<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-Q/A
(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)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
(Unaudited)
------------- -------------
(As Restated -
See Note 10)
<S> <C> <C>
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 over 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
Convertible debentures, net of debt discount of $887 2,423 -
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 $8,980 $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
Additional paid-in capital 38,741 24,982
(Deficit) (10,546) (5,549)
-------- -------
Total Shareholders' Equity 28,332 19,557
-------- -------
Total Liabilities and Shareholders' Equity $50,531 $46,269
======= =======
</TABLE>
The accompanying notes are an integral part of these Consolidated Condensed
Financial Statements.
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<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
(As Restated - (As Restated-
See Note 10) See Note 10)
<S> <C> <C> <C> <C>
Systemwide sales (Unaudited) $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 4,795 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
Amortization of debt discount 1,512 - 5,029 -
------ ------ ------ ------
Total Costs and Expenses 11,455 12,566 33,061 32,944
------ ------ ------ ------
Loss before provision for
income taxes $(1,911) $(1,266) $(4,997) $(1,248)
Benefit from income taxes - (506) - (499)
------- -------- -------- --------
Net loss $(1,911) $ (760) (4,997) $ (749)
======== ======== ======== =======
Weighted average number of common
shares outstanding 13,801 12,407 13,801 12,407
======= ======== ======== =======
Loss per common share (.14) (.06) (.36) (.06)
======= ======== ======== =======
</TABLE>
The accompanying notes are an integral part of these Consolidated Condensed
Financial Statements.
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<PAGE>
STERLING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars In Thousands)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
1997 1996
(As Restated-See Note 10)
<S> <C> <C>
Cash flow from operating activities:
Net income $(4,997) $ (749)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,614 802
Amortization of debt discount 5,029 -
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
Issuance of Non-Employee Stock Options 140
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 (1,171) (647)
Accounts payable and accrued liabilities (4,814) (2,283)
Franchise related obligations (419) (76)
Deferred franchise income (160) -
-------- -------
Net cash (used in) operating activities $(5,703) $(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 625
Borrowing on revolving credit note - 225
Payments on other debt (9,481) (1,651)
Issuance of Convertible Debentures 7,540 -
Borrowings under franchise notes
receivable Loan Agreement 9,500
Repayment of revolving credit note (1,000) -
----- -------
Net cash provided by (used in) financing activities 6,559 (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
======= =======
</TABLE>
The accompanying notes are an integral part of these Consolidated Condensed
Financial Statements.
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<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:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Statutory Federal income tax rate 0% 34%
State and local income tax rate, net of
Federal income tax benefit 0 6
Reduction in tax rate due to net operating
loss carryforward 0 -
==== ===
Effective income tax rate 0% 40%
==== ===
</TABLE>
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 certain principal
shareholders of the Company ($1,000,000, together with interest
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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 a Current
Liability. As of September 30, 1997, approximately $4,800,000 of the
Debentures had 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 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
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<PAGE>
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 shares of the Company's Common Stock,
subject to certain post closing adjustments.
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.
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:
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<PAGE>
(Dollars in thousands, except per
common share amounts)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1997 1996
<S> <C> <C>
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
Amortization of Debt Discount 5,029 -
Total Costs and Expenses 33,066 32,970
Net income (loss) before provision for
income taxes (4,796) (659)
Provision (benefit) for income taxes - (264)
Net income (loss) $(4,796) $ (395)
======= ========
Weighted average number of common
shares outstanding 13,713 12,325
======= ========
Earnings (loss) per common share (.35) (.03)
======= =========
</TABLE>
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
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.
-8-
<PAGE>
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 earnings per share, except in determining the number of dilutive
shares outstanding for options and warrants, in that the proceeds that would
be received upon the conversion of all dilutive options and warrants, are
assumed to be used to repurchase the Company's Common Stock at the average
market price of such stock during the period. For fully diluted earnings per
share, the higher of the average market price or closing market price is used.
If SFAS 128 had been in effect, the Company would have reported basic and
diluted losses per share of $.36 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
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<PAGE>
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.
<PAGE>
NOTE 10
At the March 13, 1997 meeting of the Emerging Issues Task Force, the
staff of the Securities and Exchange Commission (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,
therefor, be reflected as a charge to earnings. During the quarter ended March
31, 1997, the Company issued $8 million principal amount of its Convertible
Debentures due August 25, 1998 (the "Debentures"), together with Warrants to
purchase up to 800,000 shares of the Company's Common Stock, and, for each two
Warrants exercised within a specified period of time, one additional Bonus
Warrant (collectively, the "Units"). The Debentures provide for conversion
features that permit 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 $5,029,000 out of a total debt
discount, with respect to all of the Debentures, of $5,916,000, which will be
credited to the Company's paid-in-capital (Shareholders' Equity) over the period
of time that the holders thereof actually convert the same to Common Stock. The
non-cash portion of the discount is $5,436,000. Accordingly, once all of the
Debentures have been so converted by the holders thereof, such discount will
have 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) and the Bonus Warrants (with an assumed
exercise price of $7.50), issued with the Debentures and the issuance cost of
the Units.
This discount is being amortized over the minimum period the debentures become
convertible.
The Debentures were originally classified on the Company's Consolidated
Condensed Balance Sheets as Common Stock to be issued, net of costs
of issuance 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 a current
liability.
-10-
<PAGE>
As a result of the foregoing, the Company is restating the financials
statements contained in this Quarterly Report on Form 10Q-A for the three
month and nine month periods ended September 30, 1997. The impact of such
restatement on the Company's Consolidated Condensed Statement of Operations
and Balance Sheet is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1997 September 30, 1997
As Originally As Originally
As Restated Reported As Restated Reported
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Net income (loss) $(1,911,000) $(399,000) $(4,997,000) $31,000
Earnings (loss) per common shares ands
common share equivalents $(.14) $ (.03) $ (.36) $ (.00)
=========== ========= +========= ========
</TABLE>
September 30, 1997
As Originally
As Restated Reported
----------- -------------
Convertible Debentures $ 2,423,000 -
Shareholders' Equity $28,332,000 $30,755,000
-11-
<PAGE>
Note 10-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 lease are subject to common area
charges and additional rent based upon sales volume. As is required by SFAS 13
"Accounting for Leases", the Company amortizes its rent expense on a
straight-line basis over the life of the related lease.
The Company is a guarantor of a loan to a franchisee by a third party
lender in the principal amount of $425,000.
Item 2. Management's Discussion and Analysisof 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
$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.
-12-
<PAGE>
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 loss before income taxes increased by $3,750,000, to
$4,997,000 for the nine months ended September 30, 1997 as compared to
$1,247,000 for the same period in 1996, primarily as a result of a non-cash
charge against earnings, in the approximate amount of $5,029,000, as a result
of the Company's issuance and sale, in February 1997, of its Convertible
Debentures Due August 25, 1998 (See Note 10 of Notes to Financial Statements).
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.
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.
-13-
<PAGE>
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
$7,836,000 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).
-14-
<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 INDEX
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.
-15-
<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/ Mary Ellen Lyons
-------------------------
Mary Ellen Lyons
Chief Accounting Officer
Signing on behalf of the
Registrant as its Chief
Accounting Officer.
Date: April 15, 1998
-16-
<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) $(1,911) $ (760) $(4,997) $ (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 $ (.14) $ (.06) $ (.36) $ (.06)
======== ======== ======== ========
FULLY DILUTED EARNINGS (LOSS)*
Net income (loss) $(1,911) $ (760) $(4,997) $ (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 $ (.14) $ (.06) $ (.36) $ (.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%.
<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>
<RESTATED>
<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> 8,980
<BONDS> 16,935
<COMMON> 137
0
0
<OTHER-SE> 28,195
<TOTAL-LIABILITY-AND-EQUITY> 50,531
<SALES> 17,784
<TOTAL-REVENUES> 28,064
<CGS> 4,796
<TOTAL-COSTS> 33,061
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 293
<INTEREST-EXPENSE> 5,952
<INCOME-PRETAX> (4,997)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,997)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,997)
<EPS-PRIMARY> (.36)
<EPS-DILUTED> (.36)
<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>
