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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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(Mark One)
X Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
- ------ Act of 1934 For the Fiscal Year ended December 31, 1996
Transition Report pursuant to Section 13 or 15(d) of the Securities
- ------ Exchange Act of 1934
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 Number)
1500 Hempstead Turnpike
East Meadow, NY 11554
Telephone Number: (516) 390-2100
(Address of Principal Executive Offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
TITLE Exchange
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Common Stock, par value $.01 per share Nasdaq Market System
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
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The aggregate market value of the Common Stock held by nonaffiliates as of
March 20, 1997, (based upon the closing bid price of $7.75 per share as quoted
on the Nasdaq Market System) was approximately $43,000,000. For purposes of this
computation, the shares of Common Stock held by directors, executive officers
and principal shareholders owning more than 5% of the Company's outstanding
Common Stock and which a Schedule 13G were deemed to be stock held by
affiliates. As of March 20, 1997, there were 5,552,471 shares of Common Stock
outstanding held by nonaffiliates.
As of March 20, 1997, 12,387,535 shares of the Registrant's Common Stock
were outstanding.
The Company's Proxy Statement for the 1996 Annual Meeting of Shareholders
is incorporated by reference to Part III of this Annual Report on Form 10-K.
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Item 1. Business
All statements contained herein that are not historical facts including,
but not limited to, statements regarding the future development plans of
Sterling Vision, Inc. ("Sterling" or the "Company") and the Company's ability to
generate cash from its operations, 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 from the anticipated results or
other expectations expressed in the Company's forward-looking statements are the
following: competition in the retail optical industry; the ability of the
Company to enter into third party, managed care provider agreements on favorable
terms; the ability of the Company to acquire, at favorable prices, retail
optical chains; the uncertainty of the acceptance of Photorefractive Keratectomy
("PRK"); the availability of new and better ophthalmic laser technologies or
other technologies that serve the same purpose as PRK; the inability of the
Company to finalize favorable agreements with ophthalmologists to utilize the
Company's excimer lasers to perform PRK procedures; competition in the PRK
market; lack of experience in developing or managing PRK centers and
ophthalmological practices; the inability of the Company to enter into
amendments to the Credit Agreement (as hereinafter defined) and defaults related
therefrom; and general business and economic conditions.
General
The Company is one of the largest chains of retail optical stores and the
second largest franchised optical chain in the United States based upon domestic
sales and number of locations of Company-owned and franchised stores
(collectively, referred to herein as "Sterling Stores").
As of December 31, 1996, there were 319 Sterling Stores, consisting of 62
Company-owned stores and 257 franchised stores. The Company continually seeks to
expand both its Company-owned and franchised store operations. As of December
31, 1996, Sterling was constructing four additional stores, and had received
commitments from existing franchisees to develop an additional eight franchised
Sterling Stores. Sterling Stores are located in 27 states, the District of
Columbia and Ontario, Canada.
Most Sterling Stores offer eyecare products and services such as
prescription and non-prescription eyeglasses, eyeglass frames, ophthalmic
lenses, contact lenses, sunglasses and a broad range of ancillary items. To the
extent permitted by individual state regulations, an optometrist is employed by,
or affiliated with, most Sterling Stores, which optometrist provides
professional eye examinations to the public. The Company fills prescriptions
from these employed or affiliated optometrists, as well as from unaffiliated
optometrists and ophthalmologists. Most Sterling Stores have an inventory of
ophthalmic and contact lenses, as well as on-site lab equipment for cutting and
edging ophthalmic lenses to fit into eyeglass frames, which allows Sterling
Stores to offer same-day service in many cases.
Sterling views its Company-owned stores as "inventory" to be strategically
sold to qualified franchisees. By selling Company-owned Sterling Stores to
franchisees, the Company hopes to achieve two goals: to recognize a gain on the
conveyance of the assets of such stores, and to create a stream of royalty
payments based upon a percentage of the gross revenues of the franchised
locations. Sterling currently derives its revenues principally from: the sale of
eyecare products and services at Company-owned stores; ongoing royalties based
upon a percentage of gross revenues of franchised stores; and the conveyance of
Company-owned store assets to existing and new franchisees.
While most Sterling Stores presently operate under one of the tradenames
"Sterling Optical," "IPCO Optical," "Site For Sore Eyes," "Benson Optical",
"Southern Optical", "Superior Optical", "Nevada Optical", "Duling Optical",
Monfried Optical" or "Kindly Optical", the Company is presently formulating
plans to change the tradename of most Sterling Stores to "Sterling Optical". In
connection therewith, the Company intends to formulate and implement additional
advertising and marketing programs to create increased name recognition
throughout those areas of the United States where the Company is currently
operating under a tradename other than "Sterling Optical." The Company also
operates VisionCare of California ("VCC"), a specialized health care maintenance
organization licensed by the California Department of Corporations. VCC employs
licensed optometrists who render services in offices located immediately
adjacent to, or within, most Sterling Stores located in California.
The Company also plans to affiliate with health care providers
(ophthalmologists) in offering PRK, a procedure performed with an excimer laser
for the correction of certain degrees of myopia (near-sightedness). It is
anticipated that the Company and such ophthalmologists will enter into
agreements pursuant to which such ophthalmologists will pay to the Company a fee
for each PRK
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procedure performed using an excimer laser installed by Insight Laser Centers,
Inc. ("Insight"), a wholly-owned subsidiary of the Company, into such
ophthalmologists' offices. As of December 31, 1996, the Company had leased six
excimer lasers, each with a purchase option for nominal consideration. The
Company currently owns and operates one Insight Laser Center located in New York
City and has placed three excimer lasers into various ophthalmological offices
located in the New York metropolitan area and in San Francisco, California.
Background of the Company
Sterling was incorporated under the laws of the State of New York in
January 1992 and in February 1992, purchased substantially all of the
assets (the "IPCO Acquisition") of Sterling Optical Corp., f/k/a IPCO
Corporation ("IPCO"), a New York corporation then a
debtor-in-possession under Chapter 11 of the U.S. Bankruptcy Code.
Subsequent to the IPCO Acquisition, the Company, in October 1993,
acquired, through a merger, 26 retail optical stores (both Company
operated and franchised) operating under the name "Site For Sore Eyes"
("SFSE") and located in Northern California (the "SFSE Merger"). In
connection with the SFSE Merger, certain of the principal shareholders
of the Company also acquired VCC, a specialized health care maintenance
organization licensed by the California Department of Corporations
under the California Knox Keene Health Care Service Plan Act of 1975.
In addition, the Company: in August 1994, purchased the assets of eight
additional retail optical stores located in New York and New Jersey
from Pembridge Optical Partners, Inc. ("Pembridge"); in November 1995,
acquired, through one of its wholly-owned subsidiaries, substantially
all of the assets of Benson Optical Co., Inc., OCA Acquisition Corp.
and Superior Optical Company, Inc., (the "Benson Transaction")
including the assets contained in 32 retail optical store locations;
and, in May, 1996, acquired, through a private foreclosure sale,
substantially all of the retail optical assets of Vision Centers of
America, Ltd., D & K Optical, Inc., Monfried Corporation and Duling
Finance Corporation (collectively, "VCA") through a transaction that is
discussed more fully below. See "New Acquisitions". The Company has
also entered into an agreement to acquire, in exchange for shares of
its Common Stock, all of the issued and outstanding capital stock of
Singer Specs, Inc., a chain of approximately 30 franchised retail
optical stores located primarily in the States of Pennsylvania, New
Jersey, Delaware and Virginia. See Note 18 - Subsequent Events.
Company-Store Operations
The following chart sets forth the breakdown of the Company's Sterling
Stores as of December 31, 1996:
STERLING STORES
AS OF DECEMBER 31, 1996
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I. COMPANY-OWNED STORES:
Total Stores in Operation............................................ 62
--
Stores Under Construction............................................ 0
--
Leases Under Negotiation............................................. 0
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Total..................................................... 62
==
Existing store locations: California (18), Illinois (3), Iowa (1),
Kentucky (7), Michigan (2), Nebraska (2), Nevada (1), New Jersey (2),
New York (18), North Dakota (2), Pennsylvania (4), and West Virginia (2)
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II. FRANCHISED STORES:
Total Stores in Operation............................................ 257
Stores Under Construction............................................ 4
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Total................................... 261
===
Existing store locations: California (20), Colorado (2), Connecticut
(2), Florida (1), Illinois (13), Indiana (1), Kentucky (14), Maryland
(16), Massachusetts (1), Michigan (6), Minnesota (27), Missouri (8),
Montana (1), Nebraska (5), New Hampshire (1), New Jersey (7), New York
(45), North Carolina (5), North Dakota (7), Pennsylvania (5), South
Dakota (11), Virginia (7), Washington, D.C. (1), Washington (5), West
Virginia (3), Wisconsin (34), and Ontario, Canada (9)
Sterling Stores generally range in size from approximately 1,000 square
feet to 2,000 square feet, are substantially similar in appearance and are
operated under certain uniform standards and operating procedures. Many Sterling
Stores are located in enclosed regional shopping malls and smaller strip
centers. However, some Sterling Stores are located on the ground floor of office
buildings or other commercial structures. A limited number of Sterling Stores
are housed in freestanding buildings with adjacent parking facilities, and
certain Sterling Stores are situated in professional optometric offices (such as
facilities which also include sports therapy, physical therapy and other medical
services), clinics or hospitals. Sterling Stores are generally clustered within
geographic market areas so as to maximize the benefit of advertising strategies
and to minimize the cost of supervising operations. Sterling Stores which are
not clustered within geographic market areas (e.g. Sterling Stores located in
West Virginia and New Hampshire) have not produced results from which any
consistent performance standards can be drawn by the Company.
Most Sterling Stores offer a full line of prescription and
non-prescription eyeglasses, sunglasses and contact lenses, and, if permitted
under applicable law, professional eye examinations which are performed by
employed or affiliated optometrists. In response to the eyewear market becoming
increasingly fashion-oriented during the past decade, most Sterling Stores carry
a large selection of designer eyeglass frames. The Company continually
test-markets various brands of sunglasses, ophthalmic lenses, contact lenses and
designer frames in an attempt to maximize systemwide sales and profits from
these categories of merchandise. Small quantities of these items are usually
purchased for selected stores that test customer response and interest and, if a
product test is successful, the Company attempts to negotiate a systemwide
preferred vendor discount for such product, which discount is then made
available to the Company's franchisees. A full line of eyeglass and contact lens
accessories is also available at most Sterling Stores. For the period ended
December 31, 1996, net sales at Company-owned stores were $28,476,679.
Most Sterling Stores maintain a working inventory of the most often
prescribed contact and ophthalmic lenses and an on-site facility for cutting and
edging ophthalmic lenses to fit into eyeglass frames, which enables most
Sterling Stores to offer same-day or next-day service for a majority of
customers ordering prescription eyeglasses. At the end of the second quarter of
1995, the Company commenced operating a laboratory facility located in Roslyn,
New York which manufactured certain prescription ophthalmic lenses, which
laboratory was closed by the Company, at the end of 1996, primarily as a result
of the Company's ability to negotiate substantially lower pricing of such
products from independent laboratories and in an effort to reduce its general
and administrative expenses.
Franchise Operations
As of December 31, 1996, the Company had 257 franchised stores, as
compared to 150 franchised stores as of December 31, 1995. An integral part of
the Company's franchising system includes providing what the Company believes to
be a high level of marketing, financial, training and administrative support to
its franchisees. The Company provides "grand opening" assistance for each new
franchised location by consulting with its franchisees with respect to store
design, fixture and equipment requirements and sources,
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inventory selection and initial marketing and promotional programs.
Specifically, the Company's grand opening assistance (i) helps to establish
business plans and budgets; (ii) provides preliminary store designs and plan
approval prior to construction of a franchised store; (iii) provides initial
training, an operations manual and a comprehensive business review to aid the
franchisee in attempting to maximize its sales and profitability; and (iv) in
California, through VCC, operates Sterling VisionCare offices located adjacent
to, or within, most franchised stores, at which a licensed optometrist performs
eye examinations. Further, the Company generally restricts itself from operating
or franchising other Sterling Stores within a specified radius of each existing
franchised store. In addition, the Company, on an ongoing basis, provides
training through regional seminars and an annual convention, offers assistance
in marketing and advertising programs and promotions, and consults with its
franchisees as to their management and operational strategies and business
plans.
Preferred Vendor Network. With the collective buying power of
Company-owned and franchised stores, the Company has established a network (the
"Preferred Vendor Network") of preferred vendors (the "Preferred Vendors") whose
products may be purchased directly by franchisees at group discount prices,
thereby providing such franchisees with the opportunity for higher gross
margins. In addition, many Preferred Vendors pay promotional fees to the Company
to be used to defray a portion of the Company's costs in conducting certain
meetings, training seminars, conventions and other activities.
Franchising Agreements. Each franchisee enters into a franchise agreement
(the "Franchise Agreement") with the Company, the material terms of which are
generally as follows:
(a) Term. Generally, the term of each Franchise Agreement is ten years
and, subject to certain conditions, is renewable at the option of the
franchisee.
(b) Initial Fees. Generally, all franchisees (except for any franchisees
converting their existing retail optical store to a Sterling Store (a "Converted
Store") and those entering into agreements or for more than one location) , must
pay to the Company a non-recurring, initial franchise fee of $20,000. The
Company charges each franchisee of a Converted Store, a non-recurring, initial
franchise fee of $10,000 per location, for each franchisee entering into
agreements for more than one location, the Company charges a non-recurring
initial franchise fee of $15,000 for the second location, and $10,000 for each
location in excess of two. Initial fees collected by the Company for the year
ended December 31, 1996 were $353,555.
(c) Ongoing Royalties. Typically, all franchisees are obligated to pay to
the Company ongoing royalties in an amount equal to a percentage, generally 8%,
of the gross revenues of their Sterling Store. Franchisees of Converted Stores,
however, pay ongoing royalties on their store's historical average base sales at
reduced rates increasing, in most cases, from 2% to 6% for the first four years
of the term of the Franchise Agreement. Franchise Agreements entered into prior
to January 1994 provide for the payment of the ongoing royalties on a monthly
basis, while those entered into after January 1994 provide for their payment on
a weekly basis, in each case, based upon the gross revenues for the preceding
period. Gross revenues generally include all revenues generated from the
operation of the Sterling Store in question, except for refunds to customers,
sales taxes, a limited amount of bad debts, and, to the extent required by state
law, fees charged by independent optometrists. Ongoing royalties paid by
franchisees to the Company for the year ended December 31, 1996 were $7,616,360.
(d) Advertising Fund Contributions. Most franchisees must make ongoing
contributions to one of two advertising funds (the "Advertising Funds") equal to
a percentage of the store's gross revenues. For Franchise Agreements entered
into prior to August 1993, the rate of contribution is generally 4% of the
store's gross revenues, while Franchise Agreements entered into after August
1993 generally provide for contributions equal to 6% of the store's gross
revenues. For the year ended December 31, 1996, the Company received $2,907,875
in Advertising fund contributions from franchisees.
(e) Financing. Company-owned store assets are sold for cash although, in
most cases, the Company provides purchase money financing for all, or a portion
of, the purchase price thereof. The Company does not generally finance the
initial, non-recurring franchise fee or rent security deposits, which are
generally required under a franchisee's sublease. The purchase price is
generally based upon the historical and projected cash flow of the Sterling
Store in question and, in 1996, ranged from approximately $95,000 to $587,000.
The Company generally has financed up to 90% of the acquisition price, to be
repaid over a period of seven years, together with interest computed at the rate
of 12% per annum. However, the Company has, on occasion, financed, and may, in
the future, finance, up to 100% of the acquisition price of a franchised store.
Substantially all such financing is personally guaranteed by the franchisee (or,
if a corporation, by the principals owning in excess of 25% thereof) and is
generally secured by all assets conveyed, as well as all proceeds thereof. From
time to time, certain franchisees obtain financing from third parties. In such
event, the Company generally subordinates
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its security interest in the assets of the franchised location to the security
interests granted to the provider of such financing.
(f) Termination. Franchise Agreements may be terminated if the franchisee
has defaulted in its payment of monies due the Company or in its performance of
the other terms and conditions of the Franchise Agreement. During 1996, two
franchised stores were closed due to the expiration of the leases for each of
such store; and an additional seven franchised stores and substantially all of
the assets located therein were voluntarily surrendered and transferred back to
the Company in connection with the termination of Franchise Agreements related
thereto. The Company, in one such case, thereafter resold the assets of such
store to a new franchisee, which new franchisee thereupon entered into
Sterling's then current form of Franchise Agreement.
New Acquisitions
A key element of the Company's business strategy is to build its retail
optical business and increase its customer base by acquiring existing retail
optical chains, converting independently owned retail optical stores to Sterling
Stores and opening new stores.
On May 30, 1996, the Company, through its wholly-owned subsidiary,
Sterling Vision DKM, Inc. ("DKM"), acquired, from Norwest Investment Services,
Inc. ("Norwest") in a private, foreclosure sale, substantially all of the retail
optical assets (collectively, the "Assets"), other than leases, of Vision
Centers of America, Ltd., D & K Optical, Inc., Monfried Corporation and Duling
Finance Corporation (collectively, "VCA"), which Assets were subject to a lien
in favor of Norwest Investment Services, Inc. (the "VCA Transaction"). Norwest
was entitled to exercise its rights as a secured creditor of VCA as a result of
VCA's default with respect to its obligations to Norwest. The Assets acquired
include: (i) furniture, fixtures, machinery, equipment and inventory located in
21 company-owned and operated retail optical stores and in an ophthalmic lens
manufacturing facility and several warehouses; and (ii) all of VCA's general
intangibles (other than store leases), including franchise agreements,
promissory notes and accounts receivable related to approximately 75 franchised
retail optical stores. DKM purchased the Assets at a private foreclosure sale
subject to certain liens, claims and encumbrances; however, Norwest indemnified
DKM, in an amount up to $400,000, for certain of such liens, claims and
encumbrances. The purchase price for the Assets was $4,150,000, which was paid
by DKM's delivery to Norwest of a ninety (90) day, direct pay letter of credit
to Norwest.
In addition, DKM initially entered into three Assignment and Assumption
of Lease Agreements (two with respect to an aggregate of 13 company store leases
and one with respect to 45 stores subleased to franchisees), pursuant to which
VCA assigned to DKM all of its right, title and interest in and to each of the
leases, in exchange for DKM's payment to VCA of $50,000 and the assumption of
all of the obligations under the company store leases, only, subject to DKM's
right, in its sole discretion, to reject the lease for any such location on or
before September 30, 1996.
DKM also received an option, which expired on November 1, 1996, to
purchase the stock of VCA for $100. Additionally, DKM entered into an oral
consulting agreement with Dr. Larry Joel, the President of VCA, whereby DKM paid
to him the sum of $25,000 per month for consulting services provided to DKM,
which fee will be reduced to $12,500 per month from and after April 1997. Such
consulting arrangement is on a month-to-month basis and each party has the right
to terminate the agreement at any time. Dr. Joel was previously the President
and a shareholder of Fast Cast Corporation, an entity also owned, in part, by
certain of the Registrant's principal shareholders and from which the Company
purchases, from time to time, machinery, equipment and supplies. In addition, in
March 1997, two corporations of which Dr. Joel is a fifty percent owner: (i)
purchased the assets of the Company's laboratory facility located in Louisville,
Kentucky, (which was acquired by DKM and part of the DKM Transaction); and, (ii)
purchased the assets of four of the Company's retail optical stores and, in
connection therewith, entered into a Franchise Agreement.
DKM also subsequently purchased from Bank One Kentucky, N.A., for the
approximate sum of $111,000, all of its right, title and interest in and to
certain additional prior liens (held by such Bank) against VCA's inventory,
accounts receivable and franchise agreements.
On September 30, 1996, the Company entered into various agreements with
two Canadian corporations (collectively, the "Purchaser" or the "Master
Franchisor") and the principal owner thereof, pursuant to which the following
transactions were consummated; (i) the Company sold the assets of its four
retail optical stores located in Ontario, Canada to the Purchaser which,
simultaneously therewith, converted its five existing retail optical stores to
franchised Sterling Stores; (ii) the Company and the Master Franchisor entered
into a Master Franchise Agreement pursuant to which the aforesaid nine retail
optical stores were franchised to the Master Franchisor; and (iii) the Master
Franchisor was granted the exclusive right, in the Province of Ontario, Canada,
only, to open additional franchised Sterling Stores and/or grant sub-franchises
with respect thereto.
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In addition, the Master Franchise Agreement: (i) provides for the Master
Franchisor's payment to the Company of a portion of the initial non-recurring
franchise fees and continuing royalty fees paid by any of its sub-franchisees;
(ii) requires the Master Franchisor to open, within the Province of Ontario,
Canada, additional Sterling Stores in accordance with a specified time schedule;
and (iii) affords the Master Franchisor the right of first refusal with respect
to any other Master Franchise Agreements to be entered into by the Company in
any other Province of Canada.
Insight Laser Centers
An integral part of the Company's business strategy of becoming a
full-service eyecare company originally included developing and/or managing, a
chain of eyecare centers under the tradename "Insight Laser," offering PRK.
Published reports indicated that there are at least 50 million Americans who are
myopic (near-sighted). Management believes that some of these individuals would
prefer to correct their vision without a corrective appliance. PRK is an
outpatient procedure to be performed by ophthalmologists trained to perform the
procedure. During the PRK process, the shape of the cornea (the clear outermost
layer of the eye) is altered by a high-precision, computer controlled excimer
laser which ablates microscopic layers of corneal tissue in a predetermined
pattern to reshape the cornea in a manner that allows it to focus light
properly, thereby correcting, or treating, specific refractive conditions. In
1995 and 1996, the United States Food and Drug Administration ("FDA") approved
the use, in the United States, of an excimer laser manufactured by Summit
Technology, Inc. ("Summit") and VISX, Incorporated ("VISX"), respectively, for
use in connection with the PRK procedure to correct certain degrees of myopia.
Both Summit and VISX charge a royalty fee based on each procedure performed
utilizing their respective excimer lasers, which royalty fee is $250 per
procedure.
During 1995, the Company leased five excimer lasers manufactured by
Summit, which were delivered to the Company during the third quarter of 1995,
and in 1996, the Company leased one additional laser manufactured by VISX and
entered into two purchase orders to acquire one additional laser from both VISX
and Summit. All of such leases contain a purchase option for nominal
consideration. During 1996, the Company opened four Insight Laser Centers in the
Metropolitan New York and San Francisco markets, one of which is Company-
owned. In March, 1996, the Company entered into an agreement with an
ophthalmologist pursuant to which he agreed to pay to the Company a fee for each
PRK procedure performed with the excimer lasers installed by Insight in his two
offices located in Long Island, New York; and, in October, 1996, the Company and
such ophthalmologist entered into various agreements, which were due to be
released from escrow no later than November 30, 1996, and which provided for,
among other things: (i) the contribution, by the ophthalmologist, of
substantially all of the assets of his existing two medical practices and
ambulatory surgery center to a new entity established by the Company; (ii) an
agreement to engage the ophthalmologist, on an exclusive basis, in connection
with the ownership and/or operation of ophthalmological practices and/or laser
surgery centers located in the New York Metropolitan area; and (iii) the new
entity's management of the ophthalmologist's medical practices and ambulatory
surgery center, in exchange for a fee based upon the cost of operating such
practices and center. On November 30, 1996, the escrow agreement expired and the
documents (deposited thereunder) were terminated, by such ophthalmologist.
The Company believed that it was well positioned to successfully develop
its Insight Laser Centers by reason of, among other things: (i) Sterling's and
its franchisees' combined customer base of over one million people, some of
which may be candidates for the PRK procedure; (ii) Sterling's access to excimer
lasers for performing the PRK procedure; and (iii) Sterling's extensive
experience in marketing eyecare products and services. Accordingly, the Company
created an internal organization and staff to develop, operate and expand its
Insight Laser Center business.
Furthermore, the Company developed an advertising campaign to attract
additional customers to its Insight Laser Centers. Additionally, the Company,
from time to time, offered educational programs to the optometrists employed by,
or affiliated with, Sterling Stores and stores operated and franchised by Cohen
Fashion Optical, Inc. ("CFO"), a retail optical chain owned by certain of the
Company's shareholders, as well as to unaffiliated ophthalmologists, on the
benefits of PRK.
Because of the collective customer base of the Company and its
franchisees, the Company believed that its Insight Laser Centers would have a
competitive advantage as compared with other companies formed specifically for
this purpose. The Company was aware that the following companies operate or plan
to operate laser surgery centers in the United States: American Laser Vision,
Beacon Eye Institute, Eye Shaper Laser Centers, Global Vision, Inc., Laser
Focus, Inc., Refractive Laser Centers, Inc., The Laser Center, Inc., Vision
Correction Group, Inc., Vision Sculpting, 20/20 Laser Centers, Inc., Laser
Vision Centers, Inc., Lasersight Centers, Inc., New Vision Technology, Inc.,
LCA-Vision Inc., Summit and VISX. In addition, the Company was also aware that
numerous medical offices and hospitals located throughout the United States had
already installed, and/or were in the process of installing, excimer lasers for
performing
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the PRK procedure. Based upon the Company's growth strategy, it was anticipated
that the Company would derive a substantial portion of its revenues from the
following two businesses: (i) the management and administration of its Insight
Laser Centers; and, (ii) the management of ophthalmological practices. However,
revenues at such centers grew modestly and were predominately in the form of
laser access fees. Such fees were paid by ophthalmologists who utilized the
Company's excimer lasers to perform PRK procedure. During the latter part of
1996, published reports concluded that consumer acceptance of PRK as a vision
correction alternative was below industry expectations despite aggressive
marketing and advertising programs conducted by the Company and other such laser
surgery companies.
Competition
The optical business is highly competitive and includes chains of retail
optical stores, superstores, individual retail outlets, and a large number of
individual opticians, optometrists and ophthalmologists who provide professional
services or may, in connection therewith, dispense prescription eyewear. As
retailers of prescription eyewear generally service local markets, competition
varies substantially from one location or geographic area to another. Since
1994, certain major competitors of the Company have been offering promotional
incentives to their customers and, in response thereto, the Company has, from
time to time, offered to its customers the same or similar incentives. As such,
there can be no assurance that these competitive promotional incentives would
not adversely affect the Company's results of operations.
The Company believes that the principal competitive factors in its retail
optical business are convenience of location, the on-site availability of
professional eye examinations, quality and consistency of product and service,
price, product warranties, and a broad selection of merchandise, and it believes
that it competes favorably in each of these respects.
As of December 31, 1996, the Company owned and operated one Insight Laser
Center and had three excimer lasers placed in affiliated ophthalmological
offices. The Company believes that such Center and ophthalmological offices
experience competition from the various other companies noted above (see
"Insight Laser Centers") that have entered the business, in addition to many
existing ophthalmological offices and hospitals that are equipped with excimer
lasers that are adapted to perform the PRK procedure.
Marketing and Advertising
The Company's marketing strategy emphasizes professional eye
examinations, value pricing (primarily through product promotions), convenient
locations, excellent customer service, customer-oriented store design and
product displays, knowledgeable sales associates and a broad range of quality
products in each of its Sterling Stores. Optometric examinations by licensed
optometrists are generally available on the premises of, or directly adjacent
to, all Sterling Stores, although future markets may call for some variation due
to regulatory constraints.
The Company continually prepares and revises in-store point of purchase
displays, which provide various promotional messages to customers upon arrival
at Sterling Stores. Both Company-owned Sterling Stores and most franchised
stores participate in such advertising and in-store promotions, which include
visual merchandising techniques to draw attention to products displayed in
Sterling Stores. The Company also employs direct mail advertising to reach
prospective, as well as existing consumers.
The Company annually budgets approximately 4% to 6% of systemwide sales
for advertising and promotional expenditures. Franchisees are obligated to
contribute a percentage of their stores' gross revenues to the Company's
segregated advertising fund accounts, which the Company maintains for such
advertising, promotions or public relations programs, fifty percent of which, in
most cases, the Company may, as it directly deems necessary or appropriate to
advertise and promote all Sterling Stores.
Management Information Systems
Over the past few years, management had conducted research into the
availability and development of a point-of-sale computer system (the "POS
System" or the "System"). The Company tested several existing systems available
in the marketplace, as well as developed and installed on a trial basis, its own
Windows-based POS System. During 1995, as a result of this research, the Company
undertook the installation of ADD-POWER, a UNIX-based POS System (the "A-P
System"), that is presently utilized by various retail optical chains in
approximately 600 retail optical stores nationwide, to provide, amongst other
features, inventory and patient database
9
<PAGE>
management. The Company has commenced utilization of the system and anticipates
that it will take between one and two years to install the A-P System in all
existing Company-owned stores. As of December 31, 1996, the Company had
installed twenty such A-P Systems in existing Company-owned stores.
Government Regulation
Ophthalmic excimer lasers are considered medical devices and are subject
to regulation by the FDA. The Company understands that Summit and VISX, the
manufacturers of the excimer laser systems that the Company currently uses in
its Company-owned Insight Laser Center or makes available to its affiliated
ophthalmologists, have received approval from the FDA for their use to treat
certain degrees of near-sightedness. This approval contains restrictions on the
use, labeling, promotion and advertising of the excimer laser. In addition, as
part of the FDA approval process, Summit and VISX have agreed to conduct
post-marketing studies on the long term safety of the excimer laser, including
continuing to follow patients treated in existing studies, for at least four
years after FDA approval, to assure that those parties' vision remains stable
over long periods of time.
Manufacturers of lasers are also subject to regulation under the
Electronic Product Radiation Control Provisions of the Federal Food, Drug and
Cosmetic Act. This law requires laser manufacturers to file new product and
annual reports, to maintain quality control, product testing and sales records,
to incorporate certain design and operating features in lasers to end-users and
to certify and label each laser sold as belonging to one of four classes, based
on the level of radiation from the laser that is accessible to users. Certain
maintenance levels at the user level are also required. Various warning labels
must be affixed and certain protective devices installed, depending on the class
of the product. The Federal Food, Drug and Cosmetic Act applicable to all
medical devices, imposes fines and other remedies for violations of the
regulatory requirements.
The Company and its operations are subject to extensive federal, state
and local laws, rules and regulations affecting the health care industry and the
delivery of health care, including laws and regulations prohibiting the practice
of medicine and optometry by persons not licensed to practice medicine or
optometry, prohibiting the unlawful rebate or unlawful division of fees, and
limiting the manner in which prospective patients may be solicited. The
regulatory requirements that the Company must satisfy to conduct its business
will vary from state to state. In particular, some states have enacted laws
governing the ability of ophthalmologists and optometrists to enter into
contracts to provide professional services with business corporations or lay
persons. and some states prohibit the Company from computing its fee for its
management services based upon a percentage of the gross revenues of the
ophthalmological practice being managed. It is possible that, in certain other
states, the proposed activities of the Company will not be permissible on terms
acceptable to the Company, in which case the Company would not do business in
such states. Various federal and state regulations limit the financial and
non-financial terms of agreements with these health care providers; and the
revenues potentially generated by the Company differ among its various health
care provider affiliations.
The FDA and other United States, state or local governmental agencies may
amend current, or adopt new rules and regulations that could affect the use of
ophthalmic excimer lasers for PRK and thereby adversely affect the business of
the Company.
The Company is also subject to certain regulations adopted under the
Federal Occupational Safety and Health Act with respect to its in-store
laboratory operations. The Company believes that it is in compliance with all
such applicable laws and regulations.
As a franchisor, the Company is subject to various registrations and
disclosure requirements imposed by the Federal Trade Commission and by many
states in which the Company conducts franchising operations. The Company
believes that it is in compliance with all such applicable laws and regulations.
Environmental Regulation
The Company's business activities are not significantly affected by
environmental regulations, and no material expenditures are anticipated in order
for the Company to comply with environmental regulations. However, the Company
is subject to certain regulations promulgated under the Federal Environmental
Protection Act ("EPA") with respect to the grinding, tinting, edging and
disposing of ophthalmic lenses and solutions. In addition, the Company is
subject to additional EPA regulations as a result of its use of the excimer
laser approved by the FDA, the impact of which regulations have not been
determined at this time.
10
<PAGE>
Seasonality
The Company's retail optical and laser correction businesses are not
seasonal.
Patents and Trademarks
The Company has registered the following trademarks and/or servicemarks
with the United States Patent and Trademark Office and the Canadian Registrar of
Trademarks: "Sterling Optical," "IPCO Optical," and "Site For Sore Eyes". In
connection with the Benson and VCA Transactions, the Company acquired several
additional trademarks, certain of which the Company continues to utilize in
connection with the operation of its Sterling Stores. The Company believes that
these trademarks and servicemarks have acquired significant commercial value and
have helped to promote the Company's reputation, although the Company intends to
change the tradename of most Sterling Stores to "Sterling Optical".
Employees
As of December 31, 1996, the Company employed approximately 620
individuals, of which approximately 85% were employed on a full-time basis. No
employees are covered by any collective bargaining agreement. The Company
considers labor relations with its employees to be good and has not experienced
any interruption of its operations due to labor disagreements.
Item 2. Properties.
The Company's headquarters comprised of approximately 21,950 square feet
(approximately 60%) located in an office building situated in East Meadow, New
York, which building is owned by certain of the Company's principal
shareholders, under a sublease which expires in 2006. This facility houses the
Company's principal executive and administrative offices.
The Company's former headquarters comprised approximately 7,500 square
feet of space in a building located in Lynbrook, New York occupied under a lease
which will expire on April 30, 1997.
The Company leases the space occupied by all of its Company-owed stores
and the majority of its franchised stores. The balance of the leases for the
Sterling Stores are held in the name of the individual franchisee.
Sterling Stores are generally located in commercial areas, including
major shopping malls, strip centers, free-standing buildings and other areas
conducive to retail trade. Certain Sterling Stores not located in commercial
areas are located in professional optometric offices, clinics and hospitals.
The Company leases approximately 4,500 square feet of space in an office
building located in Trump Tower, New York, New York under a sublease which
expires on May 30, 2000. The facility houses the Company's Insight Laser Center.
Pursuant to the terms of a revolving credit and term loan agreement
between The Chase Manhattan Bank, f/k/a Chemical Bank, (the "Bank") and the
Company, dated as of April 5, 1994, as amended (the "Credit Agreement"),
substantially all of the Company's assets and properties are subject to a first
priority perfected lien and security interest in favor of the Bank.
Item 3. Legal Proceedings.
As part of the IPCO Acquisition, Sterling acquired all of IPCO's
franchise notes receivable, some of which were subject to a pledge in favor of
Sanwa Business Credit Corporation ("Sanwa"). The Company is of the opinion that,
after payment of the indebtedness owed to Sanwa, it is entitled to a return of
such franchise notes, the residual value of which the Company estimated to be
approximately $1,325,000 as of December 31, 1996. Sanwa has contested such claim
by the Company and contends that it is not obligated to return to Sterling the
franchise notes remaining after Sanwa has been paid in full. On January 9, 1995,
Sterling filed a complaint in the United States Bankruptcy Court, Southern
District of New York (Case No. 91 B15944 (JLG)) seeking a judgment of the Court
directing Sanwa to render an accounting of all monies paid to Sanwa under such
franchise notes and to declare its rights in such franchise notes receivable.
Although, management believes that it will be successful in this action, no
assurance can be given as to the outcome thereof, and in the
11
<PAGE>
event such claim is denied by the Court, such denial will result in a decrease
of the Company's assets (as set forth in the Company's Consolidated Financial
Statements) for the full amount of such estimated residual value of such
franchise notes receivable pledged to Sanwa.
The Company is a defendant in certain lawsuits alleging various claims
incurred in the ordinary course of business. These claims are generally covered
by various insurance policies, subject to certain deductible amounts and maximum
policy limits, and, in the opinion of management, the resolution of existing
lawsuits should not have a material adverse effect, individually or in the
aggregate, upon the Company's business or financial condition. Management
believes that there are no other legal proceedings pending or threatened to
which the Company is, or may be, a party or to which any of its property is or
may be subject which are likely to have a material adverse effect on the
Company.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote by the Company's shareholders
during the quarter ended December 31, 1996.
Executive Officers of the Registrant
The executive officers, directors and key employees of the Registrant are
as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Robert Cohen, O.D. 53 Chairman of the Board of Directors
Alan Cohen, O.D. 46 Vice-Chairman of the Board of Directors
Robert B. Greenberg 52 Chief Executive Officer, President and Director
Sebastian Giordano 39 Executive Vice President - Finance, Chief Financial Officer and Treasurer
Joseph Silver 50 Executive Vice President, Secretary and General Counsel
Jerry R. Darnell 46 Executive Vice President - Franchising
Kevin Cambra 33 Executive Vice President - Company Store Operations
Edward Cohen, O.D. 57 Director
Joel L. Gold 55 Director
Francis A. L'Esperance, Jr., M.D. 64 Director
Jay Fabrikant 40 Director
Martin J. Shoman, O.D. 57 President - VisionCare of California
Charles Raab 48 Chief Financial Officer - Insight Laser Centers, Inc.
Al Akbar 44 Vice President - Managed Care
</TABLE>
Dr. Robert Cohen has served as Chairman of the Board of Directors of the
Registrant since its inception. He also served as Chief Executive Officer of
Sterling from inception until October, 1995. His principal office is located at
the Company's executive offices in East Meadow, New York. Dr. Robert Cohen and
his brothers, Drs. Edward Cohen and Alan Cohen, together with certain members of
their immediate families, are the principal shareholders of Sterling. From 1968
to the present, Dr. Robert Cohen has been engaged in the retail and wholesale
optical business. For more than 10 years, Dr. Cohen has also served as President
and a director of CFO, which currently maintains its principal office in the
Company's executive offices in East Meadow, New York. Dr. Cohen and his
brothers, Drs. Edward Cohen and Alan Cohen, together with certain members of
their immediate families, also are the sole shareholders of CFO. CFO engages in
the operation and franchising of retail optical stores similar to those operated
and franchised by the Company. Dr. Cohen is a director of, and, together with
Dr. Alan Cohen and certain members of their respective immediate families, is a
shareholder of Fast Cast Corporation, f/k/a Rapid Cast ("Rapid Cast") which
offers for sale equipment and supplies to produce ophthalmic lenses.
Additionally, he is a shareholder, officer and director of Lensco Consulting
Inc. ("Lensco"), which acts as a consultant to Neolens, Inc. ("Neolens"), an
entity engaged primarily in the manufacturing and marketing of polycarbonate
ophthalmic lenses. Dr. Cohen, together with certain members of his immediate
family, also owns a portion of Neolens' outstanding common stock, as well as
warrants to purchase additional shares. Dr. Cohen is also an officer and a
director of several management and real estate companies and numerous other
businesses.
12
<PAGE>
Dr. Alan Cohen has served as a Director of Sterling since its inception.
He also served as Chief Operating Officer of Sterling from 1992 until October,
1995 when he became Vice-Chairman of the Board of Directors of Sterling. His
principal office is located at the Company's executive offices in East Meadow,
New York. Dr. Alan Cohen and his brothers, Drs. Edward Cohen and Robert Cohen,
together with certain members of their immediate families, are the principal
shareholders of Sterling. From 1974 to the present, Dr. Alan Cohen has been
engaged in the retail and wholesale optical business. For more than 10 years,
Dr. Cohen has also been a director, principal shareholder and officer of CFO.
Dr. Cohen is a director of, and, together with Dr. Robert Cohen and certain
members of their respective immediate families, is a shareholder of Rapid Cast
and a shareholder, director and officer of Lensco. Dr. Cohen, together with
certain members of his immediate family, also owns a portion of Neolens'
outstanding common stock, as well as warrants to purchase additional shares. He
is also an officer and a director of several management and real estate
companies and numerous other businesses.
Robert B. Greenberg has served as a Director of Sterling since July,
1992, became President in August, 1994 and became Chief Executive Officer in
October, 1995. From 1984 through 1994, Mr. Greenberg served as President of
Natural Cosmetic Licensing, Inc. and its predecessor companies, which was, until
September, 1994, the owner and licensor of "i natural" skin care and cosmetic
products. Mr. Greenberg previously served as a Director of I Natural, Inc., the
general partner of I Natural Cosmetics, L.P., the current owner and licensor of
the name and the products offered under the name "i natural cosmetics". Mr.
Greenberg is a member of the Board of Directors of Benihana, Inc., a company
operating company-owned and franchised Japanese-style restaurants, which
position he has held since 1983. In addition, since 1983, Mr. Greenberg has been
a member of the International Council of Shopping Centers, and the International
Franchise Association. In addition, from time to time, Mr. Greenberg renders
real estate and financial consulting advisory services to various companies,
including CFO.
Sebastian Giordano has served as Chief Financial Officer, Executive Vice
President - Finance and Treasurer of Sterling since the IPCO Acquisition. From
March 1990 to July 15, 1992, Mr. Giordano was Vice President and Treasurer of
IPCO, which was located in Hackensack, New Jersey. Accordingly, Mr. Giordano was
Vice President and Treasurer of IPCO at the time it filed for protection under
Chapter 11 of the United States Bankruptcy Code. In June, 1992, he was appointed
Responsible Officer by the Bankruptcy Court overseeing the liquidation of IPCO,
to be the person in charge of the liquidation of the remaining assets of IPCO.
Mr. Giordano resigned from that position on or about July 26, 1992. Mr. Giordano
and his wife are shareholders of Dani-Marc Optical, Inc., the former franchisee
of the Sterling Store located in Nanuet, New York.
Joseph Silver has served as Executive Vice President and Secretary of,
and General Counsel to, the Company since March, 1992. From May 1985 to December
1991, Mr. Silver served as General Counsel to The Trump Organization, located in
New York, New York. Mr. Silver is a member of the New York State Bar, and
received a Juris Doctorate degree from Brooklyn Law School in 1969. In addition
to the services which Mr. Silver provides to the Company, he also provided legal
services to other persons or entities, including persons and entities which are
affiliates of the Company, although such legal services (except with respect to
two wholly-owned subsidiaries of the Company and except for legal services
rendered for no consideration) ceased upon consummation of the Company's initial
public offering. Mr. Silver, together with his wife, are the principal
stockholders of RJL Optical, Inc., the franchisee of the Sterling Store located
in Great Neck, New York, which is presently being managed by the Company.
Jerry Darnell has served as Sterling's Executive Vice President -
Franchising since July, 1992. From February 1990 through December 1991, Mr.
Darnell served as Director of Franchise Development for Physicians Weight Loss
Centers, Inc., located in Akron, Ohio. From July 1989 to February 1990, he was
Senior Vice President of Formu-3 International, Inc., a company operating
company owned and franchised weight loss centers, located in Canton, Ohio. From
August 1988 to July 1989, Mr. Darnell was Vice President of Franchise
Development of Medicine Shoppe International, Inc., a company in the business of
franchising retail pharmaceutical stores, located in St. Louis, Missouri, having
first been associated with that company, as a consultant, in November 1987. Mr.
Darnell is a member of the International Franchise Association, served as
Chairman of its trade show exhibit committee and has served as a franchise
consultant to many franchise organizations where he has been a seminar leader.
He has also been a keynote speaker for national sales and business
organizations.
Kevin Cambra has been employed by Sterling in various capacities since
October, 1993. He has been responsible for Company store operations, first as
Director of Store Operations, and most recently as Executive Vice President -
Company Store Operations. From 1987 to 1993, Mr. Cambra was employed by SFSE in
various capacities, including Vice President of Company Store Operations, a
position to which he was appointed in 1990. Accordingly, Mr. Cambra was an
officer of SFSE at the time it filed a petition in bankruptcy and prior to the
SFSE Merger.
13
<PAGE>
Dr. Edward Cohen has served as a Director of Sterling since July, 1992.
He also served as Vice President of Sterling from July, 1992 until October,
1995. Dr. Edward Cohen and his brothers, Drs. Robert Cohen and Alan Cohen,
together with certain members of their immediate families, are principal
shareholders of Sterling. For more than 16 years, Dr. Edward Cohen has also been
a director, shareholder and officer of CFO. Dr. Cohen is also an officer and a
director of several management and real estate companies and numerous other
businesses.
Joel L. Gold has served as a Director of Sterling since December, 1995.
He is currently an Executive Vice President of LT Lawrence & Co., and was
formerly a Managing Director of Fechtor, Detwiler & Co., Inc., a representative
of the underwriters for the Company's initial public offering. Mr. Gold was a
Managing Director of Furman Selz Incorporated from January, 1992 until March,
1995. From April, 1990 until January, 1992, Mr. Gold was a Managing Director of
Bear Stearns and Co., Inc. ("Bear Stearns"). For approximately 20 years before
he became affiliated with Bear Stearns, he held various positions with Drexel
Burnham Lambert, Inc. He is currently a director of Action Industries, a
marketer of houseware products ("Action"); Concord Camera Corp., a manufacturer
and distributor of cameras ("Concord"); Life Medical Sciences, a
biotechnological company ("Life"); BCAM Corporation, a provider of ergonometric
services ("BCAM"); and William Greenberg, Jr. Desserts and Cafes, Inc., a
specialty bakery. He currently serves on the Compensation Committee of each of
Action, Concord, Life and BCAM.
Jay Fabrikant has been actively engaged in the healthcare field for over
15 years. Mr. Fabrikant , since 1983, has been the President of Medical
Development Systems, Inc., a health care consulting firm, since 1983. Mr.
Fabrikant has been the Chairman and Chief Executive Officer of Total Health
Systems, a NASDAQ( NMS) traded firm, Chairman and Chief Executive Officer of
Advanced Healthcare Systems, Inc., a New Jersey State Certified Managed Care
Organization, President of The New York Health Plan, Inc. and the founder and
initial Chairman and Chief Executive Officer of National Health Plan Plus, Inc.,
a multi-state health, life, disability, and managed care company. Mr. Fabrikant
has also been on several governmental panels for healthcare regulation.
Dr. Francis A. L'Esperance, Jr. has served as a Director of Sterling
since December, 1995 and was appointed as the Chairman of the Insight's Board of
Directors in March, 1996. Dr. L'Esperance has been a Professor of Clinical
Ophthalmology at the Columbia University College of Physicians and Surgeons and
an Attending Ophthalmologist at the Edward S. Harkness Eye Institute and the
Manhattan Eye, Ear and Throat Hospital since 1985. Throughout his career, Dr.
L'Esperance has written eight textbooks and 104 articles and multiple chapters
particularly on the subject of ophthalmic laser applications. He has been
researching ophthalmic lasers since 1963 and has performed various ophthalmic
procedures using various types of lasers since 1968. He co-founded Taunton
Technologies, Inc. (which acquired, by merger, and later changed its name to
VISX). Taunton Technologies, Inc. was the first excimer laser company to gain
approval by the FDA for evaluation of the excimer laser to remove corneal scars
and to correct certain refractive errors. He was awarded the William B. Mark
Award for Research Excellence by the American Society for Laser Medicine and
Surgery in 1986 and the Arthur L. Schawlow Award by the Laser Institute of
America in 1988. In addition, Dr. L'Esperance has been an Overseers Member at
Dartmouth Medical School and C. Everett Koop Institute in Hanover, New
Hampshire.
Dr. Martin Shoman has served as President and Chief Operating Officer of
VCC since June, 1994. From April, 1994 until June, 1994 he was Vice President of
VCC. From May, 1993 through June, 1994 he was President of M.J. Shoman &
Associates, an eyecare consultant business that offered services to the Company
and other retail optical stores. From January, 1977 until May, 1993 he was
President and Chief Executive Officer of a subsidiary of Pearle Vision Centers,
operating a California specialized health maintenance organization.
Charles Raab has been employed by Insight since February, 1996 and, in
March, 1996, was elected as its Chief Financial Officer. Prior to joining
Insight, Mr. Raab served as President of Empire Fiscal Management, Inc., since
1986. Prior to Empire he held CFO positions over a twelve year period with the
Osteopathic Hospital and Clinic in Queens, New York and the New York Medical
College/Flower Fifth Avenue Hospital in New York City. Mr. Raab holds a Masters
Degree in Accounting, a Graduate Degree in Public Health Administration, and an
Undergraduate Degree in International Business and Finance.
Al Akbar has been Vice President - Managed Care of Sterling since March,
1996. For the 11 years prior to joining the Company, Mr. Akbar served in various
capacities at Pearle, Inc., including Director of Managed Care. In 1980, Mr.
Akbar received his degree in business from the University of Dallas Graduate
School of Business.
14
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock has been listed on the Nasdaq Market System
under the trading symbol "ISEE" since December 20, 1995. For the year ended
December 31, 1996, the high and low sales prices for the Company's Common Stock
as reported on the Nasdaq Stock Market were $9.06 and $5.00, respectively.
The approximate number of recordholders of the Company's Common Stock at
March 20, 1997 was 169.
Prior to its initial public offering (the "Offering"), the Company was a
Subchapter S corporation. In 1992, 1993, 1994, and 1995, the Company paid cash
dividends to its shareholders in the aggregate amounts of $124,000, $3,943,000,
$6,187,000, and $1,800,000, respectively, and immediately prior to the
consummation of its Offering, the Company authorized and declared the payment of
a dividend,in the aggregate amount of $1,450,000, to the individuals who were
shareholders of the Company immediately prior to the Company's Offering.
The following table sets forth the high and low stock prices for 1996:
Stock Prices
High Low
---- ---
Year ended December 31, 1996:
-----------------------------
Quarter ended March 31, 1996 $7.25 $6.50
Quarter ended June 30, 1996 $8.75 $7.88
Quarter ended September 30, 1996 $8.00 $7.63
Quarter ended December 31, 1996 $8.81 $8.00
Pursuant to the Credit Agreement, the Company is restricted from paying
dividends on its Common Stock without the Bank's consent, although it has no
intention to pay dividends in the foreseeable future.
15
<PAGE>
Item 6. Selected Financial Data
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The selected consolidated financial data set forth below for the period
from February 19, 1992 through December 31, 1992 and for the years ended
December 31, 1993, 1994, 1995 and 1996 were derived from the audited
consolidated financial statements of the Company. Systemwide sales and Sterling
Store data is derived from the Company's records and is unaudited. The data set
forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements and related Notes appearing elsewhere.
<TABLE>
<CAPTION>
Period From
February 19 1992
Year Ended Through
December 31, December 31,
1996 1995 1994 1993 1992 (1)
------ ----- ------ ----- --------
(In thousands except per share data and number of stores)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data: (2)
Systemwide sales (3) $ 131,593 $ 112,258 $ 104,168 $ 84,272 $ 34,402
========= ========= ========= ======== ========
Net sales - Company-owned stores $ 28,477 $ 25,773 $ 27,684 $22,820 $12,583
Franchise royalties 7,616 6,891 5,921 4,659 1,459
Net gains and fees from the conveyance of
Company- owned store assets to
Franchisees that are:
Unrelated parties 1,963 2,197 2,832 3,044 3,943
Related parties - - 519 - -
Other income (4) 2,287 2,017 1,768 1,468 163
--------- --------- --------- -------- --------
Total revenues 40,343 36,878 38,724 31,991 18,148
--------- --------- --------- -------- --------
Cost of sales 8,851 6,495 7,590 5,870 3,698
Selling expenses 19,943 16,127 16,414 12,975 7,833
General and administrative expenses 16,743 10,529 11,321 6,155 3,714
Interest expense 1,297 831 647 786 373
--------- --------- --------- -------- --------
Total costs and expenses 46,834 33,982 35,972 25,786 15,618
--------- --------- --------- -------- --------
Income (loss) before provision for income taxes
and extraordinary item (6,491) 2,896 2,752 6,205 2,530
Provision (benefit) for income taxes (5) (2,001) 2,129 127 259 76
--------- --------- --------- -------- --------
Income (loss) before extraordinary item $ (4,490) $ 767 $ 2,625 $ 5,946 $ 2,454
--------- --------- --------- -------- --------
Income (loss) per share of common
stock and common stock equivalents
before extraordinary item $( .36) $ .08 $ .26 $ .60 $ .25
Weighted average common shares and
common share equivalents
outstanding (7) 12,341 10,031 9,963 9,963 9,963
--------- --------- --------- -------- --------
Pro forma statement of operations data
(unaudited):(2)(6)
Income before provision for income
taxes and extraordinary item $ 2,896 $ 2,752 $ 6,205 $ 2,530
Pro forma provision for income taxes 1,158 1,101 2,482 1,012
--------- --------- -------- --------
Pro forma net income before extraordinary item 1,738 1,651 3,723 1,518
Pro forma income per share of common stock and
common stock equivalents before
extraordinary item
before extraordinary item $.17 $.16 $.37 $.15
Weighted average common shares and
common share equivalents
outstanding (7) 10,031 10,031 10,031 10,031
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Period From
February 19, 1992
Year Ended Through
December 31, December 31,
1996 1995 1994 1993 1992 (1)
------- ------- --------- -------- ------------
(In thousands except per share data and number of stores)
<S> <C> <C> <C> <C> <C>
Statement Store Data:
Company-owned stores bought, opened
or reacquired 24 39 14 18 58
Company-owned stores sold or closed (33) (8) (19) (16) (15)
Company-owned stores owned at end of period 62 71 40 45 43
Franchised stores at end of period 257 150 141 126 97
Same store sales:(8)
Company-owned stores - $15,513 $16,050 - - N/A
- $19,626 $19,411 - N/A
- - $15,903 $15,520 N/A
Franchised stores - $73,664 $74,453 - - N/A
- 71,450 $69,818 - N/A
- - $52,284 $50,378 N/A
Average sales per store: (9) (10)
Company-owned stores $ 395 $ 659 $ 637 $ 594 $ 488
Franchised stores $ 392 $ 600 $ 586 $ 545 $ 501
Average franchise royalties per franchised
store (9) $ 43 $ 48 $ 45 $ 41 $ 33
</TABLE>
<TABLE>
<CAPTION>
December 31,
Balance Sheet Data :(2) 1996 1995 1994 1993 1992 (1)
------- ------- --------- -------- ----------
<S> <C> <C> <C> <C> <C>
Working capital (deficit) $(3,803) $16,312 $ 1,750 $ 2,653 $ 2,525
Total assets 46,269 46,455 24,186 25,998 19,812
Total debt 15,184 13,900 8,121 7,335 6,825
Shareholders' Equity 19,557 22,825 10,517 13,326 8,353
</TABLE>
- --------------------------------
(1) The Registrant was formed on January 15, 1992. On February 19, 1992, The
Registrant was capitalized in order to provide debtor-in-possession
financing to, and bid for the assets then comprising the retail optical
business of, IPCO. On February 28, 1992, The Registrant, as the successful
bidder, and with the approval of the United States Bankruptcy Court for the
Southern District of New York, entered into a contract to purchase
substantially all of the assets then comprising such retail optical
business of IPCO. On July 15, 1992, Sterling consummated the transactions
set forth in such contract and commenced operations.
(2) The financial data contained herein does not include information regarding
stores previously licensed by IPCO (until such stores were acquired by the
Company) since the Company believes that the information pertaining to such
stores was not, and is not, material to the Company's results of
operations.
(3) Systemwide sales are unaudited and represent the combined retail sales of
Company-owned and franchised stores, as well as revenues generated by VCA.
(4) Other income consists primarily of interest income on franchise notes
receivable and funds provided by certain Preferred Vendors for convention
and seminars.
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(5) From May 1, 1992, until the consummation of the Company's Offering, the
Company operated as an S Corporation for federal and state income tax
purposes. As a result, the Company's 1992, 1993, 1994 and 1995 earnings
through December 19, 1995, the day prior to the completion of the Company's
Offering, at which date the Company'S Corporation status terminated, have
been taxed, with certain exceptions, for federal and certain state income
tax purposes, directly to the individuals who were shareholders of the
Company immediately prior to the consummation of the Offering. The Company
authorized and declared the payment of a dividend of $1,450,000, based upon
the net income of the Company for the period January 1, 1995 to December
19, 1995, to such individuals immediately prior to the Offering.
(6) Pro Forma Income Statement Data reflect adjustments to the historical
income statement data assuming the Company had not elected S Corporation
status for income tax purposes. The provision for federal and state income
taxes assumes an effective tax rate of 40% for each of the following years:
1992, 1993, 1994 and 1995.
(7) Assumes, as outstanding during the period ended December 31, 1992 and the
years ended 1993 and 1994, 9,963,495 shares of Common Stock reflecting the
4,506.31-to-one stock split of the Company's outstanding Common Stock as of
the date of the Offering; and 12,207,495 shares of Common Stock, reflecting
the stock split, for the year ended December 31, 1995. Under the treasury
stock method of accounting, the dilutive effect of options granted under
the Company's 1995 Stock Incentive Plan is not material and therefore is
not reflected in weighted average common shares and common share
equivalents outstanding.
(8) Same store sales represent sales generated by VCC and Company-owned or
franchised stores which were open during the entirety of the one-year
periods compared and are not necessarily comparable as between one-year
periods.
(9) Average sales per store and average franchise royalties per franchised
store are computed based upon the weighted average number of Company-owned
and franchised stores, respectively, for each of the specified periods. For
periods less than a year, the averages have been annualized.
(10) The decline in average sales per store for Company-owned and franchised
stores was due primarily from the impact of the Benson and DKM stores which
have sales volumes substantially lower than the typical Sterling store.
Excluding Benson and DKM stores, averages sales per store for Sterling
Company-owned and franchised stores were $620,000, and $613,000,
respectively, for the calendar year ended December 31, 1996.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
All statements contained herein (other than 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, including the
operations of the Registrant's subsidiary, 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 from the anticipated results or other expectations
expressed in the Company's forward looking statements. Generally, the words
"anticipate", "believe", "estimate", "expects" and similar expressions, as they
relate to the Company and/or its management, are intended to identify forward
looking statements. Among the factors that could cause actual results to differ
materially are the following: the inability of the Company to obtain waivers of
its failure to comply with certain covenants under its Credit Agreement and the
possible defaults related therefrom; the inability of the Company to enter into
third party, managed care provider agreements on favorable terms; the inability
of the Company to obtain additional financing to meet its capital needs;
competition in the retail optical industry; the ability of the Company to
acquire, at favorable prices, retail optical chains; the uncertainty of the
acceptance of PRK, a procedure being offered by Insight to correct the vision of
individuals experiencing certain degrees of myopia; the availability of new
and/or better ophthalmic laser technologies or other technologies that serve the
same purpose as PRK; the inability of the Company to finalize favorable
agreements with ophthalmologists to utilize the Company's excimer lasers to
perform PRK procedures; competition in the PRK market; lack of experience in
developing or managing PRK centers and ophthalmological practices; and general
business and economic conditions.
General Overview
In July, 1992, the Company acquired substantially all of the assets
pertaining to 58 company-owned stores and 80 franchised locations then utilized
by IPCO in connection with the operation of its retail optical business.
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The expansion of the Company's franchise system was primarily
attributable to the conveyance to franchisees, by the end of 1993, of the assets
of 31 of the 58 initially acquired Company-owned stores. In October 1993, August
1994, November 1995, and May 1996, respectively, the Company replenished its
inventory of Company-owned stores with the acquisition of 16 Company-owned
stores as part of the SFSE Merger (which 16 stores were in addition to ten
stores then franchised by SFSE), the acquisition of eight of the stores
previously licensed by IPCO to Pembridge, the acquisition of 32 Company-owned
stores in connection with the Benson Transaction, and the acquisition of 13
Company-owned stores (which 13 stores were in addition to the 75 stores
franchised by VCA) in connection with the VCA Transaction.
The Company currently derives its revenues primarily from: (i) the sale
of eye care products (of which the sale of eyeglasses represented in excess of
70% of total sales for each period since inception) and by providing eye care
services at Company-owned stores and in those franchised locations in which
certain of the Company's VCC operations are located; (ii) ongoing franchise
royalties based upon the gross revenue of franchised stores; (iii) the
conveyance of Company-owned store assets to franchisees; (iv) initial franchise
fees; (v) interest income derived primarily from purchase money financing
provided by the Company on its conveyance of Company-owned store assets to
franchisees and on the proceeds of the Offering, until such time that the
proceeds were expended; and, (vi) laser access fees paid by ophthalmologists
utilizing the Company's excimer lasers to perform PRK procedures.
Management's growth strategy is to transform the Company from a retailer
of optical products into a full-service eye care company, including the
management of its existing Insight Laser Center and by developing affiliations
with ophthalmologists to utilize the Company's excimer lasers, while at the same
time expanding the Company's existing core business and customer base. A key
element of such strategy is to acquire existing retail optical chains, convert
independently owned retail optical stores to franchised stores and open new
stores.
Average retail store sales and average ongoing franchise royalty
information described below is computed based upon the weighted average of
existing stores in each category. Since the Benson Transaction occurred in
November 1995, the number of Benson stores and the retail store sales generated
by such stores are not utilized in calculating the weighted average of existing
stores and average retail store sales for the calendar year ended December 31,
1995.
Same store sales represent sales generated by Company-owned or franchised
stores which were Sterling Stores in operation during the entirety of the
one-year periods.
Net gains on the conveyance of the assets of Company-owned stores to
franchisees vary depending upon the number of stores conveyed to franchisees,
the consideration paid for the assets of each such store and the Company's basis
(net book value) in the assets of the stores conveyed.
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Results of Operations
For the Calendar-Year Ended December 31, 1996 compared to December 31, 1995
Systemwide sales, which represent combined retail sales generated by
Company-owned and franchised stores, as well as revenues generated by VCA,
increased by $19,335,000, or 17.2%, to $131,593,000 for the calendar year ended
December 31, 1996, as compared to $112,258,000 for the same period in 1995. On a
same store basis (for stores that operated as either a Company-owned or
franchised store during the entirety of both of the calendar years ended
December 31, 1996 and 1995), systemwide sales decreased by $2,459,000, or 2.3%,
to $105,630,000 for the calendar year ended December 31, 1996, as compared to
$108,089,000 for the same period in 1995. There were 171 stores that operated as
either a Company-owned or franchised store during the entirety of both of the
calendar years ended December 31, 1996 and 1995.
Aggregate sales generated from the operation of Company-owned stores
increased by $2,704,000, or 10.5%, to $28,477,000 for the calendar year ended
December 31, 1996, as compared to $25,773,000 for the same period in 1995. Such
increase was primarily due to the VCA Transaction in the second quarter of
1996), which resulted in the Company's acquisition, among other assets, of the
assets and leases for 13 company-owned stores, which was partially offset by the
decrease in aggregate sales resulting from 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 calendar years 1996 and 1995,
decreased by $537,000, or 3.4%, to $15,513,000 for the calendar year ended
December 31, 1996, as compared to $16,050,000 for the same period in 1995. The
Company believes that such decrease resulted, in part, from general business
conditions and from the Company's change in its employment arrangements with
certain of its optometrists from that of a salaried employee to an independent
optometrist subleasing the professional office located within the Sterling Store
in question. This change resulted in the loss of eye examination fee income for
the Company of approximately $290,000, since such doctors now collect such fees
as part of their income, although this contributed to the reduction in selling
expenses as described below.
Aggregate sales generated from the operation of franchised stores
increased by $16,631,000, or 19.2%, to $103,116,000 for the calendar year ended
December 31, 1996, as compared to $86,485,000 for the same period in 1995, due
primarily to an increase in the number of Company-owned stores conveyed to
franchisees and certain franchised stores acquired in the VCA Transaction. On a
same store basis, aggregate sales generated by franchised stores in operation
during the entirety of both of the calendar years 1996 and 1995, decreased by
$789,000, or 1.1%, to $73,664,000 for the calendar year ended December 31, 1996,
as compared to $74,453,000 for the same period in 1995.
Aggregate ongoing franchise royalties increased by $725,000, or 10.5%, to
$7,616,000 for the calendar year ended December 31, 1996, as compared to
$6,891,000 for the same period in 1995, due primarily to an increase in the
number of Company-owned stores conveyed to franchisees and certain franchised
stores acquired in the VCA Transaction.
Net gains on the conveyance of the assets of twenty Company-owned stores
to franchisees decreased by $234,000, or 10.7%, to $1,963,000 for the calendar
year ended December 31, 1996, as compared to net gains on the conveyance of the
assets of eight Company-owned stores to franchisees in the aggregate amount of
$2,197,000 for the same period in 1995 (which included the gain on the
conveyance of the assets of one store, in the amount of $1,173,000).
The Company's gross profit margin decreased by 6.2 percentage points, to
68.9%, for the year ended December 31, 1996, as compared to 75.1% for the same
period in 1995. 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 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 increased by $3,816,000, or 23.7%, to $19,943,000 for
the calendar year ended December 31, 1996, as compared to $16,127,000 for the
same period in 1995, due to the inclusion of selling expenses of approximately
$5,488,000 incurred by the stores
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acquired in connection with the Benson and VCA Transactions, and the operations
of Insight, which were partially offset by a decrease in selling expenses of
approximately $1,332,000, due primarily from the conveyance of the assets of
Company-owned stores to franchisees, as well as a decrease in selling expenses
of approximately $330,000 in connection with the change in the Company's
employment arrangements (as described above) with certain of its optometrists.
General and administrative expenses (including interest expense,
depreciation and bad debt expense) increased by $6,680,000, or 58.8%, to
$18,040,000 for the calendar year ended December 31, 1996, as compared to
$11,360,000 for the same period in 1995. This increase was due primarily to the
following five factors: (i) an increase in administrative costs of approximately
$3,400,000 related to the business of Insight, which incurred expenses of
approximately $600,000 in 1995; (ii) approximately $535,000 in administrative
costs related to the Benson Transaction; (iii) approximately $439,000 in
administrative costs related to the VCA Transaction; (iv) approximately $400,000
in occupancy and moving expenses related to the Company's relocation, in the
second quarter of 1996, of its administrative offices; and (v) approximately
$475,000 in costs related to operating as a publicly held company. Interest
expense, which is included in general and administrative expenses, increased by
$466,000, or 56.1%, to $1,297,000 for the calendar year ended December 31, 1996,
as compared to $831,000 for the same period in 1995. This increase was due to
increased indebtedness incurred by the Company in connection with the leasing,
in 1995, of five excimer lasers and, in 1996, one additional excimer laser
(which are capital leases and, accordingly, such payments include interest
expense), and an additional loan, at the end of the fourth quarter of 1995, of
$1,670,000 to fund the Benson Transaction. The Company's provision for doubtful
accounts, which is included in general and administrative expenses, increased by
$727,000, or 361.7%, to $928,000 for the calendar year ended December 31, 1996,
as compared to $201,000 for the same period in 1995. This increase was due
primarily to the reduction in the residual value of the cash collateral and
franchise notes held by the CIT Group / Equipment Financing, Inc. ("CIT"). See
Liquidity and Capital Resources.
The Company's income before income taxes decreased by $9,387,000, or
324.1%, to a loss of $6,491,000 for the calendar year ended December 31, 1996,
as compared to income of $2,896,000 for the same period in 1995. This decrease
was primarily due to the following three factors which were not comparable to
the Company's operations for the same period in 1995: (i) the Company
consummated the Benson Transaction during the fourth quarter of 1995 and thereby
acquired substantially all of the assets and certain continuing expenses of the
debtors. The Company incurred a loss of $2,312,000, for the calendar year ended
December 31, 1996, as compared to a loss of $520,000 for the same period in
1995, from the operation of the stores acquired in the Benson Transaction; (ii)
the Company incurred a loss of $3,330,000, for the calendar year ended December
31, 1996, as compared to a loss of $193,000 for the same period in 1995, in
establishing the operations of Insight, although Insight began generating
minimal revenues during the second quarter of 1996; and (iii) an increase in
general and administrative expenses as discussed above. This decrease was
partially offset by income of $1,112,000 generated from the operations of the
stores acquired (during the second quarter of 1996), in the VCA Transaction.
Income from the Company's operations (excluding the losses applicable to the
operations of the stores acquired in the Benson Transaction, Insight, and the
income applicable to the operation of the stores acquired in the VCA
Transaction) decreased by $5,583,000, or 285.4%, to a loss of $1,975,000 for the
calendar year ended December 31, 1996, as compared to income of $3,608,000 for
the same period in 1995. 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 Insight and the stores acquired in the Benson and VCA
Transactions. This increase in general and administrative expenses was partially
offset by an increase in net gains from the conveyance of the assets of
Company-owned stores to franchisees, (excluding such gains applicable to the
conveyance of the assets of two Company-owned store acquired in the VCA
Transaction).
Calendar Year Ended December 31, 1995 Compared to Calendar Year Ended
December 31, 1994
Systemwide sales, increased by $8,090,000, or 7.8%, to $112,258,000 for
calendar year 1995, as compared to $104,168,000 for same period in 1994. There
were 221 and 181 Sterling Stores in operation as of December 31, 1995 and
December 31, 1994, respectively, of which 150 and 141 stores, respectively, were
franchised.
Aggregate sales generated from the operation of Company-owned stores
decreased by $1,911,000, or 6.9%, to $25,773,000, for calendar year 1995, as
compared to aggregate sales of $27,684,000 at Company-owned stores for the same
period in 1994, due to the conveyance of the assets of eight Company-owned
stores to Franchisees. In addition, the Company changed its employment
arrangements with certain of its optometrists from that of a salaried employee
to an independent optometrist subleasing the professional office located within
the Sterling Store in question. This change in status resulted in the loss of
eye examination fee income for the Company, since the independent doctors now
collect such fees as part of their income, although this contributed to the
decrease in selling expenses described below.
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On a same store basis, aggregate sales generated from the operation of
Company-owned stores in operation during the entirety of both of the calendar
years 1995 and 1994 increased by $215,000, or 1.1%, to $19,626,000 for calendar
year ended December 31, 1995, as compared to $19,411,000 for the same period in
1994.
Aggregate sales generated by franchised stores increased by $10,001,000,
or 13.1%, to $86,485,000 for calendar year ended December 31, 1995, as compared
to $76,484,000 for the same period in 1994, due to an increase of the number of
franchised stores, as well as higher sales volume per store. On a same store
basis, aggregate sales generated by franchised stores increased by $1,722,000,
or 2.5%, to $71,540,000 for calendar year ended December 31, 1995, as compared
to $69,818,000 for the same period in 1994.
Average sales generated by Company-owned stores, other than the Benson
stores acquired during the fourth quarter of 1995, increased by $22,000, or
3.5%, to $659,000 for calendar year ended December 31, 1995, as compared to
$637,000 for the same period in 1994. Average sales generated by franchised
stores increased by $14,000, or 2.3%, to $600,000 for calendar year ended
December 31, 1995, as compared to $586,000 for the same period in 1994.
Aggregate ongoing franchise royalties increased by $970,000, or 16.4%, to
$6,891,000 for calendar year ended December 31, 1995, as compared to $5,921,000
for the same period in 1994, due to an increase in the number of franchised
stores, as well as an increase in the sales volume per franchised stores.
Average ongoing franchise royalties per franchised store increased by $3,000, or
6.7%, to $48,000 for calendar year ended December 31, 1995, as compared to
$45,000 for the same period in 1994.
Net gains on the conveyance of the assets of eight Company-owned stores
to franchisees decreased by $1,154,000, or 34.4%, from $2,197,000 for calendar
year ended December 31, 1995 (including the gain on the conveyance of one store,
in the amount of $1,173,000), as compared to the net gains on the conveyance of
assets of 17 Company-owned stores to franchisees, in the aggregate amount of
$3,351,000, for the same period in 1994.
The Company's gross profit margin increased by 2.3 percentage points, to
74.8%, for calendar year ended December 31, 1995, as compared to 72.5% for the
same period in 1994. This increase resulted primarily from the Company having
discontinued, in the Fall of 1995, two marketing programs: (i) a test program
which had changed the product mix in Company-owned stores by increasing the
quantities of higher priced/lower margin designer frames and specialty
ophthalmic lenses; and (ii) a promotional program in response to certain major
competitors of the Company which had offered promotional incentives to their
customers. To match such incentives, the Company had offered similar types of
promotional programs to its customers, which resulted previously in lower gross
profit 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 $287,000, or 1.8%, to $16,127,000 for
calendar year ended December 31, 1995, as compared to $16,414,000 for the same
period in 1994. Although the Company , in connection with the Benson
Transaction, acquired an additional 32 stores during the fourth quarter of 1995,
this decrease was primarily due to the change in the Company's employment
arrangement (as described above) with certain of its optometrists from that of a
salaried employee to an independent optometrist subleasing the professional
office located within the Sterling Store in question, and the conveyance of the
assets of eight Company-owned stores to franchisees during the calendar year
ended December 31, 1995.
General and administrative expenses (including interest expense,
depreciation and bad debt expense) decreased by $608,000, or 5.1%, to
$11,360,000 for calendar year ended December 31, 1995, as compared to
$11,968,000 for the same period in 1994. This decrease was primarily due to a
reduction in the Company's provision for doubtful accounts of $1,597,000 (see
explanation below) which was partially offset by an increase in administrative
costs of approximately $600,000 relating to Insight, the Company's investment
(by its wholly owned subsidiary, Sterling Vision of Metro N.Y., Inc.) in
National Optical Services, Inc. ("NOS"), an entity engaged in the business of
developing and administering third party provider agreements, and the Company's
construction and opening of an ophthalmic lens manufacturing facility, each of
which had not incurred expenses until 1995, as well as approximately $300,000 in
administrative costs related to the Benson Transaction.
Interest expense, which is included in general and administrative
expenses, increased by $184,000, or 28.4%, to $831,000 for calendar year ended
December 31, 1995, as compared to $647,000 for the same period in 1994. This
increase was due to increased indebtedness incurred by the Company in connection
with its acquisition of eight retail optical stores from Pembridge, in 1994, and
the leasing, in 1995, of five excimer lasers (which are capital leases and,
accordingly, the payments under which are treated as interest expense), as
partially offset by lower interest rates resulting from the refinancing, during
1994, of the Company's debt at more favorable
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interest rates.
The Company's provision for doubtful accounts, which is included in
general and administrative expenses, decreased by $1,597,000, or 89%, to
$201,000 as of December 31, 1995, as compared to $1,798,000 for December 31,
1994. This decrease resulted primarily from several factors: (i) the Company's
election, in 1994, to reserve an additional $194,000 and $132,000 against the
residual value of the corresponding franchise notes held by Sanwa and CIT,
respectively; (ii) the Company's election to reserve $391,000 against the cash
collateral held by CIT (see "Liquidity and Capital Resources"); (iii) as part of
the franchise system restructuring commenced by the Company in the latter part
of 1992, the Company wrote off, in 1994, $280,000 against certain franchise
notes receivable which were subject to forgiveness upon a franchisee's
compliance with certain financial covenants; and (iv) based upon historical
performance, the Company reduced its reserve against accounts and notes
receivable by approximately $600,000.
The Company's income before extraordinary item and income taxes increased
by $144,000, or 5.2%, to $2,896,000 for calendar year ended December 31, 1995,
as compared to $2,752,000 for the same period in 1994. During 1995, the Company
consummated the Benson Transaction and thereby acquired substantially all of the
assets and certain continuing expenses of the Sellers; began incurring costs in
anticipation of establishing its Insight Laser Center business; invested capital
in NOS; and opened an ophthalmic lens manufacturing facility. The Company
believes that the costs associated with acquiring and establishing these
businesses are nonrecurring. As a result, certain aspects of the Company's
operations during 1995 were not comparable to its operation during 1994. Income
from the Company's comparable operations increased by $1,156,000, or 42%, to
$3,908,000 for calendar year ended December 31, 1995, as compared to $2,752,000
for the same period in 1994, primarily due to the $895,000 decrease in selling,
general and administrative expenses, as described above, and the net profit
generated from the operations of VCC, in the amount of $212,000. This increase
was offset primarily by the following four factors: (i) the Company incurred a
$520,000 loss from the operation of the Benson stores during the fourth quarter
of 1995, primarily due to losses generated by the 66 stores the Company
ultimately closed and the costs incurred in maintaining Benson's administrative
office and warehouse facilities, which were eventually closed in the first
quarter of 1996; (ii) the Company incurred a $193,000 loss in establishing the
operations of Insight, which has yet to generate revenues, although it incurred
payroll costs and interest expense with respect to its leasing of five (5)
excimer lasers; (iii) the Company incurred a $192,000 loss from the operation of
NOS, including the Company's election to write-off the $50,000 balance of its
investment in such entity; and (iv) the Company incurred expenses in the amount
of $107,000 in connection with the initial operations of its lens manufacturing
facility.
Liquidity and Capital Resources
The Company is a party to a Term Loan and Revolving Credit Agreement (the
"Credit Agreement") with the Bank which, as of December 31, 1996, provided for
term loans totaling an aggregate principal amount of $4,640,448 and a $2,375,000
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 December
31, 1996, the outstanding principal balance of Tranche A was $2,333,344, and the
outstanding principal balance of Tranche B was $1,166,656. 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 Benson Transaction. As of
December 31, 1996, the outstanding principal balance of such loan was
$1,140,484.
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 $2,375,000 was outstanding as of December 31, 1996; 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 below)
which included, in part, a $1,000,000 payment and permanent reduction in the
amount of the line of credit and an extension of the maturity date of such line
of credit until 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
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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. Except for the quarter ended March
31, 1996, the Company was not in compliance with certain of these financial
covenants for the quarters ended June 30, 1996, September 30, 1996 and December
31, 1996, although, in each instance, the Company was able to secure a waiver of
such non-compliance from the Bank. At June 30, 1996, the Company was not in
compliance with the covenants described in (v) and (vii) above, primarily due to
the decrease in net income before taxes for the six months ended June 30, 1996
as compared to the same period in 1995, and an increase in the Company's then
short-term debt incurred as a result of the Banks issuance of a $4,150,000
letter of credit in connection with the VCA Transaction, which was completed
during the quarter ended June 30, 1996; at September 30, 1996, the Company was
not in compliance with the covenants described in (v) and (vii) above, primarily
due to the decrease in net income before taxes for the nine months ended
September 30, 1996 as compared to the same period in 1995; and, at December 31,
1996, the Company was not in compliance with any of the financial covenants
described above primarily due to the net loss before tax provision incurred for
the calendar year ended December 31, 1996. Unless waived, such defaults would
give the Bank the right to accelerate the payment of the then outstanding
balance under the Company's term loans and line of credit.
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 Banks prime rate, in effect, from time to
time. As a condition to the Company borrowings such funds, the Bank amended the
Credit Agreement which: (i) permitted the Company to borrow such funds from the
Cohen Brothers; (ii) placed additional restrictions on the Company's ability to
acquire other retail optical chains without the Bank's approval; (iii) expanded
the default provisions contained in the Credit Agreement; and (iv) placed
additional restrictions on the Company's ability to sell its excess franchisee
promissory notes. As of December 31, 1996, the aggregate outstanding principal
balance of such loans was $2,000,000. On February 26, 1997, the Company repaid
$1,000 of such loams together with the interest accrued to date thereof, and 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 Debenture and
Warrants Subscription Agreements (see Note 18 - Subsequent Events) with certain
investors in connection with 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"), which Warrants entitle the holders thereof to
purchase a maximum number of 1.2 million shares of the Company's Common Stock").
The Company intends to use the net proceeds (approximately $7,500,000) of the
private placement: (i) to repay a $1,000,000 portion of the loans made to it by
the Cohen Brothers as discussed above, together with thereon, in the approximate
amount of $50,000; (ii) to pay down the Company's revolving line of credit with
the Bank ($1,000,000): (iii) The balance of such proceeds is intended to be used
by the Company for general corporate purposes. The Debentures bear no interest
and mature on August 25, 1998.
In connection with the Company's acquisition, which occurred in May 1996,
of substantially all of the assets of VCA, the Company delivered to Norwest, the
Seller, a ninety (90) day direct pay letter of credit, in the amount of
$4,150,000, representing the purchase price for such assets, which letter of
credit was drawn upon by Norwest in the ordinary course of business.
In connection with the IPCO Acquisition, the Company acquired IPCO's
right to cash collateral and certain franchise promissory notes pledged to, and
securing loans made to, IPCO and CIT. The residual value of such franchise notes
receivable (i.e., the sums remaining payable on such franchise notes after
payment, in full, of the indebtedness owed to CIT and Sanwa, which obligations
were not assumed by the Company) represent notes acquired from IPCO and are
currently being held by Sanwa and CIT as collateral against obligations incurred
by IPCO. The indebtedness payable to CIT is scheduled to be repaid on or about
July 2000, at which time it is anticipated that the cash collateral and
franchise notes pledged to CIT will be returned to the Company. However, the
Company's residual value of the cash collateral underlying the franchise notes
pledged to CIT has been reduced as a result of the application, by CIT, of such
collateral to offset certain franchisee note forgiveness. The Company's right to
the return of the notes pledged to Sanwa (after payment of the indebtedness
incurred by IPCO and subject to which the Company acquired such notes) is the
subject of litigation between Sanwa and the Company. The Company maintains that
it is entitled to a return of the franchise notes held by Sanwa upon the
repayment of the indebtedness owed to Sanwa, based upon the advice given to it
by its outside counsel. The residual value of the franchise notes, net of
reserves of $562,000, held by Sanwa and CIT as of December 31, 1996 was
$1,325,000 and $325,000, respectively.
Franchise and other accounts receivable increased by $4,541,000, or
134.8%, to $7,911,000 as of December 31, 1996, as compared to $3,370,000 as of
December 31, 1995, due primarily to slower collections of certain amounts owed
to the Company by a number of its franchisees, as well as an increase in
royalties generated by an increase in the number of franchised stores acquired
in the VCA Transaction
24
<PAGE>
The Company is working with these franchisees in an attempt to obtain collection
of outstanding receivables through the following means: (i) restructuring of the
repayment of such obligations; or (ii) if necessary, exercising its rights under
the various documents pursuant to which each such franchisee occupies its
Sterling Store, including the possible termination of the applicable Franchise
Agreement.
Franchise and other notes receivable as of December 31, 1996 were
$19,588,000, which includes approximately $5,400,000 of franchise notes acquired
in connection with the VCA Transaction. In addition, such amount consists of
approximately $3,900,000 of new franchise notes generated from the conveyance of
Company-owned assets to franchisees, and is partially offset by approximately
$2,000,000 of principal payments collected during the calendar year ended
December 31, 1996. The Company believes that the underlying value of the
collateral securing its franchise accounts and notes receivable together, in
most cases, with the personal guarantees of the principal owners of each of the
Company's franchised stores, will be sufficient to support the collectibility of
these receivables.
Inventories at Company-owned stores decreased by $424,000, or 10.4%, to
$3,678,000 as of December 31, 1996, as compared to $4,102,000 as of December 31,
1995. This decrease was due primarily to the conveyance, during the calendar
year ended December 31, 1996, of the assets of 20 Company-owned stores to
franchisees.
As of December 31, 1996, Insight had leased, with $1.00 purchase options,
six excimer lasers. Aggregate lease payments pursuant to such leases will
approximate $1,029,000, $1,029,000, $1,015,000, $767,000 and $218,700 for the
years ended December 31, 1997, 1998, 1999, 2000 and 2001, respectively.
In December, 1995, the Company completed the Offering and raised
approximately $14,791,000, net of commissions and expenses, from the sale of
2,200,000 shares of its Common Stock at a price of $7.50 per share. In January,
1996, the Company raised approximately $625,000, net of commissions and
expenses, from the sale of an additional 100,000 shares of its Common Stock at
$7.50 per share pursuant to an over-allotment option granted the Underwriters in
connection with the Offering. As of December 31, 1996 and December 31, 1995, the
Company had $(3,803,000) and $16,312,000, respectively, in working capital, and
$868,000 and $15,493,000, 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 of six existing Company-owned stores, and the
continuing upgrade of the Company's management information system in conjunction
with the POS systems being installed in its Company-owned stores, in the
aggregate, approximate amount of $750,000; 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 to be made by Sterling in connection with a proposed acquisition
(see Note 18 - Subsequent Events); 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 calendar year ended
December 31, 1996 resulting, primarily, from losses attributable to the stores
acquired in the Benson Transaction (the "Benson Stores") and the operations of
Insight. 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
during 1996 and improve the Company's operations and cash flow in 1997: (i)
closing nine Benson Stores, some of which were unprofitable or where leases for
which were not renewed: (ii) franchising eleven Benson Stores which are
currently producing royalty income; (iii) eliminating virtually all
administrative overhead in connection with Insight; (iv) reducing overhead at
the Company's Insight Laser Center; and (v) reduced general and administrative
expenses, exclusive of those incurred by Insight, by approximately $1,000,000.
Although the Company also anticipates a positive cash flow from its retail
optical store operations, it nevertheless anticipates that Insight will
continue to operate at a loss for the twelve months ended December 31, 1997,
therefore the Company believes that such operating cash flow will be
insufficient to result in a positive cash flow for the Company for the twelve
months ended December 31, 1997. However, in February 1997, the Company entered
into a Convertible Debentures and Warrants Subscription Agreement (see Note 18
- - Subsequent Events) which provided net proceeds of approximately $7,500,000 to
the Company. Except for approximately $2,050,000 of such amount, which was
utilized to repay a portion of the Company's debt, approximately
$5,400,000 will be available to the Company for general corporate purposes.
Although the Company believes that its financial condition will improve for the
twelve months ended 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 is
required for the calendar year ended December 31, 1997, 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 under the Company's term loans and line of credit. In any
event, the line of credit and loans due to the Cohen Brothers are due to mature
on May 30, 1997 and two notes, in connection with the Pembridge Transaction, are
due to mature in August 1997. Accordingly, the Company believes that its current
cash resources and cashflow 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
25
<PAGE>
term loans. Further, the Credit Agreement currently restricts the Company's
ability to obtain additional financing except in certain circumstances. However,
in the event of such acceleration of such term loans, the Company believes it
could meet its 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
its creditors to repay that portion of its short-term debt, in connection with
the Pembridge Transaction, in stock rather than in cash; (iii) intends to
negotiate with the Bank an extension renewal of the maturity date of its line of
credit; and (iv) will request, from the Cohen Brothers, an extension of time to
repay such loans, although there can be no assurance that any of such
transactions will be consummated.
IMPACT OF INFLATION AND CHANGING PRICES
Although the Company cannot accurately determine the precise effect of
inflation on its operations, it does not believe inflation has had a material
effect on results of operations.
RECENT ACCOUNTING REQUIREMENTS
The Company has not completed the process of evaluating the impact that
will result from adopting SFAS 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilty". The Company is therefore
unable to disclose the impact that adopting SFAS 125, will have on its financial
position and results of operations when such statement is adopted.
The Company has not completed the process of evaluating the impact that
will result from adopting SFAS 128, "Earnings Per Share." The Company is
therefore unable to disclose the impact that adopting SFAS 128 will have on its
financial position and results of operations when such statement is adopted.
26
<PAGE>
Item 8. Financial Statements and Supplementary Data
STERLING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED
DECEMBER 31, 1996 AND
INDEPENDENT AUDITORS' REPORTS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INDEPENDENT AUDITORS' REPORT
Deloitte & Touche, LLP 28
Janover Rubinroit, LLC 29
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1996 and 1995 30
Consolidated Statements of Operations for the years ended December 31, 1996,
1995 and 1994 31
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1996, 1995 and 1994 32
Consolidated Statements of Cash Flows for the years ended December 31, 1996,
1995 and 1994 33
Notes to Consolidated Financial Statements 36
</TABLE>
27
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Sterling Vision, Inc. and Subsidiaries
East Meadow, New York
We have audited the accompanying consolidated balance sheets of Sterling Vision,
Inc. and Subsidiaries (the "Company") as of December 31, 1996 and December 1995
and the related statements of operations, shareholders' equity, and cash flows
for the years then ended. Our audit also included the financial statement
schedules listed in the index at Item 14(a)2. These financial statements and the
financial statements schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such 1996 and 1995 consolidated financial statements present
fairly, in all material respects, the financial position of Sterling Vision,
Inc. and Subsidiaries as of December 31, 1996 and December 31, 1995 and the
results of its operations and its cash flows for the years then ended, in
conformity with generally accepted accounting principles. Also, in our opinion,
such financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
Deloitte & Touche LLP
New York, New York
March 31, 1997
28
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Sterling Vision, Inc. and Subsidiaries:
We have audited the accompanying consolidated statements of shareholders'
equity, income, and cash flows of Sterling Vision, Inc. and subsidiaries for the
year ended December 31, 1994. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Sterling Vision, Inc. and subsidiaries for the year ended December 31,
1994, in conformity with generally accepted accounting principles.
JANOVER RUBINROIT, LLC
April 19, 1995
29
<PAGE>
STERLING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31,
1996 1995
---- ----
<S> <C> <C>
A S S E T S
-----------
Current assets:
Cash and cash equivalents $ 868 $ 15,493
Accounts receivable, net of allowance for
doubtful accounts of $557 and $422, respectively 7,911 3,370
Franchise and other notes receivable - current 3,375 3,326
Inventories 3,678 4,102
Due from related parties - current 124 176
Prepaid expenses and other current assets 883 405
-------- --------
Total current assets 16,839 26,872
Property and equipment, net 10,818 7,815
Franchise and other notes receivable - net of allowance
for doubtful accounts of $562 and $712, respectively 16,089 9,294
Due from related parties - 295
Other assets 2,523 2,179
-------- --------
$ 46,269 $ 46,455
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $ 9,151 $ 2,511
Notes Payable - Shareholders and Directors 2,000 -
Accounts payable and accrued liabilities 8,267 6,824
Franchise related obligations - current 1,224 824
Deferred income taxes payable - current - 401
-------- --------
Total current liabilities 20,642 10,560
Long-term debt 4,033 11,389
Deferred income taxes payable - 1,681
Deferred franchise income 328 -
Excess of fair value of assets acquired over cost 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 in 1996 and
12,207,495 in 1996 and 1995, respectively 124 122
Additional paid-in capital 24,982 23,762
Deficit (5,549) (1,059)
-------- --------
19,557 22,825
-------- --------
$ 46,269 $ 46,455
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
30
<PAGE>
STERLING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
For the year ended
------------------
December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Systemwide sales $ 131,593 $ 112,258 $ 104,168
========= ========= =========
Revenues:
Net sales - Company-owned stores $ 28,477 $ 25,773 $ 27,684
Franchise royalties 7,616 6,891 5,921
Net gains and fees from the conveyance of Company-owned
assets to franchisees -
- unrelated parties 1,963 2,197 2,832
- related parties - - 519
Other income 2,287 2,017 1,768
--------- --------- ---------
Total Revenue 40,343 36,878 38,724
--------- --------- ---------
Costs and expenses:
Cost of sales 8,851 6,495 7,590
Selling expenses 19,943 16,127 16,414
General and administrative expenses 16,743 10,529 11,321
Interest expense 1,297 831 647
--------- --------- ---------
Total Costs and Expenses 46,834 33,982 35,972
--------- --------- ---------
Net income (loss) before extraordinary item and provision for
(benefit from) income taxes (6,491) 2,896 2,752
Provision for (benefit from) income taxes (2,001) 2,129 127
--------- --------- ---------
Net income (loss) before extraordinary item (4,490) 767 2,625
Extraordinary item - gain on early retirement of debt,
net of income taxes of $30 - - 653
--------- --------- ---------
Net income (loss) $ (4,490) $ 767 $ 3,278
========= ========= =========
Weighted average number of common shares and
common share equivalents outstanding 12,341 10,031 9,963
========= ========= =========
Earnings (loss) per common shares and common share equivalents (.36) .08 .33
========= ========= =========
Pro forma statement of operations data (unaudited)
Net income before extraordinary item and provision for
income taxes $ 2,896 $ 2,752
Provision for income taxes 1,158 1,101
Net income before provision for extraordinary item 1,738 1,651
Extraordinary item-gain on early retirement of debt, net of
income taxes - 410
--------- ---------
Net income $ 1,738 $ 2,061
========= =========
Weighted average number of common shares and
common share equivalents outstanding 10,031 10,031
========= =========
Earnings per common shares and common shares
equivalents before extraordinary item .17 .16
========= =========
Extraordinary earnings per common shares and common
shares equivalents
- .04
========= =========
Earnings per common shares and common equivalents .17 .20
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
31
<PAGE>
STERLING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Dollars in Thousands, Except Number of Shares)
<TABLE>
<CAPTION>
Capital
Stock Additional Retained Total
Common Subscription Paid-In Earnings Shareholders'
Shares Stock Receivable Capital (Deficit) Equity
---------- -------- ------ -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance - January 1, 1994 2,211 $ 1,192 $ (37) $ 5,398 $ 4,333 $ 10,886
Payment of capital - stock
subscription to Sterling
Vision of California - - - 2,500 - 2,500
Additional capital contributed
by shareholders - - - 40 - 40
Capitalization of additional
corporations - 19 (19) - - -
Distributions - - - - (6,187) (6,187)
Net income - - - - 3,278 3,278
---------- -------- ------ -------- -------- --------
Balance - December 31, 1994 2,211 1,211 (56) 7,938 1,424 10,517
Capitalization of additional
corporations 6 (6) - - -
Stock split 9,961,284 (1,055) - 1,055 - -
Contribution of subsidiaries (62) 62 - - -
Issuance of 2,200,000 common
shares in a public offering and
44,000 shares to legal
consultants 2,244,000 22 - 14,769 - 14,791
Distributions - - - - (3,250) (3,250)
Net income - - - - 767 767
---------- -------- ------ -------- -------- --------
Balance - December 31, 1995 12,207,495 $ 122 $ - $ 23,762 $ (1,059) $ 22,825
========== ======== ====== ======== ======= ========
Issuance of 100,000 common shares
in an over-allotment from the public
offering and 80,040 shares to
Franchisees 180,040 2 - 1,220 - 1,222
Net loss - - - - (4,490) (4,490)
---------- -------- ------ -------- -------- --------
Balance - December 31, 1996 12,387,535 $ 124 - $ 24,982 $ (5,549) $ 19,557
========== ======== ====== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
32
<PAGE>
STERLING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
For the year ended
------------------
December 31,
1996 1995 1994
------ ------ -----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (4,490) $ 767 $ 3,278
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation and amortization 1,481 793 762
Extraordinary gain on early
retirement of debt - - (653)
Allowance for doubtful accounts 928 584 1,700
Net gain from the conveyance
of Company-owned assets
to franchisees (1,610) (1,907) (2,911)
Deferred income taxes payable (2,082) 1,968 (50)
Accrued interest 121 - -
Amortization of fair value of assets acquired over cost (231) - -
Changes in assets and liabilities:
Accounts receivable (4,541) (1,400) (181)
Inventories 1,168 (957) 188
Prepaid expenses and other
current assets (478) (238) 58
Other assets 50 (666) 546
Accounts payable and accrued liabilities 778 2,012 529
Franchise related obligations 400 202 (136)
Deferred franchise income 328 - -
------- ------- ------
Net cash (used in) provided by operating activities (8,178) 1,158 3,130
------- ------- ------
Cash flows from investing activities:
Acquisition, net of cash acquired (4,150) (2,396) (1,822)
Franchise notes receivable issued (3,901) (4,764) (6,308)
Repayment of franchise and other notes receivable 1,887 2,319 4,751
Purchase of property and equipment (5,607) (4,187) (497)
Conveyance of property and equipment 3,536 2,548 4,230
------- ------- ------
Net cash (used in) provided by investing activities (8,235) (6,480) 354
------- ------- ------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
33
<PAGE>
STERLING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in Thousands)
<TABLE>
<CAPTION>
For the year ended
December 31,
1996 1995 1994
------- ------ -----
<S> <C> <C> <C>
Cash flows from financing activities:
Sale of common stock and other
capital contributions 625 14,791 2,540
Repayments on secured promissory
note payable - - (6,149)
Borrowings on revolving credit note 225 2,575 250
Repayment of revolving credit note - (300) (650)
Payments on other debt (2,984) (1,838) (1,005)
Borrowings of other debt 3,922 5,342 8,984
Distributions to shareholders - (3,250) (6,187)
-------- -------- -------
Net cash provided by (used in)
financing activities 1,788 17,320 (2,217)
-------- -------- -------
Net decrease (increase) in cash and
cash equivalents (14,625) 11,998 1,267
Cash and cash equivalents -
beginning of period $ 15,493 3,495 2,228
-------- -------- -------
Cash and cash equivalents -
end of period $ 868 $ 15,493 $ 3,495
======== ======== =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 1,232 $ 753 $ 640
========= ======== =======
Taxes $ 579 $ 274 $ 372
======== ======== =======
Acquisitions, net of cash acquired:
Working capital, other than cash $ 807 $ 1,227 $ 203
Property, plant and equipment 600 800 664
Excess of cost of assets acquired over fair value - - 497
Excess of fair value of assets acquired over cost (1,940) - -
Other assets - 369 458
Franchise Notes 4,683 - -
-------- -------- -------
Acquisitions, net of cash acquired $ 4,150 $ 2,396 $ 1,822
======== ======== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
34
<PAGE>
STERLING VISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Number of Shares, Number of Stores, and Per Share Data)
NOTE 1 - BUSINESS ORGANIZATION:
Sterling Vision, Inc. and its subsidiaries ("SVI" or the Company), are
engaged in operating and franchising retail optical stores. Substantially, all
revenues result from the sale of optical products or the rendering of eye
examinations as store locations operated by the Company or franchisees. In June,
1996, the Company commenced the operations of Insight.
On August 26, 1994, the Company entered into an agreement with Pembridge
Optical Partners, Inc. ("Pembridge") pursuant to which Pembridge sold certain
assets to the Company. These assets consisted of eight retail optical store
locations and their related assets including leasehold improvements, furniture
and fixtures, machinery, equipment and inventory. The purchase price of the
assets was $1,217,000. This transaction has been accounted for as a purchase in
accordance with Accounting Principles Board Pronouncements ("APB") 16 and 17,
with allocations made based upon the estimated fair market value of the assets
acquired.
On November 7, 1995, Sterling Vision BOS, Inc. ("BOS"), a subsidiary of
the Company, acquired, pursuant to a United States Bankruptcy Court order,
substantially all of the assets of OCA Acquisition Corp., Benson Optical Co.,
Inc., and Superior Optical Company, Inc. (collectively, "Benson") consisting
principally of store cash, account receivable, inventory, furniture and
fixtures, equipment and store leases for 98 locations, for a price of
approximately $2,396,000 (the "Benson Transaction"), subject to its right, in
its sole discretion, to reject the lease for any such location on or before
December 6, 1995; provided that any such rejection would not result in any
purchase price adjustment. As of December 6, 1995, BOS rejected the leases for
66 of such locations and assumed the leases for the remaining 32 locations.
Payment of the purchase price consisted of approximately $1,570,000 in cash, as
well as the forgiveness of all sums then due by Benson to Benson Eyecare
Corporation ("BEC"), which the Company purchased from BEC in exchange for a
Subordinated Debenture (see Footnote 15 - Shareholders Equity) in the original
principal amount of $5,900,000 and then having a discounted present value of
approximately $826,000. The sums forgiven represent the notes receivable and
accounts receivable in favor of BEC and acquired by the Company from BEC in
exchange for said Convertible Debenture. On November 15, 1995, the Company
entered into a one year non-compete and consulting agreement with one of the
principals of Benson for aggregate consideration of $150,000 which was included
in the purchase price. This transaction has been accounted for as a purchase, in
accordance with APB 16 and 17, with allocations made based upon the estimated
fair market value of the assets acquired.
On May 30, 1996, the Company, through its wholly-owned subsidiary,
Sterling Vision DKM, Inc. ("DKM") acquired all of the retail optical assets,
other than leases (which such leases were assigned to the Company in three
separate agreements), of Vision Centers of America, Ltd., D & K Optical, Inc.,
Monfried Corporation and Duling Finance Corporation (collectively, "VCA"), which
assets were subject to a lien in favor of Norwest Investment Services, Inc.
("Norwest") (the "VCA Transaction"). Norwest was entitled to exercise its rights
as a secured creditor of VCA as a result of VCA's default with respect to its
obligations to Norwest. The assets acquired consisted primarily of inventory,
the fixed assets of 13 company-owned and operated retail optical centers, the
fixed assets of an ophthalmic lens manufacturing facility and assets located at
several warehouses, general intangibles (other than store leases) including
franchise agreements, promissory notes and accounts receivable related to
approximately 75 franchised retail optical stores. DKM purchased the assets at a
private foreclosure sale subject to certain liens, claims and encumbrances;
however, Norwest indemnified DKM for certain of such liens, claims and
encumbrances. The purchase price of the assets was $4,150,000, which was paid by
DKM's delivery of a ninety (90) day , direct pay letter of credit of Norwest. In
addition, VCA assigned to DKM all of this right, title and interest in and to
each of the leases in exchange for DKM's payment to VCA of $50,000 and the
assumption of all of the obligations under the company store leases, only
subject to DKM's right, at its sole discretion, to reject the lease for any such
locations on or before September 30, 1996. DKM also subsequently purchased from
a bank, in the approximate sum of $111,000, all of its right, title and interest
in and to certain additional prior liens, held by such bank, against VCA's
inventory, accounts receivable and franchise agreements. This transaction has
been accounted for as a purchase in accordance with APB 16 and 17, with
allocations made based upon the estimated fair market value of the assets
acquired.
35
<PAGE>
NOTE 1 - BUSINESS ORGANIZATION: (Continued)
The following is a summary of the operations of DKM since the acquisition
in May, 1996 and BOS since January 1996 included in the results of operation of
the Company for the year ended December 31, 1996:
Revenue $8,272
======
Net Loss before extraordinary items (1,199)
======
Net Loss (1,199)
======
Loss per share (. 10)
======
Effective with its acquisition in November 1995, the operations of BOS
included in the results of operations of the Company for the calendar year ended
December 31, 1996 are as follows:
Revenue $570
====
Net Loss before extraordinary items (520)
====
Net Loss (520)
====
Loss per share (.05)
====
Information is not available to present the operations of DKM and BOS
prior to their respective acquisitions.
NOTE 2 - INITIAL PUBLIC OFFERING:
Reorganization
In December, 1995, the Company issued 2,200,000 shares of its Common
Stock at $7.50 per share in an initial public offering (the "Offering").
Proceeds from the Offering as of December 31, 1995, net of commissions and other
related expenses totaling $1,855,000 were $14,791,000.
Immediately, prior to the Offering, the Company effected a 4,506.33:1
stock split subject to rounding upward in the case of any fractional shares held
by any shareholder, in the form of a Common Stock dividend. In addition, the
shareholders of the Company approved an amendment to SVI's Certificate of
Incorporation to increase the number of shares of Common Stock authorized from
5,000, no par value, to 33,000,000 shares of which 28,000,000 are Common Stock,
par value $.01 per share, and 5,000,000 are Preferred Stock, par value $.01 per
share. All share and per share data included in this annual report have been
restated to reflect the stock split.
As part of the Offering, the Company issued 44,000 shares of Common Stock
to certain legal consultants to the Company in consideration for past services
rendered to the Company in connection with the Company's 1992 acquisition of the
Debtor. The Company capitalized the sums not previously expressed, in the amount
of $175,000 and which is being amortized over seven years.
As part of the Offering, the Company granted 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 Prospectus, to cover
over-allotments, if any. In January, 1996, the Company 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 Company 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 future performance in accordance with the terms of their
respective Franchise Agreements. The fair value of such shares is being
amortized over the vesting period of three years.
36
<PAGE>
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements include the accounts of SVI and its
subsidiaries, all of which are wholly owned .
All significant intercompany balances and transactions have been
eliminated in consolidation.
Revenue recognition
Except in limited circumstances, the Company charges each franchisee a
nonrefundable initial franchise fee. This fee is used, in part, to defray
certain costs and expenses incurred by the Company in connection with its
franchising activities. Initial franchise fees are recognized at the time all
material services required to be provided by the Company have been substantially
performed. Franchise royalties are based upon the gross revenues of each
location and are recorded as earned.
Interest earned on franchise notes receivable is recorded as earned.
Gains or losses from the conveyance of Company-owned assets to franchisees are
recognized upon closing, net of applicable reserves for collectibility.
Allowance for possible losses
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 114 ("SFAS 114"), "Accounting by Creditors for Impairment of a
Loan", for the year ending December 31, 1995. SFAS 114 defines impairment as the
probability that all amounts due under a loan agreement will not be collected
according to the contractual terms, and requires the valuation of impaired loans
based on either the present value of expected future cash flows, discounted at
the loan's effective interest rate or the fair value of the collateral if the
loan is collateral dependent. The Company measures the impairment of its notes
receivable upon the fair market value of the underlying collateral, which is
determined on an individual note basis. In arriving at the fair market value of
the collateral, numerous factors are considered, including market evaluations of
the underlying collateral and franchise fees collected from the franchisee, less
selling costs, discounted at market discount rates. If, upon completion of the
valuations, the fair value of the underlying collateral securing the impaired
note is less than the recorded investment in the note, an allowance is created
with a corresponding charge to expense. The adequacy of the allowance is
predicated on the assumption that the Company will be able to hold these assets,
dispose of them, and realize the fair market value of these assets in the
ordinary course of business. Adjustments may be necessary in the event that
effective interest rates, future performance, economic conditions or other
relevant factors vary significantly from those assumed in estimating the
allowance for possible losses. The existing allowances will be either increased
or decreased based upon future valuations, with a corresponding increase or
reduction in the provision for note losses.
Since the Company had previously evaluated impaired notes at the lower of
recorded investment or fair value, the adoption of SFAS 114 did not have a
material impact on the Company's financial statements.
Cash and cash equivalents
Cash and cash equivalents includes cash and any investment with a
maturity of 90 days or less.
Fair value of financial instruments
At December 31, 1996 and 1995, the carrying value of financial
instruments such as cash and cash equivalents, accounts receivables, credit
facilities, long-term debt and accounts payable approximated their fair values,
based on the short-term maturities of these instruments.
Inventories
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market value, and consist primarily of contact lenses,
ophthalmic lenses, eyeglass frames and sunglasses.
Earnings per share
The computation of earnings per share is based on the weighted average
number of outstanding common shares and common
37
<PAGE>
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES: (Continued)
share equivalents (stock options). Under the treasury stock method, stock
options and the assumed conversion of the Benson Debenture are not dilutive and
are excluded from the computation of weighted average common shares and common
share equivalents outstanding.
Property and equipment
Property and equipment acquired in an acquisition are recorded at their
fair market value as of the date of acquisition. Other fixed asset acquisitions
are carried at cost. Stores reacquired by the Company are recorded at the lower
of their fair market value or the book value of the assets exchanged for the
store in question. Depreciation is provided on a straight-line basis over the
estimated life of the respective classes of assets.
Income taxes
The Company accounts for income taxes in accordance with SFAS 109,
"Accounting for Income Taxes". Under SFAS 109, a deferred tax liability or asset
is recognized for the estimated future tax consequences of temporary differences
between the carrying amounts of assets and liabilities in the financial
statements and their respective tax bases.
Accounting estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Amortization of intangibles
Included in other assets are intangible assets amortized over various
periods on a straight-line basis. Closing costs are amortized over the life of
the applicable financing agreement. Goodwill is amortized over periods not to
exceed 40 years. Deferred lease costs are amortized over the remaining life of
the lease. The covenant not to compete is amortized over its life.
Pro forma financial information (unaudited)
The unaudited pro forma income tax provision presented for the years
ended December 31, 1995 and 1994 have been prepared assuming an effective
combined federal and state tax rate of 40%.
The pro forma tax expense consists of the following:
For the year ended
December 31,
------------
1995 1994
---- ----
Current provision for income taxes $1,179 1835
Deferred provision for income taxes (21) (734)
------ ------
$1,158 $1,101
====== ======
Accounting for long-lived assets
For the calendar year ended December 31, 1996, the Company has adopted
SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of", and determined that no adjustment for impairment was
required.
Recent Accounting Requirements
The Company has not completed the process of evaluating the impact that
will result from adopting SFAS 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liability". The Company is therefore
unable to disclose the impact that adopting SFAS 125, will have on its financial
position and results of operations when such statement is adopted.
38
<PAGE>
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES (Continued):
The Company has not completed the process of evaluating the impact that
will result from adopting SFAS 128, "Earnings Per Share." The Company is
therefore unable to disclose the impact that adopting SFAS 128 will have on its
financial position and results of operations when such statement is adopted.
NOTE 4 - INCOME TAXES:
For periods prior to the Offering, the Company was an S Corporation for
federal tax purposes and in certain state tax jurisdictions. The Company's
income for such periods was included in the individual income tax returns of the
shareholders. Accordingly, the tax provisions for such periods reflect only
state and local taxes in those jurisdictions not recognizing S Corporation
status.
The Company's status as an S Corporation was terminated as a result of
the Offering. Consequently, in accordance with SFAS 109, a deferred tax
liability was recognized for the estimated future tax effect of temporary
differences between the financial statement carrying values of assets and
liabilities and their respective tax bases. Such taxes, which prior to the
offering would have been paid by the shareholders, became a future obligation of
the Company. Substantially all the tax provision for 1995 is attributable to
this deferred tax liability.
A reconciliation of the income tax expense (benefit) is as follows:
1996 1995 1994
---- ---- ----
Current:
Federal $ - $ - $ -
State and Local 81 161 177
------- ------- -----
81 161 177
------- ------- -----
Deferred:
Federal (1,770) 1,770 -
State and Local (312) 198 (50)
(2,082) 1,968 (50)
------- ------- -----
Total $(2,001) $ 2,129 $ 127
======= ======= =====
The appropriate tax effect of each type of temporary difference and
carryforward that gives rise to significant portions of the deferred tax assets
and liabilities are as follows:
1996 1995
---- ----
Deferred tax asset:
Net operating loss $ 2,856 $ -
Other temporary differences 481 85
------- -------
Subtotal 3,337 85
Valuation allowance (905) 0
------- -------
2,432 85
======= =======
Deferred tax liability:
Deferred gain on conveyance of assets to franchisees 2,432 2,167
------- -------
2,432 2,167
------- -------
Net deferred tax asset/(liability) $ 0 $(2,082)
======= ========
39
<PAGE>
NOTE 4 - INCOME TAXES: (Continued)
Under SFAS 109, the Company cannot recognize a deferred tax asset for the
future benefit of the net operating loss carryfowards unless it concludes that
it is "more likely than not" that the deferred tax asset would be realized.
Although the Company believes it has taken measures to improve the financial
performance of the Company in 1997, the Company has recorded a full valuation
allowance against its otherwise recognizable deferred tax asset until such time
that the Company demonstrates profitability which would enable it to realize
such deferred tax asset.
At December 31, 1996, the Company had a net operating loss carryforward
of approximately $7,142,000 available to offset future taxable income. The net
operating loss carryforwards expire in varying amounts through 2011 and may be
limited in certain circumstances.
A reconciliation between the statutory Federal income tax rate and the
effective income tax rate based on continuing operations is as follows:
1996 1995 1994
---- ---- ----
Statutory Federal income tax rate (34)% 34% 34%
State and local income taxes, net of
Federal tax benefit (5) 6 6
Reduction in tax liability due to status
as Subchapter S Corporation for
Federal and certain state taxes - (35) (35)
Change in the effective tax rates
applicable to the recognition of
a deferred tax liability due to term-
ination of Subchapter Selection in
conjunction with the Offering - 69 -
Valuation Allowance 8 - -
--- -- --
Effective income tax rate (31)% 74% 5%
=== == ==
NOTE 5 - NOTES RECEIVABLE:
Notes receivable consist of three components:
a) Franchise notes receivable held by the Company;
b) The residual value of franchise notes receivable that are
currently being held as collateral by secured creditors of an
acquired business;. and,
c) Other notes receivable.
Company held franchise notes receivable consist primarily of purchase
money notes relating to Company-financed conveyances of store facilities, fixed
assets, inventories, and leasehold improvements to franchisees, as well as
certain franchise notes receivable acquired by the Company, and are secured by
the underlying assets of the franchised store and, in most instances, personal
guarantees of the principal owners of the franchise. Interest is charged at
various rates, commensurate with the year of issue. Complete collection of these
receivables is expected by September 2003.
The residual value of franchise notes receivable represent notes acquired
from the Debtor and are currently being held as collateral by Sanwa Business
Credit Corp. ("Sanwa") and The C.I.T. Group/Equipment Financing Inc. ("C.I.T.")
securing obligations incurred by the IPCO, which obligations the Company did not
assume. The collateral, held by C.I.T., was scheduled to be returned to the
Company on or about July 2000. However, the Company's residual value of the cash
collateral and franchise notes pledged to CIT have been reduced due to the
application, by CIT, of such collateral to offset certain franchise note
forgiveness. The collateral held by Sanwa is the subject of litigation between
Sanwa and the Company. The Company maintains that it is entitled
40
<PAGE>
NOTE 5 - NOTES RECEIVABLE: (Continued)
to the residual value. However, such litigation makes the Company unable to
estimate the date, if any, that any such residual value will be returned to it.
Notes are shown net of applicable reserves of $562,000 and $712,000 as of
December 31, 1996 and 1995, respectively.
Notes receivable consist of the following:
As of December 31,
1996 1995
---- -----
Franchise notes held by the Company,
- includes franchise inventory notes and
franchisee fixed asset notes at interest rates
ranging from 9.5% to 12% $17,938 $10,866
Sanwa notes - net residual on franchise notes held
as collateral which, in the Company's opinion,
are to be returned by Sanwa 1,325 1,325
C.I.T. notes to be returned to the Company -
accumulating interest at 9.50%,
325 395
Other notes receivable - 34
------- -------
19,588 12,620
Less current portion (3,499) (3,326)
------- -------
$16,089 $ 9,294
======= =======
NOTE 6 - PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
As of Estimated
December 31, Useful
1996 1995 Lives
---- ---- -----
<S> <C> <C> <C>
Furniture and fixtures $ 1,383 $ 1,602 7 years
Machinery and equipment 8,889 4,806 5 years - 7 years
Leasehold improvements 3,234 3,397 10 years*
-------- -------
13,506 9,805
Less accumulated depreciation (2,688) (1,990)
-------- -------
$10,818 $ 7,815
======== =======
</TABLE>
*Useful lives of leasehold improvements are the lesser of the asset's useful
life or the term of the lease.
41
<PAGE>
NOTE 6 - PROPERTY AND EQUIPMENT: (Continued)
Effective for the calendar year ended December 31, 1996, the Company
adopted SFAS 121 "Accounting Standards 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of," which requires
that long-lived assets and certain identifiable intangibles, to be held and used
by an entity, be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable. The operating losses of Insight since its startup in 1995 were
indicators of potential impairment of the long-lived assets related to Insight.
During the latter half of 1996, the Company began an intensive review of its
Insight operations and has implemented several cost-saving procedures related to
such operations although losses are anticipated in 1997. Because of the
relatively short time period in which Insight division has been in operation,
the Company's estimate of future cash flows believes an impairment of longlived
assets related to Insight has not occurred.
NOTE 7 - OTHER ASSETS:
Other assets consist of the following components:
As of
December 31,
1996 1995
----- -----
Deposits and escrows $ 456 $ 238
Patient records, net 245 382
Unamortized covenant not to compete 28 70
Unamortized capitalized debt closing
costs 58 84
Unamortized deferred lease costs 99 121
Unamortized goodwill 594 654
Restricted cash 50 335
Other 993 295
------ ------
$2,523 $2,179
====== ======
NOTE 8 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
Accounts payable and accrued liabilities consist of the following:
1996 1995
------ -----
Accounts payable $6,742 $4,923
Accrued rent 408 545
Accrued payroll and fringe benefits 417 345
Other accrued expenses 700 1,011
------ -------
$8,267 $6,824
====== ======
42
<PAGE>
NOTE 9 - DEBT:
Principal payments due on the Company's notes payable, as of December 31,
1996, are as follows:
Bank Shareholders
For the Years Credit and Capital
Ending December 31, Agreements Directors Leases Other Notes Amount
------------------- ---------- --------- ------ ----------- ------
1997 $ 7,015 $2,000 $ 954 $1,182 $11,151
1998 - - 994 184 1,078
1999 - - 935 13 948
2000 - - 758 14 772
2001 - - 218 16 234
Thereafter - - - 1,001 1,.001
------- ------ ------ ------ -------
$ 7,015 $2,000 $3,859 $2,310 $15,184
======= ====== ====== ====== =======
As of December 31, 1996, the Company was the lessee of six excimer lasers
and ancillary equipment under capital leases expiring in various years through
2001. The assets and liabilities under capital leases are recorded at the lower
of the present value of the minimum lease payments or the fair value of the
asset.
On April 6, 1994, the Company entered into a Credit Agreement with the
Bank that provided term loans totaling $7,500,000. The loans are divided into
two separate parts or Tranches. Tranche A is for $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. Tranche B is for $2,500,000
and is being amortized over 5 years with equal monthly payments of principal.
Interest is calculated on the outstanding balance at 3/4 of one percent over the
prime rate (approximately 8 1/2% at December 31, 1996) then in effect from time
to time. The Company anticipates non-compliance during the next twelve-month
period, with certain of its existing covenants as contained in the Credit
Agreement with the Bank and has classified, as a current liability, the
long-term portion of its debt to the Bank. As of December 31, 1996 the
outstanding principal balances of Tranche A and Tranche B are $2,333,344 and
$1,166,656 respectively.
As of December 31, 1996, $2,375,000 was outstanding on a revolving line
of credit with the Bank. The maturity date of the line of credit has been
extended to May 30, 1997 (see Note 18 - Subsequent Events). The Company is
required to pay 1/4 of one percent per annum on any unused portion of the line
of credit regardless of whether any actual borrowings occur. Loans outstanding
under the line of credit bear interest at the prime rate in effect from time to
time.
In November 1995, the Company entered into a term note of $1,670,000 with
the bank. The note is being amortized over 5 years with equal monthly payments
of principal. Interest is 7.9% per annum on the outstanding balance.
The above mentioned financing by the Bank is secured by substantially all
of the Company's assets except for approximately franchise $8,500,000 of
franchise notes receivable. The financing requires that the Company adhere to
certain restrictive covenants, including maintaining a minimum tangible net
worth. At December 31, 1996 and December 31, 1995, the Company was not in
compliance with certain of its financial covenants; however, the Company secured
a waiver of such non-compliance from the Bank.
In November 1996, the Company borrowed from certain of its principal
shareholders and directors, the aggregate sum of $2,000,000 for a term of ninety
days and which bears interest at a rate of one percent over the prime interest
rate, in effect, from time to time. In February 1997, the maturity date of such
loan was extended until May 30, 1997. In addition, as additional consideration
for such loans, the Company will, (subject to shareholder approval at the
Company's next Annual Meeting of Shareholders) grant to the lenders, options to
purchase an aggregate of 200,000 shares of the Company's Common Stock at an
exercise price equal to the closing bid price of said Common Stock on November
19, 1996.
As part of the Benson Transaction, the Company issued a non-negotiable,
subordinated convertible debenture (the "Benson Debenture") in the principal
amount of $5,900,000 subject to reduction and payable, without interest, on
September 15, 2015. The Benson Debenture is subordinated to all existing and
future indebtedness, debts and obligations of the Company. The Company had a
right of offset against the principal amount of the Benson Debenture in the
event the Company did not retain at least 40 of the 98 Benson stores acquired by
the Company in the Benson Transaction, which right of offset was equal to
$147,000 for each store less than 40 that the Company retained. In December
1995, the Company elected to assume the leases for 32 stores and, consequently,
was entitled to reduce the principal amount of the Benson Debenture by the sum
of $1,176,000 from $5,900,000 to
43
<PAGE>
NOTE 9 - DEBT: (Continued)
$4,724.000. The Benson Debenture is included in long-term debt is recorded at
its present value of $969,000 using an imputed internal interest rate of 8.5%.
(See Footnote 15 - Shareholders' Equity.)
The remainder of the purchase price to the Company for the retail optical
assets of Pembridge which will be paid pursuant to two notes of $1,050,000 and
$200,000 less a $108,000 reduction in principal (see Note 1 - Business
Organization), are due in full in 1997. These notes bear interest at one and 1/2
percent over the prime interest rate, with interest being paid monthly.
Minimum future lease payments under capital leases as of December 31,
1996 are as follows:
Year Ended
December 31,
------------
1997 $1,340
1998 1,270
1999 1,053
2000 767
2001 219
-------
Total minimum lease payments 4,649
Less: Amount representing interest (790)
-------
Present value of net minimum lease payment $3,859
======
Net book value of assets held under capital leases included in property
and equipment amounted to $3,898,000 and $2,874,000 (net of accumulated
depreciation of $729,000 and $49,000) for the years ended December 31, 1996 and
1995, respectively.
NOTE 10 - COMMITMENTS AND CONTINGENCIES:
The Company is, from time to time, a party to litigation arising in the
ordinary course of its business. In the opinion of management, there are no
significant claims outstanding that are likely to have a material adverse effect
upon the consolidated financial statements of the Company.
The Company leases locations for the majority of both its operated and
franchised stores. Minimum future rental payments as of December 31, 1996 for
Company operated stores and stores subleased to franchisees, for five years and
thereafter, in the aggregate, are approximately:
For the
Periods Ending Total Sublease Net
December 31, Amount Rentals Rentals
------------ ------ -------- -------
1997 $ 9,345 $ 6,837 $ 2,508
1998 8,513 6,135 2,378
1999 7,720 5,468 2,252
2000 6,326 4,458 1,868
2001 4,973 3,297 1,676
Thereafter 11,291 6,783 4,508
------- ------- -------
$48,168 $32,978 $15,190
======= ======= =======
The Company holds the master lease on substantially all franchised
locations and, as part of the franchise agreement, sublets the subject premises
to the franchisee. Most master leases are subject to common area charges and
additional rent based upon sales volume. As is required by SFAS 13 "Accounting
for Leases", the Company amortizes its rent expense on a straight-line basis
over the life of the related lease. Rent expense was $5,185,000, $3,810,000 and
$3,853,000, net of sublease rentals of approximately $9,279,000, $8,052,000 and
$7,569,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
Such rent expense
44
<PAGE>
NOTE 10 - COMMITMENTS AND CONTINGENCIES: (Continued)
includes additional rent expense, based upon sales volume of $108,000, $117,000,
and $125,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
The Company is a guarantor of indebtedness of a loan by a franchisee to a
third party lender in the principal amount of $425,000.
NOTE 11 - CONCENTRATION OF RISK:
The Company operates retail optical stores in North America,
predominantly in the United States. Profitability of the Company and
collectibility of all receivables from franchisees is contingent upon the
financial condition of the industry, as well as the overall economic
environment.
In June 1996, the Company commenced the operations of Insight. For
information regarding the risks associated with that business, See Note
6--Property and Equipment and Note 19--Results of Operations and Management
Plans.
In addition, as of December 31, 1996, the Company had deposits in banks
that are in excess of the $100,000 of depository insurance provided by the
Federal Depository Insurance Corporation.
NOTE 12 - SYSTEMWIDE SALES (UNAUDITED):
Systemwide sales represent the combined retail sales of Company owned and
franchised stores, as well as revenues generated by the Company's health
maintenance organization, Vision Care of California.
NOTE 13 - RETAIL OUTLET COMPOSITION (UNAUDITED):
The number of Company-owned and franchised stores was as follows:
As of December 31,
1996 1995 1994
---- ---- ----
Company-owned 62 71 40
Franchised 257 150 141
--- --- ---
319 221 181
=== === ===
The Company has an option, but not an obligation, to reacquire a
franchised store upon the occurrence of a default under the applicable Franchise
Agreement. The Company reacquired the assets of eight, four and six franchised
stores in 1996, 1995 and 1994, respectively. Of these, three of the stores
reacquired in 1994 were refranchised in the same year. Losses of approximately
$101,000, 98,000 and $74,000 were recognized in 1996, 1995 and 1994
respectively, on these reacquired stores due to the write-off of accounts
receivable from the franchisees. In addition, as of December 31, 1996, the
Company is managing seven franchised stores on behalf of such franchisees
NOTE 14 - RELATED PARTY TRANSACTIONS:
Included in indebtedness from related parties are $124,000 and $130,000,
in loans to an officer of the Company at December 31, 1996 and 1995,
respectively, bearing interest at the prime rate.
During 1994, a franchise was conveyed to the husband of a shareholder of
the Company. A gain of approximately $75,000 and franchise fee income of $20,000
was recognized on this transaction and a non-recourse note receivable, at terms
otherwise equivalent to those given to unrelated parties, for approximately
$116,000 is included in indebtedness from related parties at December 31, 1995.
As part of this conveyance, an agreement was entered into whereby the Company
manages this franchise for a fee.
In 1994, gains on conveyances of Company store assets to franchisees of
approximately $384,000 and franchise fee income of $40,000 were recognized on
the conveyance of two locations, in separate transactions, to two corporations
owned by two officers of SVI and their wives. The Company believes that these
conveyance of stores to related parties were at prices that would have been
charged to unrelated parties and the gains reported on the conveyance to related
parties were not less than would have been achieved upon conveyance to an
unrelated party. In addition, included in due from related parties at December
31, 1995 is approximately $225,000 representing the principal balance of a note,
at terms equivalent to those given to unrelated parties, related to one of these
store conveyances.
45
<PAGE>
NOTE 14 - RELATED PARTY TRANSACTIONS: (Continued)
On October 31, 1995, as a condition of the contemplated Offering, the
Company agreed to require three franchises previously conveyed to related
parties, as mentioned above, to be reconveyed to independent franchisees and the
related party franchisees agreed to such reconveyance. During 1996, the Company
reconveyed one store, one related party franchisee sold his store and the
Company continued to manage another store for an officer of the Company. The
franchisee of the Company managed store has agreed to be liable for any cash
losses up to their equity in the franchise as of the date of reconveyance.
In November 1996, certain of the Company's principal shareholders
provided short-term financing to the Company (see Note 9 - Debt).
The Company shares an office building with a retail optical company, both
of which are owned by certain of the principal shareholders and directors of the
Company. Occupancy costs are appropriately allocated based upon the applicable
square footage leased by the respective tenant.
NOTE 15 - SHAREHOLDERS' EQUITY:
In April 1995, the Company adopted a Stock Incentive Plan (the "Plan")
which permits the issuance of options to selected employees of, and consultants
to, the Company. The Plan reserves 1,239,241 shares, after giving effect to the
4,506.33:1 stock split, of Common Stock for grant and provides that the term of
each award be determined by the Compensation Committee of the Board of Directors
(the "Committee") charged with administering the Plan. Under the terms of the
Plan, options are non-qualified and are granted at an exercise price determined
by the Committee.
In April, 1995, 851,696 stock options, after giving effect to the
4,506.33:1 stock split, were granted at $6.00 per share, the estimated fair
market value of the Company's Common Stock at such date. These options vest at
various dates and, in the case of employees, are contingent upon still being in
the Company's employ as of the applicable vesting date.
In November 1995, the Company entered into a written employment agreement
with a new employee and an oral agreement with a new director designee whereby
the Company had agreed to grant them each options to purchase 10,000 shares
(after giving effect to the stock split) at an exercise price equal to the
Offering price. In March 1996, the Company elected to terminate the employee
and, in accordance with the terms of the employment agreement, such options have
expired.
In December 1995, the Company issued 143,000 stock options under the Plan
to certain employees of the Company. These options are exercisable at $7.50 per
share, the estimated fair market value of the Company's Common Stock at such
date, for a ten year period beginning on January 5, 1997. These options vest
one-third in December 1996, one-third in December 1997, and one-third in
December 1998. Vesting is contingent upon the employee still being in the employ
of the Company at the vesting date.
In August 1994, Sterling and the former President of the Company entered
into a Settlement Agreement whereby the Company provided certain severance
payments and benefit reimbursements. In addition, the Company agreed to grant
the former executive stock options to purchase such number of shares of Common
Stock having a value of $435,000, based upon, and with an exercise price equal
to, the Offering price of $7.50, was conditional upon the consummation of the
Offering. Such stock options have a five year term and vested immediately upon
the consummation of the Offering.
As of December 31, 1996, no options have been exercised and 10,000
options were canceled.
At any time prior to the maturity date of the Benson Debenture, the
Company may, upon 30 days' prior written notice to Benson, exchange the Benson
Debenture for shares of its Common Stock at a ratio equal to the then principal
amount of the Benson Debenture, which as of December 31, 1996 was $970,000,
divided by the average of the previous 20 days trading price of the Common
Stock. In the event that the average trading price of the Common Stock is 350%
or greater than the initial public offering price in the Offering for a period
in excess of 60 consecutive business days, Benson may, upon 30 days prior
written notice to the Company, thereafter convert the Benson Debenture into
Common Stock of the Company based upon the above described ratios. In addition,
the Benson Debenture affords Benson certain "piggyback" registration rights
covering the Common Stock into which the Benson Debenture may be convertible,
(see Note 9 - Debt).
46
<PAGE>
NOTE 15 - SHAREHOLDERS' EQUITY: (Continued)
Additional Stock Plan Information
The Company continues to account for its stock-based awards using the
intrinsic value method in accordance with APB 25, "Accounting for Stock Issued
to Employees" and it related interpretations. Accordingly, no compensation
expense has been recognized in the financial statements for employee stock
arrangements.
SFAS 123, "Accounting for Stock-Based Compensation", requires the
disclosure of pro forma net income and earnings per share had the Company
adopted the fair value method as of the beginning of fiscal 1996. Under SFAS
123, the fair value of stock-based awards to employees is calculated through the
use of option pricing models, even though such models were developed to estimate
the fair value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option awards.
These models also require subjective assumptions, including future stock price
volatility and expected time to exercise, which greatly affect the calculated
values. The Company's calculations were made using the Black-Scholes option
pricing model with the following weighted average assumptions: expected life, 60
months following vesting; stock volatility, 21% in 1996, risk free interest
rates, 6% and no dividends during the expected term. The Company's calculations
are based on a multiple option valuation approach and forfeitures are recognized
as they occur. If the computed fair values of the award had been amortized to
expense over the vesting period of the awards, the pro forma net income(loss)
and earnings (loss) for common shares for the calendar years ended December 31,
1996 and 1995, would have been ($4,947,000) or ($.41) and $1,250,000 or $.13,
respectively.
NOTE 16 - 401(K) EMPLOYEE SAVINGS PLANS:
On December 28, 1994, by unanimous written consent of the Board of
Directors of each of Sterling Vision, Inc., Sterling Vision of California, Inc.
and VisionCare of California, each such Company separately approved and adopted,
effective January 1, 1995, a 401(k) Employee Savings Plan (the "401(k) Plan") to
provide all qualified employees of these entities with retirement benefits.
Presently, each Company pays the administrative costs of each such 401(k) Plan,
but does not provide any matching contributions to any participants in any of
the 401(k) Plans. It is the opinion of management that the 401(k) Plan is in
compliance with all ERISA regulations.
NOTE 17 - INDUSTRY SEGMENTS:
For the calendar year ended December 31, 1996, the Company's operations
were classified into two principal industry segments: (i) the retail optical
segment whereby the Company owns and operates and franchises a retail chain of
optical stores which offer eyecare products and services such as prescription
and non-prescription eyeglasses, eyeglass frames, ophthalmic lenses, contact
lenses, sunglasses and a broad range of ancillary items; and (ii) the Insight
Laser segment whereby the Company owns and operates a laser surgery center and
provides access, for a fee, to affiliated ophthalmologists to utilize the
Company's excimer lasers so as to offer PRK, a procedure performed with such
laser for the correction of certain degrees of myopia. Prior to 1996, the
Company's operations were limited to the retail optical segment.
There were no intersegment sales for the calendar year ended December 31,
1996. No single customer represented more than ten percent of consolidated
sales for the calendar year ended December 31, 1996.
December 31, 1996
-----------------
Income (loss) from operations: $ 4,158
Retail Optical (3,331)
Insight Laser (7,318)
General and Administrative --------
(Loss) before tax provision,
as reported in the accompanying
47
<PAGE>
NOTE 17 - INDUSTRY SEGMENTS: (Continued)
income statements $ (6,491)
========
Identifiable assets:
Retail Optical $ 36,392
Insight Laser 4,270
General corporate assets 5,607
--------
Total Assets as reported in the
accompanying balance sheet $ 46,269
========
Capital Expenditures:
Retail Optical $ 3,467
Insight Laser 1,883
Corporate 257
--------
Total capital expenditures $ 5,607
========
Depreciation:
Retail Optical $ 792
Insight Laser 490
Corporate 173
--------
Total Depreciation $ 1,455
========
Loss from operations represents net sales less operating expenses and
those general and administrative expenses that can be specifically identified as
pertaining to each segment, but excluding general and administrative expenses
that are general in nature or cannot be specifically attributed to a particular
segment. Identifiable assets by segment are those assets that are used in the
Company's operations within the particular segment. General corporate assets
consist primarily of cash, goodwill and the residual of franchise notes held by
CIT and Sanwa.
NOTE 18 - SUBSEQUENT EVENTS:
On February 19, 1997, the Company entered into a certain Agreement and
Plan of Reorganization with the owners (collectively, the "Shareholders") of all
of the issued and outstanding capital stock of Singer Specs, Inc. ("Singer"), a
Delaware corporation which is the: (i) operator of four retail optical stores;
(ii) the franchisor of an additional, approximately twenty-six 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.
The Singer Agreement provides 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 that number of shares of the Company's Common
Stock having a market value of $2,510,000, subject to possible adjustment as set
fourth therein.
In addition, the Agreement requires the Company to contribute to the
capital of Singer (or lend to Singer) the aggregate sum of $300,000, to be used
to pay a portion of Singer's liabilities existing as of the Singer closing, the
balance of which liabilities will be assumed by corporations owned by the
Shareholders, who will each personally guaranty the repayment of same.
In addition to the foregoing, the Singer Agreement provides for the
following: (i) the requirement that the assets for each of the four retail
optical stores currently being operated by Singer be conveyed to corporations
owned by one or more of the Shareholders, which entities will, simultaneously
with the Singer closing, enter into a Sterling Optical Center Franchise
Agreement for each of the same; (ii) that the Company file with the Securities
and Exchange Commission a Registration Statement seeking registration of the
Common Stock to be issued to the Shareholders; (iii) the pledge, by the
Shareholders, of all of their shares of the Company's Common Stock to be issued
to them, to secure their obligations under the Agreement; (iv) the Shareholders
being restricted from selling a portion of their shares of said Common Stock,
all as more particularly set forth in
48
<PAGE>
NOTE 18 - SUBSEQUENT EVENTS: (Continued)
the Agreement; and (v) the requirement that the Company pay to the Shareholders
the difference between the market price of its Common Stock (upon which the
purchase price was calculated) and the gross selling price of any such shares
sold by such Shareholders. The Company intends to account for this transaction
as a purchase and the closing is anticipated to occur on or about March 31,
1997.
On February 26, 1997, the Company entered into Convertible Debentures and
Warrants Subscription Agreements with certain investors in connection with the
private placement of units consisting of an aggregate of $8,000,000 principal
amount of Debentures and an aggregate of 800,000 Warrants), which Warrants
entitle the holders thereof to purchase from the Company a maximum number of 1.2
million shares of the Company's Common Stock, par value $.01 per share at a
predetermined price per share. The Company used the net proceeds (approximately
$7,500,000) of the private placement: (i) to 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); (ii) to pay down the
Company's revolving line of credit with the Bank ($1,000,000); and (iii)
anticipates using the balance for general corporate purposes.
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 lessor of
$6.50 or 85% of the average closing bid price of the Common Stock as reported on
the Nasdaq National Market System 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 (the "Registration
Statement") with respect to the underlying Common Stock is then in effect; 50%
of the original principal amount is convertible beginning three months after the
date of issuance; 85% 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 the Nasdaq Market System) equals or exceeds $10, the entire
principal amount of the Debentures will be convertible at any time thereafter.
At maturity, provided no event of default exists under the Debentures and a
Registration Statement covering the underlying Common Stock is then effective,
any outstanding Debentures will be converted into shares of Common Stock.
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 after the Registration Statement has been declared
effective, then the holder will receive an additional Bonus Warrant which shall
entitle the holder to purchase one share of Common Stock for each two Warrants
previously exercised. The Bonus Warrants have an exercise price of $7.50 per
share and a term of 3 years from the date of grant.
The Company has agreed to file a Registration Statement no later than
April 30, 1997, on behalf of the holders 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 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 aforementioned Debenture and Warrant Transaction. As such, the Bank amended
and waived certain provisions of the Credit Agreement. On February 26, 1997, the
Bank (i) extended the maturity date of the Company's line of credit to May 30,
1997; (ii) required a $1,000,000 pay down of the line of credit; (iii)
permanently reduced the line of credit by such amount; (iv) granted 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)
amended, for the period ended December 31, 1997, certain financial covenants
contained in the Credit Agreement.
49
<PAGE>
NOTE 18 - SUBSEQUENT EVENTS: (Continued)
The proforma effect on the results of financial operations of the Company
had the Company entered into the Convertible Debentures and Warrant Subscription
Agreements at the beginning of 1996 is immaterial.
NOTE 19 - RESULTS OF OPERATIONS AND MANAGEMENT PLANS:
For the calendar ended December 31, 1996 the Company incurred a loss of
$6,491,000 which was primarily due to: (i) a loss of $2,312,000 from the
operation of the stores acquired in the Benson Transaction; (ii) a loss of
$3,330,000 from the operations of Insight; (iii) approximately $400,000 in
occupancy and moving costs related to the Company's administrative office
relocation; (iv) approximately $475,000 in costs related to operating as a
publicly held company; and, (v) and a $466,000 increase in interest expense due
to an increase in the Company's debt.
The Company has taken the following measures which it believes will
improve its operations and cash flow in 1997: (i) closed nine Benson stores,
some of which were unprofitable or where leases were not renewed; (ii)
franchised eleven Benson stores which are now producing royalty income; (iii)
eliminated virtually all administrative overhead in connection with Insight;
(iv) reduced overhead at the Company's Insight Laser Center; and, (v) reduced
general and administrative expenses, exclusive of Insight, by approximately
$1,000,000.
The Company has formulated a new business strategy for its Insight
operation, which the Company believes: (i) should dramatically reduce the
Company's losses attributable to Insight; and (ii) is consistent with the
Company's plan to become a full-service eyecare company. Accordingly, the
Company has developed affiliations with refractive laser surgeons, whereby such
surgeons pay the Company a laser access fee to utilize the Company's excimer
laser, as well as a fee to utilize the Company's existing Insight Laser Center
facility located in New York City. Moreover, the Company plans to place certain
of its existing excimer lasers into various ophthamological centers, at little
or no risk to the Company, whereby the Company will receive a laser access fee
(from such ophthalmologists utilizing such excimer lasers to perform PRK
procedures) for each procedure performed with the Company's excimer lasers.
Notwithstanding the changes noted above, the Company anticipates that Insight
will continue to operate at a loss for the twelve months ended December 31,
1997.
Although the Company believes that its financial condition will improve
for the twelve months ended 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. In the event of a default, the
Bank has the right to accelerate the payment of the then outstanding principal
under the Loan Agreement. The Company believes it could meet such demands
through either additional borrowings, the sale of franchise notes receivable or
additional sales of equity, although there can be no assurance that the Company
could effect any of such transactions.
In February 1997, the Company entered into a Convertible Debentures and
Warrants Subscription Agreement which provided net proceeds of approximately
$7,500,000 to the Company (See Note 18.) Except for approximately $2,050,000
which was utilized to repay a portion of the company's debt, approximately
$5,400,000 will be available to the Company for general corporate purposes.
In addition, the Company is: (i) currently negotiating with a financial
institution to finance its franchise notes receivable; (ii) negotiating with
Pembridge to repay its short-term debt in stock rather than cash; (iii)
intending to negotiate with the Bank to renew its line of credit; and, (iv)
requesting, from certain shareholders and directors, an extension of time to
repay its short-term debt. However, there can be no assurance that any such
transactions could be effected.
50
<PAGE>
STERLING VISION, INC. AND SUBSIDIARIES
SCHEDULE I
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
<TABLE>
<CAPTION>
Column A Column B Column C - Additions Column D Column E
- ------------------------- --------- ------------------------ ----------- --------
Balance (1) (2) Balance
at Charged to Charged to at
beginning costs and other end
Description of period expenses accounts Deductions of period
----------- --------- -------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
For the period ended December 31, 1996 -
Allowance for doubtful
accounts receivable $ 422 572 - 437 (a) $ 557
======= ======
Reserve for uncollectible
notes receivable $ 712 - - 150 (a) $ 562
======= --- ======
For the period ended December 31, 1995 -
Allowance for doubtful
accounts receivable $ 356 267 - 201 (a) $ 422
======= ======
Reserve for uncollectible
notes receivable $3,612 584 - 3,484 (a) $ 712
====== ======
For the period ended December 31, 1994 -
Allowance for doubtful
accounts receivable $ 406 94 - 144 (a) $ 356
======= =======
Reserve for uncollectible
notes receivable $ 2,437 1,700 - 525 (a) $3,612
======= ======
</TABLE>
(a) These items represent the permanent write-off of the receivable against the
reserve.
51
<PAGE>
STERLING VISION, INC. AND SUBSIDIARIES
SCHEDULE II
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
(In Thousands, Except Per Share Data)
1996 1995 1994
-------- -------- ------
PRIMARY EARNINGS (LOSS)
Net income (loss) $(4,490) $ 767 $3,278
======= ======= ======
Weighted average number of common
shares outstanding 12,341 10,031 9,963
Incremental shares based on the treasury
stock method for stock options, using
the average market price 0 0 -
------- ------- -----
Weighted average number of common share
and common share equivalents outstanding 12,341 10,031 9,963
======= ======= ======
Primary earnings (loss) per common share $ (.36) $ .08 $ .33
======= ======= ======
FULLY DILUTED EARNINGS (LOSS)*
Net income (loss) $(4,490) $ 767 $3,278
======= ======= ======
Weighted average number of common
shares outstanding 12,341 10,031 9,963
Incremental shares based on the treasury
stock method for stock options, using
the average market price - 81 -
------- ------- ------
Weighted average number of common share
and common share equivalents outstanding 12,341 10,112 9,963
======= ======= ======
Fully diluted earnings (loss) per common share $ ( .36) $ .08 $ .33
======= ======= ======
* 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 results in dilution of less than 3%.
52
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Janover Rubinroit, LLC ("Janover Rubinroit") was previously the principal
accountant for the Company that audited the Company's financial statements. In
connection with the Company's Offering, the Company and its Underwriters agreed
that it would be in the best interests of the Company to retain a "big six"
accounting firm as the Company's principal accountants, effective for the audit
of the Company's financial statements for the fiscal year ended December 31,
1995. Accordingly, the Audit Committee of the Company's Board of Directors, on
February 23, 1996, determined to engage Deloitte & Touche LLP ("Deloitte"). On
March 4, 1996, Janover Rubinroit's appointment as principal accountant was
terminated by the Company and Deloitte was engaged as the Company's principal
accountants, although Janover Rubinroit will continue to provide certain tax and
advisory services to the Company.
In connection with the audit for the year ended December 31, 1994, the
Janover Rubinroit report contained no adverse opinion or disclaimer of opinion,
nor was it qualified or modified as to uncertainty, audit scope or accounting
principles. For the last two fiscal years ended December 31, 1995 and the
subsequent period ended March 4, 1996 there were no disagreements with Janover
Rubinroit on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope of procedure, which disagreements, if
not resolved to the satisfaction of Janover Rubinroit, would have caused it to
make reference to the subject matter of the disagreements in connection with its
reports.
53
<PAGE>
PART III
Certain information required by Part III is omitted from this Report in
that the Registrant intends to file a definitive Proxy Statement pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended, not later
than 120 days after the end of the fiscal year covered by this Report, and
certain information included therein is incorporated herein by reference.
Item 10. Directors and Executive Officers of the Registrant
The information required by this Item regarding Directors, Executive
Officers, Promoters and Control Persons is set forth in Part I of this Report
under the heading "Executive Officers of the Registrant". The additional
information required by this Item will be set forth in the Company's Proxy
Statement for the 1997 Annual Meeting of Shareholders, which information is
hereby incorporated herein by reference.
Item 11. Executive Compensation
The information required by this Item will be set forth in the Company's
Proxy Statement for the 1997 Annual Meeting of Shareholders, which information
is hereby incorporated herein by reference, excluding the Stock Price
Performance Graph and the Compensation Committee Report on Executive
Compensation.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item will be set forth in the Company's
Proxy Statement for the 1997 Annual Meeting of Shareholders, which information
is hereby incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information required by this Item will be set forth in the Company's
Proxy Statement for the 1997 Annual Meeting of Shareholders, which information
is hereby incorporated herein by reference.
54
<PAGE>
PART IV
Item 14. Exhibits, financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as a part of this Report:
1. Financial Statements.
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Income for the years ended December 31,
1996, 1995 and 1994
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994
Notes to Consolidated Financial Statements
2. Financial Statement Schedules:
Schedule I - Valuation of Qualifying Accounts
Schedule II - Computations of Earnings (Loss) per Common Share
Schedules not listed above have been omitted because they are not
applicable, are not required or the information required to be set forth therein
is included in the Consolidated Financial Statements or Notes thereto.
55
<PAGE>
3. Exhibits
EXHIBIT INDEX
Exhibit
Number
3.1 - Amended and Restated Certificate of Incorporation of Sterling
Vision, Inc., dated December 18, 1995 (incorporated by reference
to Exhibit 3.1 to the Company's Annual Report on Form 10K/A
for the calendar year ended December 31, 1995, File No. 1-14128).
3.2 - Amended and Restated By-Laws of Sterling Vision, Inc., dated
December 18, 1995 (incorporated by reference to Exhibit 3.2 to
the Company's Annual Report on Form 10K/A for the calendar
year ended December 31, 1995, File No. 1-14128).
4.1 - Specimen of Common Stock Certificate (incorporated by reference
to Exhibit 4.1 to the Company's Registration Statement
No. 33-98368).
10.1 - Credit Agreement between Sterling Vision, Inc. and Chemical Bank,
dated as of April 5, 1994 (the "Credit Agreement") (incorporated
by reference to Exhibit 10.1 to the Company's Registration
Statement No. 33-98368).
10.2 - Sterling Vision, Inc.'s 1995 Stock Incentive Plan (incorporated
by reference to Exhibit 10.2 to the Company's Registration
Statement No. 33-98368).
10.3 - Form of Sterling Vision, Inc.'s Franchise Agreement (incorporated
by reference to Exhibit 10.3 to the Company's Registration
Statement No. 33-98368).
10.4 - Settlement Agreement between Sterling Vision, Inc. and Neal Polan,
dated as of August 31, 1994 (incorporated by reference to
Exhibit 10.4 to the Company's Registration Statement No. 33-98368)
10.5 - Lease Agreements between Neptune Technology Leasing Corp. and
Sterling Vision, Inc., Sterling Vision of California, Inc. and
Sterling Vision, Inc., as successor in interest to CFO (incorporated
by reference to Exhibit 10.5 to the Company's Registration
Statement No. 33-98368).
10.6 - Assignment and Assumption of Equipment Lease by and between Cohen
Fashion Optical, Inc. and Sterling Vision, Inc. (incorporated
by reference to Exhibit 10.6 to the Company's Registration
Statement No. 33-98368).
10.7 - Form of Purchase Order between Summit Technology, Inc. and
Sterling Vision, Inc. (incorporated by reference to
Exhibit 10.7 to the Company's Registration Statement No. 33-98368).
- ----------------------------------------
* Constitutes a management contract or compensatory plan or arrangement
60
<PAGE>
10.8 - Form of Summit Laser Patent License Agreement (incorporated
by reference to Exhibit 10.8 to the Company's Registration
Statement No. 33-98368).
10.9 - Lease of 10 Peninsula Blvd., Lynbrook, N.Y. (incorporated
by reference to Exhibit 10.9 to the Company's Registration
Statement No. 33-98368).
10.10 - Underwriters' Warrant Agreement, including form of Warrant
(incorporated by reference to Exhibit 10.10 to the Company's
Registration Statement No. 33-98368).
10.11 - Referral Agreement between Cohen Fashion Optical, Inc. and Sterling
Vision, Inc. (incorporated by reference to Exhibit 10.11 to
the Company's Registration Statement No. 33-98368).
10.12 - Robert Greenberg Promissory Notes, dated August 19, 1994, as amended,
August 19, 1994, and August 31, 1994, respectively (incorporated by
reference to Exhibit 10.12 to the Company's Registration Statement No.
33-98368).
10.13 - Purchase Agreement between Sterling Vision, Inc. and RJL Optical,
Inc. and Franchise Agreement related thereto (incorporated
by reference to Exhibit 10.13 to the Company's Registration
Statement No. 33-98368).
10.14 - Purchase Agreement between Sterling Vision, Inc. and Dani-Marc
Optical, Inc. and Franchise Agreement related thereto
(incorporated by reference to Exhibit 10.14 to the Company's
Registration Statement No. 33-98368).
10.15 - Purchase Agreement between Sterling Vision, Inc. and Jeffrey
Rubin, and Franchise Agreement and Management Agreement
related thereto (incorporated by reference to Exhibit 10.15
to the Company's Registration Statement No. 33-98368).
10.16* - Management Agreement, dated October 31, 1995, between Sterling
Vision, Inc. and RJL Optical, Inc. (incorporated by reference
to Exhibit 10.16 to the Company's Registration Statement
No. 33-98368).
10.17* - Amended and Restated Management Agreement, dated October 31, 1995,
between Sterling Vision, Inc. and Jeffrey Rubin (incorporated
by reference to Exhibit 10.17 to the Company's Registration
Statement No. 33-98368).
10.18* - Employment Agreement, dated November 27, 1995, between Sterling
Vision, Inc. and Joseph Silver (incorporated by reference
to Exhibit 10.18 to the Company's Registration Statement
No. 33-98368).
- ----------------------------------------
* Constitutes a management contract or compensatory plan or arrangement
61
<PAGE>
10.19* - Employment Agreement, dated November 18, 1995, between Sterling
Vision, Inc. and Kevin Cambra (incorporated by reference
to Exhibit 10.19 to the Company's Registration Statement
No. 33-98368).
10.20* - Employment Agreement, dated November 18, 1995, between Sterling
Vision, Inc. and Sebastian Giordano (incorporated by reference
to Exhibit 10.20 to the Company's Registration Statement
No. 33-98368).
10.21* - Employment Agreement, dated November 27, 1995, between Sterling
Vision, Inc. and Jerry Darnell (incorporated by reference
to Exhibit 10.21 to the Company's Registration Statement
No. 33-98368).
10.22* - Employment Agreement, dated November 27, 1995, between Sterling
Vision, Inc. and Robert Greenberg (incorporated by reference
to Exhibit 10.22 to the Company's Registration Statement
No. 33-98368).
10.23* - Legal Fee Retainer Agreement, dated November 27, 1995, between
Sterling Vision BOS, Inc. and Sterling Vision of California, Inc.,
and Joseph Silver (incorporated by reference to Exhibit 10.23 to
the Company's Registration Statement No. 33-98368).
10.24 - Seventh Amendment to the Credit Agreement between Sterling
Vision, Inc. Chemical Bank (incorporated by reference to Exhibit
10.24 to the Company's Registration Statement No. 33-98368).
10.25 - Waiver, dated as of November 28, 1995, to the Credit Agreement,
between Sterling Vision, Inc. and Chemical Bank (incorporated
by reference to Exhibit 10.25 to the Company's Registration
Statement No. 33-98368).
10.26 - Sixth Amendment, dated as of October 24, 1995, to the Credit
Agreement between Sterling Vision, Inc. and Chemical Bank
(incorporated by reference to Exhibit 10.26 to the Company's
Registration Statement No. 33-98368).
10.27 - Fifth Amendment and Waiver, dated as of September 15, 1995, to
the Credit Agreement between Sterling Vision, Inc. and Chemical
Bank (incorporated by reference to Exhibit 10.27 to the Company's
Registration Statement No. 33-98368).
10.28 - Waiver, dated as of August 8, 1995, to the Credit
Agreement between Sterling Vision, Inc. and Chemical Bank
(incorporated by reference to Exhibit 10.28 to the Company's
Registration Statement No. 33-98368).
- ----------------------------------------
* Constitutes a management contract or compensatory plan or arrangement
62
<PAGE>
10.29 - Fourth Agreement and Waiver, dated as of April 25, 1995, to
the Credit Agreement between Sterling Vision, Inc. and Chemical
Bank (incorporated by reference to Exhibit 10.29 to the Company's
Registration Statement No. 33-98368).
10.30 - Third Amendment and Waiver, dated as of March 30, 1995, to
the Credit Agreement between Sterling Vision, Inc. and Chemical
Bank (incorporated by reference to Exhibit 10.30 to the Company's
Registration Statement No. 33-98368).
10.31 - Second Amendment and Waiver, dated as of September 30, 1994, to
the Credit Agreement between Sterling Vision, Inc. and Chemical
Bank (incorporated by reference to Exhibit 10.31 to the Company's
Registration Statement No. 33-98368).
10.32 - First Amendment and Waiver, dated as of July 26, 1994, to
the Credit Agreement between Sterling Vision, Inc. and Chemical
Bank (incorporated by reference to Exhibit 10.32 to the Company's
Registration Statement No. 33-98368).
10.33 - Schedule No. 2 to Master Lease Agreement No. 1580, dated as of
August 31, 1995, between BLT Leasing Corp. and Sterling Vision,
Inc. (incorporated by reference to Exhibit 10.33 to the Company's
Registration Statement No. 33-98368).
10.34 - Order (1) Approving Sale of Assets and (2) Granting Related Relief
in Re: OCA Acquisition, Inc. Case No. 395-35856-RCM 11 and Benson
Optical Co., Inc. Case NO. 395-35857-SAF-11 and Superior Optical
Company, Inc. Case No. 395-36572-SAF 11, Jointly Administered under
Case No. 395-35856-RCM-11, filed November 6, 1995 in the Bankruptcy
Court for the Northern District of Texas, Dallas Division
(incorporated by reference to Exhibit 10.34 to the Company's
Registration Statement No. 33-98368).
10.35 - Asset Purchase Agreement, dated August 26, 1994, between Pembridge
Optical Partners, Inc. and Sterling Vision, Inc. (incorporated
by reference to Exhibit 10.35 to the Company's Registration
Statement No. 33-98368).
10.36 - Asset Purchase Agreement, dated October 24, 1995, between Sterling
Vision BOS, Inc. and Benson Optical Co., Inc., OCA Acquisition,
Inc. n/k/a Optical Corporation of America, and Superior Optical
Company, Inc. (incorporated by reference to Exhibit 10.36 to the
Company's Registration Statement No. 33-98368).
10.37 - Convertible, Callable, Subordinated Debenture Due September 15, 2015,
made by Sterling Vision, Inc. and payable to Benson Eyecare Corp.
(incorporated by reference to Exhibit 10.37 to the Company's
Registration Statement No. 33-98368).
- ----------------------------------------
* Constitutes a management contract or compensatory plan or arrangement
63
<PAGE>
10.38 - Assignment, by Benson Eyecare Corp. to Sterling Vision, Inc., of that
certain Security Agreement, dated October 20, 1994, between Benson
Eyecare Corp. and OCA Acquisition, Inc., dated September 15, 1995
(incorporated by reference to Exhibit 10.38 to the Company's
Registration Statement No. 33-98368).
10.39 - Assignment, dated September 15, 1995, by Benson Eyecare Corporation
to Sterling Vision, Inc. of that certain Revolving Credit Note
(incorporated by reference to Exhibit 10.39 to the Company's
Registration Statement No. 33-98368).
10.40 - Assignment, dated September 15, 1995, by Benson Eyecare Corporation
to Sterling Vision, Inc. of that certain Subordinated Promissory Note
made by OCA Acquisition Inc. (incorporated by reference to
Exhibit 10.40 to the Company's Registration Statement No. 33-98368).
10.41 - Assignment, dated September 15, 1995, by Benson Eyecare Corporation
to Sterling Vision, Inc. of Benson Eyecare Corporation's rights,
title and interest in certain trade receivables (incorporated by
reference to Exhibit 10.41 to the Company's Registration Statement
No. 33-98368).
10.42 - Note Purchase Agreement, dated September 15, 1995, between Benson
Eyecare Corporation and Sterling Vision, Inc. (incorporated by
reference to Exhibit 10.42 to the Company's Registration Statement
No. 33-98368).
10.43* - Employment Agreement, dated as of April 1, 1994, between VisionCare
of California and Martin J. Shoman, as amended by a Letter Agreement,
dated May 12, 1994 (incorporated by reference to Exhibit 10.44 to the
Company's Registration Statement
No. 33-98368).
10.44 - Eighth Amendment and Waiver, dated as of December 19, 1995, to the
Credit Agreement, between Sterling Vision, Inc. and Chemical
Bank (incorporated by reference to Exhibit 10.45 to the Company's
Registration Statement No. 33-98368).
10.45 - Tax Agreement, dated as of December 19, 1995, between Sterling
Vision, Inc. and the shareholders of Sterling Vision, Inc.
(incorporated by reference to Exhibit 10.46 to the Company's
Registration Statement No. 33-98368).
10.46 - Form of Franchisee Stockholder Agreement to be entered into between
Sterling Vision, Inc. and certain of its Franchisees (incorporated by
reference to Exhibit 10.47 to the Company's Registration Statement No.
33-98368).
10.47 - Non-Qualified Stock Option Agreement between Sterling Vision, Inc.
and Neal Polan (incorporated by reference to Exhibit 10.48
to the Company's Registration Statement No. 33-98368).
- ----------------------------------------
* Constitutes a management contract or compensatory plan or arrangement
64
<PAGE>
10.48* - Stock Purchase Agreement, dated as of December 18, 1995, between
Sterling Vision, Inc. and Robert Cohen, Alan Cohen, Edward Cohen,
Stefanie Cohen Rubin, Allyson Cohen, Jeffrey Cohen, Richard Cohen, Abby
Cohen May, Jennifer Cohen, Meryl Cohen a/c/f Gabrielle Cohen and Meryl
Cohen a/c/f Jaclyn Cohen (incorporated by reference to Exhibit 10.49 to
the Company's Registration Statement No. 33-98368).
10.50 - Stock Purchase Agreement, dated as of December 18, 1995, between
Sterling Vision, Inc. and Neal Polan (incorporated by reference to
Exhibit 10.51 to the Company's Registration Statement No. 33-98368).
10.51 - Multiple Franchise Agreement, dated February 7, 1996, between
Leonard Vainio and the Company (incorporated by reference to Exhibit
10.51 to the Company's Annual Report on Form 10K/A for the calendar
year ended December 31, 1995, File No. 1-14128).
10.52 - Sublease, dated November 29, 1995, as amended, between Conopco, Inc.
and the Company with respect to the Insight Laser Center to be located
at 725 Fifth Avenue, New York, New York (incorporated by reference to
Exhibit 10.52 to the Company's Annual Report on Form 10K/A for the
calendar year ended December 31, 1995, File No. 1-14128).
10.53 - Sublease, dated February 27, 1996, between 1500 Hempstead Tpke., L.L.C.
and the Company with respect to the Company's new office facilities to
be located at 1500 Hempstead Turnpike, East Meadow, New York
(incorporated by reference to Exhibit 10.53 to the Company's Annual
Report on Form 10 K/A for the calendar year ended December 31, 1995,
File No. 1-14128).
10.54 - Sales Agreement, dated January 31, 1996, between Insight Laser Centers,
Inc. and VISX Incorporated, together with the form of VISX Patent and
Software License Agreement to be entered into in connection therewith
(incorporated by reference to Exhibit 10.54 to the Company's Annual
Report on Form 10K/A for the calendar year ended December 31, 1995,
File No. 1-14128).
10.55 - Waiver, dated as of March 25, 1996, to the Credit Agreement between
Sterling Vision, Inc. and Chemical Bank (incorporated by reference to
Exhibit 10.55 to the Company's Annual Report on Form 10K/A for the
calendar year ended December 31, 1995, File No. 1-14128).
10.56* - Employment Agreement, dated March 8, 1996, between Sterling Vision,
Inc. and Mr. Ali Akbar (incorporated by reference to Exhibit 10.56 to
the Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1996, File No. 1-14128).
10.57 - Employment Agreement, dated March 29, 1996, between Sterling Vision,
Inc., Insight Laser Centers, Inc. and Dr. Francis A. L'Esperance, Jr.,
M.D. (Incorporated by reference to Exhibit 10.57 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1996,
File No. 1-14128).
- ----------------------------------------
* Constitutes a management contract or compensatory plan or arrangement
65
<PAGE>
10.58 - Laser Access Agreement, dated March 28, 1996, between Insight Laser
Centers, Inc. and Nassau Ophthalmic Services, P.C. (incorporated by
reference to Exhibit 10.58 to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1996, File No. 1-14128).
10.59 - Assignment and Assumption of Lease Agreement ("VCA" Company Store
Leases"), dated June 7, 1996, between VCA and certain of its affiliates
and DKM (incorporated by reference to Exhibit 10.59 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, File
No. 1-14128).
10.60 - Assignment and Assumption of Lease Agreement ("VCA" Company Store
Leases"), as amended by a Letter Agreement, dated June 10, 1996,
between VCA and certain of its affiliates and DKM (incorporated by
reference by to Exhibit 10.60 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1996, File No. 1-14128).
10.61 - Assignment and Assumption of Lease Agreement ("VCA Franchised Store
Leases") as amended by a Letter Agreement, dated July 11, 1996
(incorporated by reference to Exhibit 10.61 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996, File No.
1-14128).
10.62 - Assignment, dated June 19, 1996, by Bank One Kentucky, N.A. (Assignor")
to DKM, all of Assignor's right, title and interest in and to that
certain Revolving Credit Loan Agreement and Security Agreement, dated
January 10, 1992, between the Assignor and Duling Optical Corporation,
et. al. (incorporated by reference to Exhibit 10.62 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, File
No. 1-14128).
10.63 - First Amendment to the Company's 1995 Stock Incentive Plan
(incorporated by reference to Exhibit 10.63 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996, File No.
1-14128).
10.64 - Purchase and Sale Agreement, dated September 30, 1996, between Eye Site
(Ontario) Ltd. And the Company (incorporated by reference to Exhibit
10.64 to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996 , File No. 1-14128).
10.65 - Master Franchise Agreement, dated September 30, 1996, between Eye Site,
Inc., and Eye Site (Ontario) Ltd. and the Company (incorporated by
reference to Exhibit 10.65 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1996, File No. 1-14128).
10.66 - Form of Promissory Notes, dated November 29, 1996, between
the Company and each of Drs. Edward, Robert and Alan Cohen.
10.67 - Ninth Amendment, dated November 29, 1996, to the Credit Agreement
between the Company and Chase Manhattan Bank.
- ----------------------------------------
* Constitutes a management contract or compensatory plan or arrangement
66
<PAGE>
10.68 - Tenth Amendment and Waiver, dated February 26, 1997, to the Credit
Agreement between the Company and Chase Manhattan Bank.
10.69 - Form of Convertible Debentures and Warrants Subscription Agreement,
dated February 26, 1997 (incorporated by reference to Exhibit 4.1 to
the Company's Current Report on Form 8-K dated March 5, 1997).
16.1 - Letter, dated March 4, 1996, from Janover Rubinroit LLC, the former
independent certified public accountant for the Company (incorporated
by reference to Exhibit 16 to the Company's Current Report on Form 8-K
dated March 7, 1996).
21 - List of Subsidiaries.
27 - Financial Data Schedule.
- ----------------------------------------
* Constitutes a management contract or compensatory plan or arrangement
67
<PAGE>
(b) Reports on Form 8-K.
1) On March 7, 1996, the Company filed a Report on Form 8-K with
respect to a change in its Certifying Accountants.
2) On May 30, 1996, the Company filed a Report on Form 8-K with
respect to the transactions embodied in DKM's Asset Purchase
Agreement with Norwest and a series of other arrangements
which resulted in DKM's acquisition of substantially all of
the retail optical assets of VCA.
3) On November 29, 1996, the Company filed a Report on Form 8-K
with respect to a loan agreement whereby certain principal
shareholders of the Company provided short-term financing to
the Company. In addition, the Company reported the expiration
and termination of an agreement related to Insight and an
affiliated ophthalmologist.
68
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
STERLING VISION, INC.
By: /s/ Robert Greenberg
------------------------
Robert Greenberg
President and Chief Executive Officer
Date: March 28, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Robert Cohen Chairman of the Board March 28, 1997
- ------------------------------------------------------ of Directors
Robert Cohen
/s/ Alan Cohen Vice-Chairman of the March 28, 1997
- ----------------------------------------------------- Board of Directors
Alan Cohen
/s/ Robert Greenberg Chief Executive Officer March 28, 1997
- ----------------------------------------------------- President and Director
Robert Greenberg (Principal Executive Officer)
/s/ Sebastian Giordana Chief Financial Officer, March 28, 1997
- ----------------------------------------------------- Executive Vice-President Finance
Sebastian Giordano and Treasurer (Principal Financial
and Accounting Officer)
/s/ Edward Cohen Director March , 1997
- ----------------------------------------------------
Edward Cohen
/s/ Joel Gold Director March , 1997
- ----------------------------------------------------
Joel Gold
/s/ Francis L'Esperance, Jr. Director March , 1997
- ----------------------------------------------------
Francis L'Esperance, Jr.
/s/ Jay Fabrikant Director March 28, 1997
- ----------------------------------------------------
Jay Fabrikant
</TABLE>
78
<PAGE>
NEGOTIABLE PROMISSORY NOTE
East Meadow, New York
$666,666.66 November , 1996
FOR VALUE RECEIVED, Sterling Vision, Inc., a New York corporation
having an office at 1500 Hempstead Turnpike, East Meadow, New York 11554 (the
"Maker"), on or before February , 1997, promises to pay to the order of Dr. Alan
Cohen, an individual residing at 3 Surrey Lane, Old Westbury, New York 11568
("PAYEE"), his successors and/or assigns, the sum of SIX HUNDRED SIXTY-SIX
THOUSAND SIX HUNDRED SIXTY-SIX and 66/100 ($666,666.66) DOLLARS, together with
interest, to be computed thereon at a rate equal to one (1%) percent above the
prime rate of interest in effect, from time to time, at Chase Manhattan Bank,
New York, New York.
This Note is subject to the following additional terms:
1. Prepayment - Application of Payment.
This Note may be prepaid without penalty, in whole or in part, at any
time.
All payments hereunder shall first be applied to interest which shall
have accrued, but shall not have been paid, hereunder at the time at which such
payment is made, and the balance of such payment shall be applied to reduce the
then outstanding principal balance hereof.
Nothing contained in this Note, or in any other agreement between the
Maker and PAYEE, shall require the Maker to pay, or PAYEE to accept, interest in
an amount which would subject PAYEE to any penalty or forfeiture under
applicable law. In no event shall the total of all charges payable hereunder,
whether of interest or of such other charges which may or might be characterized
as interest, exceed the maximum rate permitted to be charged under the laws of
the State of New York. Should PAYEE receive any payment on this Note which is or
would be in excess of that permitted to be charged under said laws, such payment
shall have been, and shall be deemed to have been, made in error and shall
automatically be applied to reduce the principal indebtedness outstanding on
this Note.
2. Place of Payment; Waiver of Defenses, and Notices.
All payments hereunder shall be payable at the offices of PAYEE,
1500 Hempstead Turnpike, East Meadow, New York 11554, or at such other place as
PAYEE may from time to time designate pursuant to the provisions of Section 5
hereof, or at such other place as may be agreed upon by the parties.
This Note is payable by Maker without deduction by reason of set-off or
counterclaim or any defense whatsoever (except payment).
The Maker hereby waives demand for payment, notice of dishonor, and
-69-
<PAGE>
notice of protest or any other notice of any kind.
3. Default; Remedies.
In the event of:
(i) the nonpayment of any installment of principal or interest when due
on this Note, and such nonpayment continues for a period in excess of
five (5) days following the day written notice of such nonpayment has
been given to the Maker; or
(ii) the issuance of any judgment, warrant or order of attachment, tax
lien or levy, or execution or garnishment against any property of the
Maker which is not bonded, discharged, vacated or satisfied within
thirty (30) days after the issuance thereof;
then, on the happening of any such event, any remaining unpaid installments and
all liability of the Maker under this Note, at the option of PAYEE, shall become
due and payable immediately upon the giving of written notice by PAYEE to the
Maker. The failure to assert this right shall not be deemed a waiver thereof.
After maturity, stated or accelerated, interest shall accrue at the
maximum rate permitted by law, but this provision shall not be deemed to
constitute an extension of time for payment of the principal balance due
hereunder.
If this Note is not paid in full in accordance with its terms, the
Maker agrees to pay all costs and expenses of collection, including reasonable
attorneys' fees and expenses.
4. Amendments.
This Note may not be changed or terminated orally, but only by an
agreement, in writing, signed by the party against whom enforcement of any
waiver, change, modification or discharge is sought.
5. Notices.
All notices, requests or other communications required hereunder shall
be in writing and shall be deemed to have been duly given or made if delivered
personally or by courier service which obtains a signed receipt upon delivery,
or if mailed by United States certified mail, postage prepaid, return receipt
requested, to the parties at the respective addresses first above written, or at
such other addresses as shall be specified in writing by either of the parties
to the other in accordance with the terms and conditions of this Section.
Notices shall be deemed effective, if delivered personally or by courier
service, on the date delivered or, if mailed in accordance herewith, then three
(3) days after the date of such mailing.
6. Successors and Assigns.
PAYEE may, upon written notice thereof to the Maker, assign this Note
and the right to receive the payments evidenced hereby to any other person or
entity, which assignment may be made on such terms and conditions as PAYEE shall
consider appropriate, in its sole and absolute
-70-
<PAGE>
discretion. The terms and provisions of this Note shall be binding upon and
inure to the benefit of the parties hereto and their respective successors,
assigns, and legal representatives.
7. Nonwaiver.
No failure by PAYEE or any subsequent holder hereof to insist upon
exact compliance with any of the terms of this Note shall be deemed or construed
as a waiver by such party of the right to require exact compliance with each and
every duty and obligation herein contained in the future.
8. Applicable Law and Jurisdiction.
THIS NOTE SHALL BE CONSTRUED AND ENFORCED IN ALL RESPECTS IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO ANY PRINCIPLES
RELATING TO CONFLICT OF LAWS. THE PARTIES HERETO CONSENT THAT ANY LEGAL OR
EQUITY PROCEEDING BROUGHT IN CONNECTION WITH OR ARISING OUT OF ANY MATTER
RELATING TO THIS NOTE SHALL BE INSTITUTED ONLY IN A FEDERAL OR STATE COURT OF
COMPETENT JURISDICTION WITHIN THE STATE OF NEW YORK, COUNTY OF NASSAU. THE MAKER
HEREBY IRREVOCABLY CONSENTS AND SUBMITS TO THE JURISDICTION, IN ANY SUCH MATTER,
OF THE COURTS OF THE STATE OF NEW YORK AND WAIVES ANY OBJECTION HE MAY HAVE TO
EITHER THE JURISDICTION OR VENUE OF SUCH COURTS.
9. Joint and Several Liability. In the event that more than one person
shall execute this Note, the liability of each hereunder shall be joint and
several.
IN WITNESS WHEREOF, the Maker has executed this Note on the day and
year first above written.
STERLING VISION, INC.
By: /s/ Robert Greenberg
--------------------------------------
Robert Greenberg, President
-71-
<PAGE>
NEGOTIABLE PROMISSORY NOTE
East Meadow, New York
$666,666.66 November , 1996
FOR VALUE RECEIVED, Sterling Vision, Inc., a New York corporation
having an office at 1500 Hempstead Turnpike, East Meadow, New York 11554 (the
"Maker"), on or before February , 1997, promises to pay to the order of Dr.
Edward Cohen, an individual residing at 400 East 56th Street, Apt. 320, New
York, New York 10022, New York, New York ("PAYEE"), his successors and/or
assigns, the sum of SIX HUNDRED SIXTY-SIX THOUSAND SIX HUNDRED SIXTY-SIX and
66/100 ($666,666.66) DOLLARS, together with interest, to be computed thereon at
a rate equal to one (1%) percent above the prime rate of interest in effect,
from time to time, at Chase Manhattan Bank, New York, New York.
This Note is subject to the following additional terms:
1. Prepayment - Application of Payment.
This Note may be prepaid without penalty, in whole or in part, at any
time.
All payments hereunder shall first be applied to interest which shall
have accrued, but shall not have been paid, hereunder at the time at which such
payment is made, and the balance of such payment shall be applied to reduce the
then outstanding principal balance hereof.
Nothing contained in this Note, or in any other agreement between the
Maker and PAYEE, shall require the Maker to pay, or PAYEE to accept, interest in
an amount which would subject PAYEE to any penalty or forfeiture under
applicable law. In no event shall the total of all charges payable hereunder,
whether of interest or of such other charges which may or might be characterized
as interest, exceed the maximum rate permitted to be charged under the laws of
the State of New York. Should PAYEE receive any payment on this Note which is or
would be in excess of that permitted to be charged under said laws, such payment
shall have been, and shall be deemed to have been, made in error and shall
automatically be applied to reduce the principal indebtedness outstanding on
this Note.
2. Place of Payment; Waiver of Defenses, and Notices.
All payments hereunder shall be payable at the offices of PAYEE,
1500 Hempstead Turnpike, East Meadow, New York 11554, or at such other place as
PAYEE may from time to time designate pursuant to the provisions of Section 5
hereof, or at such other place as may be agreed upon by the parties.
This Note is payable by Maker without deduction by reason of set-off or
counterclaim or any defense whatsoever (except payment).
The Maker hereby waives demand for payment, notice of dishonor, and
notice of protest or any other notice of any kind.
-72-
<PAGE>
3. Default; Remedies.
In the event of:
(i) the nonpayment of any installment of principal or interest when due
on this Note, and such nonpayment continues for a period in excess of
five (5) days following the day written notice of such nonpayment has
been given to the Maker; or
(ii) the issuance of any judgment, warrant or order of attachment, tax
lien or levy, or execution or garnishment against any property of the
Maker which is not bonded, discharged, vacated or satisfied within
thirty (30) days after the issuance thereof;
then, on the happening of any such event, any remaining unpaid installments and
all liability of the Maker under this Note, at the option of PAYEE, shall become
due and payable immediately upon the giving of written notice by PAYEE to the
Maker. The failure to assert this right shall not be deemed a waiver thereof.
After maturity, stated or accelerated, interest shall accrue at the
maximum rate permitted by law, but this provision shall not be deemed to
constitute an extension of time for payment of the principal balance due
hereunder.
If this Note is not paid in full in accordance with its terms, the
Maker agrees to pay all costs and expenses of collection, including reasonable
attorneys' fees and expenses.
4. Amendments.
This Note may not be changed or terminated orally, but only by an
agreement, in writing, signed by the party against whom enforcement of any
waiver, change, modification or discharge is sought.
5. Notices.
All notices, requests or other communications required hereunder shall
be in writing and shall be deemed to have been duly given or made if delivered
personally or by courier service which obtains a signed receipt upon delivery,
or if mailed by United States certified mail, postage prepaid, return receipt
requested, to the parties at the respective addresses first above written, or at
such other addresses as shall be specified in writing by either of the parties
to the other in accordance with the terms and conditions of this Section.
Notices shall be deemed effective, if delivered personally or by courier
service, on the date delivered or, if mailed in accordance herewith, then three
(3) days after the date of such mailing.
6. Successors and Assigns.
PAYEE may, upon written notice thereof to the Maker, assign this Note
and the right to receive the payments evidenced hereby to any other person or
entity, which assignment may be made on such terms and conditions as PAYEE shall
consider appropriate, in its sole and absolute
-73-
<PAGE>
discretion. The terms and provisions of this Note shall be binding upon and
inure to the benefit of the parties hereto and their respective successors,
assigns, and legal representatives.
7. Nonwaiver.
No failure by PAYEE or any subsequent holder hereof to insist upon
exact compliance with any of the terms of this Note shall be deemed or construed
as a waiver by such party of the right to require exact compliance with each and
every duty and obligation herein contained in the future.
8. Applicable Law and Jurisdiction.
THIS NOTE SHALL BE CONSTRUED AND ENFORCED IN ALL RESPECTS IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO ANY PRINCIPLES
RELATING TO CONFLICT OF LAWS. THE PARTIES HERETO CONSENT THAT ANY LEGAL OR
EQUITY PROCEEDING BROUGHT IN CONNECTION WITH OR ARISING OUT OF ANY MATTER
RELATING TO THIS NOTE SHALL BE INSTITUTED ONLY IN A FEDERAL OR STATE COURT OF
COMPETENT JURISDICTION WITHIN THE STATE OF NEW YORK, COUNTY OF NASSAU. THE MAKER
HEREBY IRREVOCABLY CONSENTS AND SUBMITS TO THE JURISDICTION, IN ANY SUCH MATTER,
OF THE COURTS OF THE STATE OF NEW YORK AND WAIVES ANY OBJECTION HE MAY HAVE TO
EITHER THE JURISDICTION OR VENUE OF SUCH COURTS.
9. Joint and Several Liability. In the event that more than one
person shall execute this Note, the liability of each hereunder shall be joint
and several.
IN WITNESS WHEREOF, the Maker has executed this Note on the day and
year first above written.
STERLING VISION, INC.
By: /s/ Robert Greenberg
--------------------------------------
Robert Greenberg, President
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NEGOTIABLE PROMISSORY NOTE
East Meadow, New York
$666,666.66 November , 1996
FOR VALUE RECEIVED, Sterling Vision, Inc., a New York corporation
having an office at 1500 Hempstead Turnpike, East Meadow, New York 11554 (the
"Maker"), on or before February , 1997, promises to pay to the order of Dr.
Robert Cohen, an individual residing at 167 East 61st Street, New York, New York
("PAYEE"), his successors and/or assigns, the sum of SIX HUNDRED SIXTY-SIX
THOUSAND SIX HUNDRED SIXTY-SIX and 66/100 ($666,666.66) DOLLARS, together with
interest, to be computed thereon at a rate equal to one (1%) percent above the
prime rate of interest in effect, from time to time, at Chase Manhattan Bank,
New York, New York.
This Note is subject to the following additional terms:
1. Prepayment - Application of Payment.
This Note may be prepaid without penalty, in whole or in part, at any
time.
All payments hereunder shall first be applied to interest which shall
have accrued, but shall not have been paid, hereunder at the time at which such
payment is made, and the balance of such payment shall be applied to reduce the
then outstanding principal balance hereof.
Nothing contained in this Note, or in any other agreement between the
Maker and PAYEE, shall require the Maker to pay, or PAYEE to accept, interest in
an amount which would subject PAYEE to any penalty or forfeiture under
applicable law. In no event shall the total of all charges payable hereunder,
whether of interest or of such other charges which may or might be characterized
as interest, exceed the maximum rate permitted to be charged under the laws of
the State of New York. Should PAYEE receive any payment on this Note which is or
would be in excess of that permitted to be charged under said laws, such payment
shall have been, and shall be deemed to have been, made in error and shall
automatically be applied to reduce the principal indebtedness outstanding on
this Note.
2. Place of Payment; Waiver of Defenses, and Notices.
All payments hereunder shall be payable at the offices of PAYEE,
1500 Hempstead Turnpike, East Meadow, New York 11554, or at such other place as
PAYEE may from time to time designate pursuant to the provisions of Section 5
hereof, or at such other place as may be agreed upon by the parties.
This Note is payable by Maker without deduction by reason of set-off or
counterclaim or any defense whatsoever (except payment).
The Maker hereby waives demand for payment, notice of dishonor, and
notice of protest or any other notice of any kind.
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3. Default; Remedies.
In the event of:
(i) the nonpayment of any installment of principal or interest when due
on this Note, and such nonpayment continues for a period in excess of
five (5) days following the day written notice of such nonpayment has
been given to the Maker; or
(ii) the issuance of any judgment, warrant or order of attachment, tax
lien or levy, or execution or garnishment against any property of the
Maker which is not bonded, discharged, vacated or satisfied within
thirty (30) days after the issuance thereof;
then, on the happening of any such event, any remaining unpaid installments and
all liability of the Maker under this Note, at the option of PAYEE, shall become
due and payable immediately upon the giving of written notice by PAYEE to the
Maker. The failure to assert this right shall not be deemed a waiver thereof.
After maturity, stated or accelerated, interest shall accrue at the
maximum rate permitted by law, but this provision shall not be deemed to
constitute an extension of time for payment of the principal balance due
hereunder.
If this Note is not paid in full in accordance with its terms, the
Maker agrees to pay all costs and expenses of collection, including reasonable
attorneys' fees and expenses.
4. Amendments.
This Note may not be changed or terminated orally, but only by an
agreement, in writing, signed by the party against whom enforcement of any
waiver, change, modification or discharge is sought.
5. Notices.
All notices, requests or other communications required hereunder shall
be in writing and shall be deemed to have been duly given or made if delivered
personally or by courier service which obtains a signed receipt upon delivery,
or if mailed by United States certified mail, postage prepaid, return receipt
requested, to the parties at the respective addresses first above written, or at
such other addresses as shall be specified in writing by either of the parties
to the other in accordance with the terms and conditions of this Section.
Notices shall be deemed effective, if delivered personally or by courier
service, on the date delivered or, if mailed in accordance herewith, then three
(3) days after the date of such mailing.
6. Successors and Assigns.
PAYEE may, upon written notice thereof to the Maker, assign this Note
and the right to receive the payments evidenced hereby to any other person or
entity, which assignment may be made on such terms and
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conditions as PAYEE shall consider appropriate, in its sole and absolute
discretion. The terms and provisions of this Note shall be binding upon and
inure to the benefit of the parties hereto and their respective successors,
assigns, and legal representatives.
7. Nonwaiver.
No failure by PAYEE or any subsequent holder hereof to insist upon
exact compliance with any of the terms of this Note shall be deemed or construed
as a waiver by such party of the right to require exact compliance with each and
every duty and obligation herein contained in the future.
8. Applicable Law and Jurisdiction.
THIS NOTE SHALL BE CONSTRUED AND ENFORCED IN ALL RESPECTS IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO ANY PRINCIPLES
RELATING TO CONFLICT OF LAWS. THE PARTIES HERETO CONSENT THAT ANY LEGAL OR
EQUITY PROCEEDING BROUGHT IN CONNECTION WITH OR ARISING OUT OF ANY MATTER
RELATING TO THIS NOTE SHALL BE INSTITUTED ONLY IN A FEDERAL OR STATE COURT OF
COMPETENT JURISDICTION WITHIN THE STATE OF NEW YORK, COUNTY OF NASSAU. THE MAKER
HEREBY IRREVOCABLY CONSENTS AND SUBMITS TO THE JURISDICTION, IN ANY SUCH MATTER,
OF THE COURTS OF THE STATE OF NEW YORK AND WAIVES ANY OBJECTION HE MAY HAVE TO
EITHER THE JURISDICTION OR VENUE OF SUCH COURTS.
9. Joint and Several Liability. In the event that more than one
person shall execute this Note, the liability of each hereunder shall be joint
and several.
IN WITNESS WHEREOF, the Maker has executed this Note on the day and
year first above written.
STERLING VISION, INC.
By: /s/ Robert Greenberg
--------------------------------------
Robert Greenberg, President
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NINTH AMENDMENT AND WAIVER TO CREDIT AGREEMENT
NINTH AMENDMENT and WAIVER dated as of November 29, 1996 (the "Ninth
Amendment and Waiver"), to the Credit Agreement dated as of April 5, 1994, by
and between STERLING VISION, INC. a New York corporation (the "Company") and THE
CHASE MANHATTAN BANK, a New York banking corporation (the "Bank"), (as amended
prior to the date hereof, the "Credit Agreement").
RECITALS
The Company has requested and the Bank has agreed, subject to the terms
and conditions of this Ninth Amendment and Waiver, to amend and waive certain
provisions of the Credit Agreement as herein set forth.
Accordingly, in consideration of the premises and of the mutual covenants
and agreements hereinafter set forth, the parties hereto agree as follows:
I. Amendments to Credit Agreement.
1. The Credit Agreement is hereby amended to add an (a) Exhibit X
entitled "Form of Insight Guaranty" which exhibit shall read in its entirety as
set forth on Schedule A attached hereto, (b) Exhibit Y entitled "Form of
Buy-Sell Agreement" which exhibit shall read in its entirety as set forth on
Schedule B attached hereto, (c) Exhibit W entitled "Leases", which exhibit shall
read in its entirety as set forth on Schedule D hereto, and (d) Exhibit Z
entitled "Form of Insight Operating Agreement" which exhibit shall read in its
entirety as set forth on Schedule C attached hereto.
2. The following defined terms are hereby added to Section 1.01:
"Buy-Sell Agreement" shall mean that certain undated Buy-Sell Agreement by
and among Nassau Ophthalmic Services, P.C., d/b/a Stahl Eye Associates,
Nassau Center for Ambulatory Surgery, Inc., Eye Physicians and Surgeons of
Hauppauge, P.C. and the Company, a copy of which is attached hereto as
Exhibit Y.
"DKM Franchisee Notes" shall mean the promissory notes:(i) issued to
Sterling DKM by a Franchisee con-currently with the establishment of a
Franchise Store or the conversion of a Company Store into a Franchise
Store; and (ii) assigned to Sterling DKM by the previous owner thereof
prior to the date hereof, as the same may be amended, modified and/or
restated (prior to the date of any pledge thereof to the Bank) by the maker
thereof with the consent of Sterling DKM but further provided the form of
each such note is reasonably acceptable to the Bank.
"Insight LLC" shall mean Insight Laser Centers, LLC, a New
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York limited liability company.
"Insight Guaranty" shall mean the Guaranty in the form attached hereto as
Exhibit X to be executed and delivered by the Company in favor of the
Recipients identified on Schedule A thereto.
"Insight Operating Agreement" shall mean the Operating Agreement of Insight
LLC, a copy of which is attached hereto as Exhibit Z.
"Sterling DKM" shall mean Sterling Vision DKM, Inc., a Delaware
corporation.
3. The definition of "Eligible Franchisee Notes" in Section 1.01 is
hereby amended to read in its entirety as follows:
"Eligible Franchisee Notes" shall mean and include only those Franchisee
Notes which have no payments thereunder which are more than forty-five (45)
days past due and which at all times are in compliance with the following
additional conditions: (i) not more than 50% of the royalties or fees
payable under the related Franchise Agreement by the Franchisee thereof to
the Company, Sterling BOS, Sterling Vision California or Sterling DKM, as
applicable, with respect to the Franchise Store to which said Franchisee
Note relates are more than one Hundred and Twenty (120) days past due, (ii)
not more than 50% of the lease payments payable by the Franchisee thereof
with respect to its lease or sublease of real property from the Company,
Sterling BOS, Sterling Vision California or Sterling DKM, as applicable, or
any Real Estate Affiliate of the Franchise Store to which said Franchisee
Note relates, are more than one hundred and twenty (120) days past due,
(iii) there exists no default or event which, upon notice, lapse of time or
both would constitute a default under said Franchisee Note or the relevant
Franchise Agreement, other than defaults resulting from (x) a Franchisee's
failure to timely pay principal and/or interest under said Franchisee Note
or timely pay any royalties or fees payable under the related Franchise
Agreement or any lease payments under a lease or sublease of a Store and
(y) a default under the terms of any agreement between the Franchisee and
the Company, Sterling BOS, Sterling Vision California or Sterling DKM, as
applicable, which pertains solely to a Store which is not the Store with
respect to which such Franchisee Note was issued (provided, in each case,
the Company, Sterling BOS, Sterling Vision California or Sterling DKM, as
applicable, has neither exercised any of its rights or remedies as a
secured party with respect to any or all collateral pledged by Franchisee
to it to secure the Franchisee's Franchisee Note nor has deemed such
Franchisee Note uncollectible in full for any reason), and (iv) with
respect to which, the Bank shall have received an opinion of counsel to the
Company (which may include in-house counsel) to the effect that each said
Franchisee Note and the related Debt Pledge Agreement constitute the legal,
valid and binding obligation of the Franchisee and the Company, Sterling
BOS, Sterling Vision California or Sterling DKM, as applicable,
respectively.
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4. The definition of "Franchisee Notes" in Section 1.01 is hereby
amended to read in its entirety as follows:
"Franchisee Notes" shall mean, collectively, the Company Franchisee Notes,
the DKM Franchisee Notes, the BOS Franchisee Notes and the California
Franchisee Notes.
5. Section 3.10 is hereby amended and restated in its entirety to read
as follows:
SECTION 3.10 In the event that prior to payment in full of the Obligations
the Company or any Subsidiary of the Company shall sell any Franchisee Note
as permitted pursuant to Section 7.05 hereof, the Company shall apply or
cause to the Subsidiary (which is the owner of said Franchise Note) to
apply the gross proceeds therefrom, less the sum of the reasonable
out-of-pocket fees and expenses incurred in connection therewith, to prepay
the Tranche A Term, the Tranche B Term Loan and the Time Loan (as
determined by the Bank). Prepayments of the Tranche A Term, the Tranche B
Term Loan and the Time Loan shall be applied to the remaining installments
of principal thereof in the inverse order of maturity. In the event such
Loans are paid in full all prepayments thereafter shall be used to pay the
amount then outstanding on the Revolving Credit Loans.
6. Section 3.12(a) is hereby amended to add the text "(other than
Insight Inc and Insight LLC)" after the text "Corporate Guarantors" therein.
7. Section 6.03 is hereby amended to add a new clause (q) which shall
read in its entirety as follows:
(q) (i) as soon as available, but in no event later than December 9, 1996,
a thirteen (13) week projected cash flow (on a weekly basis) of the Company
and its Subsidiaries on a consolidated basis, and of Insight LLC, each in
form and detail reasonably satisfactory to the Bank, covering the thirteen
(13) week period commencing December 9, 1996, prepared under the
supervision of and certified by the Chief Financial Officer of the Company
and its Subsidiaries and of Insight LLC, respectively, and (ii) as soon as
available, but in no event later than fifteen (15) days after the end of
each calendar month, commencing with the calendar month ending December 31,
1996, a cash flow report of the Company and its Subsidiaries and of Insight
LLC, prepared under the supervision of and certified by the Chief Financial
Officer of the Company and its Subsidiaries and of Insight LLC,
respectively, which shall include (x) a detailed analysis of the actual
weekly consolidated cash flow of the Company and its Subsidiaries or the
actual weekly cash flow of Insight LLC, as applicable, for the calendar
month just ended compared to the projected weekly consolidated cash flow of
the Company and its Subsidiaries or the projected weekly cash flow of
Insight LLC, as applicable, for such period (which such projection was
previously provided to the Bank),
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explaining the variances (if any) between the actual and the projected
weekly cash flows and (y) a "roll forward" of the thirteen (13) week
consolidated cash flow projection of the Company and its Subsidiaries and
of the thirteen (13) week cash flow projection of Insight LLC provided to
the Bank in the preceding calendar month which "roll forward" incorporates
the next succeeding four (4) weeks subsequent to the end of the period
covered by the previous cash flow report provided to the Bank.
8. Section 6.13 is hereby amended and restated in its entirety as
follows:
SECTION 6.13 Franchisee Notes.
(a) The Company shall pledge or cause to be pledged Eligible Franchisee
Notes in an outstanding unpaid principal amount equal to 1.25 multiplied by
the then outstanding principal balance of the Loans (the "Minimum Secured
Amount"). The Company shall first pledge Company Franchisee Notes which
constitute Eligible Franchisee Notes. To the extent the aggregate unpaid
principal balance of such Company Franchisee Notes is less then the Minimum
Secured Amount, Sterling BOS, Sterling Vision California and/or Sterling DKM
shall pledge BOS Franchisee Notes, California Franchisee Notes and DKM
Franchisee Notes, respectively, to cover the shortfall. To the extent the
Company, Sterling BOS, Sterling Vision California or Sterling DKM,
collectively, do not have Eligible Franchisee Notes in an aggregate unpaid
principal amount equal to the Minimum Secured Amount, the Company shall not
be deemed to be in default under this Section 6.13, if the Company, Sterling
DKM, Sterling Vision California and/or Sterling BOS, has pledged to the Bank
Eligible Franchisee Notes in an amount not less than the outstanding
principal amount of the Loans and the Company maintains Eligible Royalty
Receivables and/or Eligible Rent Receivables in an aggregate amount equal to
(x) the sum of the pledged Eligible Franchisee Notes less (y) the Minimum
Secured Amount; provided, however, the aggregate amount of Eligible Rent
Receivables pledged hereunder shall not exceed $250,000. Eligible Franchisee
Notes pledged pursuant to this Section 6.13 shall be held by the Bank
pursuant to the terms of the applicable Debt Pledge Agreement. The Bank shall
be granted a security interest in all Royalty Receivables and Rent
Receivables pursuant to the applicable Security Agreement.
(b) Provided no Event of Default or event which upon lapse of time,
notice or both would constitute an Event of Default shall have occurred and
be continuing and further provided the Bank shall have received Eligible
Franchisee Notes in an aggregate amount equal to the then Minimum Secured
Amount, the Bank shall release from time to time, Company Franchisee Notes,
DKM Franchisee Notes, California Franchisee Notes and/or BOS Franchisee Notes
in an aggregate principal amount equal to the aggregate principal amount of
all Eligible Franchisee Notes pledged to the Bank pursuant to the applicable
Debt Pledge Agreements less the Minimum Secured Amount for the sole purpose
of and in connection with the sale of such notes in accordance
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with Section 7.05 hereof; provided, however, no Company Franchisee Notes
shall be released until all BOS Franchisee Notes, California Franchisee Notes
and all DKM Franchisee Notes have been released.
(c) In the event the Bank determines at any time that a Company
Franchisee Note, DKM Franchisee Note, California Franchisee Note or BOS
Franchisee Note is not an Eligible Franchisee Note or the aggregate principal
amount of Eligible Franchisee Notes pledged to the Bank together with the
aggregate principal amount of the Eligible Royalty Receivables and Eligible
Rent Receivables is less than the Minimum Secured Amount, the Company shall
promptly upon the Bank's request provide to the Bank (i) additional Eligible
Franchisee Notes (ii) evidence of additional Eligible Royalty Receivables
and/or Eligible Rent Receivables to the extent permitted by clause (a) above,
and/or (iii) cash or Cash Equivalents properly margined and satisfactory to
the Bank in its sole and absolute discretion in an aggregate amount which,
when aggregated with all other Eligible Franchisee Notes, cash and Cash
Equivalents pledged to the Bank and Eligible Rent Receivables and Eligible
Royalty Receivables maintained by the Company to the extent permitted by
clause (a) above, shall be equal to the Minimum Secured Amount. Payments
received on the Eligible Franchisee Notes pledged pursuant to the Debt Pledge
Agreements shall be subject to the terms of the Debt Pledge Agreement
applicable thereto.
(d) So long as the Obligations shall remain unpaid (i) the Company shall
deliver to the Bank within ten (10) days after the close of each calendar
month, an aging of the Franchisee Notes, Royalty Receivables, Rent
Receivables and advertising receivables under the Franchise Agreements and
(ii) the Company shall deliver to the Bank (x) within thirty (30) days after
the end of each calendar quarter, a certificate executed by the Company's
Chief Financial Officer and (y) within thirty (30) days after then end of
each fiscal year of the Company a certificate executed by the Chief Financial
Officer in each case, stating that each Franchisee Note then held by the Bank
constitutes an Eligible Franchisee Note.
(e) Upon the occurrence and continuance of an Event of Default, the Bank
may, at its option, and at the Company's expense, conduct (or cause its
designated representative to conduct) updated field audits of the Franchisee
Notes, Rent Receivables and Royalty Receivables and the supporting books,
records and documentation relating to each of the same for the purpose of
determining whether the Franchisee Notes, Rent Receivables and Royalty
Receivables constitute Eligible Franchisee Notes, Eligible Rent Receivables
and Eligible Royalty Receivables, respectively.
9. Section 7.01 is hereby amended to delete the text of clause (i)
thereof and to insert in place thereof "[intentionally omitted]."
10. Article VII is hereby amended to add the text "(other than Insight
LLC and Insight, Inc.)", after the text "(Subsidiary of the Company)" each time
it appears in (I) clause (g) of Section 7.02, (II) clause (c) of Section 7.03,
(III) Section 7.04 (other than the last line
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thereof), (IV) clause (iv) of Section 7.06, and (V) clause (iv) of Section 7.12.
11.Section 7.03 is hereby amended to add a new clause (h) and a new
clause (i) which shall read in their entirety as follows:
(h) The Insight Guaranty (but excluding any amendments, extensions, or
any other modifications thereto) with respect to those agreements identified
on Schedule A attached thereto (but excluding any amendments, waivers,
extensions or any other modifications to any thereof (other than an amendment
to the Purchase and Sale Agreement listed as document No. 4 on Schedule A
attached thereto extending the payment terms of the purchase price set forth
therein but not the aggregate purchase price thereof) unless the Bank shall
have consented to the same); provided, however, the aggregate obligations of
the Company under the Insight Guaranty shall not exceed $5,000,000 (the Bank
hereby acknowledging that no limitation on the liability of the Company is
set forth in the Insight Guaranty provided such acknowledgment shall not
constitute a waiver of a breach of this covenant if the aggregate obligations
guaranteed under the Insight Guaranty exceed $5,000,000) and, further
provided the obligations under the Insight Guaranty are unsecured.
(i) Unsecured guarantees by the Company of the obligations of Insight
Inc. or Insight LLC under (x) the leases described on Exhibit W attached
hereto provided the rental payments shall not exceed the amount of the rental
payments as set forth on Exhibit W, (y) equipment leases entered into in the
ordinary course of business financing equipment, the aggregate cost of which
shall not exceed $200,000, and (z) an equipment lease covering the laser
described in clause (xiv) of Section 7.06 hereof provided the proceeds from
the sale of the equipment to the lessor thereof shall be used to repay any
loan made by the Company to Insight LLC pursuant to clause (xii) of Section
7.06
12. Clause (vii) of Section 7.06 is hereby amended and restated in its
entirety to read as follows:
(vii) Franchisee Notes issued to the Company, Sterling DKM, Sterling BOS or
Sterling Vision California concurrently with the conversion of a Store to a
Franchisee Store, provided the form of such Note shall have been approved
by the Bank.
13. Section 7.05 is hereby amended and restated in its entirety as
follows:
SECTION 7.05. Sale of Notes. Sell, transfer, discount or otherwise dispose of
notes, accounts receivable or other obligations owing to the Company or any
Subsidiary of the Company, with or without recourse, except for collection in
the ordinary course of business;
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provided however, the Company may sell for cash Franchisee Notes provided
that (i) such sale is non-recourse to the Company, (ii) the cash proceeds
received by the Company shall be in a minimum amount equal to the principal
amount outstanding of each Franchisee Note sold, (iii) no Event of Default or
event which upon notice, lapse of time or both would constitute an Event of
Default shall have occurred (iv) the Company shall have provided the Bank not
less than ten days prior written notice of the proposed sale of each
Franchisee Note, and (v) the Company shall apply the cash proceeds from such
sale immediately to the prepayment of the Obligations in accordance with
Section 3.10 hereof.
14.Section 7.06 is hereby amended to add a clause (xii), clause (xiii)
and clause (xiv) which shall read in their entirety as follows:
(xii) The Company may purchase a membership interest in Insight LLC to the
extent required under the Buy-Sell Agreement but not pursuant to any
discretionary right of the Company provided in the Buy-Sell Agreement, the
form of which is attached hereto as Exhibit Y;
(xiii) Insight Inc. may make additional capital contributions to Insight LLC
to the extent required pursuant to Section 6.2(b) of the Insight Operating
Agreement, the form of which is attached hereto as Exhibit Z; and
(xiv) The Company may make loans, directly or indirectly, to Insight LLC not
to exceed $400,000 in the aggregate; provided in the event Insight LLC elects
to purchase a laser owned by Dr. Norman Stahl for a purchase price of
$213,000 then such aggregate amount shall be $613,000.
15.SECTION 7.15. Net Worth plus Subordinated Indebtedness. Permit
Consolidated Tangible Worth of the Company and its Subsidiaries plus
Consolidated Subordinated Indebtedness of the Company and its Subsidiaries at
any time to be less than:
(i) $22,600,000 from the date hereof through December 30, 1997; and
(ii) for each fiscal year thereafter commencing December 31, 1997 and ending
December 30th of the immediately following fiscal year, $500,000 plus an
amount equal to the required level of the minimum required Consolidated
Tangible Net Worth plus Consolidated Subordinated Indebtedness of the Company
and its Subsidiaries for the prior fiscal year ended December 31.
16.Section 7.26 is hereby amended to add the following clause after the
word "Person" and before the period at the end thereof;
; provided, however, that (x) the Company may purchase a membership interest
in Insight LLC to the extent required
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under the Buy-Sell Agreement but not pursuant to any discretionary right of
the Company provided in that Agreement, and (y) any wholly-owned Subsidiary
of the Company may declare and pay a dividend to the Company.
17.Section 8.01 is hereby amended to add a new clause (o) which shall
read in its entirety as follows:
(o) The Company or any of its Subsidiaries shall make any payments to Insight
LLC, Dr. Norman Stahl or to any Recipient (as that term is defined in the
Insight Guaranty) in excess of $50,000, individually or in the aggregate,
whether pursuant to the Insight Guaranty, the Buy-Sell Agreement (regardless
if such buy-out is required or discretionary on the part of the Company or
any of its Subsidiaries), the Insight Operating Agreement or any other
agreement or arrangement; provided, however, there shall be excluded from the
calculation of such $50,000 (i) payment the proceeds of insurance received by
the Company pursuant to a policy maintained with respect to the life of the
Person whose interest is required to be repurchased pursuant to the Buy-Sell
Agreement and (ii) loans permitted pursuant to Section 7.06 (xiv).
II. Waivers. The Bank hereby grants the following waivers in respect to
the Credit Agreement:
(a) Compliance with Section 7.13 of the Credit Agreement is hereby
waived with respect to the requirement to provide a Corporate Guaranty and
Guarantor Security Agreement executed by Insight Laser Centers, LLC ("Insight
LLC") provided that (i) immediately upon ownership by the Company and/or its
Subsidiaries of all (but not less than all) of the membership interests of
Insight LLC and regardless of whether or not such membership interest is subject
to a lien pursuant to the terms of the Buy-Sell Agreement between the Company
and the other members of Insight LLC ("Other Members") the Company shall cause
Insight LLC to execute and deliver to the Bank a Corporate Guaranty and a
Guarantor Security Agreement, (ii) the Bank is notified in writing of the
release from escrow of the documents between or among, as applicable, Insight
LLC, Insight Laser Centers, Inc. ("Insight Inc.") and Dr. Norman Stahl and his
affiliates and of the Buy-Sell Agreement and the Insight Guaranty, and further
provided on such date Insight Inc. shall immediately assign to the Bank the
Promissory Note in the principal amount of $1,936,000 from Insight LLC to
Insight Inc. to secure the guaranty obligations of Insight, Inc. to the Bank
pursuant to Insight, Inc.'s existing Guaranty executed in favor of the Bank,
(iii) until payment in full of the Obligations, the Company will not exercise
any discretionary right to purchase the membership interest of any Other Member
in the Insight LLC; provided, however, the foregoing shall not be deemed to
prohibit any obligation on the part of the Company to buy-out such membership
interest pursuant to the terms of the Buy-Sell Agreement among the Company,
Nassau Ophthalmic Services, P.C. d/b/a Stahl Eye Associates, Nassau Center for
Ambulatory Surgery, Inc. and Eye Physicians and Surgeons of Hauppauge, P.C. (the
"Buy-Sell Agreement") (iv) the Company will provide to the Bank, upon request,
all documents and agreements to which Insight LLC, Insight Inc. or the Company
is a party with respect to the operations and ownership of Insight LLC.
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(b) Compliance with Section 7.02 of the Credit Agreement is hereby
waived to permit the Company to borrow on the date hereof $666,666.66 from each
of Dr. Robert Cohen, Dr. Edward Cohen and Dr. Alan Cohen for a term of ninety
(90) days, in each case to be repaid to each of such individuals together with
interest thereon, to be computed at a rate of interest equal to one (1%) percent
over the prime rate charged from time to time (during the term of said loans) by
The Chase Manhattan Bank.
(c) Compliance with Section 7.06 of the Credit Agreement is hereby
waived to permit a capital contribution from Insight Inc. to Insight LLC of
$1,500,000 by contribution of all of its Assets (as that term is defined in and
pursuant to that certain undated Contribution Agreement dated October 1, 1996 by
and between Insight Inc. and Insight LLC, a true and correct copy of which has
been previously delivered to the Bank), all pursuant to and in accordance with
Section 5.1(a) of the Insight Operating Agreement in the form attached hereto as
Schedule C.
III. Additional Agreements.
The Company acknowledges that on the date hereof the Bank is making a
loan to Dr. Alan Cohen, Dr. Robert Cohen and Dr. Edward Cohen in the aggregate
principal amount of $1,999,999.98 (the "Shareholder Loans"), the proceeds of
which in turn will be loaned by such individuals, on the date hereof, to the
Company. In consideration of the foregoing and the amendments and waivers
provided for herein, the Company agrees that:
(a) In the event that prior to December 27, 1996, (the "Commitment
Date") the Company shall not have delivered to the Bank a commitment letter from
a reputable financial institution pursuant to which such financial institution
commits, subject to customary and usual terms, to provide to the Company a loan
or loans on or prior to the sixtieth day following the date of such commitment
letter or such earlier date as set forth in such commitment letter (the "Take
Out Closing Date") sufficient to pay in full all Obligations of the Company and
its Subsidiaries to the Bank and to Alan Cohen, Edward Cohen and Robert Cohen
with respect to the Shareholder Loans, then effective on the Commitment Date the
multiple for purposes of determining the Minimum Secured Amount shall, without
further action, be deemed amended from 1.25 to 1.50 and (y) an Event of Default
shall be deemed to have occurred pursuant to Article VIII and the Bank shall
have all the rights and remedies in respect thereof provided for in the Loan
Documents, at law or otherwise.
(b) In the event the commitment letter described in paragraph (1) above
is issued on or prior to December 27, 1996, but for any reason the Obligations
to the Bank and to Alan Cohen, Edward Cohen and Robert Cohen with respect to the
Shareholder Loans are not paid in full on or prior to the Take Out Closing Date
then effective on the Take Out Closing Date (x) the multiple for purposes of
determining the Minimum Secured Amount shall, without further action, be deemed
amended from 1.25 to 1.50 and (y) an Event of Default shall be deemed to have
occurred pursuant to Article VIII and the Bank shall have all the rights and
remedies in respect thereof provided for in the Loan Documents, at law or
otherwise.
(c) During the period commencing the date hereof and ending
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<PAGE>
February 26, 1997, the Company shall not, without the prior written consent of
the Bank, acquire or establish directly or indirectly any Subsidiary (other than
a Real Estate Subsidiary, the sole purpose of which shall be to enter into a
lease for a Company Store or Franchisee Store, or, directly or indirectly,
acquire all or substantially all of the assets of, or all or substantially all
of the assets of a business of, any Person (other than as permitted by Section
7.06(xii)) notwithstanding any right to do so otherwise set forth in the Credit
Agreement.
The Company acknowledges that the foregoing additional agreements are a
material inducement to the extension of the Shareholder Loans and to the making
of the amendments and the waivers provided for herein.
IV. Miscellaneous.
This Ninth Amendment and Waiver shall be governed by and construed in
accordance with the laws of the State of New York.
All terms used herein shall have the same meaning as in the Credit
Agreement, as amended hereby, unless specifically defined herein.
This Ninth Amendment and Waiver shall constitute a Loan Document.
Except as expressly amended hereby, the Credit Agreement shall remain
in full force and effect in accordance with the terms thereof. As amended
hereby, the Credit Agreement is ratified and confirmed in all respects. The
amendments and waivers herein are limited specifically to the matters set forth
above and for the specific instance and purpose for which given and do not
constitute directly or by implication an amendment or waiver of any other
provisions of the Credit Agreement or of any Event of Default or default which
may occur or may have occurred under the Credit Agreement.
The Company hereby represents and warrants that, after giving effect to
this Ninth Amendment and Waiver, no Event of Default or event upon which notice,
lapse of time or both would constitute an Event of Default, exists under the
Credit Agreement or any other Loan Document.
This Ninth Amendment and Waiver may be executed in one or more
counterparts, each of which shall constitute an original, but all of which, when
taken together, shall constitute but one Ninth Amendment and Waiver.
-88-
<PAGE>
IN WITNESS WHEREOF, the Company and the Bank have caused this Ninth
Amendment and Waiver to be duly executed by their duly authorized officers as of
the day and year first above written.
STERLING VISION, INC.
By:
---------------------------------
Title: Executive Vice President
THE CHASE MANHATTAN BANK
By:
---------------------------------
Title: Vice President
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<PAGE>
TENTH AMENDMENT AND WAIVER TO CREDIT AGREEMENT
TENTH AMENDMENT and WAIVER dated as of February 26, 1997, (the "Tenth
Amendment and Waiver"), to the Credit Agreement dated as of April 5, 1994, by
and between STERLING VISION, INC. a New York corporation (the "Company") and THE
CHASE MANHATTAN BANK, a New York banking corporation (the "Bank"), (as amended
prior to the date hereof, the "Credit Agreement").
RECITALS
The Company has requested and the Bank has agreed, subject to the terms
and conditions of this Tenth Amendment and Waiver, to amend and waive certain
provisions of the Credit Agreement as herein set forth.
Accordingly, in consideration of the premises and of the mutual covenants
and agreements hereinafter set forth, the parties hereto agree as follows:
I. Amendments to Credit Agreement.
1. The Credit Agreement is hereby amended to add a new Schedule XII in
the form attached hereto as Schedule XII.
2. The Credit Agreement is hereby amended to (x) delete clause (h) and
clause (i) of Section 7.03, and (y) to delete clause (xii), clause (xiii), and
clause (xiv) of Section 7.06.
3. Section 1.01 is hereby amended to add the following defined terms:
"Debentures" shall mean, collectively, the Company's Debentures to be
dated on or about February 26, 1997, in the aggregate principal amount
of $8,000,000 which Debentures together with the Warrants and Bonus
Warrants, referred to therein, are to be issued pursuant to the
Subscription Agreements.
"Subscription Agreements" shall mean, collectively, the Convertible
Debentures and Warrants Subscription Agreements between an investor and
the Company to be dated or about February 26, 1997.
4. Section 1.02 is hereby amended to add the following sentence at the
end thereof:
Notwithstanding the foregoing, the principal amount outstanding under
the Debenture from time to time shall be reflected as Indebtedness, not
equity, of the Company regardless of whether or not generally accepted
accounting principles would permit treatment of such Indebtedness as
equity.
5. The definition of "Revolving Credit Commitment Termination
-90-
<PAGE>
Date" in Section 1.01 is hereby amended and restated in its entirety to read as
follows:
"Revolving Credit Commitment Termination Date" shall mean May 30, 1997.
6. Clause (a) of Section 2.01 is hereby amended to (i) delete the
amount "$2,500,000" and substitute the amount of "$1,500,000" in place thereof
and (ii) restate in its entirety the last sentence thereof as follows:
Notwithstanding anything to the contrary in this Agreement or in any
other Loan Document, the Company will not be permitted to reborrow
under the Revolving Credit Commitment, it being expressly acknowledged
that each payment (whether mandatory, optional or otherwise) of a
Revolving Credit Loan shall permanently reduce the Revolving Credit
Commitment by an amount equal to the principal amount of such payment.
7. Section III(c) of the Ninth Amendment and Waiver to the Credit
Agreement dated November 29, 1996, between the Bank and the Company (the "Ninth
Amendment and Waiver") is hereby amended to delete the date "February 26, 1997",
therein and to insert the date "May 30, 1997" in place thereof.
8. The Waivers granted pursuant to clause (a) and (c) of Paragraph II
of the Ninth Amendment and Waiver are hereby revoked.
9. Article 4 is hereby amended to add a new Section 4.20 which shall
read in its entirety as follows:
"SECTION 4.20. Debenture and Subscription Agreement. Attached hereto as
Schedule XII is a true, correct and complete copy of the form of
Debentures and the form of Subscription Agreements."
10.Section 7.02 is hereby amended to add a new clause (i) which shall
read in its entirety as follows:
(i) Indebtedness evidenced by Debentures (each in the form attached
hereto as Schedule XII and each issued pursuant to a Subscription
Agreement in the form attached hereto as Schedule XII) in the aggregate
original principal amount of $8,000,000, but not any refinancings,
renewals, or extensions thereof.
11. Section 7.15 is hereby amended and restated in its entirety to read
as follows:
(a) SECTION 7.15. Consolidated Tangible Net Worth plus
Subordinated Indebtedness. Permit Consolidated Tangible Net Worth of the Company
and its Subsidiaries plus Consolidated Subordinated Indebtedness of the Company
and its Subsidiaries at any time to be less than:
(i) $19,000,000 during the period commencing December 31, 1996
and ending December 30, 1997; and
(ii) for each fiscal year thereafter commencing
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<PAGE>
December 31, 1997 and ending December 30 of the immediately
following fiscal year, the sum of (x) $500,000 plus the
minimum required Consolidated Tangible Net Worth plus
Consolidated Subordinated Indebtedness of the Company and its
Subsidiaries for the prior fiscal year ending December 31, and
(y) the aggregate principal amount of the Debentures converted
to shares of the Company's common stock pursuant to the terms
of the Debentures during such fiscal year.
12. Section 7.16 is hereby amended and restated in its entirety to read
as follows:
(a) SECTION 7.16. Total Consolidated Unsubordinated
Liabilities to Consolidated Tangible Net Worth. Permit the ratio of Consolidated
Total Unsubordinated Liabilities of the Company and its Subsidiaries, including
contingent liabilities, to Consolidated Tangible Net Worth plus Consolidated
Subordinated Indebtedness of the Company and its Subsidiaries to be greater
than, at any time, 1.55:1.0; provided, however, the 1.55 shall be reduced by an
amount equal to 1 basis point for each $100,000 of principal of the Debentures
converted to common stock of the Company pursuant to the Debentures (whether
mandatory, optional or otherwise) and such reduction shall occur without further
action on the date of each conversion.
13.Article VII is hereby amended to add a new Section 7.28 and a new
Section 7.29 which shall read in their respective entirety as follows:
SECTION 7.28. Modification of Debenture and Subscription
Agreement. Amend, waive or modify any provision of any Debenture or of
any Subscription Agreement, without the prior written consent of the
Bank.
SECTION 7.29. Prepayment of Debentures. Directly, or
indirectly prepay, defease, purchase, redeem, or otherwise acquire any
Indebtedness evidenced by the Debentures (including, without
limitation, any payment to the holder of any Debenture in lieu of
conversion to common stock of the Company, which shall include a
prohibition of such payment to a holder of any Debenture in lieu of
conversion to common stock pursuant to Section 2.1(d) of the Debenture)
prior to the scheduled maturity date of the Debenture; provided the
foregoing shall not be construed to prohibit the payment of interest
pursuant to Section 4.1 of a Debenture or the payment of the amounts
due pursuant to Section 4.2 of a Debenture.
II. Waivers. The Bank hereby grants the following waivers with respect
to the Credit Agreement:
(a) Compliance with Section 7.15 is hereby waived for the period
commencing December 31, 1996 through the date hereof provided that the
Consolidated Tangible Net Worth of the Company and its Subsidiaries plus
Consolidated Subordinated Indebtedness of the Company and its Subsidiaries at
all times during such period was at least $19,000,000.
(b) Compliance with Section 7.16 is hereby waived for the
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<PAGE>
period commencing December 31, 1996, through the date hereof, provided the ratio
of Consolidated Total Unsubordinated Liabilities of the Company and its
Subsidiaries, including contingent liabilities, to Consolidated Tangible Net
Worth plus Consolidated Subordinated Indebtedness of the Company and its
Subsidiaries was not greater than 1.45 at any time during such period.
(c) Compliance with Section 7.18 is hereby waived for the period
commencing December 31, 1996, through the date hereof.
(d) Compliance with Section 7.19 is hereby waived with respect to the
semi-annual fiscal period ended December 31, 1996, provided that the
Consolidated net loss of the Company and its Subsidiaries for such semi-annual
fiscal period was not in excess of $2,000,000.
(e) The Event of Default arising from the failure to deliver prior to
December 27, 1996, a commitment letter pursuant to paragraph III(a) of the Ninth
Amendment and Waiver is hereby waived.
III. Additional Agreements.
In consideration of the amendments and waivers provided for herein, the
Company agrees that:
(a) The Bank shall not be required to release any Company Franchisee
Notes, DKM Franchisee Notes, California Franchisee Notes or BOS Franchisee Notes
pursuant to Section 6.13 of the Credit Agreement or any other Loan Document in
accordance with the terms thereof until completion by the Bank of an audit of
the Company's and the Corporate Guarantor's Franchisee Notes (which audit shall
be completed on or prior to April 1, 1997) and to the Bank's satisfaction of the
results of such audit.
(b) Upon completion by the Company of the sale and issuance of the
Debenture on the date hereof, the Company shall on the date hereof apply a
portion of the proceeds thereof in an amount equal to $1,000,000 to payment of
the Revolving Credit Loans then outstanding. Further, an additional $1,000,000
of the proceeds shall be used by the Company to repay on the date hereof fifty
(50%) percent of the loans made by Robert Cohen, Alan Cohen and Edward Cohen
(the "Shareholders") to the Company on November 29, 1996, which payment of
$1,000,000 shall be made directly to the Bank in accordance with the Notice of
Collateral Assignment dated November 29, 1996, executed by the Shareholders and
the Company.
(c) The Bank may debit the account of the Company at the Bank for the
amount of $2,010,000 constituting the sum of payments due to the Bank pursuant
to paragraphs III(b) and IV(i) hereof.
The Company acknowledges that the foregoing additional agreements are a
material inducement to the amendments and the waivers provided for herein.
IV. Conditions Precedent. Neither the amendments set forth in paragraph I
nor the waivers set forth in paragraph II shall be effective unless (i) the Bank
shall have received from the Company on the date hereof a structuring fee of
$10,000, (ii) the Company shall have completed the issuance of Debentures in the
aggregate principal amount of $3,000,000 on the date hereof and the issuance of
Debentures in the
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<PAGE>
aggregate principal amount of $5,000,000 on or prior to March 3, 1997, and (iii)
the Company shall have complied with its agreement set forth in paragraph III(b)
above. In the event that any of the foregoing conditions are not satisfied when
required to be satisfied, the amendments set forth in Section 1 and the waivers
granted pursuant to Section 2 shall be null and void and of no force or effect.
V. Miscellaneous.
(a) This Tenth Amendment and Waiver shall be governed by and construed
in accordance with the laws of the State of New York.
(b) All terms used herein shall have the same meaning as in the Credit
Agreement, as amended hereby, unless specifically defined herein.
(c) This Tenth Amendment and Waiver shall constitute a Loan Document.
(d) Except as expressly amended hereby, the Credit Agreement shall
remain in full force and effect in accordance with the terms thereof. As amended
hereby, the Credit Agreement is ratified and confirmed in all respects. The
amendments and waivers herein are limited specifically to the matters set forth
above and for the specific instance and purpose for which given and do not
constitute directly or by implication an amendment or waiver of any other
provisions of the Credit Agreement or of any Event of Default or event which
upon notice, lapse of time or both would constitute an Event of Default which
may occur or may have occurred under the Credit Agreement or any other Loan
Document.
(e) The Company hereby represents and warrants that, after giving
effect to this Tenth Amendment and Waiver, no Event of Default or event upon
which notice, lapse of time or both would constitute an Event of Default, exists
under the Credit Agreement or any other Loan Document.
(f) This Tenth Amendment and Waiver may be executed in one or more
counterparts, each of which shall constitute an original, but all of which, when
taken together, shall constitute but one Tenth Amendment and Waiver.
IN WITNESS WHEREOF, the Company and the Bank have caused this Tenth
Amendment and Waiver to be duly executed by their duly authorized officers as of
the day and year first above written.
STERLING VISION, INC.
By: /s/ Robert Greenberg
---------------------------------
Name: Robert Greenberg
Title: President
THE CHASE MANHATTAN BANK
By: /s/ William G. Flister
---------------------------------
Name: William G. Flister
Title: Senior Vice President
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<PAGE>
The undersigned, not parties to the Agreement but as Corporate Guarantors
under Corporate Guaranties executed in favor of the Bank, hereby accept and
agree to the terms of the foregoing Tenth Amendment and Waiver and further
acknowledge that their respective Corporate Guaranties are in full force and
effect and are ratified and confirmed.
STERLING ADVERTISING, INC.
STERLING VISION OF MAIN PLACE, INC.
STERLING VISION OF HEMPSTEAD, INC.
STERLING VISION OF NORTHWAY MALL, INC.
STERLING VISION OF REGO PARK, INC.
STERLING VISION OF BATAVIA, INC.
STERLING VISION OF NORTH SHORE MART, INC.
STERLING VISION OF BAY STREET, INC.
STERLING VISION OF BRAMALEA, INC.
STERLING VISION OF HAMILTON, INC.
STERLING VISION OF LIME RIDGE, INC.
STERLING VISION OF KINGSTON, INC.
STERLING VISION OF BLUE HEN MALL, INC.
STERLING VISION OF LANDOVER, INC.
STERLING VISION OF MONDAWMIN, INC.
STERLING VISION OF PADDOCK MALL, INC.
STERLING VISION OF METRO NORTH, INC.
STERLING VISION OF FRANKLIN MALL, INC.
STERLING VISION OF TINLEY PARK, INC.
STERLING VISION OF EAU CLAIRE, INC.
STERLING VISION OF SENECA, INC.
STERLING ROSLYN CORP.
STERLING VISION OF WALDEN, INC.
STERLING VISION OF INDEPENDENCE, INC.
STERLING VISION OF ROTTERDAM, INC.
STERLING VISION OF NEWBURGH, INC.
STERLING VISION OF BAY RIDGE, INC.
STERLING VISION OF WESTPORT, INC.
STERLING VISION, U.S.A., INC.
STERLING VISION OF CALIFORNIA, INC.
SITE FOR SORE EYES SACRAMENTO, INC.
SITE FOR SORE EYES ADVERTISING, INC.
STERLING VISION OF POTOMAC MILLS, INC.
SITE FOR SORE EYES YUBA CITY, INC.
STERLING VISION OF WHEATON PLAZA, INC.
STERLING VISION OF MID RIVERS, INC.
STERLING VISION OF EAST ROCKAWAY, INC.
STERLING VISION OF NEWPARK, INC.
STERLING VISION OF COLUMBUS MILLS, INC.
STERLING VISION OF ONTARIO MILLS, INC.
STERLING VISION OF NANUET, INC.
STERLING VISION OF DELAFIELD, INC.
STERLING VISION OF TOMS RIVER, INC.
STERLING VISION OF ISLANDIA, INC.
STERLING VISION OF HAWTHORNE CENTER, INC.
STERLING VISION OF LEVITTOWN, INC.
STERLING VISION OF CHARLESTOWN, INC.
STERLING VISION OF SYOSSET, INC.
STERLING VISION OF CAPITOLA, INC.
-95-
<PAGE>
STERLING VISION OF FOX RUN, INC.
STERLING VISION OF METRO N.Y., INC.
STERLING VISION OF BRUNSWICK, INC.
STERLING VISION OF ROSLYN, INC.
INSIGHT LASER CENTERS, INC.
STERLING VISION OF EAST MADISON, INC.
STERLING VISION OF HAGERSTOWN, INC.
STERLING VISION BRYANT II CORP.
STERLING VISION OF WHITE FLINT, INC.
STERLING VISION OF CAMBRIDGE SQUARE, INC.
STERLING VISION OF CAPE GIRARDEAU, INC.
STERLING VISION OF EDISON, INC.
STERLING VISION OF NAPA, INC.
STERLING VISION OF LOS GATOS, INC.
STERLING VISION OF PRINCE GEORGES PLAZA, INC.
STERLING VISION, INC.
STERLING VISION BOS, INC.
VISIONCARE OF CALIFORNIA
STERLING VISION OF TRACY, INC.
INSIGHT LASER CENTERS N.Y. I, INC.
INSIGHT LASER CENTERS NEW YORK II, LTD.
INSIGHT LASER CENTERS N.C. II, INC.
STERLING VISION DKM, INC.
STERLING VISION OF GREEN ACRES, INC.
STERLING VISION OF M.V., INC.
STERLING VISION OF SOUTHPARK, INC.
STERLING VISION OF NORTHPARK, INC.
STERLING VISION OF BREA, INC.
STERLING VISION OF BLASDELL, INC.
STERLING VISION OF SOUTHDALE, INC.
STERLING VISION OF WESTMINSTER, INC.
STERLING VISION OF FAIR OAKS, INC.
STERLING VISION OF NEWPORT BEACH, INC.
STERLING VISION OF FULTON ST., INC.
STERLING VISION DKM ADVERTISING, INC.
720 MARKET STREET REALTY CORPORATION
STERLING VISION OF SACRAMENTO, INC.
STERLING VISION OF FARGO, INC.
STERLING VISION OF 1900 BROADWAY, INC.
STERLING VISION OF ANAHEIM, INC.
STERLING VISION OF EASTLAND, INC.
STERLING VISION OF GASTONIA, INC.
STERLING VISION OF KIRKWOOD MALL, INC.
STERLING VISION OF BLUEFIELD, INC.
STERLING VISION OF GREEN BAY, INC.
STERLING VISION KENNEDY BLVD., INC.
STERLING VISION OF WEST BEND, INC.
STERLING VISION OF WEST MADISON, INC.
STERLING VISION DKM OF SHEBOYGAN, INC.
STERLING VISION OF KENOSHA, INC.
STERLING VISION OF HAMPTON, INC.
STERLING VISION OF FORESTVILLE, INC.
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STERLING VISION OF FOND DU LAC, INC.
STERLING VISION OF FNR, INC.
STERLING VISION OF MINOT, INC.
STERLING VISION LABORATORIES, INC.
STERLING VISION OF BASHFORD MANOR, INC.
By /s/ Robert Greenberg
--------------------------------------
Name: Robert Greenberg
Title: President
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<PAGE>
EXHIBIT 21
LIST OF SUBSIDIARIES:
STERLING ADVERTISING, INC.
STERLING VISION OF MAIN PLACE, INC.
STERLING VISION OF HEMPSTEAD, INC.
STERLING VISION OF NORTHWAY MALL, INC.
STERLING VISION OF REGO PARK, INC.
STERLING VISION OF BATAVIA, INC.
STERLING VISION OF REGO PARK, INC.
STERLING VISION OF NORTH SHORE MART, INC.
STERLING VISION OF BAY STREET, INC.
STERLING VISION OF BRAMALEA, INC.
STERLING VISION OF HAMILTON, INC.
STERLING VISION OF LIME RIDGE, INC.
STERLING VISION OF KINGSTON, INC.
STERLING VISION OF BLUE HEN MALL, INC.
STERLING VISION, OF LANDOVER, INC.
STERLING VISION OF MONDAWMIN, INC.
STERLING VISION OF PADDOCK MALL, INC.
STERLING VISION OF METRO NORTH, INC.
STERLING VISION OF FRANKLIN MALL, INC.
STERLING VISION OF TINLEY PARK, INC.
STERLING VISION OF EAU CLAIRE, INC.
STERLING VISION OF SENECA, INC.
STERLING ROSLYN CORP.
STERLING VISION OF WALDEN, INC.
STERLING VISION OF INDEPENDENCE, INC.
STERLING VISION OF ROTTERDAM, INC.
STERLING VISION OF FRANKLIN MILLS, INC.
STERLING VISION OF NEWBURGH, INC.
STERLING VISION OF BAY RIDGE, INC.
STERLING VISION OF WESTPORT, INC.
STERLING VISION OF DUNKIRK, INC.
STERLING VISION U.S.A., INC.
STERLING VISION OF CALIFORNIA, INC.
SITE FOR SORE EYES SACRAMENTO, INC.
SITE FOR SORE EYES ADVERTISING, INC.
STERLING VISION OF POTOMAC MILLS, INC.
SITE FOR SORE EYES YUBA CITY, INC.
STERLING VISION OF WHEATON PLAZA, INC.
STERLING VISION OF MID RIVERS, INC.
SVCI REAL ESTATE, INC.
STERLING VISION OF EAST ROCKAWAY, INC.
STERLING VISION OF NEWPARK, INC.
STERLING VISION OF BREA, INC.
STERLING VISION OF BLASDELL, INC.
STERLING VISION OF SOUTHDALE, INC.
56
<PAGE>
LIST OF SUBSIDIARIES(Continued):
STERLING VISION OF NANUET, INC.
STERLING VISION OF DELAFIELD, INC.
STERLING VISION OF TOMS RIVER, INC.
STERLING MANAGEMENT SERVICES, INC.
OPTI-PLEX OF NEW YORK, INC.
STERLING VISION OF ISLANDIA, INC.
STERLING VISION OF HAWTHORNE CENTER, INC.
STERLING VISION OF LEVITTOWN, INC.
STERLING VISION OF CHARLESTOWN, INC.
STERLING VISION OF SYOSSET, INC.
STERLING VISION OF CAPITOLA, INC.
STERLING VISION OF FOX RUN, INC.
STERLING VISION OF METRO N.Y., INC.
STERLING VISION OF BRUNSWICK, INC.
STERLING VISION OF ROSYLN, INC.
INSIGHT LASER CENTERS, INC.
INSIGHT LASER CENTERS, N.Y.I, INC.
INSIGHT LASER CENTERS NEW YORK II, LTD.
INSIGHT LASER CENTER N.C. II, INC.
STERLING VISION OF EAST MADISON, INC.
STERLING VISION OF HAGERSTOWN, INC.
STERLING BRYANT II CORP.
VISIONCARE OF CALIFORNIA
STERLING VISION OF WHITE FLINT, INC.
STERLING VISION OF CAMBRIDGE SQUARE, INC.
STERLING VISION OF CAPE GIRARDEAU, INC.
STERLING VISION OF EDISON, INC.
STERLING VISION BOS, INC.
STERLING VISION OF NAPA, INC.
STERLING VISION OF LOS GATOS, INC.
STERLING VISION OF PRINCE GEORGES PLAZA, INC.
STERLING VISION OF TRACY, INC.
STERLING VISION OF COLUMBUS MILLS, INC.
STERLING VISION OF ONTARIO MILLS, INC.
STERLING VISION OF GREEN ACRES, INC.
STERLING VISION OF M.V., INC.
STERLING VISION OF SOUTHPARK, INC.
STERLING VISION OF NORTHPARK, INC.
STERLING VISION OF BREA, INC.
STERLING VISION OF BLASDELL, INC.
STERLING VISION OF SOUTHDALE, INC.
STERLING VISION DKM, INC.
STERLING VISION OF WESTMINSTER, INC.
57
<PAGE>
LIST OF SUBSIDIARIES (Continued):
STERLING VISION OF FAIR OAKS, INC.
STERLING VISION OF NEWPORT BEACH, INC.
STERLING VISION OF FULTON ST., INC.
STERLING VISION DKM ADVERTISING, INC.
720 MARKET STREET REALTY CORPORATION
STERLING VISION OF SACRAMENTO, INC.
STERLING VISION OF FARGO, INC.
STERLING VISION OF 1900 BROADWAY, INC.
STERLING VISION OF ANAHEIM, INC.
STERLING VISION OF EASTLAND, INC.
STERLING VISION OF GASTONIA, INC.
STERLING VISION OF KIRKWOOD MALL, INC.
STERLING VISION OF BLUEFIELD, INC.
STERLING VISION OF GREEN BAY, NC.
STERLING VISION OF KENNEDY BLVD., INC.
STERLING VISION OF WEST BEND, INC.
STERLING VISION OF WEST MADISON, INC.
STERLING VISION DKM OF SHEBOYGAN, INC.
STERLING VISION OF KENOSHA, INC.
STERLING VISION OF HAMPTON, INC.
STERLING VISION OF FORESTVILLE, INC.
STERLING VISION OF FOND DU LAC, INC.
STERLING VISION OF FNR, INC.
STERLING VISION OF MINOT, INC.
STERLING LABORATORIES, INC.
STERLING VISION OF BASHFORD MANOR, INC.
STERLING VISION OF RIVERSIDE, INC.
58
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATIN EXTRACTED FROM THE COMPANY'S
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS FOR THE CALENDAR YEAR ENDED
DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 868
<SECURITIES> 0
<RECEIVABLES> 28,056
<ALLOWANCES> 557
<INVENTORY> 3,678
<CURRENT-ASSETS> 16,839
<PP&E> 13,506
<DEPRECIATION> 2,688
<TOTAL-ASSETS> 46,269
<CURRENT-LIABILITIES> 20,642
<BONDS> 15,184
0
0
<COMMON> 124
<OTHER-SE> 19,433
<TOTAL-LIABILITY-AND-EQUITY> 46,269
<SALES> 28,477
<TOTAL-REVENUES> 40,343
<CGS> 8,851
<TOTAL-COSTS> 46,834
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 928
<INTEREST-EXPENSE> 1,297
<INCOME-PRETAX> (6,491)
<INCOME-TAX> (2,001)
<INCOME-CONTINUING> (4,490)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,490)
<EPS-PRIMARY> (.36)
<EPS-DILUTED> (.36)
</TABLE>
