<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q/A2
(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)
----------- ------------
<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)
<S> <C> <C>
Systemwide sales (Unaudited) $37,031 $36,658
======= =======
Revenues:
Net sales - Company stores $ 5,813 $ 5,455
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 8,888 8,925
----- -----
Costs and expenses:
Cost of sales 1,589 1,473
Selling expenses 3,489 3,452
General and Administrative expenses 3,386 3,344
Gain from managed stores (Note 10) (73) (4)
Interest expense 395 334
Amortization of debt discount 1,073 2,021
------- -------
Total Costs and Expenses 9,859 10,620
------- -------
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 14,189 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
---- ----
<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
---- ----
<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 11:
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
11).
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 - Company-Managed Stores
In the fourth quarter of 1998, the Company, as required, adopted the
provisions of Emerging Issues Task Force Issue 97-2 ("EITF 97-2"), "Application
of FASB Statement No. 94 and APB Opinion No. 16 to Physician Practice Management
Entities and Certain Other Entities with Contractual Management Arrangements."
As of March 31, 1998, the Company managed a total of 12 locations for
franchisees under the terms of management agreements. Such agreements generally
provide for the operations of the location to be run by the Company, with
primarily all operating decisions made by Company employees. The Company owns
the inventory at the locations and is generally responsible for the collection
of all revenues, and the payment of expenses.
In connection with the adoption of EITF 97-2, the Company is restating
the financial statements contained in this Quarterly Report on Form 10-Q/A2 for
the three month period ended March 31, 1998; in addition, the Company has
deconsolidated the results of operations of certain franchise locations operated
by the Company under management agreements to conform to the provisions of EITF
97-2. Such restatement had the effect of reducing net sales by approximately
$1,126,000 and $549,000 and total expenses by approximately $1,053,000 and
$545,000 for the three month periods ended March 31, 1998 and 1997,
respectively. The net result of such operations is classified as gain from
stores operated under management agreements in the accompanying consolidated
statement of operations. Such restatement had no impact on the net loss or net
loss per share for either period.
NOTE 11 - 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 Sterling
Stores in operation, consisting of 45 Company-owned (including 6 stores being
managed by Franchisees), 263 franchised stores including 12 stores being managed
by the Company on behalf of the Franchise/owners thereof as of March 31, 1998,
as compared to 309 Sterling Stores in operation, consisting of 53 Company-owned
(including 6 stores being managed by Franchisees), 256 franchised stores
including 6 stores being managed by the Company on behalf of the
Franchise/owners thereof as of March 31, 1997. 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. Systemwide 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 $78,000, or .3%, to $30,481,000 for the three
months ended March 31, 1998, as compared to $30,403,000 for the same period in
1997. There were 276 stores that operated as either a Company-owned, a
Company-managed 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 $358,000, or 6.6%, to $5,813,000 for the three months ended March
31, 1998, as compared to $5,455,000 for the same period in 1997. This increase
was principally due to an increase of approximately $350,000 in the Insight
Laser sales for the three months ended March 31, 1998, over the comparable
period in 1997. 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
-14-
<PAGE>
March 31, 1998 and 1997, decreased by $(22,000), or .5%, to $4,279,000 for the
three months ended March 31, 1998, as compared to $4,301,000 for the comparable
period in 1997.
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 approximately $37,000, or 1.1%, to
$3,489,000 for the three months ended March 31, 1998, as compared to $3,452,000
for 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.
Gain from Company-managed stores increased $69,000 to $73,000 for the
three month period ended March 31, 1998, from $4,000 for the comparable period
in 1997. This increase is principally due to an increase in the number of
Company-managed stores for the three month period ended March 31, 1998, from the
comparable period in 1997.
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
-15-
<PAGE>
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 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: May 13, 1999
-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.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 717
<SECURITIES> 0
<RECEIVABLES> 29,022
<ALLOWANCES> 1,166
<INVENTORY> 3,273
<CURRENT-ASSETS> 18,198
<PP&E> 14,338
<DEPRECIATION> 4,724
<TOTAL-ASSETS> 46,953
<CURRENT-LIABILITIES> 12,338
<BONDS> 11,666
0
0
<COMMON> 143
<OTHER-SE> 23,867
<TOTAL-LIABILITY-AND-EQUITY> 46,953
<SALES> 5,813
<TOTAL-REVENUES> 8,888
<CGS> 1,589
<TOTAL-COSTS> 9,859
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 90
<INTEREST-EXPENSE> 1,468
<INCOME-PRETAX> (971)
<INCOME-TAX> 0
<INCOME-CONTINUING> (971)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (971)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> (.07)
<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>
