<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number: 1-14128
STERLING VISION, INC.
(Exact name of Registrant as specified in its Charter)
New York 11-3096941
(State of Incorporation) (IRS Employer
Identification No.)
1500 Hempstead Turnpike
East Meadow, NY 11554
(Address of Principal Executive Offices, including Zip Code)
(516)390-2100
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the Registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS:
There were 13,842,406 shares outstanding of the Registrant's Common Stock, par
value $.01 per share, as of October 27, 1997.
<PAGE>
Item 1. Financial Statements
STERLING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars In Thousands)
September 30, December 31,
1997 1996
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 682 $ 868
Accounts receivable - net of allowance for
doubtful accounts of $715 and $557,
respectively 7,939 7,911
Franchise and other notes receivable - current 3,206 3,375
Inventories 3,641 3,678
Due from related parties - current 114 124
Prepaid expenses and other current assets 1,234 883
Total Current Assets 16,816 16,839
Property and equipment - net of
accumulated depreciation
11,080 10,818
Franchise and other notes receivable - net of
allowance for doubtful accounts of $562 16,484 16,089
Excess of cost, net of assets acquired 3,200 594
Restricted cash 1,050 50
Other noncurrent assets 1,901 1,879
Total Assets $ 50,531 $ 46,269
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 1,998 $ 9,151
Notes payable - Shareholders and Directors -- 2,000
Accounts payable and accrued liabilities 3,754 8,267
Franchise related obligations - current 805 1,224
Total Current Liabilities 6,557 20,642
Long term debt 11,626 4,033
Deferred franchise income 168 328
Excess of fair value of assets acquired over cost 1,425 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 13,712,585 137 124
Common stock to be issued - net of costs of issuance
of $480 2,831 --
Additional paid-in capital 33,305 24,982
(Deficit) (5,518) (5,549)
Total Shareholders' Equity 30,755 19,557
Total Liabilities and Shareholders' Equity $ 50,531 $ 46,269
======== ========
The accompanying notes are an integral part of these Consolidated Condensed
Financial Statements.
-2-
<PAGE>
STERLING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Systemwide sales $ 42,013 $ 33,593 $114,950 $ 96,815
======== ======== ======== ========
Revenues:
Net sales - Company stores $ 6,027 $ 7,770 $ 17,784 $ 22,147
Franchise royalties 2,263 2,023 6,931 5,783
Net gains and fees from the conveyance of
Company-owned assets to franchisees 414 665 1,293 2,227
Other income 840 842 2,056 1,539
Total Revenues 9,544 11,300 28,064 31,696
Costs and expenses:
Cost of sales 1,622 1,937 4,796 5,677
Selling expenses 3,831 5,221 11,196 15,096
General and Administrative expenses 4,189 5,107 11,118 11,267
Interest expense 301 301 923 904
Total Costs and Expenses 9,943 12,566 28,033 32,944
Net income (loss) before provision for
income taxes (399) (1,266) 31 (1,248)
Provision (benefit) for income taxes -- (506) -- (499)
Net income (loss) $ (399) $ (760) $ 31 $ (749)
======== ======== ======== ========
Weighted average number of common
shares outstanding 13,713 12,325 13,713 12,325
======== ======== ======== ========
Earnings (loss) per common share (.03) (.06) .00 (.06)
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these Consolidated Condensed
Financial Statements.
-3-
<PAGE>
STERLING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars In Thousands)
For the Nine Months Ended
September 30,
1997 1996
Cash flow from operating activities:
Net income $ 31 $ (749)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,614 802
Allowance for doubtful accounts 625 679
Net gain from the conveyance
of Company-owned assets
to franchisees (1,053) (1,913)
Deferred gain on the conveyance of
Company stores assets to franchisees 328
Deferred income taxes payable -- (165)
Accrued interest 63 --
Amortization of fair value of assets
acquired over cost (284) --
Changes in assets and liabilities:
Accounts receivable 30 (2,460)
Inventories 37 446
Prepaid expenses and other
current assets (343) (782)
Other assets (1,506) (647)
Accounts payable and accrued
liabilities (4,813) (2,283)
Franchise related obligations (419) (76)
Deferred franchise income (160) --
Net cash (used in) operating activities $ (6,178) $ (6,820)
Cash flows from investing activities:
Acquisition, net of cash acquired -- (4,150)
Franchise notes receivable issued (2,945) (4,038)
Repayment of franchise notes receivable 2,107 1,522
Purchase of property and equipment (1,331) (3,080)
Conveyance of property and equipment 1,127 2,944
Net cash (used in) investing activities (1,042) (6,802)
Cash flows from financing activities:
Sale of common stock and other
capital contributions 7,515 625
Borrowing on revolving credit note -- 225
Payments on other debt (9,481) (1,651)
Restricted cash related to acquisition -- --
Borrowings under franchise notes
receivable Loan Agreement 10,000 --
Repayment of revolving credit note (1,000) --
Net cash provided by (used in) financing activities 7,034 (801)
Net increase (decrease) in cash and cash equivalents (186) (14,423)
Cash and cash equivalents - beginning of year 868 15,493
Cash and cash equivalents - end of period $ 682 $ 1,070
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 860 $ 945
======== ========
Taxes $ 47 $ 566
======== ========
Acquisition, net of cash acquired:
Working capital, other than cash (231) 759
Property, plant and equipment 200 600
Other assets -- 2,791
Goodwill 2,541 --
Less: Common Stock issued (2,510) --
Acquisition, net of cash acquired $ 0 $ 4,150
======== ========
The accompanying notes are an integral part of these Consolidated Condensed
Financial Statements.
-4-
<PAGE>
STERLING VISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1
The accompanying Consolidated Condensed Financial Statements of Sterling
Vision, Inc. (the "Registrant") and Subsidiaries (collectively, the "Company")
have been prepared in accordance with generally accepted accounting principles
for interim financial information and in accordance with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statement presentation. In the opinion of
management, all adjustments for a fair statement of the results of operations
and financial position for the interim periods presented have been included. All
such adjustments are of a normal recurring nature. This financial information
should be read in conjunction with the Consolidated Condensed Financial
Statements and Notes thereto included in the Registrant's Annual Report on Form
10-K for the year ended December 31, 1996. There have been no changes in
significant accounting policies since December 31, 1996.
NOTE 2
Income tax provisions are based on estimated annual effective tax rates.
The effective income tax rate (before a reduction due to a net operating loss
carryforward) used for the nine months ended September 30, 1997 was
approximately 40%.
A reconciliation between the statutory Federal income tax rate and the
effective income tax rate based on continuing operations for the nine months
ended September 30, 1997 is as follows:
1997 1996
Statutory Federal income tax rate 34% 34%
State and local income tax rate, net of
Federal income tax benefit 6 6
Reduction in tax rate due to net operating
loss carryforward (40) -
=== ==
Effective income tax rate 0% 40%
=== ===
NOTE 3
During the calendar year ended December 31, 1996, the Registrant issued
80,040 shares of its Common Stock to certain of the franchisees of those
franchised stores in existence on the date of the consummation of the Company's
inital public offering (the "Offering"), in consideration of their future
performance of, and compliance with, the terms of their respective Franchise
Agreements. The fair value of such shares is being amortized over the vesting
period of three years.
NOTE 4
On February 26, 1997, the Company entered into Convertible Debentures and
Warrants Subscription Agreements with certain investors in connection with the
private placement (the "Private Placement") of units consisting of an aggregate
of $8,000,000 principal amount of Convertible Debentures (collectively, the
"Debentures") and an aggregate of 800,000 warrants (collectively, the
"Warrants"), each Warrant entitling the holder thereof to purchase one share of
the Registrant's Common Stock, par value $.01 per share (the "Common Stock"), at
a price to be determined in accordance with a specified formula and, for each
two Warrants exercised within a specified period of time, an additional warrant
(collectively, the "Bonus Warrants") to purchase one additional share of Common
Stock at a price of $7.50 per share. The Company used the net proceeds
(approximately $7,500,000) of the Private Placement to: (i) repay a portion of
the loans made to it by
-5-
<PAGE>
NOTE 4 (Continued)
certain principal shareholders of the Company ($1,000,000, together with
interest thereon, in the approximate amount of $50,000), and (ii) pay down the
Company's revolving line of credit ($1,000,000) with the Chase Manhattan Bank
(the "Bank").
The Debentures bear no interest and mature on August 25, 1998. They are
convertible at a price per share (the "Conversion Price") equal to the lesser of
$6.50 or 85% of the average closing bid price of the Common Stock as reported on
the Nasdaq National Market System ("Nasdaq") for the 5 trading days immediately
preceding the date of conversion; provided, however, that the Company has the
right to redeem that portion of the Debentures requested to be converted in the
event the Conversion Price is $6.00 or less. In such event, the redemption price
will be equal to 115% of the face amount of that portion of the Debentures
requested to be converted. The Debentures are convertible subject to the
following limitations: 25% of the original principal amount is convertible
beginning on the date of issuance provided a registration statement, pursuant to
which the underlying shares of Common Stock will be registered under the
Securities Act of 1933, as amended (the "Act"), is then in effect; 50% of the
original principal amount is convertible beginning three months after the date
of issuance; 75% of the original principal amount is convertible beginning six
months after the date of issuance; and the entire original principal amount is
convertible beginning nine months after the date of issuance. Notwithstanding
the foregoing, if, at any time, the intra-day bid price of the Common Stock (as
reported on Nasdaq) equals or exceeds $10, the entire principal amount of the
Debentures will be convertible at any time thereafter.
In addition to the foregoing, the Debentures provide for the automatic
conversion of any Debentures not previously converted as of the maturity date,
provided that, as of such date: (i) the Company's registration statement with
respect to the underlying shares of Common Stock continues to be effective; and
(ii) no Event of Default exists under the Debentures. In the event that the
Company does not have a registration statement with respect to the underlying
shares or an Event of Default exists under the Debentures, the holders of the
Debentures would be entitled to a cash payment, (in lieu of shares of the
Company's Common Stock) in an amount equal to the aggregate principal of those
Debentures not previously converted. The Debentures are classified on the
Company's Consolidated Condensed Balance Sheet as Common Stock to be issued, net
of costs of issuance of approximately $500,000, because the Company believes the
likelihood that the Debentures will not be converted to Common Stock is remote.
As of September 30, 1997, approximately $4,800,000 of the Debentures have been
converted to Common Stock.
In July 1997, the Company elected, in connection with its Private
Placement, to pay to one of its Debenture holders $460,000, which represented
the redemption price for the conversion of $400,000 principal amount of
Debentures.
The Warrants entitle the holders thereof to purchase an aggregate of
800,000 shares of Common Stock at an exercise price per share equal to the lower
of $6.50 or the average of the Conversion Price of any Debentures converted, by
the holder, prior to the date of exercise. The Warrants are exercisable until
February 26, 2000. If a holder of a Warrant exercises a Warrant at any time
during the 2 year period following the effectiveness of the registration
statement, such holder will receive, for each two Warrants exercised within such
time, an additional Bonus Warrant entitling the holder thereof to purchase one
additional share of Common Stock at an exercise price of $7.50 per share, which
Bonus Warrants have a term of 3 years from the date of grant.
The Company has filed, and the U.S. Securities and Exchange Commission
(the "SEC") has declared effective, a registration statement on behalf of the
holders of the Debentures with respect to all of the shares of Common Stock
underlying the Debentures, the Warrants and the Bonus Warrants, not to exceed,
in any event, an aggregate amount equal to 19.999% of the number of shares of
Common Stock issued and outstanding on February 26, 1997; and the Company has
agreed to maintain the effectiveness of such
-6-
<PAGE>
NOTE 4 (Continued)
registration statement until the earlier of: (i) 3 years; and (ii) the date all
of the shares underlying the Debentures have been sold and the Warrants and the
Bonus Warrants have been exercised.
The Company was required to obtain the consent of the Bank to complete the
Private Placement and, in connection therewith, the Bank, on February 26, 1997,
amended the Company's Term Loan and Revolving Credit Agreement, dated April 5,
1994, as amended, (the "Credit Agreement" which, as of the date of this Report,
has been satisfied in full) by: (i) extending the maturity date of the Company's
line of credit to May 30, 1997; (ii) requiring a $1,000,000 pay down of the line
of credit; (iii) permanently reducing the line of credit by such amount; (iv)
granting waivers with respect to the Company's anticipated non-compliance with
certain financial covenants contained in the Credit Agreement through February
26, 1997; and (v) amending, for the period ending December 31, 1997, certain
financial covenants contained in the Credit Agreement.
NOTE 5
On April 1, 1997, the Company acquired all of the issued and outstanding
shares of the capital stock of Singer Specs, Inc., a Delaware corporation, and
certain of its wholly-owned subsidiaries (collectively, "Singer"), pursuant to
the terms of a certain Agreement and Plan of Reorganization, dated February 19,
1997 (the "Singer Agreement"), between the Company and the owners (collectively,
the "Shareholders") of all of such capital stock of Singer Specs, Inc. As of the
closing, Singer was the: (i) operator of four retail optical stores
(collectively, the "Company Stores"); (ii) franchisor of an additional,
approximately 27 other retail optical stores, all of which company operated and
franchised stores are located in the States of Pennsylvania, Delaware, New
Jersey and Virginia, and a store that opened in the U.S. Virgin Islands in July
1997; and (iii) owner of a commercial building (the "Building") located in
Philadelphia, Pennsylvania (collectively, the "Singer Transaction").
The Singer Agreement provided for the Shareholders to convey all of said
capital stock to the Company, free and clear of any and all claims, liens and/or
encumbrances, in exchange for 305,747 shares of the Company's Common Stock,
subject to certain post closing adjustments.
In addition, pursuant to the Singer Agreement, the Company, immediately
after the closing, lent to Singer the aggregate sum of $300,000, which was used
to repay a portion of Singer's liabilities existing as of the closing date
(April 1, 1997), the balance of which liabilities were assumed by corporations
owned by the Shareholders, who each personally guaranteed the repayment of same.
The Singer Agreement provided: (i) that the assets of each of the Company
Stores be conveyed to corporations owned by one or more of the Shareholders,
which entities, simultaneously with the closing, each entered into a Sterling
Optical Center Franchise Agreement; (ii) for the pledge, by the Shareholders, of
all of their shares of the Common Stock, to secure their obligations under the
Singer Agreement; (iii) that the Shareholders be restricted from selling a
portion of their shares of said Common Stock, all as more particularly set forth
in the Singer Agreement; and (iv) for the requirement that the Company, under
certain circumstances, pay to the Shareholders the difference between the market
price of its Common Stock (upon which the purchase price was calculated) and the
selling price (net of 50% of commissions) of any such shares sold by the
Shareholders (see Note 8). This transaction has been accounted for as a
purchase, effective April 1, 1997, in accordance with Accounting Principle Board
Pronouncements ("APB") 16 and 17, with allocations made based upon the
estimated, fair market value of the assets acquired. Franchise Agreements are
being amortized over a period of ten years.
-7-
<PAGE>
NOTE 5 (Continued)
On July 2, 1997, the Company entered into a letter agreement with the
former Shareholders of Singer whereby such Shareholders, in consideration of a
loan by the Company to the Shareholders, agreed that they would delay their sale
of their remaining Initial Sale Shares (as defined in the Singer Agreement) for
a specified period of time.
The Company was required, under the terms of the Singer Agreement, to pay
to the Shareholders approximately $143,000, which represented the difference
between the market price of its Common Stock (upon which the purchase price for
the capital stock of Singer was calculated) and the selling price (net of 50% of
commissions) generated from the sale of approximately 100,000 shares by the
Shareholders.
The following table reflects the unaudited pro forma combined results of
operations of the Company assuming the acquisition of Singer and Vision Centers
of America ("VCA"), acquired in May 1996, had taken place on January 1, 1996.
However, information is not available to present the operations of VCA prior to
its acquisition:
(Dollars in thousands, except per
common share amounts)
Nine Months Ended
September 30,
1997 1996
Systemwide sales $ 117,530 $ 104,501
========= =========
Revenues:
Net sales - Company stores $ 17,784 $ 22,147
Franchise royalties 7,137 6,398
Net gains and fees from the conveyance of
Company-owned assets to franchisees 1,293 2,227
Other income 2,056 1,539
Total Revenues 28,270 32,311
Costs and expenses:
Cost of sales 4,796 5,677
Selling expenses 11,196 15,096
General and Administrative expenses 11,122 11,293
Interest expense 923 904
Total Costs and Expenses 28,037 32,970
Net income (loss) before provision for
income taxes 233 (659)
Provision (benefit) for income taxes -- (264)
Net income (loss) $ 233 $ (395)
========= =========
Weighted average number of common
shares outstanding 13,713 12,325
========= =========
Earnings (loss) per common share .02 (.03)
========= =========
The Company was required to obtain the consent of the Bank to complete the
aforesaid transactions and, in connection therewith, the Bank, on April 1, 1997,
amended the Credit Agreement by: (i) extending the maturity date of the line of
credit to November 15, 1998; (ii) requiring that such line of credit be further
reduced by the sum of $75,000 per month, commencing April 15, 1997 and
continuing until the maturity date; and (iii) granting a waiver, permitting the
Company to purchase all of the issued and outstanding capital stock of Singer.
On April 21, 1997, the Company entered in a Note Amendment and Conversion
Agreement (the "BEC Agreement") with BEC Group, Inc. ("BEC"), the holder of two
promissory notes (each having an original term of 25 months and in the original
principal amounts of $1,050,000 and $200,000, respectively) issued by the
Company in connection with its acquisition (the "Pembridge Transaction"), on
August 26, 1994, from Pembridge Optical Partners, Inc., of the assets of eight
retail optical stores. Pursuant to the BEC Agreement: (i) the Company, on June
9, 1997, prepaid the principal balance of (but not
-8-
<PAGE>
NOTE 5 (Continued)
accrued interest on) each of said promissory notes in registered shares of its
Common Stock; and (ii) the Company, in certain circumstances, will be required
to pay to BEC the difference between the market price of its Common Stock (upon
which the number of shares issued to BEC was calculated) and the selling price
of any such shares sold by BEC.
The Company is required, under the terms of the BEC Agreement, to pay to
BEC approximately $167,000, which represents the difference between the market
price of its Common Stock (upon which the number of shares issued to BEC, in
prepayment of the promissory notes discussed above, was calculated) and the
selling price of a portion of such shares issued to BEC.
On May 9, 1997, the Company filed, with the SEC, a registration statement
on Form S-3 seeking registration, under the Act, of an aggregate of 3,213,464
shares of its Common Stock, as follows: (i) 2,477,506 shares being registered on
behalf of the investors in the Private Placement (see Note 4); (ii) 305,747
shares being registered on behalf of the Shareholders; (iii) 152,211 shares
being registered on behalf of BEC, as discussed above; and (iv) 278,000 shares
being registered on behalf of the holders of certain options granted to the
former President of the Company and certain warrants issued to the underwriters
of the Offering.
NOTE 6
On June 30, 1997, the Company entered into a loan agreement (the "Loan
Agreement") with STI Credit Corporation ("STI") that: (i) established, in favor
of the Company, a $20,000,000 credit facility to finance a portion of the
Company's currently existing and future franchise promissory notes receivable;
and, (ii) funded $10,000,000, (although $1,000,000 [the "Additional Funds"] of
the funded amount was withheld pending disbursement and will be disbursed
promptly after the Company's satisfaction of a required collateral ratio - see
note 8), of such credit facility (less a facility fee equal to two percent of
the amount of the loan). Sixty-five percent (65%) of the funded amount is to be
repaid by the Company, over a term of 60 months, with a final balloon payment at
the expiration of the sixty-first month of the term of said loan. The Company
granted to STI a first priority, continuing security interest in a substantial
portion of its franchise notes and the proceeds related to such notes. A portion
of the net proceeds (approximately $6,100,000) of the loan was used to satisfy,
pay and discharge, in full, all amounts due by the Company to: (i) the Bank
($5,035,000, together with accrued interest thereon, in the approximate amount
of $37,000); and (ii) certain principal shareholders of the Company ($1,000,000,
together with accrued interest thereon, in the approximate amount of $9,000). As
a result of the foregoing: (i) the Bank's lien upon, and security interest in,
substantially all of the Company's assets (previously securing the Bank's
various loans to the Company) was discharged; and (ii) restrictions previously
imposed upon the Company (pursuant to the Credit Agreement) are no longer
applicable.
Pursuant to the terms of the Loan Agreement, the Company must comply with
certain financial covenants. At September 30, 1997, the Company was in
compliance with all of such covenants and the outstanding principal balance on
the STI note was approximately $9,400,000 (see Note 8 below).
NOTE 7
In February 1997, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"). SFAS 128 changes the computational guidelines for earnings per share
information. The Company will adopt the provisions of SFAS 128 in its December
31, 1997 consolidated financial statements. SFAS 128 will eliminate the
presentation of primary earnings per share and replace it with basic earnings
per share. Basic earnings per share differs from primary earnings per share
because common stock equivalents are not considered in computing basic earnings
per share. Fully diluted earnings per share will be replaced with diluted
earnings per share. Diluted earnings per share is similar to fully diluted
-9-
<PAGE>
NOTE 7 (Continued)
earnings per share, except in determining the number of dilutive shares
outstanding for options and warrants, in that the proceeds that would be
received upon the conversion of all dilutive options and warrants, are assumed
to be used to repurchase the Company's Common Stock at the average market price
of such stock during the period. For fully diluted earnings per share, the
higher of the average market price or closing market price is used. If SFAS 128
had been in effect, basic earnings per share would have approximated primary
earnings per share and fully diluted earnings per share for the nine month
period ended September 30, 1997.
NOTE 8
On August 13, 1997, each of Drs. Robert, Alan and Edward Cohen and Mr. Jay
Fabrikant relinquished any and all of their rights to receive options to
purchase 66,667, 66,667, 66,667 and 200,000 shares, respectively, of the
Company's Common Stock, which was previously approved at the Annual Meeting of
Shareholders of the Company held on June 20, 1997.
On October 9, 1997, STI amended the Loan Agreement and, disbursed a
portion of the Additional Funds to the Company.
On November 6, 1997, the Company entered into a Master Grid Note ("Grid
Note") with the Bank that provided the Company with a short-term loan of up to
$1,000,000. The maturity date of the Grid Note is February 6, 1998. Interest is
calculated on the outstanding balance at 3/4 of one percent over the prime rate
(approximately 8 1/2% at November 1, 1997) then in effect from time to time. As
of the date of the filing of this Form 10-Q, the outstanding principal balance
of the Grid Note was $750,000.
NOTE 9
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 its 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 the 1996 calendar year.
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 terms of a
substantial portion of the options previously awarded by the Company pursuant to
its Employee Stock Optical Plan. These models also require subjective
assumptions, including future stock price volatility and expected times 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 aver assumptions: expected life 60 months following vesting; stock
volatility, 20% 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 with forfeitures being recognized as they occur. If the
computed fair values of the options (previously awarded by the Company) had been
amortized to expense over the vesting period of the options, the pro forma net
income (loss) and earnings (loss) for common shares for the three month and nine
month periods ended September 30, 1997, would have been ($424,000) or (.03) and
($315,000) or (.02), respectively.
-10-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
All statements contained herein which are not historical facts including,
but not limited to, statements regarding the Company's future development plans,
the Company's ability to generate cash from its operations and the operations of
Insight Laser Centers, Inc. ("Insight"), as well as any losses related thereto,
are based upon current expectations. These statements are forward looking in
nature and involve a number of risks and uncertainties. Actual results may
differ materially. Among the factors that could cause actual results to differ
materially are the following: competition in the retail optical and managed care
industries; the ability of the Company to acquire, at favorable prices, retail
optical chains; the uncertainty of the acceptance of Photorefractive
Keractectomy ("PRK"); the availability of new and better ophthalmic laser
technologies or other technologies that serve the same purpose as PRK; the
ability of the Company to finalize favorable affiliation agreements with
ophthalmologists offering PRK; cost over-runs; and general business and economic
conditions.
Results of Operations
For the Nine Months Ended September 30, 1997 compared to September 30, 1996
Systemwide sales represent combined retail sales generated by
Company-owned and franchised stores, as well as revenues generated by VisionCare
of California ("VCC"), a wholly-owned subsidiary of the Company licensed by the
California Department of Corporations as a specialized health maintenance
organization, and Insight. There were 317 and 322 Sterling Stores in operation
as of September 30, 1997 and September 30, 1996, respectively, of which 267 and
251, respectively, were franchised. Such stores operate under various tradenames
including Sterling Optical, Site for Sore Eyes, IPCO Optical, Benson Optical,
Superior Optical, Southern Optical, Nevada Optical, Duling Optical, Monfried
Optical, Kindy Optical and Singer Specs. Systemwide sales increased by
$18,135,000, or 18.7%, to $114,950,000 for the nine months ended September 30,
1997, as compared to $96,815,000 for the same period in 1996. On a same store
basis (for stores that operated as either a Company-owned or franchised store
during the entirety of both of the nine month periods ended September 30, 1997
and 1996), systemwide sales decreased by $3,258,000, or 3.7%, to $83,728,000 for
the nine months ended September 30, 1997, as compared to $86,986,000 for the
same period in 1996. The Company believes that such decrease resulted, in part,
from general business conditions. There were 197 stores that operated as either
a Company-owned or franchised store during the entirety of both of the nine
month periods ended September 30, 1997 and 1996.
Aggregate sales generated from the operation of Company-owned stores
decreased by $4,363,000, or 19.7%, to $17,784,000 for the nine months ended
September 30, 1997, as compared to $22,147,000 for the same period in 1996. Such
decrease was primarily due to the conveyance of the assets of Company-owned
stores to franchisees. Historical comparisons of aggregate sales generated by
Company-owned stores can become distorted due to the conveyance of Company-owned
store assets to franchisees. When Company-owned store assets are conveyed to
franchisees, sales generated by such franchised store are no longer reflected in
Company-owned store sales; however, the Company receives on-going royalties
based upon a percentage of the sales generated by such franchised stores. On a
same store basis, aggregate sales generated by Company-owned stores in operation
during the entirety of both of the nine month periods ended September 30, 1997
and 1996, decreased by $376,000, or 2.7%, to $13,663,000 for the nine months
ended September 30, 1997, as compared to $14,039,000 for the same period in
1996.
Aggregate sales generated from the operation of franchised stores
increased by $22,498,000, or 30.1%, to $97,166,000 for the nine months ended
September 30, 1997, as compared to $74,668,000 for the same period in 1996, due
primarily to the acquisition of certain franchised stores on:(i) May 30, 1996,
from Vision Centers of America, Ltd. ("VCA") and its affiliates (the "VCA
Transaction"); and (ii) April 1, 1997, in connection with the Singer
Transaction. On a same store basis, aggregate sales generated by franchised
stores in operation during the entirety of both of the nine month periods ended
September 30, 1997 and 1996, decreased by $1,853,000, or 3.0%, to
-11-
<PAGE>
$60,937,000 for the nine month period ended September 30, 1997, as compared to
$62,790,000 for the same period in 1996.
Aggregate ongoing franchise royalties increased by $1,148,000, or 19.9%,
to $6,931,000 for the nine months ended September 30, 1997, as compared to
$5,783,000 for the same period in 1996, due primarily to the acquisition of
certain franchised stores in connection with the VCA and Singer Transactions.
Net gains on the conveyance of the assets of eight Company-owned stores to
franchisees decreased by $934,000, or 41.9%, to $1,293,000 for the nine months
ended September 30, 1997, as compared to net gains on the conveyance of the
assets of twelve Company-owned stores to franchisees, in the aggregate amount of
$2,227,000, for the same period in 1996. 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 stores and the Company's basis (net book value) in the assets of the stores
conveyed.
The Company's gross profit margin decreased by 1.4 percentage points, to
73.0, for the nine months ended September 30, 1997, as compared to 74.4% for the
same period in 1996. This decrease resulted primarily from the continuation of
promotional programs, instituted in the Fall of 1996, 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 decreased by $3,900,000 or 25.8%, to $11,196,000 for the
nine months ended September 30, 1997, as compared to $15,096,000 for the same
period in 1996, due primarily to the conveyance of the assets of Company-owned
stores to franchisees.
General and administrative expenses (including interest expense,
depreciation and bad debt expense) decreased by $130,000, or 1.1%, to
$12,041,000 for the nine months ended September 30, 1997, as compared to
$12,171,000 for the same period in 1996. This decrease was due primarily to a
reduction in administrative costs of approximately $560,000 related to the
business of Insight and a reduction of the Company's provision for doubtful
accounts, which is included in general and administrative expenses of $121,000,
or 29.2%, to $293,000 for the nine months ended September 30, 1997, as compared
to $414,000 for the same period in 1996. This decrease was offset by an increase
in administrative expenses of approximately $500,000, which related primarily
to: (i)approximately $140,000 in higher occupancy expenses in connection with
the Company's relocation, in the second quarter of 1996, of its administrative
offices; (ii) approximately $100,000 in higher costs related to operating as a
publicly-held company; (iii) approximately $85,000 in costs related to stock
options granted to certain consultants to the Company; and (iv) approximately
$137,000 in costs related to compensation paid to the Company's new President
and Chief Operating Officer, and (v) approximately $151,000 in consulting fees
paid to a company owned by two of the Company's principal shareholders. Interest
expense, which is included in general and administrative expenses, increased by
$19,000, or 2.1%, to $923,000 for the nine months ended September 30, 1997, as
compared to $904,000 for the same period in 1996.
The Company's income before income taxes increased by $1,279,000, to
$31,000 for the nine months ended September 30, 1997 as compared to $1,248,000
loss for the same period in 1996. The Company consummated the VCA Transaction
and the Singer Transaction during the second quarter of 1996 and the second
quarter of 1997, respectively. As a result, certain aspects of the Company's
operations during the nine months ended September 30, 1997 were not comparable
to its operations for the same period in 1996. Losses from the Company's
operations increased by $217,000, or 10.9%, to a loss of $2,217,000 for the nine
months ended September 30, 1997, as compared to a loss of $2,000,000 for the
same period in 1996. This increase was primarily due to the decrease in general
and administrative expenses (including interest expense, depreciation and bad
debt expense), as explained above, which was offset by a decrease in the net
gains on the conveyance of the assets of Company-owned stores to franchisees.
-12-
<PAGE>
Liquidity and Capital Resources
On February 26, 1997, the Company entered into Convertible Debentures and
Warrants Subscription Agreements (see Note 4) with certain investors in
connection with the Private Placement. The Company utilized the net proceeds
(approximately $7,500,000) of the Private Placement to: (i) repay $1,000,000 of
the loans made to it by certain principal shareholders of the Company, as
discussed above, together with interest thereon, in the approximate amount of
$50,000; and (ii) pay down the Company's revolving line of credit with the Bank
($1,000,000). The balance of such proceeds were utilized for general corporate
purposes.
On June 30, 1997, the Company entered into the Loan Agreement (see Note 6)
with STI to finance a portion of its existing and future franchise promissory
notes receivable. The Company utilized a portion of the net proceeds
(approximately $6,100,000) of the loan to repay the balance of all outstanding
amounts due to: (i) the Bank ($5,035,000, together with interest thereon, in the
approximate amount of $37,000); and (ii) certain principal shareholders of the
Company ($1,000,000, together with interest thereon, in the approximate amount
of $9,000). The Company used the balance of such proceeds for general corporate
purposes.
As of September 30, 1997 and December 31, 1996, the Company had
$10,339,000 and $(3,803,000), respectively, in working capital, and $682,000 and
$868,000, respectively, of cash and cash equivalents. As of the date hereof, the
Company has ceased the construction of any new Insight Laser Centers, including
the one in San Francisco, California (which was anticipated to open during the
first quarter of 1997). During the twelve months ending December 31, 1997, the
Company anticipates having the following capital requirements: renovating six
existing Company-owned stores; the continuing upgrade of the Company's
management information system in conjunction with the point-of-sale computer
systems being installed in its Company-owned stores, in the aggregate,
approximate amount of $250,000; and acquiring retail optical stores, subject to
the availability of qualified opportunities in furtherance of the Company's
business strategy, in amounts that cannot be projected by the Company at this
time.
The Company experienced negative cash flow from its operations during the
nine months ended September 30, 1997 resulting, primarily, from losses
attributable to the operations of Insight and a substantial reduction in the
Company's accounts payable. By the end of 1996, the following measures were
taken by the Company, which management believes will reduce, in the future, the
magnitude of the losses it sustained for the calendar year ended December 31,
1996, as well as improve the Company's operations and cash flow: (i) closed or
failed to renew the leases for nine of the stores acquired from Benson Optical
Co., Inc. in November 1995 (collectively, the "Benson Stores"), some of which
were unprofitable; (ii) franchised eleven Benson Stores which are currently
producing royalty income; (iii) eliminated virtually all administrative overhead
in connection with Insight; and (iv) reduced overhead at the Company's Insight
Laser Center located in New York City. Although the Company anticipates a
positive cash flow, for 1997, from its retail optical store operations, it
nevertheless anticipates that Insight will continue to operate at a loss for the
twelve months ending December 31, 1997 and, therefore, the Company believes that
its retail optical store operating cash flow will be insufficient to result in a
positive cash flow from operations for the Company for this period. However, the
Company believes that it can meet its cash requirements through either
additional borrowings, financing future franchise notes receivable under the
terms of the Loan Agreement, or additional sales of equity, although there can
be no assurance that the Company would be successful in obtaining any such
additional borrowings, financing future franchise notes receivable and/or
selling additional equity, or on what terms such transactions could be effected.
In November 1997, the Company finalized an agreement with the Bank pursuant to
which it agreed to advance to the Company up to $1,000,000 on a short-term basis
(see Note 8).
-13-
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On June 19, 1997, a former employee of Sterling Vision of California, Inc.
("SVCI") filed a complaint, seeking an undetermined sum of damages, against the
Registrant and SVCI (hereinafter collectively referred to as "Sterling") for
unlawful discrimination, intentional infliction of emotional distress, fraud,
negligent misrepresentation, breach of implied contract, and breach of covenant
of good faith and fair dealing. Based upon advice given to Sterling by its
special litigation counsel, Sterling is of the opinion that it has a meritorious
defense to said action. At the present time, the parties are conducting
discovery proceedings.
Item 2. Changes in Securities. Not applicable.
Item 3. Defaults Upon Senior Securities. Not applicable.
Item 4. Submission of Matter to a Vote of Security Holders. Not applicable.
Item 5. Other Information. Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
a.) Exhibits
Exhibit
Number
10.75 First Amendment to Loan Agreement, dated October 9, 1997, between
the Company and STI Credit Corporation.
10.76 Stock Option Recision Letters, dated August 13, 1997, from each
of Drs. Robert, Alan and Edward Cohen and Mr. Jay Fabrikant.
11 Computation of Earnings Per Common Share.
27 Financial Data Schedule.
b.) Reports on Form 8-K
1) On August 11, 1997, the Company filed a Report on Form 8-K with
respect to the Private Placement, the Singer Transaction and the
BEC Agreement.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this Report to be signed on its behalf
by the undersigned thereunto duly authorized.
STERLING VISION, INC.
(Registrant)
BY: /s/ Sebastian Giordano
------------------------
Sebastian Giordano
Chief Financial Officer,
Executive Vice President-
Finance and Treasurer
Signing on behalf of the
Registrant as its
Principal Financial
Officer.
Date: November 14, 1997
<PAGE>
EXHIBIT 10.75
FIRST AMENDMENT TO LOAN AGREEMENT
This First Amendment to Loan Agreement ("Amendment") is made and
entered into on this 9th day of October, 1997, by and between Sterling Vision,
Inc., a New York corporation (the "Borrower"), and STI Credit Corporation, a
Nevada corporation (the "Lender").
Rectials
A. The Borrower and the Lender are parties to a Loan Agreement
dated June 30, 1997 (the "Agreement"), which is incorporated herein by
reference. Capitalized terms used in this Amendment that are not otherwise
defined herein shall have the meanings assigned to such terms in the Agreement.
B. The Borrower and the Lender desire to amend the Agreement as
hereinafter provided.
Amendment
1. Initial Advance. Subparagraph (b) of Section 1.2 of the
Agreement is hereby amended by deleting the existing subparagraph (b) of Section
1.2 in its entirety and substituting in place thereof the following:
(b) The Additional Funds, together with all interest
earned thereon, shall be disbursed by the Lender to the Borrower
promptly after the satisfaction of the following conditions: (i)
the Collateral Ratio (as that term is hereinafter defined) is, at
the time, 1.2 to 1.0 or greater; and (ii) no Event of Default, or
event that, with notice or the passage of time or both, would be
an Event of Default hereunder, has occurred and is then
continuing. The Additional Funds, or any portion thereof, may also
be disbursed by the Lender to the Borrower, from time to time, at
the Lender's discretion even though the foregoing conditions have
not been satisfied.
2. Effect of Amendment. Except as expressly set forth in this
Amendment, all provisions of the Agreement shall remain unchanged and shall
continue in full force and effect. This Amendment is hereby incorporated into
the Agreement for all purposes.
-15-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment to be
executed on the date first written above.
STERLING VISION, INC.
1500 Hempstead Turnpike
East Meadow, New York 11554
By: /s/ Robert Greenberg
Title: Chief Executive Officer
STI CREDIT CORPORATION
6490 South McCarran Blvd., C-21
Reno, Nevada 89509
By: /s/ Scott Hastings
Title: Senior Vice President
-16-
<PAGE>
EXHIBIT 10.76
JAY FABRIKANT
Medical Development Systems, Inc.
560 Sylvan Avenue
Englewood Cliffs, New Jersey 07632
August 13, 1997
Board of Directors
Sterling Vision, Inc.
1500 Hempstead Turnpike
East Meadow, New York 11554
Gentlemen:
Reference is made to the 200,000 stock options previously granted to me by
Sterling Vision, Inc.'s Board of Directors (collectively, the "Options").
When executed, this letter will serve to confirm my advice to you that I hereby
relinquish any and all rights to receive said Options, ab initio.
Very truly yours,
/s/
Jay Fabrikant
JF/pas
options
-17-
<PAGE>
DR. EDWARD COHEN
400 East 56th Street
New York, New York 10022
August 13, 1997
Board of Directors
Sterling Vision, Inc.
1500 Hempstead Turnpike
East Meadow, New York 11554
Gentlemen:
Reference is made to the 66,667 stock options previously granted to me by
Sterling Vision, Inc.'s Board of Directors (collectively, the "Options").
When executed, this letter will serve to confirm my advice to you that I hereby
relinquish any and all rights to receive said Options, ab initio.
Very truly yours,
/s/
Dr. Edward Cohen
JF/pas
options
-18-
<PAGE>
DR. ROBERT COHEN
1500 Hempstead Turnpike
East Meadow, New York 11554
August 13, 1997
Board of Directors
Sterling Vision, Inc.
1500 Hempstead Turnpike
East Meadow, New York 11554
Gentlemen:
Reference is made to the 66,667 stock options previously granted to me by
Sterling Vision, Inc.'s Board of Directors (collectively, the "Options").
When executed, this letter will serve to confirm my advice to you that I hereby
relinquish any and all rights to receive said Options, ab initio.
Very truly yours,
/s/
Dr. Robert Cohen
JF/pas
options
-19-
<PAGE>
DR. ALAN COHEN
1500 Hempstead Turnpike
East Meadow, New York 11554
August 13, 1997
Board of Directors
Sterling Vision, Inc.
1500 Hempstead Turnpike
East Meadow, New York 11554
Gentlemen:
Reference is made to the 66,667 stock options previously granted to me by
Sterling Vision, Inc.'s Board of Directors (collectively, the "Options").
When executed, this letter will serve to confirm my advice to you that I hereby
relinquish any and all rights to receive said Options, ab initio.
Very truly yours,
/s/
Dr. Alan Cohen
JF/pas
options
-20-
<PAGE>
EXHIBIT 11
STERLING VISION, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
(Unaudited)
(Dollars In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
PRIMARY EARNINGS (LOSS)
Net income (loss) $ (399) $ (760) $ 31 $ (749)
======== ======== ======== ========
Weighted average number of common
shares outstanding 13,289 12,325 13,289 12,325
Weighted average number of common shares
to be issued 377 -- 377 --
--------
Incremental shares based on the treasury
stock method for stock options, using
the average market price 135 82 135 82
Weighted average number of common share
and common share equivalents
outstanding 13,801 12,407 13,801 12,407
======== ======== ======== ========
Primary earnings (loss) per common share $(.03) $ (.06) $ .00 $ (.06)
======== ======== ======== ========
FULLY DILUTED EARNINGS (LOSS)*
Net income (loss) $ (399) $ (760) $ 31 $ (749)
======== ======== ======== ========
Weighted average number of common
shares outstanding 13,289 12,325 13,289 12,325
Weighted average number of common
shares to be issued 377 -- 377 --
Incremental shares based on the treasury
stock method for stock options, using
the average market price 331 170 331 170
Weighted average number of common share
and common share equivalents
outstanding 13,997 12,495 13,997 12,495
======== ======== ======== ========
Fully diluted earnings (loss) per
common share $ (.03) $ (.06) $ .00 $ (.06)
======== ======== ======== ========
</TABLE>
* This calculation is submitted in accordance with Securities 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%.
-21-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED CONDENSED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 682
<SECURITIES> 0
<RECEIVABLES> 29,020
<ALLOWANCES> 1,277
<INVENTORY> 3,641
<CURRENT-ASSETS> 16,816
<PP&E> 14,347
<DEPRECIATION> 3,267
<TOTAL-ASSETS> 50,531
<CURRENT-LIABILITIES> 6,557
<BONDS> 13,624
0
0
<COMMON> 137
<OTHER-SE> 30,618
<TOTAL-LIABILITY-AND-EQUITY> 50,531
<SALES> 17,784
<TOTAL-REVENUES> 28,064
<CGS> 4,796
<TOTAL-COSTS> 28,033
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 293
<INTEREST-EXPENSE> 923
<INCOME-PRETAX> 31
<INCOME-TAX> 0
<INCOME-CONTINUING> 31
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
<FN>
*Notes and accounts receivable - trade are reported net of allowances for
doubtful account in the Statement of Financial Position.
Amounts inapplicable or not disclosed as a separate line o n the Statement of
Financial Position or Results of Operations are reported at -0- herein.
</FN>
</TABLE>
