<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 March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------- ----------
Commission file number: 1-14128
STERLING VISION, INC.
----------------------------------------------------
(Exact name of Registrant as specified in its Charter)
New York 11-3096941
---------------------- ------------------------------
(State of Incorporation) (IRS Employer Identification No.)
1500 Hempstead Turnpike
East Meadow, New York 11554
----------------------------------------------------------
(Address of Principal Executive Offices, including Zip Code)
(516) 390-2100
--------------------------------------------------
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the Registrant has filed all
documents and reports required to be filed by Section 12, 13 or 15(d) of
the Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court.
Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS:
There were 14,714,857 shares outstanding of the Registrant's
Common Stock, par value $.01 per share, as of May 14, 1998.
<PAGE>
Item 1. Financial Statements
STERLING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars In Thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
(Unaudited)
(As Restated - See Note 6)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 717 $ 334
Accounts receivable - net of allowance for
doubtful accounts of $604 and $514, respectively 10,247 8,446
Franchise and other notes receivable - current 3,270 3,301
Inventories 3,273 3,310
Due from related parties - current 104 110
Prepaid expenses and other current assets 587 516
-------- --------
Total Current Assets $ 18,198 $ 16,017
Property and equipment - net of accumulated depreciation 9,614 9,903
Franchise and other notes receivable - net of allowance
for doubtful accounts of $562 14,235 14,884
Excess of cost over fair value of assets acquired 3,120 3,272
Restricted cash 550 550
Other noncurrent assets 1,236 1,217
-------- -------
Total Assets $ 46,953 $ 45,843
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 2,477 $ 3,477
Convertible debentures due August 25, 1998 - 1,652
Convertible debentures due February 17, 1999 2,658 -
Accounts payable and accrued liabilities 6,445 6,579
Franchise related obligations - current 758 837
-------- -------
Total Current Liabilities $ 12,338 $ 12,545
Long term debt 9,189 10,249
Deferred franchise income 93 96
Excess of fair value of assets acquired over cost 1,275 1,362
Lease terminations costs 191 320
Commitments and contingencies (Note 7)
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; 14,322,857
and 13,927,227 issued and outstanding,
respectively 143 139
Additional paid-in capital 44,406 40,843
(Deficit) (20,682) (19,711)
-------- --------
Total Shareholders' Equity 23,867 21,271
------ ------
Total Liabilities and Shareholders' Equity $ 46,953 $ 45,843
======== ========
</TABLE>
See accompanying notes to Consolidated Condensed Financial Statements.
-2-
<PAGE>
STERLING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
1998 1997
(As Restated - See Note 6)
<S> <C> <C>
Systemwide sales (Unaudited) $37,031 $36,658
======== =========
Revenues:
Net sales - Company stores $ 6,939 $ 6,004
Franchise royalties 2,385 2,113
Net gains and fees from the conveyance of
Company-owned assets to franchisees 135 810
Other income 555 547
-------- --------
Total Revenues 10,014 9,474
-------- --------
Costs and expenses:
Cost of sales 1,894 1,621
Selling expenses 4,237 3,849
General and Administrative expenses 3,386 3,344
Interest expense 395 334
Amortization of debt discount 1,073 2,021
------- ---------
Total Costs and Expenses 10,985 11,169
------- ---------
Loss before provision for income taxes $ (971) $ (1,695)
Provision for income taxes - -
-------- ---------
Net (loss) $ (971) $ (1,695)
======== =========
Weighted average number of common shares outstanding 14,318 13,239
========= =========
Basic (loss) per common share (Note 4) $ (.07) $ (.13)
========= =========
</TABLE>
See accompanying notes to Consolidated Condensed Financial Statements.
-3-
<PAGE>
STERLING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
1998 1997
(As Restated - See Note 6)
<S> <C> <C>
Cash flow from operating activities:
Net (loss) $ (971) $ (1,695)
Adjustments to reconcile net (loss) to net cash provided
by operating activities:
Depreciation and amortization 572 408
Amortization of debt discount 1,073 2,001
Allowance for doubtful accounts 90 91
Net gain from the conveyance of Company-owned
assets to franchisees (75) (700)
Accrued interest 22 21
Accretion of fair value of assets acquired over cost (87) (97)
Changes in assets and liabilities:
Accounts receivable (1,890) (825)
Inventories 38 240
Prepaid expenses and other current assets (71) (63)
Other assets (42) 21
Accounts payable and accrued liabilities (134) (2,785)
Franchise related obligations (80) (149)
Deferred franchise income (3) (100)
Lease termination costs (129) -
--------- ----------
Net cash (used in) operating activities $ (1,687) $ (3,632)
--------- ----------
Cash flows from investing activities:
Franchise notes receivable issued (22) (982)
Repayment of franchise notes receivable 708 502
Purchase of property and equipment (182) (205)
Conveyance of property and equipment 148 1,041
--- -----
Net cash provided by investing activities $ 652 $ 356
---------- ----------
</TABLE>
See accompanying notes to Consolidated Condensed Financial Statements.
-4-
<PAGE>
STERLING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS -- Cont'd.
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
1998 1997
---- ----
(As Restated - See Note 6)
<S> <C> <C>
Cash flows from financing activities:
Repayment of term loans - (498)
Repayment of revolving credit note - (1,000)
Payments on other debt (2,082) (1,224)
Issuance of Convertible Debentures 3,500 7,540
Net cash provided by financing activities 1,418 4,818
Net increase (decrease) in cash and cash equivalents 383 1,542
Cash and cash equivalents - beginning of year 334 868
-------- --------
Cash and cash equivalents - end of period $ 717 $ 2,410
======== ========
Supplemental disclosure of cash flow information: Cash paid during
the period for:
Interest $ 331 $ 334
Income taxes $ 0 $ 43
========= ==========
</TABLE>
See accompanying notes to Consolidated Condensed Financial Statements.
-5-
<PAGE>
STERLING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(Unaudited)
(In Thousands, Except Number of Shares)
<TABLE>
<CAPTION>
Additional Retained Total
Common Stock Paid-In Earnings Shareholders'
Shares Amount Capital (Deficit) Equity
<S> <C> <C> <C> <C> <C>
Balance - December 31, 1997 13,927,227 $139 $40,843 $(19,711) $21,271
========== ===== ======= ========= ========
Issuance of shares upon
conversion of 1997 debentures 395,630 4 1,648 - 1,652
Debt discount for the intrinsic
value of the 1998 Debentures
and fair value of Warrants - - 1,915 - 1,915
Net loss - - - (971) (971)
---------- ----- ------- --------- --------
Balance - March 31, 1998 14,322,857 $143 $44,406 $(20,682) $23,867
========== ===== ======= ========= ========
</TABLE>
See accompanying notes to Consolidated Condensed Financial Statement.
-6-
<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, 1997. There
have been no changes in significant accounting policies since December
31, 1997.
NOTE 2
On February 26, 1997, the Company entered into Convertible
Debentures and Warrants Subscription Agreements with certain investors in
connection with the private placement (the "Private Placement") of units
(collectively, the "Units") consisting of an aggregate of $8,000,000
principal amount of Convertible Debentures (collectively, the
"Debentures") and an aggregate of 800,000 warrants (collectively, the
"Warrants"), each Warrant entitling the holder thereof to purchase one
share of Common Stock at a price to be determined in accordance with a
specified formula and, for each two Warrants exercised within a specified
period of time, an additional warrant (collectively, the "Bonus
Warrants") to purchase one additional share of the Common Stock at a
price of $7.50 per share. The Company used the net proceeds
(approximately $7,500,000) of the Private Placement to: (i) repay a
portion of the loans made to it by certain principal shareholders of the
Company ($1,000,000, together with interest thereon, in the approximate
amount of $50,000); and (ii) pay down the Company's revolving line of
credit ($1,000,000) with The Chase Manhattan Bank (the "Bank"). (See Note
10: Subsequent Events).
The Debentures bear no interest and mature on August 25, 1998.
Except for $400,000 principal amount of the Debentures which were
redeemed by the Company, prior to March 31, 1998 all of the Debentures
were converted by the holders thereof into registered shares of the
Company's Common Stock at a price per share (the "Conversion Price")
equal to the lesser of $6.50 or 85% of the average closing bid price of
the Common Stock as reported on the Nasdaq National Market System
("Nasdaq") for the five trading days immediately preceding the date of
conversion (See Note 5).
The Warrants entitle the holders thereof to purchase an aggregate
of 800,000 shares of Common Stock at an exercise price per share equal to
the lower of $6.50 or the average of the Conversion Price of any
Debentures converted, by the holder, prior to the date of exercise. The
Warrants are exercisable until February 26, 2000. If a holder of a
Warrant exercises a Warrant at any time during the 2-year period
following the effectiveness of the registration statement, such holder
will receive, for each two Warrants exercised within such time, an
additional Bonus Warrant entitling the holder thereof to purchase one
additional share of Common Stock at an exercise price of $7.50 per share,
which Bonus Warrants have a term of 3-years from the date of grant. (See
Notes 5 and 10).
NOTE 3
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
-7-
<PAGE>
the terms of a certain Agreement and Plan of Reorganization, dated
February 19, 1997 (the "Singer Agreement"), between the Company and the
owners (collectively, the "Shareholders") of all of the capital stock of
Singer. As of the closing, Singer was the: (i) operator of four retail
optical stores (collectively, the "Company Stores"); (ii) franchisor of
approximately an additional 27 other retail optical stores, all of which
are company operated and franchised stores located in the States of
Pennsylvania, Delaware, New Jersey, Virginia and the U.S. Virgin Islands;
and (iii) owner of a commercial building located in Philadelphia,
Pennsylvania.
The Singer Agreement provided for such Shareholders to convey all
of said capital stock to the Company, free and clear of any and all
claims, liens and/or encumbrances, in exchange for shares of the
Company's Common Stock, 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
Company file, with the Securities and Exchange Commission ("SEC"), a
registration statement seeking registration of the Common Stock issued to
the Shareholders, as discussed below; (iv) for the Shareholders being
restricted from selling a portion of their shares of said Common Stock,
all as more particularly set forth in the Singer Agreement; and (v) a
requirement that the Company, under certain circumstances, pay to the
Shareholders the difference between the market price of its Common Stock
(upon which the purchase price was calculated) and the selling price (net
of 50% of commissions) of any such shares sold by such Shareholders. This
transaction was accounted for as a purchase, effective April 1, 1997, in
accordance with Accounting Principle Board Pronouncements ("APB") 16 and
17, with allocations made based upon the estimated, fair market value of
the assets acquired. Franchise Agreements are being amortized over a
period of ten (10) years. The Company, pursuant to the terms of the
Singer Agreement, paid to the Shareholders approximately $143,000, which
represented the difference between the market price of its Common Stock
(upon which the purchase price for the capital stock of Singer was
calculated) and the selling price (net of 50% of commissions) generated
from their sale of approximately 100,000 shares of the Company's Common
Stock.
On April 21, 1997, the Company entered in to a Note Amendment and
Conversion Agreement (the "BEC Agreement") with BEC Group, Inc. ("BEC"),
the holder of two promissory notes (each having a term of 25 months and
in the original principal amount 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) is
afforded the right to prepay the principal balance of (but not accrued
interest on) each of said promissory notes in registered shares of its
Common Stock; and was required to pay the difference between market price
of its Common Stock (upon which the number of shares to be used to BEC
was calculated) and the selling price of any such shares sold by BEC.
On May 9, 1997, the Company filed, with the SEC, a registration
statement on Form S-3 seeking registration, under the Securities Act of
1933, as amended (the "Act"), of an aggregate of 3,213,464 shares of its
Common Stock, as follows: (i) 2,477,506 shares 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, 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 Company's
initial public offering.
-8-
<PAGE>
NOTE 4
Effective December 31, 1997, the Company adopted SFAS No. 128,
"Earnings Per Share." Basic net income (loss) per common share ("Basic
EPS") is computed by dividing net income (loss) by the weighted average
number of common shares outstanding. Diluted net income (loss) per common
share ("Diluted EPS") is computed by dividing net income (loss) by the
weighted average number of common shares, dilutive common share
equivalents and convertible securities then outstanding. SFAS No. 128
requires the presentation of both Basic EPS and Diluted EPS on the face
of the Company's Consolidated Statements of Operation. No information is
presented for Diluted EPS, as the effect of the inclusion of convertible
securities would be anti-dilutive.
NOTE 5
At the March 13, 1997 meeting of the Emerging Issues Task Force,
the staff of the SEC issued an announcement regarding accounting for the
issuance of convertible debt securities. The announcement dealt with,
among other things, the belief, by the SEC, that any beneficial
conversion features on future conversions of debt securities increase the
effective interest rate of the securities and should, therefore, be
reflected as a charge to earnings. During the quarter ended March 31,
1997, the Company issued the Units consisting of $8 million principal
amount of the Debentures, together with the Warrants and Bonus Warrants.
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 $2,021,000, out
of a total debt discount, with respect to all of the Debentures, of
$5,916,000, which was credited to the Company's paid-in-capital
(Shareholders' Equity) over the period of time that the holders thereof
actually converted the same to Common Stock. The non-cash portion of the
discount was $5,436,000. Accordingly, as of March 31, 1998 such discount
had no effect on the Company's Shareholders' Equity. This amount
represented: (i) the intrinsic value of the beneficial conversion feature
which is inherent in the conversion terms of the Debentures; (ii) the
fair value of the Warrants (with an assumed exercise price of $6.50), and
Bonus Warrants (with an assumed exercise price of $7.50) issued as part
of the Units; and (iii) the issuance costs 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 approximately $500,000, because the Company believed that 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.
NOTE 6
In February 1998, the Company entered into Convertible Debentures
and Warrants Subscription Agreements with certain investors in connection
with the private placement of units consisting of an aggregate of $3.5
million principal amount of convertible debentures (as amended on March
25, 1998, collectively, the "1998 Debentures") and an aggregate of
700,000 warrants (collectively, the "1998 Warrants"), which 1998 Warrants
entitled the holders thereof to purchase up to 700,000 shares of the
Company's Common Stock at a price of $5.00 per share. The Company used
the net proceeds (approximately $3.3 million) of the private placement:
(i) to repay certain loans previously made to it ($1,700,000), together
with interest thereon; and (ii) the balance for general corporate
purposes.
-9-
<PAGE>
Subsequent to the date of the Company's issuance and sale of the
1998 Debentures and 1998 Warrants, the Company and the Holders thereof
(collectively, the "Original Holders") determined that the issuance and
sale of such 1998 Debentures and 1998 Warrants should be rescinded based
upon a certain mutual mistake of the Company and the Original Holders.
Accordingly, on April 14, 1998, the Company and the Original Holders
entered into an Exchange Agreement, effective as of February 17, 1998,
pursuant to which the 1998 Debentures were rescinded and declared null
and void from inception, and were exchanged for $3.5 million Stated Value
of a series of the Company's Preferred Stock, par value $.01 per share
(the "Stock"), and the 1998 Warrants were exchanged for new warrants (the
"New Warrants"), entitling Holders thereof to purchase up to 700,000
shares of Common Stock at a price of $5.00 per share until February 17,
2001.
The Stock: (i) requires the Company to pay quarterly dividends
thereon, commencing May 17, 1998, calculated at the rate of ten (10%)
percent per annum; (ii) permits the Company to pay such dividends in
registered shares of its Common Stock; (iii) permits the holders thereof,
at any time prior to redemption by the Company, to convert all or a
portion of the same into shares of Common Stock based upon a conversion
price of $5.00: (iv) requires the Company to redeem, in either cash or
registered shares of its Common Stock, at the Company's option, all (but
not less than all) of the Stock (at 105% of the then, outstanding Stated
Value thereof, based upon the conversion price of $5.00; hereinafter the
"Redemption Amount") at any time from and after February 17, 1999 that a
registration statement (pursuant to which the Common Stock (into which
the Stock may be converted) has been registered) is effective; (v)
permits the Company to redeem all (but not less than all) of the Stock,
in cash and at the Redemption Amount, at any time from and after February
17, 1999; and (vi) provides that from and after February 18, 1999, the
Company will be required to pay dividends thereon, until the same are
redeemed by the Company, at the rate of twenty-four (24%) percent per
annum.
After the Exchange Agreement was entered into, management
determined that it was in the Company's best interest to select another
firm of independent public accountants as the auditors of the Company. In
response to the Company's change in auditors, the SEC reviewed and
discussed the exchange transaction with the Company. As a result of these
discussions, the Company determined that the issuance and sale, in
February, 1998, of the 1998 Debentures and 1998 Warrants should be
treated separate and apart from the April, 1998 exchange of such
securities for the Stock and New Warrants. Therefore, the Company
determined that it should restate its March 31, 1998 Form 10-Q.
As a result of the foregoing, the Company has recorded, in the
accompanying financial statements, amortization of the debt discount of
$1,073,000. This amount represents the intrinsic value of the beneficial
conversion feature which is inherent in the conversion terms of the 1998
Debentures of approximately $963,000 related to the 1998 Debentures, and
approximately $110,000 of amortization related to the $952,000 of fair
value for the Warrants issued in connection with the 1998 Debentures. The
remaining portion of the discount, attributable to the Warrants, would
have been amortized over the life of the Debentures. The terms of the
Warrant allow for exercise at a price of $5.00 per share through the year
2001. The impact of such restatement on the Company's Consolidated
Condensed Statement of Operations and Consolidated Condensed Balance
Sheet is as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1998
As Originally
As Restated Reported
<S> <C> <C>
Net income (loss) $ (971,000) $ 166,000
=========== ============
Net income (loss) available to
common shareholders $ (971,000) $(2,303,000)
=========== ============
Weighted average number of
common shares outstanding 14,318,000 14,318,000
=========== ============
Earnings (loss) per common share
and common share equivalents $ (.07) $ (.16)
=========== ============
</TABLE>
-10-
<PAGE>
<TABLE>
<CAPTION>
March 31, 1998
As Originally
As Restated Reported
<S> <C> <C>
Convertible Debentures due February 17, 1999 $ 3,500,000 -
Total Shareholders' Equity $23,867,000 $26,369,000
</TABLE>
On April 14, 1998, the Company and Original Holders entered into
an Exchange Agreement pursuant to which the 1998 Debentures were
exchanged for $4,025,000, the fair value of the Company's Preferred
Stock, par value $.01 per share, (the "Preferred Stock") and the 1998
Warrants were exchanged for new warrants (the "Warrants"), entitling the
Holders thereof to purchase up to 700,000 shares of Common Stock at a
price of $5.00 per share (the "Conversion Price"), until February 17,
2001. Therefore, in the 1998 second quarter, the Company will recognize
an extraordinary loss of $805,000 which represents the unamortized
discount related to the 1998 Warrants.
NOTE 7 - Commitments and Contingencies
The Company is, from time to time, a party to litigation arising
in the ordinary course of business. In the opinion of management, there
are no significant claims outstanding that are likely to have a material
adverse effect upon the consolidated financial statements of the Company.
The Company leases locations for the majority of both its
operated and franchised stores. The Company holds the master lease on
substantially all franchised locations and, as part of the franchise
agreement, sublets the subject premises to the franchisee. Most master
leases 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.
In connection with the November, 1995 acquisition, by Sterling
Vision BOS, Inc., of substantially all of the assets of OCA Acquisition
Corp., Benson Optical Co., Inc. and Superior Optical Company, Inc., the
Company issued a non-negotiable, subordinated convertible debenture (the
"Benson Debenture"), in the principal amount of $5,900,000, subject to
reduction and payable, without interest, on September 15, 2015. The
Benson Debenture is subordinated to all existing and future indebtedness,
debts and obligations of the Company. The Company had a right of offset
against the principal amount of the Benson Debenture in the event the
Company did not retain at least 40 of the 98 Benson stores acquired by
the Company in the Benson Transaction, which right of offset was equal to
$147,000 for each store less than 40 that the Company retained. In
December 1995, the Company elected to assume the leases for 32 stores
and, consequently, was entitled to reduce the principal amount of the
Benson Debenture by the sum of $1,176,000, from $5,900,000 to $4,724,000.
The Benson Debenture is included in Long-Term Debt and is recorded at its
present value of $1,076,000 using an imputed internal interest rate of
8.5%.
On June 30, 1997, the Company entered into a loan agreement (the
"Loan Agreement") with STI Credit Corporation ("STI") that: (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 the Company's satisfaction of a required collateral
ratio with respect to such credit facility (less a facility fee equal to
two percent of the amount of the loan). Sixty-five (65%) percent of the
funded amount is to be repaid by the Company over a term of 60 months,
with a final balloon payment at the expiration of the sixty-first month
of the term of said loan. The Company granted to STI a first priority,
continuing security interest in a substantial portion of its franchise
notes and the proceeds related to such notes. A portion of the net
proceeds (approximately $6,100,000) of the loan was
-11-
<PAGE>
used to satisfy, pay and discharge, in full, all amounts then due by the
Company to: (i) the Bank ($5,035,000, together with accrued interest
thereon, in the approximate amount of $37,000); and (ii) certain
principal shareholders of the Company ($1,000,000, together with accrued
interest thereon, in the approximate amount of $9,000). As a result of
the foregoing: (i) the Bank's lien upon, and security interest in,
substantially all of the Company's assets (previously securing the Bank's
various loans to the Company) was discharged; and (ii) restrictions
previously imposed upon the Company (pursuant to the Company's Credit
Agreement with the Bank) are no longer applicable.
On October 9, 1997, STI amended the Loan Agreement and disbursed
a portion of the Additional Funds to the Company. As of March 31, 1998,
the outstanding principal balance of such loan was approximately
$8,026,000. Pursuant to the terms of the Loan Agreement, the Company must
comply with the following financial covenants: (i) the maintenance of
positive, annual net income for each of its calendar years; (ii) working
capital of not less than $2 million; (iii) shareholders' equity of not
less than $26 million; and (iv) from and after June 30, 1998, a
collateral ratio of 1.2 to 1.0. As of December 31, 1997, the Company was
not in compliance with the financial covenants described in clauses (i)
and (iii) above, although STI subsequently waived such non-compliance in
exchange for the Company's agreement to execute an amendment to the Loan
Agreement, which amended the Loan Agreement so as to: (i) waive the
Company's compliance with all of its financial covenants until December
31, 1998; (ii) reduced such shareholders' equity requirement to $25
million; (iii) provided for a prepayment penalty of $500,000; and (iv)
required the Company to pay certain fees to STI, in the aggregate amount
of $70,000.
As of March 31, 1998, the Company was the lessee of six excimer
lasers and ancillary equipment under capital leases expiring in various
years through 2001. The assets and liabilities under capital leases are
recorded at the lower of the present value of the minimum lease payments
or the fair value of the asset.
NOTE 8 - Recent Accounting Requirements
In the first quarter of 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income," which requires companies to report all
changes in equity during a period, except those relating from investment
by owners and distribution to owners, for the period in which they are
recognized. Comprehensive income is the total of net income and all other
nonowner changers in equity (or other comprehensive income) such as
unrealized gains/losses on securities classified as available-for-sale,
foreign currency translation adjustments and minimum pension liability
adjustments. Comprehensive and other comprehensive income must be
reported on the face of annual financial statements or in the case of
interim reporting, the footnote approach may be utilized. For the
quarters ended March 31, 1998 and 1997, the Company's operations did not
give rise to items includible in comprehensive income which were not
already included in net income. Accordingly, the Company's comprehensive
income is the same as its net income for all periods presented.
In June 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information." SFAS No. 131 requires the reporting of profit and
loss, specific revenue and expense items, and assets for reportable
segments. It also requires the reconciliation of total segment revenues,
total segment profit or loss, total segment assets, and other amounts
disclosed for segments, to the corresponding amounts in the general
purpose financial statements. SFAS No. 131 is effective for fiscal years
beginning after December 15, 1997. The Company's operations are presently
classified into two principal industry segments: (i) the retail optical
segment, whereby the Company owns and operates, as well as franchises a
retail chain of optical stores which offer eyecare products and services
such as prescription and non-prescription eyeglasses, eyeglass frames,
ophthalmic lenses, contact lenses, sunglasses and a broad range of
ancillary items; and (ii) the Insight Laser segment, whereby the Company
owns and operates a laser surgery center and provides access, for a fee,
to affiliated ophthalmologists who utilize Insight's excimer lasers in
offering PRK, a procedure performed with such lasers for the correction
of certain degrees of myopia. Management is presently evaluating the
impact on the Company's financial reporting from the adoption of this
statement.
-12-
<PAGE>
NOTE 9 - Impact of the Year 2000 Issue
The Year 2000 Issue is the result of potential problems with
computer systems and/or any equipment with computer chips that use dates,
where the date has been stored as just two digits (e.g. 97 for 1997). On
January 1, 2000, any clock or date recording mechanism (including date
sensitive software) which uses only two digits to represent the year, may
recognize a date using 00 as the year 1900, rather than the year 2000.
This could result in a system failure or miscalculations, causing
disruption of operations, as such systems may be unable to accurately
process certain date-based information.
The Company has reviewed the Year 2000 Issue with its Management
Information Systems's providers and consultants. The Company believes
that the Year 2000 Issue will not have a material impact on the
operations of the Company since its computer programs were written
utilizing four digits to define the applicable year. The Company,
however, cannot determine, as of the date hereof, the impact of the Year
2000 Issue on any of its vendors and/or franchisees, which might
materially impact the operations of the Company.
NOTE 10 - Subsequent Events
On May 1, 1998, certain of the holders of the Company's Warrants
exercised their right to acquire an aggregate of 392,000 registered
shares of the Company's Common Stock in exchange for the Company's
agreement to reduce the respective exercise prices thereof by 15%. The
proceeds of such exercise were utilized by the Company to acquire the
Ambulatory Surgery Center described below.
On May 6, 1998, the Company, through its wholly-owned
subsidiary, Insight Laser Centers N.Y. I, Inc., purchased substantially
all of the assets of an ambulatory surgery center located in Garden City,
New York (the "Center") and, in connection therewith: (i) settled its
legal action against the estate of the former owner of such Center; (ii)
entered into a long term lease of the premises in which such Center is
located; and (iii) entered into an agreement pursuant to which it will
manage the operations of the Center, on an interim basis, pending the
approval, from the New York State Department of Health, of the transfer
of the license and certificate of need therefor to an affiliate of the
Company.
-13-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
All statements contained herein (other than historical facts)
including, but not limited to, statements regarding the Company's future
development plans, the Company's ability to generate cash from its
operations, including the operations of the Registrant's subsidiary,
Insight Laser Centers, Inc. ("Insight"), and any losses related thereto,
are based upon current expectations. These statements are forward looking
in nature and involve a number of risks and uncertainties. Actual results
may differ from the anticipated results or other expectations expressed
in the Company's forward looking statements. Generally, the words
"anticipate", "believe", "estimate", "expects" and similar expressions,
as they relate to the Company and/or its management, are intended to
identify forward looking statements. Among the factors that could cause
actual results to differ materially are the following: the inability of
the Company to obtain a waiver from STI of its failure to comply with
certain covenants under its Loan Agreement; the inability of the Company
to enter into third party, managed care provider agreements on favorable
terms; the inability of the Company to obtain additional financing to
meet its capital needs; competition in the retail optical, managed care
and ambulatory surgery center industries; the ability of the Company to
acquire, at favorable prices, retail optical chains; the uncertainty of
the acceptance of PRK, a procedure being offered by the Company's
subsidiary, Insight, to correct the vision of individuals experiencing
certain degrees of myopia; the availability of new and better ophthalmic
laser technologies or other technologies that serve the same purpose as
PRK; the inability of the Company to finalize favorable agreements with
ophthalmologists to utilize the Company's excimer lasers to perform the
PRK procedure; competition in the PRK market; and general business and
economic conditions.
Results of Operations
For the Three Months Ended March 31, 1998 compared to March 31, 1997
Systemwide sales represent combined retail sales generated by
Company-owned and franchised stores, as well as revenues generated by
VisionCare of California ("VCC"), a specialized health care maintenance
organization licensed by the California Department of Corporations. There
were 308 and 309 Sterling Stores in operation as of March 31, 1998 and
March 31, 1997, respectively, of which 263 and 256, respectively, were
franchised. Such stores operate under various trade names 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. Systemize sales
increased by $373,000, or 1.0%, to $37,031,000 for the three months ended
March 31, 1998, as compared to $36,658,000 for the same period in 1997.
On a same store basis (for stores that operated as either a Company-owned
or franchised store during the entirety of both of the three month
periods ended March 31, 1998 and 1997), systemwide sales increased by
$142,000, or .5%, to $31,003,000 for the three months ended March 31,
1998, as compared to $30,861,000 for the same period in 1997. There were
276 stores that operated as either a Company-owned or franchised store
during the entirety of both of the three month periods ended March 31,
1998 and 1997.
Aggregate sales generated from the operation of Company-owned
stores increased by $935,000, or 15.6%, to $6,939,000 for the three
months ended March 31, 1998, as compared to $6,004,000 for the same
period in 1997. This increase was principally due to the Company's
agreements to manage, on behalf of the owners of seven (7) franchised
stores, the operations of such stores, which increase was offset, in
part, by the decrease in sales from the conveyance of Company-owned store
assets 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 three month periods ended
March 31, 1998 and 1997, increased by $71,000, or 1.5%, to $4,801,000 for
the three months ended March 31, 1998, as compared to $4,730,000 for the
comparable period in 1997.
-14-
<PAGE>
Aggregate sales generated from the operation of franchised
stores decreased by $562,000, or 1.8%, to $30,092,000 for the three
months ended March 31, 1998, as compared to $30,654,000 for the
comparable period in 1997. This decrease was principally due to the
Company's agreement to manage the operations of certain of its franchised
stores (as discussed above). On a same store basis, aggregate sales
generated by franchised stores in operation during the entirety of both
of the three month periods ended March 31, 1998 and 1997, increased by
$100,000, or .4%, to $26,202,000 for the three month period ended March
31, 1998, as compared to $26,102,000 for the comparable period in 1997.
Franchise royalties increased by $272,000, or 12.9% to
$2,385,000 for the three months ended March 31, 1998, as compared to
$2,113,000 for the same period in 1997. This increase is principally due
to an increase in the number of Company-owned stores conveyed to
franchisees and the acquisition of certain franchised stores acquired
from Singer.
Net gains and fees from the conveyance of Company-owned assets
to franchisees decreased by $675,000, or (83.3%), to $135,000 for the
three months ended March 31, 1998, as compared to $810,000 for the same
period in 1997. This decrease was principally due to the conveyance of
the assets of two Company-owned stores to franchisees for the three
months ended March 31, 1998, as compared to the conveyance of the assets
of six Company-owned stores to franchisees during the comparable period
in 1997. This decrease in gains and fees reflects a change in Company's
policy to focus on operational earnings.
The Company's gross profit margin was 73% for both of the three
months ended March 31, 1998 and March 31, 1997. In the future, the
Company's gross profit margin may fluctuate depending upon the extent and
timing of changes in the product mix in Company-owned stores, competition
and promotional incentives.
Selling expenses increased by 388,000, or 10.1%, to $4,237,00
for the three months ended March 31, 1998, as compared to $3,849,000 for
the comparable period in 1997. This increase was principally due to the
increase in the number of Company-owned and/or managed stores over the
comparable period in 1997.
General and administrative expenses (including interest expense)
increased $103,000, or 2.8%, to $3,781,000 for the three months ended
March 31, 1998, as compared to $3,678,000 for the comparable period in
1997. This increase was principally due to additional interest expense
and amortization of debt issuance costs of $64,000 related to the
issuance of the 1998 Debentures and an increase in depreciation and
amortization expense of approximately $208,000, to $615,000 for the three
months ended March 31, 1998, as compared to $407,000 for the same period
in 1997, which increase was offset, in part, by a decrease in payroll
costs related to the Company's reduction in administrative payroll.
The Company's income before taxes increased by $724,000 to a
loss of $(971,000) for the three months ended March 31, 1998, as compared
to a loss of $(1,695,000) for the comparable period in 1997. This
increase was principally due to a non-cash charge against earnings, for
the three months ended March 31, 1998, in the amount of approximately
$1,073,000, as a result of the Company's issuance and sale, in February
1998, of its 1998 Debentures (See Note 6), as compared to a non-cash
charge of $2,021,000 for the three months ended March 31, 1997. In
addition, for the three months ended March 31, 1998, income before taxes
reflected gains on the conveyance of Company-owned store assets to
franchisees of approximately $75,000, as compared to approximately
$700,000 for the comparable period in 1997.
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
-15-
<PAGE>
it by Drs. Robert, Alan and Edward Cohen, 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), with the balance of such proceeds being utilized by the
Company for general corporate purposes.
As of March 31, 1998 and December 31, 1997, the Company had
$5,860,000 and $3,472,000, respectively, in working capital, and $717,000
and $334,000, respectively, of cash and cash equivalents. During the
twelve months ended December 31, 1998, the Company anticipates having the
following capital requirements: renovating one existing Company-owned
store; the continuing upgrade of the Company's management information
system in conjunction with the software computer programs being installed
in its Company-owned stores, in the aggregate, approximate amount of
$250,000; and acquiring retail optical stores, subject to availability of
qualified opportunities, in furtherance of the Company's business
strategy, in amounts that cannot be projected by the Company at this
time.
The Company experienced negative cash flow from operations
during the three months ended March 31, 1998 resulting, primarily, from
an increase in accounts receivable. By the end of 1997, the following
measures were taken by the Company, which management believes will
reduce, in the future, the magnitude of the losses it sustained for the
calendar year ended December 31, 1997, as well as improve the Company's
operations and cash flow: (i) closed or did not renew the leases for ten
of its Company-owned stores; and (ii) reduced a substantial amount of
administrative overhead expenses. Although the Company, based, in part,
upon the anticipated financial impact of such measure taken by the
Company, believes that its financial condition will improve for the
twelve months ended December 31, 1998, there can be no assurance that its
financial condition will so improve. The Company was not in compliance
with certain of its existing financial covenants as contained in its Loan
Agreement with STI as of December 31, 1997, although the Company
subsequently received a waiver thereof. In the event the Company is not
in compliance with such covenants by the end of 1998, there can be no
assurance that it will be able to obtain a waiver thereof and, in such
event, STI will have the right to accelerate the payment of the then
outstanding principal amount then due under the Company's Loan Agreement
with STI. Accordingly, the Company believes that its current cash
resources and cash flow from operations would be sufficient to fund its
anticipated capital expenditures in 1998.
-16-
<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 Matters 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
27. Financial Data Schedule.
10.77 Waiver, dated April 14, 1998, to the Company's Loan
Agreement, dated June 30, 1997, as previously amended on
October 9, 1997 (Incorporated by reference to Exhibit
10.77 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997).
10.78 Form of Exchange Agreement, with Exhibits attached
thereto, entered into on April 14, 1998, effective as of
February 17, 1998, between the Company and the holders
of its Convertible Debentures Due February 17, 1999
(Incorporated by reference to Exhibit 10.78 to the
Company's Current Report on Form 8-K, dated April 14,
1998).
10.79 Contract of Sale, dated May 6, 1998, pursuant to which
Insight Laser Centers N.Y. I, Inc. purchased, from
Nassau Center for Ambulatory Surgery, Inc.,
substantially all of the non-medical assets of an
ambulatory surgery center located in Garden City, New
York. (Incorporated by reference to Exhibit 10.79 to the
Company's Current Report on Form 8-K, dated May 6,
1998).
10.80 Contract of Sale, dated May 6, 1998, pursuant to which
Insight AmSurg Centers, Inc. has agreed to purchase,
from Nassau Center for Ambulatory Surgery, Inc., the New
York State License and Certificate of Need for an
ambulatory surgery center located in Garden City, New
York (Incorporated by reference to Exhibit 10.80 to the
Company's Current Report on Form 8-K, dated May 6,
1998).
10.81 Form of Convertible Debentures and Warrants Subscription
Agreement, with Exhibits attached thereto, dated
February 17, 1998, representing the form of Debenture
and Warrant (Incorporated by reference to Exhibit 4.2 to
the Company's Current Report on Form 8-K, dated February
17, 1998).
10.82 Employment Agreement, dated as of March 2, 1998, between the
Company and William J. Young.
10.82 Letter from Deloitte & Touche LLP, dated May 12, 1998, in
response to the Company's Current Report on Form 8-K, dated May
1, 1998 (Incorporated by reference to Exhibit 16 to the
Company's Current Report on Form 8-K/A, dated May 13, 1998).
-17-
<PAGE>
B. Reports on Form 8-K
1. On February 17, 1998, the Company filed a Report on Form
8-K with respect to its issuance and sale of its
Convertible Debentures due February 17, 1999.
2. On April 14, 1998, the Company filed a Report on Form
8-K with respect to the exchange of its Convertible
Debentures due February 17, 1999, for shares of its
Senior Convertible Preferred Stock.
3. On May 1, 1998, the Company filed a Report on Form 8-K
with respect to its decision to replace its auditors for
the 1998 fiscal year.
4. On May 1, 1998, the Company filed a Report on Form 8-K
with respect to its acquisition of the assets of an
ambulatory surgery center located in Garden City, New
York.
5. On May 13, 1998, the Company filed a Report on Form
8-K/A with respect to Deloitte & Touche LLP's response
to the Company's Report on Form 8-K, dated May 1, 1998.
-18-
<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 hereunto duly authorized.
STERLING VISION, INC.
(Registrant)
BY: /s/William J. Young
-------------------
William J. Young
Chief Financial Officer/Treasurer
Dated: July 21, 1998
-19-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE COMPANY'S CONSOLIDATED CONDENSED FINANCIAL STATEMENTS FOR THE THREE
MONTHS ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
Amounts inapplicable or not disclosed as a seperate line on the Statement of
Financial Position or Results of Operations are reported at -0- herein. * Notes
and acounts recievable - trade are reported net of allowances for doubtful
account in the Statement of Financial Position.
</LEGEND>
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<CGS> 1,894
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