<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 June 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 13,356,107 shares outstanding of the Registrant's Common Stock, par
value $.01 per share, as of August 11, 1997.
<PAGE>
Item 1. Financial Statements
STERLING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars In Thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
(Unaudited)
----------- -----------
(As Restated-
See Note 10)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 2,590 $ 868
Accounts receivable - net of allowance for
doubtful accounts of $559 and $557, respectively 8,084 7,911
Franchise and other notes receivable - current 3,092 3,375
Inventories 3,488 3,678
Due from related parties - current 120 124
Prepaid expenses and other current assets 1,131 883
------- -------
Total Current Assets 18,505 16,839
Property and equipment - net of
accumulated depreciation
11,205 10,818
Franchise and other notes receivable - net of allowance
for doubtful accounts of $562 16,672 16,089
Other assets 5,752 2,523
------- -------
Total Assets $52,134 $46,269
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 1,998 $ 9,151
Notes payable - shareholders and directors - 2,000
Accounts payable and accrued liabilities 3,800 8,267
Franchise related obligations - current 848 1,224
Deferred income taxes payable - current - -
-------- -------
Total Current Liabilities 6,646 20,642
Long term debt 12,961 4,033
Convertible debentures net of debt discount of $2,399 4,601 -
Deferred franchise income 172 328
Excess of fair value of assets acquired over cost 1,515 1,709
Commitments and contingencies
Shareholders' Equity:
Preferred stock, $.01 par value per share;
authorized 5,000,000 shares - -
Common stock, $.01 par value per share; authorized
28,000,000 shares; issued 12,928,092 129 124
Additional paid-in capital 34,745 24,982
(Deficit) (8,635) (5,549)
------- -------
Total Shareholders' Equity $26,239 $19,557
-------- -------
Total Liabilities and Shareholders' Equity $52,134 $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 Six Months Ended
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
------------------ ----------------
(As Restated- (As Restated-
See Note 10) See Note 10)
<S> <C> <C> <C> <C>
Systemwide sales (Unaudited) $36,279 $32,621 $72,937 $63,506
======= ======= ======= =======
Revenues:
Net sales - Company stores $ 5,753 $ 7,104 $11,757 $14,377
Franchise royalties 2,555 1,930 4,668 3,760
Net gains and fees from the conveyance of
Company-owned assets to franchisees 68 1,028 878 1,562
Other income 670 307 1,217 697
------- ------- ------- -------
Total Revenues 9,046 10,369 18,520 20,396
------- ------- ------- -------
Costs and expenses:
Cost of sales 1,552 1,849 3,173 3,740
Selling expenses 3,516 5,058 7,365 9,875
General and Administrative expenses 3,586 3,424 6,930 6,160
Interest expense 287 283 621 603
Amortization of debt discount 1,496 - 3,517 -
------- ------- --------- ----
Total Costs and Expenses 10,437 10,614 21,606 20,378
------- ------- ------- -------
(Loss) income before provision for
income taxes (1,391) (245) (3,086) 18
Provision (benefit) for income taxes - (98) - 7
------- ------- ------- -------
Net (loss) income $(1,391) $ (147) $(3,086) $ 11
======== ======= ======== ======
Weighted average number of common
shares outstanding 13,915 12,329 13,915 12,329
======= ======= ======= ======
Earnings (loss) per common share $ (.10) $ (.01) $ (.22) $ 0
======== ======= ======== ======
</TABLE>
The accompanying notes are an integral part of these Consolidated Condensed
Financial Statements.
-3-
<PAGE>
STERLING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars In Thousands)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
1997 1996
-------------------------
(As Restated-
See Note 10)
<S> <C> <C>
Cash flow from operating activities:
Net income $(3,086) $ 11
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 929 436
Allowance for doubtful accounts 879 110
Net gain from the conveyance
of Company-owned assets
to franchisees (757) (1,371)
Deferred income taxes payable - 334
Accrued interest 42 -
Amortization of fair value of assets
acquired over cost (194) -
Issuance of non-employee stock options 140 -
Amortization of debt discount 3,517 -
Changes in assets and liabilities:
Accounts receivable (115) (1,853)
Inventories 190 82
Prepaid expenses and other
current assets (240) (814)
Other assets (1,312) (380)
Accounts payable and accrued liabilities (4,767) (1,698)
Franchise related obligations (376) 78
Deferred franchise income (156) -
Net cash (used in) operating activities $(5,306) $(5,065)
-------- -------
Cash flows from investing activities:
Acquisition, net of cash acquired - (4,715)
Franchise notes receivable issued (2,583) (2,494)
Repayment of franchise notes receivable 1,411 1,121
Purchase of property and equipment (405) (1,398)
Conveyance of property and equipment 690 2,369
Net cash (used in) investing activities (887) (5,117)
------- -------
Cash flows from financing activities:
Sale of common stock and other
capital contributions - 625
Borrowing on revolving credit note - 225
Payments on other debt (8,125) (1,328)
Restricted cash related to acquisition - (4,150)
Borrowings related to acquisition of a
retail optical chain - 4,311
Borrowings under franchise notes
receivable Loan Agreement 9,500 -
Repayment of revolving credit note (1,000) -
Issuance of convertible debenture 7,540 -
------ -------
Net cash provided by (used in) financing activities 7,915 (317)
------- -------
Net increase (decrease) in cash and cash equivalents 1,722 (10,499)
Cash and cash equivalents - beginning of year 868 15,493
------- -------
Cash and cash equivalents - end of period $ 2,590 $ 4,994
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 579 $ 603
======= =======
Taxes $ 47 $ 423
======= =======
Acquisition, net of cash acquired:
Working capital, other than cash (231) 1,324
Property, plant and equipment 600 600
Other assets - 2,791
Goodwill 2,141 -
</TABLE>
-4-
<PAGE>
<TABLE>
<S> <C> <C>
Less: Common Stock issued (2,510)
-------
Acquisition, net of cash acquired $ 0 $ 4,715
======= =======
</TABLE>
The accompanying notes are an integral part of these Consolidated Condensed
Financial Statements.
-5-
<PAGE>
STERLING VISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1
The accompanying Consolidated Condensed Financial Statements of Sterling
Vision, Inc. (the "Registrant") and Subsidiaries (collectively, the "Company")
have been prepared in accordance with generally accepted accounting principles
for interim financial information and in accordance with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statement presentation. In the opinion of
management, all adjustments for a fair statement of the results of operations
and financial position for the interim periods presented have been included.
All such adjustments are of a normal recurring nature. This financial
information should be read in conjunction with the Consolidated Condensed
Financial Statements and Notes thereto included in the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1996. There have been no
changes in significant accounting policies since December 31, 1996.
NOTE 2
Income tax provisions are based on estimated annual effective tax rates.
The effective income tax rate (before a reduction due to a net operating loss
carryforward) used for the six months ended June 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 six months
ended June 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 initial 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 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").
-6-
<PAGE>
The Debentures bear no interest and mature on August 25, 1998. They are
convertible at a price per share (the "Conversion Price") equal to the lesser
of $6.50 or 85% of the average closing bid price of the Common Stock as
reported on the Nasdaq National Market System ("Nasdaq") for the 5 trading
days immediately preceding the date of conversion; provided, however, that the
Company has the right to redeem that portion of the Debentures requested to be
converted in the event the Conversion Price is $6.00 or less. In such event,
the redemption price will be equal to 115% of the face amount of that portion
of the Debentures requested to be converted. The Debentures are convertible
subject to the following limitations: 25% of the original principal amount is
convertible beginning on the date of issuance provided a registration
statement, pursuant to which the underlying shares of Common Stock will be
registered under the Securities Act of 1933, as amended (the "Act"), is then
in effect; 50% of the original principal amount is convertible beginning three
months after the date of issuance; 75% of the original principal amount is
convertible beginning six months after the date of issuance; and the entire
original principal amount is convertible beginning nine months after the date
of issuance. Notwithstanding the foregoing, if, at any time, the intra-day bid
price of the Common Stock (as reported on Nasdaq) equals or exceeds $10, the
entire principal amount of the Debentures will be convertible at any time
thereafter.
In addition to the foregoing, the Debentures provide for the automatic
conversion of any Debentures not previously converted as of the maturity date,
provided that, as of such date: (i) the Company's registration statement with
respect to the underlying shares continues to be effective; and (ii) no Event
of Default exists under the Debentures. In the event that the Company does not
have a registration statement with respect to the underlying shares or an
event of default exists under the Debentures, the holders of the Debentures
would be entitled to a cash payment, (in lieu of shares of the Company's
Common Stock) in an amount equal to the aggregate principal of those
Debentures not previously converted. The Debentures are classified on the
Company's Consolidated Condensed Balance Sheet as Long Term Debt (See Note
10).
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") by: (i) extending the
maturity date of the Company's line of credit to May 30, 1997; (ii) requiring
a $1,000,000 pay down of the line of credit; (iii) permanently reducing the
line of credit by such amount; (iv) granting waivers with respect to the
Company's anticipated non-compliance with certain financial covenants
contained in the Credit Agreement through February 26, 1997; and (v) amending,
for the period ending December 31, 1997, certain financial covenants contained
in the Credit Agreement.
NOTE 5
On April 1, 1997, the Company acquired all of the issued and outstanding
shares of the capital stock of Singer Specs, Inc., a Delaware corporation, and
certain of its
-7-
<PAGE>
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 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.
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) that the Company
file, with the SEC, a registration statement seeking registration of the
Common Stock issued to the Shareholders, as discussed below; (iii) for the
pledge, by the Shareholders, of all of their shares of the Common Stock, to
secure their obligations under the Singer Agreement; (iv) that the
Shareholders being restricted from selling a portion of their shares of said
Common Stock, all as more particularly set forth in the Singer Agreement; and
(v) the requirement that the Company, under certain circumstances, pay to the
Shareholders the difference between the market price of its Common Stock (upon
which the purchase price was calculated) and the selling price (net of 50% of
commissions) of any such shares sold by 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, of approximately $2,100,000, are being
amortized over a period of seven years.
Effective with its acquisition in April 1997, the operations of Singer
included in the results of operations of the Company for the six months ended
June 30, 1997, are as follows:
Revenue 217
===
Net income before extraordinary items 190
===
Net income 190
===
Earnings per share .01
===
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 (see Note 8).
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
-8-
<PAGE>
on behalf of the Shareholders, as discussed above; (iii) 152,211 shares being
registered on behalf of BEC, as discussed above; and (iv) 278,000 shares being
registered on behalf of the holders of certain options granted to the former
President of the Company and certain warrants issued to the underwriters of
the Offering.
NOTE 6
On June 30, 1997, the Company entered into a loan agreement (the "Loan
Agreement") with STI Credit Corporation ("STI") that: (i) established, in
favor of the Company, a $20,000,000 credit facility to finance a portion of
the Company's currently existing and future franchise promissory notes
receivable; and, (ii) funded $10,000,000 of such credit facility (less a
facility fee equal to two percent of the amount of the loan). 65% of the
funded amount is to be repaid by the Company, together with interest payable
at the rate of 10.25% per annum, 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 relating to its: (i) annual net income; (ii)
tangible net worth; (iii) working capital, all as such terms are defined in
the Loan Agreement. At June 30, 1997, the Company was in compliance with all
of such covenants.
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 $.22 for the six month period ended June 30, 1997.
NOTE 8
On July 2, 1997, the Company entered into a letter agreement with the
former Shareholders of Singer Specs, Inc. whereby such Shareholders, in
consideration of a loan (the "First Advance") by the Company to the
Shareholders, in an amount equal to $400,000 plus the amount required
(approximately $105,000) to pay off their debt to a bank holding a first
mortgage on the building owned by Singer (and acquired by the Company in
connection with the Singer Transaction), agreed that they would not sell or
offer to sell, without the prior written consent of the Company, any of their
remaining Initial Sale Shares (as defined in the Singer Agreement) for a
period of thirty (30) days, expiring July 31, 1997 (the "First Standstill
Period").
-9-
<PAGE>
The agreement further provides that, upon the expiration of the First
Standstill Period, the Company would have the option, which the Company did
not exercise, to extend the period of time during which the Shareholders would
refrain from selling any of their remaining Initial Sale Shares without the
prior, written consent of the Company, for an additional period of three (3)
months, expiring October 31, 1997 (the "Second Standstill Period"), in
exchange for a "Second Advance" equal to the difference between (i) $820,940
and (ii) the sum of (A) the First Advance and (B) the gross proceeds (less 50%
of any commissions payable to broker agents, underwriters, etc.) realized from
all sales of the Initial Sale Shares theretofore consummated or in the process
of being consummated.
The First Advance is evidenced by a Note, accruing no interest and
providing for the payment of the principal amount thereof, only out of the
first proceeds received by any of the Shareholders from their sale of the
remaining Initial Sale Shares.
In July 1997, the Company was required, under the terms of the BEC
Agreement (see Note 5), to pay to BEC approximately $67,000, which represented
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.
In July 1997, the Company was required, under the terms of the Singer
Agreement (see Note 5), to pay to the Shareholders approximately $32,000,
which represented the difference between the market price of its Common Stock
(upon which the purchase price for the capital stock of Singer Specs, Inc. was
calculated) and the selling price (net of 50% of commissions) generated from
the sale of approximately 20,000 shares by the Shareholders.
In July 1997, the Company elected, in connection with its Private
Placement (see Note 4), 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.
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.
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
-10-
<PAGE>
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 $3,517,000 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 Sheet 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 Long Term Debt.
As a result of the foregoing, the Company is restating the financial
statements contained in this Quarterly Report on Form 10Q-A for the three
month and six month periods June 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 Six Months Ended
June 30, 1997 June 30, 1997
As As Originally As As Originally
Restated Reported Restated Reported
-------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income (loss) $ (1,391,000) $105,000 $(3,086,000) $431,000
============ ========== ============ ========
Earnings (loss) per
common share $(.10) $.01 $ (.22) $ (.03)
====== ======== =========== ========
<CAPTION>
June 30, 1997
As Originally
As Restated Reported
----------- --------------
<S> <C> <C>
Convertible Debentures $ 4,601,000 --
Shareholders' Equity $26,239,000 $30,840,000
</TABLE>
<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 leases are subject to common
area charges and additional rent based upon sales volume. As is required by
SFAS 13 "Accounting for Leases", the Company amortizes its rent expense on a
straight-line basis over the life of the related lease.
The Company is a guarantor of a loan to a franchisee by a third party
lender in the principal amount of $425,000.
-11-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
All statements contained herein which are not historical facts
including, but not limited to, statements regarding the Company's future
development plans, the Company's ability to generate cash from its operations
and the operations of Insight Laser Centers, Inc. ("Insight"), and any losses
related thereto, are based upon current expectations. These statements are
forward looking in nature and involve a number of risks and uncertainties.
Actual results may differ materially. Among the factors that could cause
actual results to differ materially are the following: competition in the
retail optical and managed care industries; the ability of the Company to
acquire, at favorable prices, retail optical chains; the uncertainty of the
acceptance of Photorefractive Keractectomy ("PRK"); the availability of new
and better ophthalmic laser technologies or other technologies that serve the
same purpose as PRK; the ability of the Company to finalize favorable
affiliation agreements with ophthalmologists offering PRK; cost over-runs; and
general business and economic conditions.
Results of Operations
For the Six Months Ended June 30, 1997 compared to June 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 339 and 317 Sterling Stores
in operation as of June 30, 1997 and June 30, 1996, respectively, of which 228
and 242, 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 $9,431,000, or 14.9%, to $72,937,000 for the six months ended
June 30, 1997, as compared to $63,506,000 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 six month periods ended
June 30, 1997 and 1996), systemwide sales decreased by $996,000, or 3.9%, to
$24,413,000 for the six months ended June 30, 1997, as compared to $25,409,000
for the same period in 1996. The Company believes that such decrease resulted,
in part, from general business conditions. There were 186 stores that operated
as either a Company-owned or franchised store during the entirety of both of
the six month periods ended June 30, 1997 and 1996.
Aggregate sales generated from the operation of Company-owned stores
decreased by $2,620,000, or 18.2%, to $11,757,000 for the six months ended
June 30, 1997, as compared to $14,377,000 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 six month
periods ended June 30, 1997 and 1996, decreased by $715,600, or 8.6%, to
$7,577,000 for the six months ended June 30, 1997, as compared to $8,292,000
for the same period in 1996.
Aggregate sales generated from the operation of franchised stores
increased by $12,051,000, or 24.5%, to $61,180,000 for the six months ended
June 30, 1997, as compared to $49,129,000 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 six month periods ended
June 30, 1997 and 1996, decreased by $1,636,000, or 3.9%, to $40,907,000
-12-
<PAGE>
for the six month period ended June 30, 1997, as compared to $42,543,000 for
the same period in 1996.
Aggregate ongoing franchise royalties increased by $908,000, or 24.2%,
to $4,668,000 for the six months ended June 30, 1997, as compared to
$3,760,000 for the same period in 1996, due primarily to the acquisition of
certain franchised stores in connection with the VCA and Singer Transactions.
Net gains on the conveyance of the assets of seven Company-owned stores
to franchisees decreased by $684,000, or 43.8%, to $878,000 for the six months
ended June 30, 1997, as compared to net gains on the conveyance of the assets
of seven Company-owned stores to franchisees, in the aggregate amount of
$1,562,000 for the same period in 1996.
The Company's gross profit margin decreased by one percentage point, to
73.0, for the six months ended June 30, 1997, as compared to 74% 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 $2,510,000 or 25.4%, to $7,365,000 for the
six months ended June 30, 1997, as compared to $9,875,000 for the same period
in 1996, due primarily to the conveyance of the assets of Company-owned stores
to franchisees.
General and administrative expenses (including interest expense,
depreciation and bad debt expense) increased by $788,000, or 11.7%, to
$7,551,000 for the six months ended June 30, 1997, as compared to $6,763,000
for the same period in 1996. This increase was due primarily to the following
five factors: (i) approximately $325,000 in administrative costs and legal
fees related to the stores acquired in the VCA Transaction; (ii) approximately
$140,000 in higher occupancy expenses related to the Company's relocation, in
the second quarter of 1996, of its administrative offices; (iii) approximately
$100,000 in higher costs related to operating as a publicly-held company; (iv)
approximately $85,000 in costs related to stock options granted to certain
consultants to the Company; and (v) approximately $113,000 in costs related to
compensation paid to the Company's new President and Chief Operating Officer,
and 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 $18,000, or 3.0%, to $621,000 for the
six months ended June 30, 1997, as compared to $603,000 for the same period in
1996. The Company's provision for doubtful accounts, which is included in
general and administrative expenses, decreased by $131,000, or 56.7%, to
$100,000 for the six months ended June 30, 1997, as compared to $231,000 for
the same period in 1996.
The Company's income before income taxes decreased by $3,104,000, to a
loss of $3,086,000 for the six months ended June 30, 1997, as compared to net
income (before provision for income taxes) of $18,000 for the same period in
1996, primarily as a result of a non-cash charge against earnings, in the
approximate amount of $3,517,000, as 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). During the second quarter of
1996, the Company consummated the VCA Transaction and, as a result, certain
aspects of the Company's operations during the six months ended June 30, 1997
were not comparable to its operations for the same period in 1996. Losses from
the Company's operations (excluding income applicable to the operation of the
stores acquired in the VCA Transaction) increased by $1,106,000, or 256%, to a
loss of $1,538,000 for the six months ended June 30, 1997, as compared to a
loss of $432,000 for the same period in 1996. This increase was primarily due
to the increase in general and administrative expenses (including interest
expense, depreciation and bad debt expense), as explained above, (excluding
such expenses applicable to the operation of the stores acquired in the VCA
Transaction) and a decrease in the net gains on the conveyance of the assets
of Company- owned stores to franchisees (excluding such gains applicable to
the conveyance of the assets of five Company-owned stores acquired in the VCA
Transaction).
-13-
<PAGE>
Liquidity and Capital Resources
On February 26, 1997, the Company entered into Convertible Debentures
and Warrants Subscription Agreements (see Note 4) with certain investors in
connection with the Private Placement. The Company utilized the net proceeds
(approximately $7,500,000) of the Private Placement to: (i) repay $1,000,000
of the loans made to it by certain principal shareholders of the Company, as
discussed above, together with interest thereon, in the approximate amount of
$50,000; and (ii) pay down the Company's revolving line of credit with the
Bank ($1,000,000). The balance of such proceeds were utilized for general
corporate purposes.
On June 30, 1997, the Company entered into a 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 intends to use the balance of such proceeds for
general corporate purposes.
As of June 30, 1997 and December 31, 1996, the Company had $11,859,000
and $(3,803,000), respectively, in working capital, and $2,590,000 and
$868,000, respectively, of cash and cash equivalents. As of the date hereof,
the Company has ceased the construction of any new Insight Laser Centers,
including the one in San Francisco, California (which was anticipated to open
during the first quarter of 1997). During the twelve months ending December
31, 1997, the Company anticipates having the following capital requirements:
renovating six existing Company-owned stores; the continuing upgrade of the
Company's management information system in conjunction with the point-of-sale
computer systems being installed in its Company-owned stores, in the
aggregate, approximate amount of $250,000; acquiring retail optical stores,
subject to the availability of qualified opportunities in furtherance of the
Company's business strategy, in amounts that cannot be projected by the
Company at this time, and opening new retail optical stores in furtherance of
the Company's business strategy, also in amounts that cannot be projected by
the Company at this time.
The Company experienced negative cash flow from its operations during
the six months ended June 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 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 in 1997: (i) closed or
failed to renew the leases for nine of the stores acquired from Benson Optical
Co., Inc. in November 1995 (collectively, the "Benson Stores"), some of which
were unprofitable; (ii) franchised eleven Benson Stores which are currently
producing royalty income; (iii) eliminated virtually all administrative
overhead in connection with Insight; 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 such 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 addition, the Company is currently
finalizing an agreement with the Bank for a new short-term line of credit
which the Bank offered to the Company subsequent to the Company's repayment of
all outstanding sums due to the Bank, although there can be no assurance that
such transaction will be consummated.
-14-
<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 second Annual Meeting of Shareholders of the Company was held on
June 20, 1997.
<TABLE>
<S> <C>
(c)
(i) The election of the nominees for three Class II Directors who will serve
for a term to expire at the 1998 Annual Meetings 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 II nominees,
all of whom were elected, were Robert Cohen, Alan Cohen and Joel Gold. The
Inspectors of Election certified the following vote tabulations with
respect thereto:
Class I Director For Withheld
---------------- --- --------
Robert Cohen 10,759,628 281,843
Alan Cohen 10,759,628 281,843
Joel Gold 10,919,004 122,467
(ii) A proposal to approve Amendment No. 2 to the Company's 1995 Stock Incentive Plan was approved
by the shareholders. The Inspectors of Election certified the following vote tabulations:
Broker
For Against Abstain Non-Votes
--- ------- ------- ----------
7,425,553 393,152 23,450 3,199,316
(iii) A proposal to approve Amendment No. 3 to the Company's 1995 Stock Incentive Plan was approved
by the shareholders. The Inspectors of Election certified the following vote tabulations:
Broker
For Against Abstain Non-Votes
--- ------- ------- ---------
899,250 388,519 23,950 3,199,316
(iv) 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:
Broker
For Against Abstain Non-Votes
--- ------- ------- ---------
5,453,623 268,576 185,976 3,199,316
(v) 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:
Broker
For Against Abstain Non-Votes
--- ------- ------- ---------
7,351,502 466,253 23,400 3,200,316
</TABLE>
-15-
<PAGE>
<TABLE>
<S> <C>
(vi) A proposal to approve the granting to Meadows Management, LLC, a limited liability company
owned by Drs. Robert and Alan 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:
Broker
For Against Abstain Non-Votes
--- ------- ------- ---------
5,442,639 442,936 22,600 3,199,316
(vii) A proposal to approve the reappointment of Deloitte & Touche LLP, independent certified
public accountants, as the Company's auditors for the calendar year ending December 31, 1997,
was approved by the shareholders. The Inspectors of Election certified the following vote
tabulations:
Broker
For Against Abstain Non-Votes
--- ------- ------- -----------
10,939,171 88,950 13,350 - 0 -
</TABLE>
Item 5. Other Information. Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
a.) Exhibits
EXHIBIT INDEX
Exhibit
Number
10.72 Loan Agreement, dated June 30, 1997, between the Company and STI
Credit Corporation (incorporated by reference to Exhibit 10.72
to the Company's Current Report on Form 8-K, dated June 30,
1997).
10.73 Letter Agreement, dated July 2, 1997, among the Company and
Messrs. Sidney, Alan and David Singer.
10.74 Form of Non-Negotiable Judgment Note, dated July 1, 1997, among
the Company and Messrs. Sidney, Alan and David Singer.
11 Computation of Earnings Per Common Share.
27 Financial Data Schedule.
b.) Reports on Form 8-K
-------------------
1) On June 30, 1997, the Company filed a Report on Form 8-K with
respect to the Loan Agreement.
-16-
<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
-17-
<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 Six Months Ended
June 30, June 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
PRIMARY EARNINGS (LOSS)
Net income (loss) $(1,391) $ (147) $(3,086) $ 11
======== ====== ======== =======
Weighted average number of common
shares outstanding 12,657 12,294 12,657 12,294
Weighted average number of common shares
to be issued 903 - 903 -
Incremental shares based on the treasury
stock method for stock options, using
the average market price 355 35 355 35
------- ------- ------- ------
Weighted average number of common share
and common share equivalents
outstanding 13,915 12,329 13,915 12,329
======= ======= ======= =======
Primary earnings (loss) per common share $ (.10) $ (.01) $ (.22) $ .00
======== ======= ======== =======
FULLY DILUTED EARNINGS (LOSS)*
Net income (loss) $(1,391) $ (147) $(3,086) $ 11
======== ======= ======== =======
Weighted average number of common
shares outstanding 12,657 12,294 12,657 12,294
Weighted average number of common
shares to be issued 903 - 903 -
Incremental shares based on the treasury
stock method for stock options, using
the average market price (32) 223 (32) 223
------- ------- ------- -------
Weighted average number of common share
and common share equivalents
outstanding 13,528 12,517 13,528 12,517
======= ======= ======= =======
Fully diluted earnings (loss) per
common share $ (.10) $ (.01) $ (.22) $ .00
======== ======= ======= =======
</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% or is
anti-dilutive.
<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, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 2,590
<SECURITIES> 0
<RECEIVABLES> 29,089
<ALLOWANCES> 1,121
<INVENTORY> 3,488
<CURRENT-ASSETS> 18,505
<PP&E> 14,137
<DEPRECIATION> 2,932
<TOTAL-ASSETS> 52,134
<CURRENT-LIABILITIES> 6,646
<BONDS> 21,959
<COMMON> 0
0
129
<OTHER-SE> 26,110
<TOTAL-LIABILITY-AND-EQUITY> 52,134
<SALES> 11,757
<TOTAL-REVENUES> 18,520
<CGS> 3,173
<TOTAL-COSTS> 21,606
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 100
<INTEREST-EXPENSE> 4,138
<INCOME-PRETAX> (3,086)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,086)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,086)
<EPS-PRIMARY> (.22)
<EPS-DILUTED> (.22)
<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>
