<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
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.
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(Exact name of Registrant as specified in its Charter)
New York 11-3096941
-------- ----------
(State of Incorporation) (IRS Employer Identification No.)
1500 Hempstead Turnpike
East Meadow, New York 11554
---------------------------
(Address of Principal Executive Offices, including Zip Code)
(516) 390-2100
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(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 14,872,857 shares outstanding of the Registrant's Common
Stock, par value $.01 per share, as of August 7, 1998.
<PAGE>
Item 1. Financial Statements
STERLING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars In Thousands)
June 30,
1998 December 31,
(Unaudited) 1997
-------- --------
ASSETS
Current Assets:
Cash and cash equivalents $ 764 $ 334
Accounts receivable - net of allowance for
doubtful accounts of $1,858 and $514, respectively 8,287 8,446
Franchise and other notes receivable - current 2,868 3,301
Inventories 3,365 3,310
Due from related parties - current 104 110
Prepaid expenses and other current assets 384 516
-------- --------
Total Current Assets $ 15,772 $ 16,017
Property and equipment - net of accumulated depreciation 10,694 9,903
Franchise and other notes receivable - net of allowance
for doubtful accounts of $562 (for both periods) 13,699 14,884
Excess of cost over fair value of assets acquired 4,745 3,272
Restricted cash 550 550
Other noncurrent assets 1,167 1,217
-------- --------
Total Assets $ 46,627 $ 45,843
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 2,477 $ 3,477
Convertible debentures due August 25, 1998 -- 1,652
Accounts payable and accrued liabilities 8,205 6,579
Franchise related obligations - current 850 837
-------- --------
Total Current Liabilities $ 11,532 $ 12,545
Long term debt 8,379 10,249
Deferred franchise income 90 96
Excess of fair value of assets acquired over cost 1,216 1,362
Lease termination costs 59 320
Commitments and contingencies (Note 7)
Shareholders' Equity:
Preferred stock, $.01 par value per share;
authorized 5,000,000 shares; issued 35 shares 4,025 --
Common stock, $.01 par value per share;
authorized 28,000,000 shares; 14,714,857,
13,927,227, issued and outstanding, respectively 147 139
Additional paid-in capital 45,954 40,843
(Deficit) (24,775) (19,711)
-------- --------
Total Shareholders' Equity 25,351 21,271
-------- --------
Total Liabilities and Shareholders' Equity $ 46,627 $ 45,843
======== ========
See accompanying notes to Consolidated Condensed Financial Statements.
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STERLING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
-------- -------- -------- --------
(As Restated - (As Restated -
See Note 5) See Note 5)
<S> <C> <C> <C> <C>
Systemwide sales (Unaudited) $ 38,996 $ 36,279 $ 76,328 $ 72,937
======== ======== ======== ========
Revenues:
Net sales - Company stores $ 6,737 $ 5,753 $ 13,676 $ 11,757
Franchise royalties 2,301 2,555 4,686 4,668
Net gains and fees from the conveyance of
Company-owned store assets to franchisees 32 68 167 878
Other income 671 670 1,226 1,217
-------- -------- -------- --------
Total revenues $ 9,741 $ 9,046 $ 19,755 $ 18,520
-------- -------- -------- --------
Costs and expenses:
Cost of sales $ 1,611 $ 1,552 $ 3,505 $ 3,173
Selling expenses 5,124 3,516 9,361 7,365
General and administrative expenses 5,735 3,586 9,121 6,930
Interest expense 522 287 917 621
Amortization of debt discount 37 1,496 1,110 3,517
-------- -------- -------- --------
Total costs and expenses $ 13,029 $ 10,437 $ 24,014 $ 21,606
-------- -------- -------- --------
(Loss) before extraordinary charge and
provision for income taxes $ (3,288) $ (1,391) $ (4,259) $ (3,086)
Extraordinary charge for early retirement of debt (805) -- (805) --
-------- -------- -------- --------
(Loss) before provision for income taxes $ (4,093) $ (1,391) $ (5,064) $ (3,086)
Provision for income taxes -- -- -- --
Net (loss) $ (4,093) $ (1,391) $ (5,064) $ (3,086)
======== ======== ======== ========
Weighted average number of
common shares outstanding 14,571 13,915 14,382 13,915
======== ======== ======== ========
Basic (loss) per common share $ (.28) $ (.10) $ (.35) $ (.22)
======== ======== ======== ========
</TABLE>
See accompanying notes to Consolidated Condensed Financial Statements.
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STERLING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
For the Six Months Ended
June 30,
1998 1997
------- -------
(As Restated -
See Note 5)
Cash flow from operating activities:
Net (loss) $(5,064) $(3,086)
Adjustments to reconcile net (loss) to net
cash provided by operating activities:
Depreciation and amortization 1,215 929
Allowance for doubtful accounts 1,906 879
Net gain from the conveyance of Company-owned
assets to franchisees (102) (757)
Accrued interest 36 42
Amortization of fair value of assets acquired
over cost (145) (194)
Issuance of non-employee stock options -- 140
Lease termination costs (261) --
Amortization of debt discount 1,915 3,517
Changes in assets and liabilities:
Accounts receivable (2,244) (115)
Inventories (56) 190
Prepaid expenses and other current assets 154 (240)
Other assets 36 (1,312)
Accounts payable and accrued liabilities 1,188 (4,767)
Franchise related obligations 13 (376)
Deferred franchise income (6) (156)
------- -------
Net cash (used in) operating activities $(1,415) $(5,306)
------- -------
Cash flows from investing activities:
Acquisition, net of cash acquired (1,598) --
Franchise notes receivable issued (379) (2,583)
Repayment of franchise notes receivable 1,443 1,411
Purchase of property and equipment (465) (405)
Conveyance of property and equipment 173 690
------- -------
Net cash (used in) investing activities $ (826) $ (887)
------- -------
See accompanying notes to Consolidated Condensed Financial Statements.
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<PAGE>
STERLING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS C Cont'd.
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
1998 1997
------- -------
(As Restated -
See Note 5)
<S> <C> <C>
Cash flows from financing activities:
Sale of common stock and other capital contributions 2,077 --
Payments on debt (2,906) (8,125)
Borrowings under franchise notes receivable Loan Agreement -- 9,500
Repayment of revolving credit note -- (1,000)
Issuance of Convertible Debentures 3,500 7,540
------- -------
Net cash provided by (used in) financing activities $ 2,671 $ 7,915
------- -------
Net increase in cash and cash equivalents $ 430 $ 1,722
Cash and cash equivalents - beginning of year 334 868
------- -------
Cash and cash equivalents - end of period $ 764 $ 2,590
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 945 $ 579
======= =======
Income taxes $ -- $ 47
======= =======
Non-cash transactions:
Franchise stores reacquired 1,159 --
Conversion of Convertible Debentures to Preferred Stock 4,025 --
Acquisition, net of cash acquired:
Working capital, other than cash (314) (231)
Property, plant and equipment 160 600
Other assets 31 --
Goodwill 1,721 2,141
Less: Common Stock issued -- (2,510)
------- -------
Acquisition, net of cash acquired $ 1,598 $ 0
======= =======
</TABLE>
See accompanying notes to Consolidated Condensed Financial Statements.
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STERLING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(Unaudited)
(In Thousands, Except Number of Shares)
<TABLE>
<CAPTION>
Additional Total
Preferred Stock Common Stock Paid-In Retained Shareholders'
Shares Amount Shares Amount Capital (Deficit) Equity
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1997 -- -- 13,927,227 $ 139 $ 40,843 $ (19,711) $ 21,271
=========== =========== =========== =========== ===========
Issuance of shares upon
conversion of 1997 Debentures -- -- 395,630 4 1,648 -- 1,652
Debt discount for the intrinsic
value of the 1998 Debentures
and fair value of Warrants -- -- -- -- 1,915 -- 1,915
Net (loss) -- -- -- -- -- (971) (971)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance - March 31, 1998 -- -- 14,322,857 $ 143 $ 44,406 $ (20,682) $ 23,867
=========== =========== =========== =========== =========== =========== ===========
Issuance of shares upon
conversion of 1997 Warrants 392,000 4 2,073 2,077
Issuance of Preferred Stock 35 4,025 (525) 3,500
Net (loss) (4,093) (4,093)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance - June 30, 1998 35 $ 4,025 14,714,857 $ 147 $ 45,954 $ (24,775) $ 25,351
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to Consolidated Condensed Financial Statements.
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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. Except for the extraordinary charge noted in the Condensed
Consolidated Balance Sheets, 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, 1997.
There have been no changes in significant accounting policies since December
31, 1997.
NOTE 2
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 the
capital stock of Singer. As of the closing, Singer was the: (i) operator of
four retail optical stores (collectively, the "Singer Stores"); (ii)
franchisor of approximately an additional 27 other retail optical stores, all
of which company operated and franchised stores are located in the States of
Pennsylvania, Delaware, New Jersey, Virginia and the U.S. Virgin Islands; and
(iii) owner of a commercial building located in Philadelphia, Pennsylvania.
The Singer Agreement provided for such Shareholders to convey all of
said capital stock to the Company, free and clear of any and all claims, liens
and/or encumbrances, in exchange for shares of the Company's Common Stock.
The Singer Agreement also provided: (i) that the assets of each of
the Singer 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 for the same; (ii) for the
pledge, by the Shareholders, of all of their shares of the Company's Common
Stock, to secure their obligations under the Singer Agreement; (iii) that the
Company file, with the Securities and Exchange Commission ("SEC"), a
registration statement seeking registration of the Common Stock issued to the
Shareholders, as discussed below; (iv) for the Shareholders being restricted
from selling a portion of their shares of said Common Stock, all as more
particularly set forth in the Singer Agreement; and (v) a requirement that the
Company, under certain circumstances, pay to the Shareholders the difference
between the market price of its Common Stock (upon which the purchase price
was calculated) and the selling price (net of 50% of commissions) of any such
shares sold by such Shareholders (the "Price Protection Guaranty Amount").
This transaction was 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
(10) years. The Company, pursuant to the terms of the Singer Agreement: (i)
filed with the SEC a registration statement seeking registration of the
Shareholders' Common Stock, which registration statement was declared
effective on May 30, 1997; and (ii) paid 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 their sale of approximately 100,000 shares of the Company's Common Stock
(see Note 11 - Subsequent Events).
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<PAGE>
On April 21, 1997, the Company entered in to a Note Amendment and
Conversion Agreement (the "BEC Agreement") with BEC Group, Inc. ("BEC"), the
holder of two promissory notes (each having a term of 25 months and in the
original principal 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 accrued interest
on) each of said promissory notes in registered shares of its Common Stock;
and (ii) was required to pay 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.
On May 9, 1997, the Company filed with the SEC, and on May 30, 1997
the SEC declared effective, a Registration Statement on Form S-3 seeking
registration, under the Securities Act of 1933, as amended (the "Act"), of an
aggregate of 3,213,464 shares of its Common Stock, as follows: (i) 2,477,506
shares registered on behalf of the investors in the Private Placement (see
Note 4); (ii) 305,747 shares registered on behalf of the Shareholders, as
discussed above; (iii) 152,211 shares registered on behalf of BEC, as
discussed above; and (iv) 278,000 shares 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 Company's initial public offering.
NOTE 3
Effective December 31, 1997, the Company adopted SFAS No. 128,
"Earnings Per Share." Basic net income (loss) per common share ("Basic EPS")
is computed by dividing net income (loss) by the weighted average number of
common shares outstanding. Diluted net income (loss) per common share
("Diluted EPS") is computed by dividing net income (loss) by the weighted
average number of common shares, dilutive common share equivalents and
convertible securities then outstanding. SFAS No. 128 requires the
presentation of both Basic EPS and Diluted EPS on the face of the Company's
Consolidated Statements of Operations. No information is presented for Diluted
EPS, as the effect of the inclusion of convertible securities would be
anti-dilutive.
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 (collectively, the
"Units") consisting of an aggregate of $8,000,000 principal amount of
Convertible Debentures (collectively, the "Debentures") and an aggregate of
800,000 warrants (collectively, the "Warrants"), each Warrant entitling the
holder thereof to purchase one share of Common Stock at a price to be
determined in accordance with a specified formula and, for each two Warrants
exercised within a specified period of time, an additional warrant
(collectively, the "Bonus Warrants") to purchase one additional share of the
Common Stock at a price of $7.50 per share. The Company used the net proceeds
(approximately $7,500,000) of the Private Placement to: (i) repay a portion of
the loans made to it by certain principal shareholders of the Company
($1,000,000, together with interest thereon, in the approximate amount of
$50,000); and (ii) pay down the Company's revolving line of credit
($1,000,000) with The Chase Manhattan Bank (the "Bank").
The Debentures bear no interest and mature on August 25, 1998. Except
for $400,000 principal amount of the Debentures which were redeemed by the
Company, prior to March 31, 1998 all of the Debentures were converted by the
holders thereof into registered shares of the Company's Common Stock 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 five trading days immediately
preceding the date of conversion (see Note 5).
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
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<PAGE>
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 (see Note 5).
In May 1998, certain of the holders of the Company's Warrants
exercised their right to acquire an aggregate of 392,000 registered shares of
the Company's Common Stock in exchange for the Company's agreement to reduce
the respective exercise prices thereof by 15%. The proceeds of such exercise
were utilized by the Company to acquire the Ambulatory Surgery Center
described in Note 10. (See Note 11 - Subsequent Events).
NOTE 5
At the March 13, 1997 meeting of the Emerging Issues Task Force, the
staff of the SEC issued an announcement regarding accounting for the issuance
of convertible debt securities. The announcement dealt with, among other
things, the belief, by the SEC, that any beneficial conversion features on
future conversions of debt securities increase the effective interest rate of
the securities and should, therefore, be reflected as a charge to earnings.
During the quarter ended March 31, 1997, the Company issued $8 million
principal amount of the Debentures, together with the Warrants and Bonus
Warrants. The Debentures provided for conversion features that permitted the
holders thereof to convert their Debentures to shares of the Company's Common
Stock at a discount from the market price at the time the Debentures were
issued. Although the date of this pronouncement was subsequent to the
Company's issuance of the Debentures, it is the Company's opinion that the SEC
intended this announcement to apply retroactively.
Utilizing the conversion terms most beneficial to the purchasers of
the Units, the Company has recorded in the accompanying financial statements
amortization of debt discount of approximately $3,517,000 out of a total debt
discount, with respect to all of the Debentures, of $5,916,000, which was
credited to the Company's paid-in-capital (Shareholders' Equity) over the
period of time that the holders thereof actually converted the same to Common
Stock. The non-cash portion of the discount is $5,436,000. Accordingly, since
all of the Debentures were previously converted by the holders thereof, such
discount has no effect on the Company's Shareholders' Equity. This amount
represents the intrinsic value of the beneficial conversion feature which is
inherent in the conversion terms of the Debenture, and the fair value of the
Warrants (with an assumed exercise price of $6.50), the Bonus Warrants (with
an assumed exercise price of $7.50), and the issuance cost of the Units. This
discount is being amortized over the minimum period the Debentures became
convertible.
The Debentures were originally classified on the Company's
Consolidated Balance Sheet as Common Stock to be issued, net of costs of
approximately $500,000, because the Company believed the likelihood that the
Debentures would not be converted was remote. Since such date, however, the
Company has determined that the Debentures should have been classified on the
Company's Consolidated Condensed Balance Sheet as Long-Term Debt. As a result,
the Company restated the financial statements contained in its Quarterly
Report on Form 10-Q for the three month and six month periods ended June 30,
1997.
NOTE 6
In February 1998, 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 $3.5 million
principal amount of convertible debentures (as amended on March 25, 1998,
collectively, the "1998 Debentures") and an aggregate of 700,000 warrants
(collectively, the "1998 Warrants"), which 1998 Warrants entitled the holders
thereof to purchase up to 700,000 shares of the Company's Common Stock at a
price of $5.00 per share. The Company used the net proceeds (approximately
$3.3 million) of the private placement: (i) to repay certain loans previously
made to it by certain of the Company's principal shareholders ($1,700,000),
together with interest thereon; and (ii) the balance for working capital.
-9-
<PAGE>
Subsequent to the date of the Company's issuance and sale of the 1998
Debentures and 1998 Warrants, the Company and the holders thereof
(collectively, the "Original Holders") determined that the issuance and sale
of such 1998 Debentures and 1998 Warrants should be rescinded based upon a
certain mutual mistake of the Company and the Original Holders. Accordingly,
on April 14, 1998, the Company and the Original Holders entered into an
Exchange Agreement, effective as of February 17, 1998, pursuant to which the
1998 Debentures were rescinded and declared null and void from inception, and
were exchanged for $3.5 million stated value ($4,025,000 fair value) of a
series of the Company's Preferred Stock, par value $.01 per share (the "Senior
Convertible Preferred Stock"), and the 1998 Warrants were exchanged for new
warrants (the "New Warrants"), entitling the Original Holders to purchase up
to 700,000 shares of Common Stock at a price of $5.00 per share until February
17, 2001.
The Senior Convertible Preferred Stock: (i) requires the Company to
pay quarterly dividends thereon, commencing May 17, 1998, calculated at the
rate of ten (10%) percent per annum; (ii) permits the Company to pay such
dividends in registered shares of its Common Stock; (iii) permits the holders
thereof, at any time prior to redemption by the Company, to convert all or a
portion of the same into shares of Common Stock based upon a conversion price
of $5.00; (iv) requires the Company to redeem, in either cash or registered
shares of its Common Stock, at the Company's option, all (but not less than
all) of the Senior Convertible Preferred Stock (at 105% of the then
outstanding stated value thereof, based upon the conversion price of $5.00;
hereinafter the "Redemption Amount") at any time from and after February 17,
1999 that a registration statement (pursuant to which the Common Stock (into
which the Stock may be converted) has been registered) is effective; (v)
permits the Company to redeem all (but not less than all) of the Senior
Convertible Preferred Stock, in cash and at the Redemption Amount, at any time
from and after February 17, 1999; and (vi) provides that from and after
February 18, 1999, the Company will be required to pay dividends thereon,
until the same are redeemed by the Company, at the rate of twenty-four (24%)
percent per annum.
After the Exchange Agreement was entered into, management determined
that it was in the Company's best interest to select another firm of
independent public accountants as the auditors of the Company. In response to
the Company's change in auditors, the SEC reviewed and discussed the exchange
transaction with the Company. As a result of these discussions, the Company
determined that the issuance and sale, in February 1998, of the 1998
Debentures and 1998 Warrants should be treated separate and apart from the
April 1998 exchange of such securities for the Senior Convertible Preferred
Stock and New Warrants.
As a result of the foregoing, the Company recorded in its financial
statements for the quarter ended June 30, 1998 amortization of the debt
discount of $1,110,000 and an extraordinary loss of $805,000 related to the
early extinguishment of the 1998 Debentures. This amount represents the
intrinsic value of the beneficial conversion feature which is inherent in the
conversion feature of the 1998 Debentures (approximately $963,000),
amortization of approximately $147,000 related to the fair value of the
Warrants, and an extraordinary loss of $805,000, which represents the
unamortized discount related to the 1998 Warrants in connection with the early
extinguishment of the 1998 Debentures and the issuance of the Senior
Convertible Preferred Stock.
NOTE 7 - Commitments and Contingencies
The Company is, from time to time, a party to litigation arising in
the ordinary course of 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. 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 require the payment of
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.
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In connection with the November 1995 acquisition, by Sterling Vision
BOS, Inc., of substantially all of the assets of OCA Acquisition Corp., Benson
Optical Co., Inc. and Superior Optical Company, Inc., 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 $4,724,000. The
Benson Debenture is included in Long-Term Debt and is recorded at its present
value of $1,076,000 using an imputed internal interest rate of 8.5%.
On June 30, 1997, the Company entered into a loan agreement (the
"Loan Agreement") with STI Credit Corporation ("STI") that 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, $10,000,000 of which was funded by STI on such date, although
$1,000,000 (the "Additional Funds") of the funded amount was withheld pending
the Company's satisfaction of a required collateral ratio with respect to such
credit facility (less a facility fee equal to two percent of the amount of the
loan). Sixty-five (65%) percent 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 then 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
Company's Credit Agreement with the Bank) are no longer applicable.
On October 9, 1997, STI amended the Loan Agreement and disbursed a
portion of the Additional Funds to the Company. As of June 30, 1998, the
outstanding principal balance of such loan was approximately $7,444,000.
Pursuant to the terms of the Loan Agreement, the Company must comply with the
following financial covenants: (i) the maintenance of positive, annual net
income for each of its calendar years; (ii) working capital of not less than
$2 million; (iii) shareholders' equity of not less than $26 million; and (iv)
from and after June 30, 1998, a collateral ratio of 1.2 to 1.0. As of December
31, 1997, the Company was not in compliance with the financial covenants
described in clauses (i) and (iii) above, although STI subsequently waived
such non-compliance in exchange for the Company's agreement to execute an
amendment to the Loan Agreement, which amended the Loan Agreement so as to:
(i) waive the Company's compliance with all of its financial covenants until
December 31, 1998; (ii) reduced such shareholders' equity requirement to $25
million; (iii) provided for a prepayment penalty of $500,000; and (iv)
required the Company to pay certain fees to STI, in the aggregate amount of
$70,000.
As of June 30, 1998, 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.
NOTE 8 - Recent Accounting Requirements
In the first quarter of 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income," which requires companies to report all
changes in equity during a period, except those relating from investment by
owners and distribution to owners, for the period in which they are
recognized. Comprehensive income is the total of net income and all other
nonowner changers in equity (or other comprehensive income) such as unrealized
-11-
<PAGE>
gains/losses on securities classified as available-for-sale, foreign currency
exchange adjustments and minimum pension liability adjustments. Comprehensive
and other comprehensive income must be reported on the face of annual
financial statements or in the case of interim reporting, the footnote
approach may be utilized. For the quarters ended March 31, 1998 and 1997, the
Company's operations did not give rise to items included in comprehensive
income which were not already included in net income. Accordingly, the
Company's comprehensive income is the same as its net income for all periods
presented.
In June 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information." SFAS No. 131 requires the reporting of profit and loss, specific
revenue and expense items, and assets for reportable segments. It also
requires the reconciliation of total segment revenues, total segment profit or
loss, total segment assets, and other amounts disclosed for segments, to the
corresponding amounts in the general purpose financial statements. SFAS No.
131 is effective for fiscal years beginning after December 15, 1997. The
Company's operations are presently classified into two principal industry
segments: (i) the retail optical segment, whereby the Company owns and
operates, as well as franchises a retail chain of optical stores which offer
eye care 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: (x) owns the tangible assets of, and operates an ambulatory
surgery center; and (y) owns and operates a laser surgery center and provides
access, for a fee, to affiliated ophthalmologists who utilize Insight's other
excimer lasers in offering PRK, a procedure performed with such lasers for the
correction of certain degrees of myopia. Management is presently evaluating
the impact on the Company's financial reporting from the adoption of this
statement.
NOTE 9 - Impact of the Year 2000 Issue
The Year 2000 Issue is the result of potential problems with computer
systems and/or any equipment with computer chips that use dates, where the
date has been stored as just two digits (e.g. 98 for 1998). On January 1,
2000, any clock or date recording mechanism (including date sensitive
software) which uses only two digits to represent the year, may recognize a
date using 00 as the year 1900, rather than the year 2000. This could result
in a system failure or miscalculations, causing disruption of operations, as
such systems may be unable to accurately process certain date-based
information.
The Company has reviewed the Year 2000 Issue with its Management
Information Systems's providers and consultants. The Company believes that the
Year 2000 Issue will not have a material impact on the operations of the
Company since its computer programs were written utilizing four digits to
define the applicable year. The Company, however, cannot determine, as of the
date hereof, the impact of the Year 2000 Issue on any of its vendors and/or
franchisees, which might materially impact the operations of the Company.
NOTE 10
On May 6, 1998, the Company, through its wholly-owned subsidiary,
Insight Laser Centers N.Y. I, Inc., purchased substantially all of the assets
of an ambulatory surgery center located in Garden City, New York (the
"Center") and, in connection therewith: (i) settled its legal action against
the estate of the former owner of such Center; (ii) entered into a long term
lease of the premises in which such Center is located; and (iii) entered into
an agreement pursuant to which it will manage the operations of the Center, on
an interim basis, pending the approval, from the New York State Department of
Health, of the transfer of the license and certificate of need therefore to an
affiliate of the Company.
NOTE 11 - Subsequent Events
In July 1998, certain of the holders of the Company's Warrants
exercised their right to acquire an aggregate of 158,000 registered shares of
the Company's Common Stock in exchange for the Company's agreement to reduce
the respective exercise prices thereof to $4.50. The proceeds of such exercise
are being utilized by the Company for working capital.
-12-
<PAGE>
On July 31, 1998, the Company and the Singer Shareholders entered
into a Settlement Agreement pursuant to which: (i) the Company released to
such Shareholders all of the remaining shares pledged to the Company to secure
their obligations under the Singer Agreement; (ii) the parties agreed to
reduce the Price Protection Guaranty Amount to $6.60; (iii) the Shareholders
agreed to pay to the Company the first $300,000 of net proceeds realized by
them in connection with their future sale of the Company's Common Stock above
the Price Protection Guaranty Amount; (iv) the Shareholders are restricted
from selling such shares except pursuant to an agreed upon schedule; and (v)
the Company waived certain of its claims against the Shareholders.
On August 10, 1998, Mr. Jay Fabrikant resigned as a Director of the
Registrant.
On August 12, 1998, the SEC declared effective the Company's
Registration Statement on Form S-3 pursuant to which the shares of Common
Stock into which the Senior Convertible Preferred Stock is convertible,
together with the Common Stock issuable upon exercise of the New Warrants
issued in connection therewith, and, in addition, 70,000 shares of Common
Stock which may be issued by the Company in payment of the dividends on the
Senior Convertible Preferred Stock, were registered.
Item 2. 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 Laser
Centers, Inc. ("Insight"), and any losses related thereto, are based upon
current expectations. These statements are forward looking in nature and
involve a number of risks and uncertainties. Actual results may differ 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 a waiver from STI of its
failure to comply with certain covenants under its Loan Agreement; 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, managed care and ambulatory surgery center industries; 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 the
Company's subsidiary, Insight, to correct the vision of individuals
experiencing certain degrees of myopia; 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 the
PRK procedure; competition in the PRK market; and general business and
economic conditions.
Results of Operations
For the Six Months Ended June 30, 1998 compared to June 30, 1997
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 305 and 319 Sterling Stores
in operation as of June 30, 1998 and June 30, 1997, respectively, of which 249
and 257, 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 $3,090,000, or 4.2%, to $76,328,000 for the six month period
ended June 30, 1998, as compared to $72,937,000 for the comparable period in
1997. On a same store basis (for stores that operated as either a
Company-owned or franchised store during the entirety of both of the six month
periods ended June 30, 1998 and 1997), systemwide sales increased $495,000, or
.8%, to $59,171,000 for the six month period ended June 30, 1998, as compared
to $58,676,000 for the comparable period in 1997.
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<PAGE>
Aggregate sales generated from the operation of Company-owned stores
increased by $1,919,000, or 16.3%, to $13,676,000 for the six month period
ended June 30, 1998, as compared to $11,757,000 for the comparable period in
1997. This increase was principally due to the Company's agreement to manage,
on behalf of the owner of seven franchised stores, the operation of such
stores, and an increase in comparative sales as described below. 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 six month periods ended June 30, 1998 and 1997,
increased by $263,000, or 3%, to $8,954,000 for the six month period ended
June 30, 1998, as compared to $8,691,000 for the comparable period in 1997.
Aggregate sales generated from the operation of franchised stores
increased by $1,472,000, or 2.4%, to $62,652,000 for the six month period
ended June 30, 1998, as compared to $61,180,000 for the comparable period in
1997. On a same store basis, aggregate sales generated by franchised stores in
operation during the entirety of both of the six month periods ended June 30,
1998 and 1997, increased $232,000, or .5%, to $50,217,000 for the six month
period ended June 30, 1998 as compared to $49,985,000 for the comparable
period in 1997.
Franchise royalties increased by $18,000, or .4%, to $4,686,000 for
the six month period ended June 30, 1998, as compared to 4,668,000 for the
comparable period in 1997.
Net gains on the conveyance of the assets of three Company-owned
stores to franchisees decreased by $711,000, or 81%, to $167,000 for the six
month period ended June 30, 1998, as compared to net gains on the conveyance
of the assets of seven Company owned stores to franchisees of $878,000 for
the comparable period in 1997.
The Company's gross profit margin increased by 1.0%, to 74% for the
six month period ended June 30, 1998, as compared to 73% for the comparable
period in 1997. 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 $1,996,000, or 27.1%, to $9,361,000 for
the six month period ended June 30, 1998, as compared to $7,365,000 for the
comparable period in 1997. This increase was principally due to the increase
in the number of Company managed, franchised stores over the comparable period
in 1997.
General and administrative expenses (including interest expense)
increased by $2,487,000, or 32.9%, to $10,038,000 for the six month period
ended June 30, 1998, as compared to $7,551,000 for the comparable period in
1997. This increase is principally due to a $1,800,000 increase in the
Company's provision for doubtful accounts, the writeoff of $175,000 of debt
issuance costs related to the issuance of the 1998 Debentures, and $311,000
of Warrant conversion costs.
The Company's net loss increased by $(1,978,000), or 64.1%, to a loss
of $(5,064,000) for the six month period ended June 30, 1998, as compared to a
loss of $(3,086,000) for the comparable period in 1997. The increase in net
loss was principally due to an increase of $1,800,000 in the Company's
provision for doubtful accounts, a non-cash charge
-14-
<PAGE>
of $1,915,000 ($1,110,000 of amortization of debt discount and an
extraordinary loss of $805,000 of unamortized debt discount related to the
extinguishment of debt upon the issuance of the Senior Convertible Preferred
Stock on April 14, 1998), the writeoff of $175,000 of debt issuance costs
related to the issuance of the 1998 Debentures, $311,000 of costs related to
the inducement of Warrant conversions, a reduction in the net gains on the
conveyance of Company-owned store assets to franchisees, the increase of costs
associated with the increase in Company managed, franchised stores in 1998 and
1997, offset, in part, by a decrease in the amortization of debt discount of
approximately $2,407,000.
Liquidity and Capital Resources
As of June 30, 1998 and December 31, 1997, the Company had $4,240,000
and $3,472,000, respectively, in working capital, and $764,000 and $334,000,
respectively, of cash and cash equivalents. During the twelve month period
ending December 31, 1998, the Company anticipates having the following capital
requirements: renovating and/or remodelling of Company-owned stores; the
continuing upgrade of the Company's management information system in
conjunction with the software computer programs 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 operations during the
six months ended June 30, 1998 resulting, primarily, from an increase in
accounts receivable. By the end of 1997, 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,
1997, as well as improve the Company's operations and cash flow: (i) closed or
did not renew the leases for ten of its Company-owned stores; and (ii) reduced
a substantial amount of administrative overhead expenses. Although the
Company, based, in part, upon the anticipated financial impact of such
measures taken by the Company, believes that its financial condition will
improve for the twelve months ended December 31, 1998, there can be no
assurance that its financial condition will so improve. The Company was not in
compliance with certain of its existing financial covenants as contained in
its Loan Agreement with STI as of December 31, 1997, although the Company
subsequently received a waiver thereof. In the event the Company is not in
compliance with such covenants by the end of 1998, there can be no assurance
that it will be able to obtain a waiver thereof and, in such event, STI will
have the right to accelerate the payment of the then outstanding principal
amount then due under the Company's Loan Agreement with STI. Accordingly, the
Company believes that its current cash resources and cash flow from operations
would be sufficient to fund its anticipated capital expenditures in 1998.
-15-
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. Not applicable.
Item 2. Changes in Securities. Not applicable.
Item 3. Defaults Upon Senior Securities. Not applicable.
Item 4. Submission of Matter to a Vote of Security Holders.
(a) The third Annual Meeting of Shareholders of the Company was
held on June 26, 1998.
(c)
(i) The election of the nominees for three Class I Directors
who will serve for a term to expire at the 2000 Annual
Meeting of Shareholders or until each of their respective
successors shall have been duly elected and qualified was
voted on by the shareholders. The three Class I nominees,
all of whom were elected, were Edward Cohen, Jerry Lewis
and Jay Fabrikant (who resigned as a Director on August
10, 1998). The Inspectors of Election certified the
following vote tabulations with respect thereto:
Class I Director For Withheld
---------------- --- --------
Edward Cohen 12,249,378 472,043
Jerry Lewis 12,256,897 464,524
Jay Fabrikant 12,263,415 458,006
(ii) A proposal to approve the granting, to each Drs. Robert,
Alan and Edward Cohen, of options to purchase shares of the
Company's Common Stock was approved by the shareholders.
The Inspectors of Election certified the following vote
tabulations:
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
10,174,517 577,998 29,263 1,939,643
(iii) A proposal to approve the granting, to Jay Fabrikant, of
options to purchase shares of the Company's Common Stock
was approved by the shareholders. The Inspectors of
Election certified the following vote tabulations:
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
11,890,457 795,084 30,213 5,667
(iv) A proposal to approve the appointment of Arthur Andersen
LLP, independent certified public accountants, as the
Company's auditors for the calendar year ending December
31, 1998, was approved by the shareholders. The Inspectors
of Election certified the following vote tabulations:
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
12,630,886 71,168 13,700 5,667
Item 5. Other Information. Not applicable.
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<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
a.) Exhibits
EXHIBIT INDEX
Exhibit
Number
10.83 Settlement Agreement dated July 31, 1998, pursuant to which the
Company settled various disputes existing between the Company
and Messrs. Sidney, Alan and David Singer (incorporated by
reference to Exhibit 10.83 to the Company's Current Report on
Form 8-K, dated July 31, 1998).
27 Financial Data Schedule.
b.) Reports on Form 8-K
1) On August 6, 1998, the Company filed a Report on Form 8-K with
respect to the settlement of various disputes concerning the
Company's acquisition, from Messrs. Sidney, Alan and David Singer,
of all of the capital stock of Singer/Specs, Inc.
-17-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned thereunto duly authorized.
STERLING VISION, INC.
(Registrant)
By: /s/ William J. Young
-----------------------------
William J. Young
Chief Financial Officer
Date: August 14, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED CONDENSED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 764
<SECURITIES> 0
<RECEIVABLES> 27,378
<ALLOWANCES> 2,420
<INVENTORY> 3,365
<CURRENT-ASSETS> 15,772
<PP&E> 15,889
<DEPRECIATION> 5,195
<TOTAL-ASSETS> 46,627
<CURRENT-LIABILITIES> 11,532
<BONDS> 10,856
0
4,025
<COMMON> 147
<OTHER-SE> 21,179
<TOTAL-LIABILITY-AND-EQUITY> 46,627
<SALES> 13,676
<TOTAL-REVENUES> 19,755
<CGS> 3,505
<TOTAL-COSTS> 24,014
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,780
<INTEREST-EXPENSE> 2,027
<INCOME-PRETAX> (4,259)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,259)
<DISCONTINUED> 0
<EXTRAORDINARY> (805)
<CHANGES> 0
<NET-INCOME> (5,064)
<EPS-PRIMARY> (.35)
<EPS-DILUTED> (.35)
<FN>
Amounts inapplicable or not disclosed as a separate line on the Statement of
Financial Position or Results of Operations are reported at -0- herein.
* Notes and accounts receivable - trade are reported net of allowances for
doubtful account in the Statement of Financial Position.
</FN>
</TABLE>
