $ 43 $ 38
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
STERLING VISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1
The accompanying Consolidated Condensed Financial Statements of Sterling
Vision, Inc. (the "Registrant") and Subsidiaries (collectively, the "Company")
have been prepared in accordance with generally accepted accounting principles
for interim financial information 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 Condensed Financial
Statements and Notes thereto included in the Registrant's Annual Report on Form
10-K for the year ended December 31, 1996. There have been no changes in
significant accounting policies since December 31, 1996.
NOTE 2
Income tax provisions are based on estimated annual effective tax rates.
The effective income tax rate used for the three months ended March 31, 1997 was
approximately 40%.
A reconciliation between the statutory Federal income tax rate and the
effective income tax rate based on continuing operations for the three months
ended March 31, 1997 is as follows:
1997 1996
---- ----
Statutory Federal income tax rate 34% 34%
State and local income tax rate, net of
Federal income tax benefit 6 6
Reduction in tax rate due to net operating
loss carry forward (40) --
=== ===
Effective income tax rate 0% 40%
=== ===
NOTE 3
As part of the initial public offering (the "Offering") of its common
stock, par value $.01 per share (the "Common Stock") in December 1995, the
Registrant granted the underwriters (the "Underwriters") a 30-day option to
purchase up to an aggregate of 330,000 additional shares of Common Stock, on the
terms and conditions set forth in the Company's Prospectus, dated December 20,
1995, to cover over-allotments, if any. In January 1996, the Registrant issued
to the Underwriters an additional 100,000 shares of its Common Stock at $7.50
per share pursuant to such over-allotment option. Proceeds, net of commissions
and expenses totaling approximately $125,000, were approximately $625,000.
During the calendar year ended December 31, 1996, the Registrant issued
80,040 shares of its Common Stock to certain of the franchisees of those
franchised stores in existence on the date of the consummation of the Offering,
in consideration of their future performance of, and compliance with, the terms
of their respective Franchise Agreements. The fair value of such shares is being
amortized over the vesting period of three years.
NOTE 4
On February 26, 1997, the Company entered into Convertible Debentures and
Warrants Subscription Agreements with certain investors in connection with the
private placement (the "Private Placement") of units consisting of an aggregate
of $8,000,000 principal amount of Convertible Debentures (collectively, the
"Debentures") and an aggregate of 800,000 warrants (collectively, the
"Warrants"), each Warrant entitling the holder thereof to purchase one share of
Common Stock at a price to be determined in accordance with a specified formula
and, for each two Warrants exercised within a specified period of time, an
additional warrant (collectively, the "Bonus Warrants") to purchase one
additional share of the Common Stock at a price of $7.50 per share. The Company
used the
6
<PAGE>
NOTE 4 (Continued)
net proceeds (approximately $7,500,000) of the Private Placement to: (i) repay a
portion of the loans made to it by certain principal shareholders of the Company
($1,000,000, together with interest thereon, in the approximate amount of
$50,000); and (ii) pay down the Company's revolving line of credit ($1,000,000)
with The Chase Manhattan Bank (the "Bank").
The Debentures bear no interest and mature on August 25, 1998. They are
convertible at a price per share (the "Conversion Price") equal to the lesser of
$6.50 or 85% of the average closing bid price of the Common Stock as reported on
the Nasdaq National Market System ("Nasdaq") for the 5 trading days immediately
preceding the date of conversion; provided, however, that the Company has the
right to redeem that portion of the Debentures requested to be converted in the
event the Conversion Price is $6.00 or less. In such event, the redemption price
will be equal to 115% of the face amount of that portion of the Debentures
requested to be converted. The Debentures are convertible subject to the
following limitations: 25% of the original principal amount is convertible
beginning on the date of issuance provided a registration statement, pursuant to
which the underlying shares of Common Stock will be registered under the
Securities Act of 1933, as amended (the "Act"), is then in effect; 50% of the
original principal amount is convertible beginning three months after the date
of issuance; 75% of the original principal amount is convertible beginning six
months after the date of issuance; and the entire original principal amount is
convertible beginning nine months after the date of issuance. Notwithstanding
the foregoing, if, at any time, the intra-day bid price of the Common Stock (as
reported on Nasdaq) equals or exceeds $10, the entire principal amount of the
Debentures will be convertible at any time thereafter.
In addition to the foregoing, the Debentures provide for the automatic
conversion of any Debentures not previously converted as of the maturity date,
provided that, as of such date: (i) the Company's registration statement with
respect to the underlying shares continues to be effective; and (ii) no Event of
Default exists under the Debentures. In the event that the Company does not have
a registration statement with respect to the underlying shares or an Event of
Default exists under the Debentures, the holders of the Debentures would be
entitled to a cash payment, (in lieu of shares of the Company's Common
Stock) in an amount equal to the aggregate principal of those Debentures not
previously converted. The Debentures are classified on the Company's
Consolidated Condensed Balance Sheet as Common Stock to be issued, net of costs
of issuance of approximately $480,000, because the Company believes the
likelihood that the Debentures will not be converted to Common Stock is remote.
The Warrants entitle the holders thereof to purchase an aggregate of
800,000 shares of Common Stock at an exercise price per share equal to the lower
of $6.50 or the average of the Conversion Price of any Debentures converted, by
the holder, prior to the date of exercise. The Warrants are exercisable until
February 26, 2000. If a holder of a Warrant exercises a Warrant at any time
during the 2 year period following the effectiveness of the registration
statement, such holder will receive, for each two Warrants exercised within such
time, an additional Bonus Warrant entitling the holder thereof to purchase one
additional share of Common Stock at an exercise price of $7.50 per share, which
Bonus Warrants have a term of 3 years from the date of grant.
The Company has filed a registration statement on behalf of the holders of
the Debentures with respect to all of the shares of Common Stock underlying the
Debentures, the Warrants and the Bonus Warrants, not to exceed, in any event, an
aggregate amount equal to 19.999% of the number of shares of Common Stock issued
and outstanding on February 26, 1997; and the Company has agreed to maintain the
effectiveness of such registration statement until the earlier of: (i) 3 years;
and (ii) the date all of the shares underlying the Debentures have been sold and
the Warrants and the Bonus Warrants have been exercised.
The Company was required to obtain the consent of the Bank to complete the
Private Placement and, in connection therewith, the Bank, on February 26, 1997,
amended the Company's Term Loan and Revolving Credit Agreement, dated April 5,
1994, as amended, (the "Credit Agreement") by: (i) extending the maturity date
of the Company's line of credit to May 30, 1997; (ii) requiring a $1,000,000 pay
down of the line of credit; (iii) permanently reducing the line of credit by
such amount; (iv) granting waivers with respect to the Company's anticipated
non-compliance with certain financial covenants contained in the Credit
Agreement through February 26, 1997; and (v) amending, for the period ending
December 31, 1997, certain financial covenants contained in the Credit
Agreement.
NOTE 5
On April 1, 1997, the Company acquired all of the issued and outstanding
shares of the capital stock of Singer Specs, Inc. ("Singer"), a Delaware
corporation, pursuant to the terms of a certain Agreement and Plan of
Reorganization, dated February 19, 1997 (the "Singer Agreement"), between the
Company and the owners (collectively, the "Shareholders") of all of the capital
stock of Singer. As of the closing, Singer was the: (i) operator of four retail
optical stores (collectively, the "Company Stores"); (ii) franchisor of an
additional, approximately 27 other retail optical stores, all of which company
operated and franchised stores are located in the States of Pennsylvania,
Delaware, New Jersey and Virginia, and a store that will be opened in the U.S.
Virgin Islands; and (iii) owner of a commercial building located in
Philadelphia, Pennsylvania.
7
<PAGE>
NOTE 5 (Continued)
The Singer Agreement provided for such Shareholders to convey all of said
capital stock to the Company, free and clear of any and all claims, liens and/or
encumbrances, in exchange for 305,747 shares of the Company's Common Stock.
In addition, pursuant to the Singer Agreement, the Company, immediately
after the closing, lent to the shareholders of Singer the aggregate sum of
$300,000, which was used to repay a portion of Singer's liabilities existing as
of the closing date (April 1, 1997), the balance of which liabilities were
assumed by corporations owned by the Shareholders, who each personally
guaranteed the repayment of same.
The Singer Agreement provides: (i) that the assets of each of the Company
Stores be conveyed to corporations owned by one or more of the Shareholders,
which entities, simultaneously with the closing, each entered into a Sterling
Optical Center Franchise Agreement; (ii) that the Company file, with the
Securities and Exchange Commission ("SEC"), a registration statement seeking
registration of the Common Stock issued to the Shareholders, as discussed below;
(iii) the pledge, by the Shareholders, of all of their shares of the Common
Stock, to secure their obligations under the Singer Agreement; (iv) the
Shareholders being restricted from selling a portion of their shares of said
Common Stock, all as more particularly set forth in the Singer Agreement; and
(v) the requirement that the Company, under certain circumstances, pay to the
Shareholders the difference between the market price of its Common Stock (upon
which the purchase price was calculated) and the selling price (net of 50% of
commissions) of any such shares sold by such Shareholders. This transaction,
which is not reflected on the Company's Consolidated Condensed Financial
Statements as of March 31, 1997, will be accounted for as a purchase, effective
April 1, 1997, in accordance with Accounting Principle Board Pronouncements
("APB") 16 and 17, with allocations made based upon the estimated, fair market
value of the assets acquired.
The Company was required to obtain the consent of the Bank to complete the
aforesaid transactions and, in connection therewith, the Bank, on April 1, 1997,
amended the Credit Agreement by: (i) extending the maturity date of the line of
credit to November 15, 1998; (ii) requiring that such line of credit be further
reduced by the sum of $75,000 per month, commencing April 15, 1997 and
continuing until the maturity date; and (iii) granting a waiver, permitting the
Company to purchase all of the issued and outstanding capital stock of Singer.
On April 21, 1997, the Company entered in a Note Amendment and Conversion
Agreement (the "BEC Agreement") with BEC Group, Inc. ("BEC"), the holder of two
promissory notes (each having a term of 25 months and in the original principal
amount of $1,050,000 and $200,000, respectively) issued by the Company in
connection with its acquisition (the "Pembridge Transaction"), on August 26,
1994, from Pembridge Optical Partners, Inc., of the assets of eight retail
optical stores. Pursuant to the BEC Agreement: (i) the Company is afforded the
right to prepay the principal balance of (but not accrued interest on) each of
said promissory notes in registered shares of its Common Stock; and (ii) the
Company, in certain circumstances, may be required to pay to BEC the difference
between market price of its Common Stock (upon which the number of shares to be
used to BEC was calculated) and the selling price of any such shares sold by
BEC.
On May 9, 1997, the Company filed, with the SEC, a registration statement
on Form S-3 seeking registration, under the Act, of an aggregate of 3,213,464
shares of its Common Stock, as follows: (i) 2,477,506 shares being registered on
behalf of the investors in the Private Placement (see Note 4); (ii) 305,747
shares being registered on behalf of the Shareholders, as discussed above; (iii)
152,211 shares being registered on behalf of BEC, as discussed above; and (iv)
278,000 shares being registered on behalf of the holders of certain options
granted to the former President of the Company and certain warrants issued to
the Underwriters.
NOTE 6
In February 1997, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"). SFAS 128 changes the computational guidelines for earnings per share
information. The Company will adopt the provisions of SFAS 128 in its December
31, 1997 consolidated financial statements. SFAS 128 will eliminate the
presentation of primary earnings per share and replace it with basic earnings
per share. Basic earnings per share differs from primary earnings per share
because common stock equivalents are not considered in computing basic earnings
per share. Fully diluted earnings per share will be replaced with diluted
earnings per share. Diluted earnings per share is similar to fully diluted
earnings per share, except in determining the number of dilutive shares
outstanding for options and warrants, in that the proceeds that would be
received upon the conversion of all dilutive options and warrants, are assumed
to be used to repurchase the Company's Common Stock at the average market price
of such stock during the period. For fully diluted earnings per share, the
higher of the average market price or closing market price is used. If SFAS 128
had been in effect, the Company would have reported basic earnings per share of
$.03 and diluted earnings per share of $.02 for the three month period ended
March 31, 1997.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
All statements contained herein which are not historical facts including,
but not limited to, statements regarding the Company's future development plans,
the Company's ability to generate cash from its operations and the operations of
Insight Laser Centers, Inc. ("Insight"), and any losses related thereto, are
based upon current expectations. These statements are forward looking in nature
and involve a number of risks and uncertainties. Actual results may differ
materially. Among the factors that could cause actual results to differ
materially are the following: competition in the retail optical and managed care
industries; the ability of the Company to acquire, at favorable prices, retail
optical chains; the uncertainty of the acceptance of Photorefractive
Keractectomy ("PRK"); the availability of new and better ophthalmic laser
technologies or other technologies that serve the same purpose as PRK; the
ability of the Company to finalize favorable affiliation agreements with
ophthalmologists offering PRK; cost over-runs; the failure of the Bank to grant
waivers under the Credit Agreement and the possible defaults related therefrom;
and general business and economic conditions.
Results of Operations
For the Three Months Ended March 31, 1997 compared to March 31, 1996
Systemwide sales represent combined retail sales generated by
Company-owned and franchised stores, as well as revenues generated by VisionCare
of California ("VCC"), a wholly-owned subsidiary of the Company licensed by the
California Department of Corporations as a specialized health maintenance
organization, and Insight. There were 309 and 231 Sterling Stores in operation
as of March 31, 1997 and March 31, 1996, respectively, of which 256 and 160,
respectively, were franchised. Such stores operate under various tradenames
including Sterling Optical, Site for Sore Eyes, IPCO Optical, Benson Optical,
Superior Optical, Southern Optical, Nevada Optical, Duling Optical, Monfried
Optical and Kindy Optical. Systemwide sales increased by $5,773,000, or 18.7%,
to $36,658,000 for the three months ended March 31, 1997, as compared to
$30,885,000 for the same period in 1996. On a same store basis (for stores that
operated as either a Company-owned or franchised store during the entirety of
both of the three month periods ended March 31, 1997 and 1996), systemwide sales
decreased by $996,000, or 3.9%, to $24,413,000 for the three months ended March
31, 1997, as compared to $25,409,000 for the same period in 1996. The Company
believes that such decrease resulted, in part, from general business conditions.
There were 167 stores that operated as either a Company-owned or franchised
store during the entirety of both of the three month periods ended March 31,
1997 and 1996.
Aggregate sales generated from the operation of Company-owned stores
decreased by $1,269,000, or 17.5%, to $6,004,000 for the three months ended
March 31, 1997, as compared to $7,273,000 for the same period in 1996. Such
decrease was primarily due to the conveyance of the assets of Company-owned
stores to franchisees. Historical comparisons of aggregate sales generated by
Company-owned stores can become distorted due to the conveyance of Company-owned
store assets to franchisees. When Company-owned store assets are conveyed to
franchisees, sales generated by such franchised store are no longer reflected in
Company-owned store sales; however, the Company receives on-going royalties
based upon a percentage of the sales generated by such franchised stores. On a
same store basis, aggregate sales generated by Company-owned stores in operation
during the entirety of both of the three month periods ended March 31, 1997 and
1996, decreased by $365,000, or 8.7%, to $3,842,000 for the three months ended
March 31, 1997, as compared to $4,207,000 for the same period in 1996.
Aggregate sales generated from the operation of franchised stores
increased by $7,042,000, or 29.8%, to $30,654,000 for the three months ended
March 31, 1997, as compared to $23,612,000 for the same period in 1996, due
primarily to an increase in the number of Company-owned stores conveyed to
franchisees, as well as certain franchised stores acquired, on May 30, 1996,
from Vision Centers of America, Ltd. ("VCA") and its affiliates (the "VCA
Transaction"). On a same store basis, aggregate sales generated by franchised
stores in operation during the entirety of both of the three month periods ended
March 31, 1997 and 1996, decreased by $632,000, or 3.0%, to $20,570,000 for the
three month period ended March 31, 1997, as compared to $21,202,000 for the same
period in 1996.
Aggregate ongoing franchise royalties increased by $283,000, or 15.5%, to
$2,113,000 for the three months ended March 31, 1997, as compared to $1,830,000
for the same period in 1996, due primarily to an increase in the number of
Company-owned stores conveyed to franchisees and the acquisition of certain
franchised stores acquired in the VCA Transaction.
Net gains on the conveyance of the assets of six Company-owned stores to
franchisees increased by $276,000, or 51.2%, to $810,000 for the three months
ended March 31, 1997, as compared to net gains on the conveyance of the assets
of two Company-owned stores to franchisees, in the aggregate amount of $534,000
for the same period in 1996.
The Company's gross profit margin decreased by 1 percentage point, to 73%,
for the three months ended March 31, 1997, as compared to 74% for the same
period in 1996. This decrease resulted primarily from the Company having
instituted, in the Fall of 1996, a promotional program in response to certain
promotional incentives offered by certain major competitors of the Company. To
match such incentives, the Company offered similar types of promotional programs
to its customers, which resulted in lower gross profit
9
<PAGE>
margins. 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 expenses decreased by $968,000, or 20.1%, to $3,849,000 for the
three months ended March 31, 1997, as compared to $4,817,000 for the same period
in 1996, due primarily to the conveyance of the assets of Company-owned stores
to franchisees.
General and administrative expenses (including interest expense,
depreciation and bad debt expense) increased by $622,000, or 20.4%, to
$3,678,000 for the three months ended March 31, 1997, as compared to $3,056,000
for the same period in 1996. This increase was due primarily to the following
four factors: (i) an increase in administrative costs of approximately $125,000
related to the business of Insight; (ii) approximately $235,000 in
administrative costs and legal fees related to the stores acquired in the VCA
Transaction; (iii) approximately $70,000 in higher occupancy expenses related in
the Company's relocation, in the second quarter of 1996, of its administrative
offices; and (iv) approximately $74,000 in costs related to operating as a
publicly held company. Interest expense, which is included in general and
administrative expenses, increased by $14,000, or 4.4%, to $334,000 for the
three months ended March 31, 1997, as compared to $320,000 for the same period
in 1996. The Company's provision for doubtful accounts, which is included in
general and administrative expenses, increased by $70,600, or 346.1%, to $91,000
for the three months ended March 31, 1997, as compared to $20,400 for the same
period in 1996.
The Company's income before income taxes increased by $63,000, or 24.0%,
to $326,000 for the three months ended March 31, 1997, as compared to $263,000
for the same period in 1996. During the second quarter of 1996, the Company
consummated the VCA Transaction and, as a result, certain aspects of the
Company's operations during the three months ended March 31, 1997 were not
comparable to its operations for the same period in 1996. Income from the
Company's operations (excluding income applicable to the operation of the stores
acquired in the VCA Transaction) decreased by $1,044,000, or 396.9%, to a loss
of $781,000 for the three months ended March 31, 1997, as compared to income of
$263,000 for the same period in 1996. This decrease was primarily due to the
increase in general and administrative expenses (including interest expense,
depreciation and bad debt expense), as explained above, (excluding such expenses
applicable to the operation of the stores acquired in the VCA Transaction) and a
decrease in the net gains on the conveyance of the assets of Company-owned
stores to franchisees (excluding such gains applicable to the conveyance of the
assets of five Company-owned stores acquired in the VCA Transaction).
Liquidity and Capital Resources
The Company is a party to the Credit Agreement with the Bank which, as of
March 31, 1997, provided for term loans, in the aggregate principal amount of
$4,143,285, and a $1,375,000 revolving line of credit.
The term loans are divided into two separate classes or tranches
(collectively, the "Tranches"). Tranche A was in the original principal amount
of $5,000,000 and is being amortized over five years with equal monthly payments
of principal. Interest is fixed at 8.07% per annum on the outstanding balance
and is payable monthly. Tranche B was in the original principal amount of
$2,500,000 and is being amortized over five years with equal monthly payments of
principal. Interest is calculated on the outstanding balance at 3/4% over the
prime rate in effect from time to time and is payable monthly. As of March 31,
1997, the outstanding principal balance of Tranche A was $2,083,342, and the
outstanding principal balance of Tranche B was $1,041,655. In addition, on
November 30, 1995, the Bank converted an existing demand loan into a term loan
to be repaid over the remaining term of the Tranches, with interest payable
monthly at a fixed rate of 7.9% per annum. Such loan, in the original amount of
$1,670,000, was incurred by the Company to fund the acquisition of substantially
all of the assets of Benson Optical Co., Inc., OCA Acquisition Corp. and
Superior Optical Company, Inc. ("the Benson Transaction"). As of March 31, 1997,
the outstanding principal balance of such loan was $1,018,288.
In addition to the term loans mentioned above, the Bank initially also
provided a $1,000,000 revolving line of credit. The Company is required to pay
1/4% per annum on the unused portion of this line of credit, regardless of
whether any actual borrowings occur. On November 30, 1995, the Bank: (i)
converted an existing bridge loan, in the principal amount of $1,670,000, into
the term loan mentioned above, which will be amortized over the remaining term
of the Tranches; (ii) increased the Company's line of credit by an additional
$1,500,000, of which $1,375,000 was outstanding as of March 31, 1997; and (iii)
extended the maturity date of the line of credit to April 5, 1997. On February
26, 1997, the Bank amended the Credit Agreement (as explained above) which
required, in part, a $1,000,000 payment and permanent reduction in the amount of
the line of credit, and included an extension of the maturity date of such line
of credit to May 30, 1997. Loans outstanding under the line of credit bear
interest at the prime rate in effect from time to time.
Pursuant to the terms of the Credit Agreement, the Company must comply
with certain financial covenants relating to: (i) the ratio of total assets to
total revenues; (ii) minimum net worth plus subordinated indebtedness; (iii) the
ratio of total unsubordinated liabilities to net worth; (iv) its current ratio;
(v) its debt service coverage ratio; (vi) maximum net loss; and (vii) the ratio
of funded debt to net operating cash flow, all as such terms are defined in the
Credit Agreement. For the three months ended March 31, 1997, the Company
10
<PAGE>
did not maintain the required ratios described in (iv), (v) and (vii) above,
primarily due to the: (i) net loss, before tax benefit, incurred for the
calendar year ended December 31, 1996; (ii) increase in the Company's short-term
debt, in the amount of $2,000,000, of amounts borrowed from certain of the
Company's principal shareholders (as discussed below) the aggregate outstanding
principal balance which, as of March 31, 1997, was $1,000,000; and (iii)
classification, as a current liability, of the long-term portion of the
Company's debt to the Bank, in the amount of $2,154,501. The Company has
requested a waiver from the Bank with respect to such non-compliance with the
Credit Agreement; and although the Company anticipates receiving such waiver
from the Bank subsequent to the filing of this Form 10-Q, there can be no
assurance that the Bank will issue such waiver to the Company. Such default
gives the Bank the right to accelerate the payment of the then outstanding
balance of the Company's term loans and line of credit. In the event of such
acceleration of such term loans and line of credit, the Company, in all
likelihood, would not have adequate cash available to repay such loans. In such
event, the Company would attempt to meet such needs through either additional
borrowings, sale of franchise notes receivable or additional sales of equity,
although there can be no assurance that the Company would be successful in
obtaining any such additional borrowings, selling any of its franchise notes
receivable and/or selling additional equity, or on what terms such transactions
could be effected.
On November 29, 1996, the Company borrowed from each of Drs. Robert Cohen,
Alan Cohen and Edward Cohen (collectively, the "Cohen Brothers") the sum of
$666,666.66, each of which loans was for a term of ninety (90) days and bears
interest at a rate of 1.0% above the Bank's prime rate, in effect, from time to
time. As a condition to the Company borrowing such funds, the Bank amended the
Credit Agreement to: (i) permit the Company to borrow such funds from the Cohen
Brothers; (ii) place additional restrictions on the Company's ability to acquire
other retail optical chains without the Bank's approval; (iii) expand the
default provisions contained in the Credit Agreement; and (iv) place additional
restrictions on the Company's ability to sell its excess franchisee promissory
notes. As of March 31, 1997, the aggregate outstanding principal balance of such
loans was $1,000,000. The Cohen Brothers orally agreed to extend the maturity
date of the balance of such loans to May 30, 1997.
On February 26, 1997, the Company entered into Convertible Debentures and
Warrants Subscription Agreements (see Note 4) with certain investors in
connection with the Private Placement. The Company utilized the net proceeds
(approximately $7,500,000) of the Private Placement to: (i) repay $1,000,000 of
the loans made to it by the Cohen Brothers, as discussed above, together with
interest thereon, in the approximate amount of $50,000; and, (ii) pay down the
Company's revolving line of credit with the Bank ($1,000,000). In addition, the
Company intends to use the balance of such proceeds for general corporate
purposes.
As of March 31, 1997 and December 31, 1996, the Company had $3,838,000
and $(3,803,000), respectively, in working capital, and $2,410,000 and $868,000,
respectively, of cash and cash equivalents. As of the date hereof, the Company
has ceased the construction of any new Insight Laser Centers, including the one
in San Francisco, California (which was anticipated to open during the first
quarter of 1997). During the twelve months ending December 31, 1997, the Company
anticipates having the following capital requirements: renovating six existing
Company-owned stores; the continuing upgrade of the Company's management
information system in conjunction with the point-of-sale computer systems being
installed in its Company-owned stores, in the aggregate, approximate amount of
$250,000; acquiring retail optical stores, subject to the availability of
qualified opportunities and which would require the approval of the Bank, in
furtherance of the Company's business strategy, in amounts that cannot be
projected by the Company at this time, (except for a $300,000 loan which was
made by the Company in connection with the Singer Transaction (see Note 5); and
opening new retail optical stores in furtherance of the Company's business
strategy, also in amounts that cannot be projected by the Company at this time.
The Company experienced negative cash flow during the three months ended
March 31, 1997 resulting, primarily, from losses attributable to the operations
of Insight and a substantial reduction in the Company's accounts payable. By the
end of 1996, the following measures were taken by the Company, which management
believes will reduce the magnitude of the losses it sustained for the calendar
year ended December 31, 1996 and improve the Company's operations and cash flow
in 1997: (i) closed or failed to renew the leases for nine of the stores
acquired from Benson Optical Co., Inc. in November 1995 (collectively, the
"Benson Stores"), some of which were unprofitable; (ii) franchised eleven Benson
Stores which are currently producing royalty income; (iii) eliminated virtually
all administrative overhead in connection with Insight; (iv) reduced overhead at
the Company's Insight Laser Center located in New York City; and (v) reduced
general and administrative expenses, exclusive of those incurred by Insight, by
approximately $1,000,000.
Although the Company anticipates a positive cash flow, for 1997, from its
retail optical store operations, it nevertheless anticipates that Insight will
continue to operate at a loss for the twelve months ending December 31, 1997
and, therefore, the Company believes that such operating cash flow will be
insufficient to result in a positive cash flow for the Company for this period.
As of the date of the filing of this Form 10-Q, the following additional
measures have been taken by the Company, which management believes will improve
the Company's operations and cash flow in 1997: (i) completed the Private
Placement (see Note 4) which provided net proceeds of approximately $7,500,000
to the Company, of which, approximately $5,400,000 will be available to the
Company for general corporate purposes; (ii) entered into an agreement to repay,
in the form of registered shares of its Common Stock (in lieu of cash) that
portion of its short-term debt incurred in connection with the Pembridge
Transaction (see Note 5); (iii) amended the Credit Agreement with the Bank which
extended the maturity date of the line of credit and provided for a monthly
repayment of such credit line (see Note 5); (iv)
11
<PAGE>
hired a new President and Chief Operating Officer, with over thirty years
experience in the international eyecare industry; and (v) expanded the Company's
managed care department which recently finalized an agreement with the nation's
largest provider based network, whereby the Company will be the exclusive
optical provider for its 4.6 million member group. The Company anticipates that
this agreement and similar types of agreements, which the Company is presently
negotiating, should increase sales at both Company-owned and franchised stores.
Although the Company believes that its financial condition will improve for the
twelve months ending December 31, 1997, the Company also anticipates that it may
not be in compliance with certain of its existing financial covenants as
contained in its Credit Agreement with the Bank. Consequently, the Company was
required, as of December 31, 1996, to reclassify, as a current liability, the
long-term portion of its debt to the Bank. In the event of a default, the Bank
has the right to accelerate the payment of the then outstanding principal
balances of the Company's term loans and line of credit. In any event, the loans
due to the Cohen Brothers are due to mature on May 30, 1997. Accordingly, the
Company believes that its current cash resources and cash flow from operations
would be sufficient to fund its anticipated capital expenditures in 1997, unless
the Bank exercises its right to accelerate the repayment of the aforementioned
term loans and line of credit. Further, the Credit Agreement currently restricts
the Company's ability to obtain additional financing except in certain
circumstances. In the event of such acceleration of such term loans and line of
credit, the Company, in all likelihood, would not have adequate cash available
to repay such loans; however, the Company, in such event, would attempt to meet
such needs through either additional borrowings, the sale of franchise notes
receivable or additional sales of equity, although there can be no assurance
that the Company would be successful in obtaining any such additional
borrowings, selling any of its franchise notes receivable and/or selling
additional equity, or on what terms such transactions could be effected. In
addition, the Company: (i) is currently negotiating with a financial institution
to finance its franchise notes receivable; (ii) is currently negotiating with
the Bank to amend certain of its existing financial covenants as contained in
the Credit Agreement; and (iii) will request, from the Cohen Brothers, an
extension of time to repay the outstanding principal balances of such loans,
although there can be no assurance that any of such transactions will be
consummated.
12
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. Not applicable.
Item 2. Changes in Securities. 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. Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
a.) Exhibits
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number
- ------
<S> <C>
10.70 Eleventh Amendment and Waiver, dated April 1, 1997, to the Credit Agreement between the
Company and Chase Manhattan Bank (incorporated by reference to Exhibit 10.70 to the Company's
Current Report on Form 8-K, dated April 7, 1997).
10.71 Agreement and Plan of Reorganization, dated February 19, 1997, as amended, among the
Company and Messrs., David, Alan and Sidney Singer (incorporated by reference to Exhibit
10.71 to the Company's Current Report on Form 8-K, dated April 7, 1997).
11 Computation of Earnings Per Common Share.
27 Financial Data Schedule.
</TABLE>
b.) Reports on Form 8-K
1) On February 26, 1997, the Company filed a Report on Form 8-K with
respect to its Private Placement.
13
<PAGE>
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.
STERLING VISION, INC.
(Registrant)
BY: /s/Sebastian Giordano
Sebastian Giordano
Chief Financial Officer,
Executive Vice President-
Finance and Treasurer
Signing on behalf of
the Registrant as
its Principal Financial
Officer.
Date: May 15, 1997
14
<PAGE>
EXHIBIT 11
STERLING VISION, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
(Unaudited)
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
1997 1996
---- ----
<S> <C> <C>
PRIMARY EARNINGS
Net income $ 326 $ 158
======= =======
Weighted average number of common
shares outstanding 12,387 12,277
Weighted average number of common shares
to be issued 450 --
Incremental shares based on the treasury
stock method for stock options and warrants,
using the average market price 402 104
------- -------
Weighted average number of common share
and common share equivalents outstanding 13,239 12,381
======= =======
Primary earnings per common share $ .02 $ .01
======= =======
FULLY DILUTED EARNINGS*
Net income $ 326 $ 158
======= =======
Weighted average number of common
shares outstanding 12,387 12,277
Weighted average number of common shares
to be issued 450 --
Incremental shares based on the treasury
stock method for stock options and warrants,
using the average market price 405 71
------- -------
Weighted average number of common share
and common share equivalents outstanding 13,242 12,348
======= =======
Fully diluted earnings per common share $ .02 $ .01
======= =======
</TABLE>
* This calculation is submitted in accordance with Security Exchange Act of
1934 Release No. 9083 although not required by footnote 2 to paragraph 14 of
APB Opinion No. 15 because it is anti-dilutive or results in dilution of less
than 3%.
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED CONDENSED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 2,410
<SECURITIES> 0
<RECEIVABLES> 29,912
<ALLOWANCES> 1,199
<INVENTORY> 3,438
<CURRENT-ASSETS> 19,028
<PP&E> 13,361
<DEPRECIATION> 3,046
<TOTAL-ASSETS> 48,284
<CURRENT-LIABILITIES> 15,190
<BONDS> 12,483
<COMMON> 124
0
0
<OTHER-SE> 27,280
<TOTAL-LIABILITY-AND-EQUITY> 48,284
<SALES> 6,004
<TOTAL-REVENUES> 9,474
<CGS> 1,621
<TOTAL-COSTS> 9,148
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 90
<INTEREST-EXPENSE> 334
<INCOME-PRETAX> 326
<INCOME-TAX> 0
<INCOME-CONTINUING> 326
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 326
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
<FN>
Amounts inapplicable or not disclosed as a separate line on the Statement
of Financial Position or Results of Operations are reported at -0- herein.
* Notes and accounts receivable - trade are reported net of allowances for
doubtful account in the Statement of Financial Position.
</TABLE>
