<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended June 30, 1999
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 15,179,130 shares outstanding of the Registrant's Common Stock,
par value $.01 per share, as of August 6, 1999.
<PAGE>
Item 1. Financial Statements
STERLING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars In Thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 850 $ 828
Accounts receivable - net of allowance for
doubtful accounts of $1,962 and $1,858, respectively 2,801 2,257
Other receivables 1,550 1,121
Franchise and other notes receivable 2,690 3,077
Inventories 2,248 2,268
Due from related parties 109 125
Prepaid expenses and other current assets 474 395
-------- --------
Total Current Assets 10,722 10,071
Property and equipment - net of accumulated depreciation 6,747 8,104
Franchise and other notes receivable - net of allowance
for doubtful accounts of $400 and $450, respectively 10,327 11,359
Excess of cost over fair value of assets acquired 3,558 3,735
Restricted cash 124 624
Other assets 580 601
-------- --------
Total Assets $ 32,058 $ 34,494
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 3,997 $ 4,130
Accounts payable and accrued liabilities 6,689 7,099
Accrual for store closings and lease termination costs 1,155 1,254
Franchise related obligations 947 939
-------- --------
Total Current Liabilities 12,788 13,422
Long-term debt 5,219 7,422
Deferred franchise income 77 90
Excess of fair value of assets acquired over cost 839 1,013
Commitments and contingencies (Note 5)
Shareholders' Equity:
Senior Convertible Preferred Stock, $.01 par value per share;
authorized 5,000,000 shares; 29 and 35 shares issued and
outstanding, respectively 3,277 4,025
Common stock, $.01 par value per share; authorized 28,000,000
shares; 15,118,524 and 14,920,351 issued and outstanding,
respectively 151 149
Additional paid-in capital 46,846 46,036
(Deficit) (37,139) (37,663)
-------- --------
Total Shareholders' Equity 13,135 12,547
-------- --------
Total Liabilities and Shareholders' Equity $ 32,058 $ 34,494
======== ========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
-2-
<PAGE>
STERLING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Systemwide sales $ 36,417 $ 38,996 $ 73,515 $ 76,328
======== ======== ======== ========
Revenues:
Net sales $ 5,984 $ 5,486 $ 12,232 $ 11,299
Franchise royalties 2,344 2,301 4,570 4,686
Net gains and fees from the conveyance of
Company-owned store assets to franchisees 155 32 564 167
Other income 410 671 873 1,226
-------- -------- -------- --------
Total Revenues 8,893 8,490 18,239 17,378
-------- -------- -------- --------
Costs and Expenses:
Cost of sales 1,748 1,265 3,548 3,031
Selling expenses 3,681 4,225 7,471 7,775
General and administrative expenses 2,795 5,596 5,664 8,744
Loss from managed stores 139 133 252 60
Interest expense 238 522 544 917
Amortization of debt discount -- 37 -- 1,110
-------- -------- -------- --------
Total Costs and Expenses 8,601 11,778 17,479 21,637
-------- -------- -------- --------
Income (Loss) before extraordinary item and
provision for income taxes 292 (3,288) 760 (4,259)
Extraordinary item - loss from early retirement of debt -- (805) -- (805)
-------- -------- -------- --------
Gain (Loss) before provision for income taxes 292 (4,093) 760 (5,064)
Provision for income taxes -- -- -- --
-------- -------- -------- --------
Net income (loss) $ 292 $ (4,093) $ 760 $ (5,064)
======== ======== ======== ========
Per share information (Note 4):
Net income (loss) per share:
Basic $ .02 $ (.28) $ .04 $ (.35)
-------- -------- -------- --------
Diluted $ (.06) $ (.28) $ (.06) $ (.35)
-------- -------- -------- --------
Shares used in computing net income (loss) per share:
Basic 15,119 14,571 15,089 14,382
------ ------ ------ ------
Diluted 16,377 14,571 16,231 14,382
------ ------ ------ ------
</TABLE>
See accompanying notes to Consolidated Financial Statements.
-3-
<PAGE>
STERLING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 760 $(5,064)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,285 1,215
Amortization of debt discount -- 1,915
Allowance for doubtful accounts 379 1,906
Net gain from the conveyance of Company-owned store
assets to franchisees (391) (102)
Accrued interest 36 36
Accretion of fair value of assets acquired over cost (174) (145)
Changes in assets and liabilities:
Accounts receivable (960) (2,244)
Inventories 20 (56)
Prepaid expenses and other current assets (62) 154
Other assets (24) 36
Accounts payable and accrued liabilities (412) 1,188
Franchise related obligations 9 13
Deferred franchise income (13) (6)
Accrual for store closings and lease termination costs (99) (261)
------- -------
Net cash provided by (used in) operating activities 354 (1,415)
------- -------
Cash flows from investing activities:
Acquisition net of cash acquired -- (1,598)
Franchise notes receivable issued (1,015) (379)
Proceeds from repayment of franchise notes receivable 2,338 1,443
Purchase of property and equipment (492) (465)
Conveyance of property and equipment 881 173
------- -------
Net cash provided by (used in) investing activities $ 1,712 $ (826)
------- -------
</TABLE>
See accompanying notes to Consolidated Financial Statements.
-4-
<PAGE>
STERLING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- Cont'd.
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
1999 1998
---- ----
<S> <C> <C>
Cash flows from financing activities:
Payment of Price Protection Guarantee $ (172) $ --
Repayment of borrowings under STI Loan Agreement (1,310) (1,407)
Repayment of other debt (623) (1,499)
Sale of common stock and other capital contributions -- 2,077
Issuance of 1998 Debentures -- 3,500
Borrowings under additional loan agreements 61 --
------- -------
Net cash (used in) provided by financing activities (2,044) 2,671
Net increase in cash and cash equivalents 22 430
Cash and cash equivalents - beginning of period 828 334
------- -------
Cash and cash equivalents - end of period $ 850 $ 764
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 386 $ 945
======= =======
Acquisition, net of cash acquired:
Working capital, other than cash $ -- $ (314)
Property and equipment -- 160
Other assets -- 31
Excess of cost over fair value of assets acquired -- 1,721
------- -------
Acquisition, net of cash acquired $ -- $ 1,598
======= =======
</TABLE>
See accompanying notes to Consolidated Financial Statements.
-5-
<PAGE>
STERLING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(Unaudited)
(In Thousands, Except Number of Shares)
<TABLE>
<CAPTION>
Senior Convertible Additional Total
Preferred Stock Common Stock Paid-In Shareholders'
Shares Amount Shares Amount Capital (Deficit) Equity
------ ------ ------ ------ ------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1998 35 $ 4,025 14,920,351 $ 149 $ 46,036 $ (37,663) $ 12,547
Issuance of common shares upon
conversion of Senior Convertible
Preferred Stock (6) (748) 175,000 2 899 (153) --
Stock dividend on Senior Convertible
Preferred Stock -- -- 22,506 -- 83 (83) --
Reduction related to Price Protection
Guarantee -- -- -- -- (99) -- (99)
Issuance of common shares to
franchisees -- -- 667 -- -- -- --
Net income -- -- -- -- -- 468 468
-- ---------- ---------- ---------- ---------- ---------- -----------
Balance - March 31, 1999 29 $ 3,277 15,118,524 $ 151 $ 46,919 $ (37,431) $ 12,916
== ========== ========== ========== ========== ========== ==========
Reduction related to Price Protection
Guarantee -- -- -- -- (73) -- (73)
Net income -- -- -- -- -- 292 292
-- ---------- ---------- ---------- ---------- ---------- -----------
Balance - June 30, 1999 29 $ 3,277 15,118,524 $ 151 $ 46,846 $ (37,139) $ 13,135
== ========== ========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
-6-
<PAGE>
STERLING VISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1
The accompanying Consolidated 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 Financial Statements and Notes
thereto included in the Registrant's Annual Report on Form 10-K for the Year
Ended December 31, 1998. There have been no changes in significant accounting
policies since December 31, 1998.
NOTE 2 - Convertible Debentures
1997 Debentures
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 the Company's
Debentures due August, 1998, (collectively, the "Debentures") and an aggregate
of 800,000 warrants (collectively, the "Warrants"). Each Warrant, exercisable
until February 26, 2000, entitles the holder to purchase one share of the
Company's Common Stock at an average exercise price per share of $5.16. For
every two Warrants exercised during the 2-year period ending May 30, 1999, a
holder would receive an additional warrant (collectively, the "Bonus Warrants")
to purchase one additional share of Common Stock at a price of $7.50 per share.
Bonus Warrants would have a term of 3 years from the date of grant.
The Debentures were convertible at a price per share (the "Conversion
Price") equal to the lesser of $6.50 or 85% of the average closing bid price of
the Common Stock, as reported on the Nasdaq National Market System, for the 5
trading days immediately preceding the date of conversion. The Company did,
however, have the right to redeem any Debentures requested to be converted, in
the event the Conversion Price was $6.00 or less. In such event, the redemption
price would have been equal to 115% of the face amount of that portion of the
Debentures requested to be converted. As of June 30, 1999, all of the Debentures
had been converted by the holders thereof.
As of June 30, 1999, 250,000 and 275,000 Warrants and Bonus Warrants,
respectively, remained outstanding.
1998 Debentures/Convertible Preferred Stock
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 $3,500,000 principal
amount of convertible debentures due February, 1999 (collectively, the "1998
Debentures") and an aggregate of 700,000 warrants (collectively, the "1998
Warrants"). The 1998 Warrants initially 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
through the year 2001.
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 the 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, whereby the 1998 Debentures were rescinded
and declared null and void from inception, and were exchanged for $3,500,000
stated value ($4,025,000 fair value) of a series of the Company's
-7-
<PAGE>
Preferred Stock, par value $.01 per share (the "Senior Convertible Preferred
Stock"), and the 1998 Warrants were exchanged for new warrants (the "New
Warrants") entitling the Original Holders to purchase, until February 17, 2001,
to the extent the Company did not redeem the Senior Convertible Preferred Stock
on February 17, 1999, up to 700,000 shares of Common Stock at a price of $5.00
per share.
The Senior Convertible Preferred Stock originally required the Company to
pay quarterly dividends (in cash or Common Stock) calculated at a rate of 10%
per annum, commencing May 17, 1998. Additionally, the Company, from and after
February 17, 1999, was required to redeem (in cash or Common Stock) all of the
Senior Convertible Preferred Stock at 105% of the then outstanding stated value,
based on a conversion price of $5.00. Thereafter, the Company would be required
to pay dividends thereon, calculated at the rate of 24% per annum. Finally, the
Senior Convertible Preferred Stock contained a price-protection guarantee
provision, whereby the Company, under certain circumstances, would be required
to pay to the holders, the difference between the $5.00 conversion price and the
selling price (net of commissions) of any such shares sold by the holders.
As a result of the foregoing, the Company recorded amortization of debt
discount of $1,073,000 in the first quarter of 1998. This amount represented the
intrinsic value of the beneficial conversion feature, which was inherent in the
conversion terms of the 1998 Debentures (approximately $963,000), and $110,000
of amortization related to the fair value of the 1998 Warrants issued in
connection with the 1998 Debentures. The remaining portion of the discount,
attributable to the 1998 Warrants would have been amortized over the life of the
1998 Debentures; however, due to the issuance of the Senior Convertible
Preferred Stock and the resulting extinguishment of such 1998 Debentures, that
portion of the discount, $805,000, was recorded as loss from early
extinguishment of debt on the Consolidated Statement of Operations in 1998.
On August 18, 1998 and November 19, 1998, the Company issued 19,550 and
27,944 registered shares of its Common Stock, respectively, in payment of the
required dividends on the Senior Convertible Preferred Stock.
On January 4, 1999, the Company and the holders of its Senior Convertible
Preferred Stock entered into an Amendment Agreement to reduce the conversion
price, from $5.00 to $4.00, of all shares of Senior Convertible Preferred Stock
converted into Common Stock on or prior to February 10, 1999, and to eliminate
the Price Protection Guarantee provision contained in the original Agreement.
On March 4, 1999, effective as of February 11, 1999, the Company and each
of the then, four remaining holders of the Senior Convertible Preferred Stock
entered into another amendment to the original agreement, whereby: (i) the
conversion price of all outstanding shares of Senior Convertible Preferred Stock
was reduced from $5.00 to $3.00; (ii) extended the date by which the Company is
required to redeem all outstanding Senior Convertible Preferred Stock was
extended, from February 17, 1999 to February 17, 2000; (iii) the requirement for
the Company to pay dividends on the Senior Convertible Preferred Stock from and
after February 17, 1999, was eliminated; and (iv) the exercise price of the
outstanding 1998 Warrants was reduced from $5.00 to $4.00.
On January 13, 1999 and March 26, 1999, certain holders of the Company's
Senior Convertible Preferred Stock exercised their right to convert an aggregate
of $650,000 stated value of Senior Convertible Preferred Stock, into an
aggregate of 175,000 registered shares of the Company's Common Stock.
NOTE 3 - Singer Transaction
On April 1, 1997, the Company acquired all of the issued and outstanding
shares of the capital stock of Singer Specs, Inc., a Delaware corporation, and
certain of its wholly-owned subsidiaries (collectively, "Singer") pursuant to
the terms of a certain Agreement and Plan of Reorganization, dated February 19,
1997 (the "Singer Agreement"), between the Company and the owners (collectively,
the "Shareholders") of all of the capital stock of Singer; and, in April 1998,
Singer Specs, Inc. was merged with and into the Registrant. As of the date of
such acquisition, Singer was the operator of 4 retail optical stores, each of
which were simultaneously franchised to corporations owned by the Shareholders,
the franchisor of an additional 27 retail optical stores, all of which were
located in the States of Pennsylvania, Delaware, New Jersey, Virginia and the
U.S. Virgin Islands, and the owner of a commercial building
-8-
<PAGE>
located in Philadelphia, Pennsylvania, which was sold by the Company in December
1998.
The Singer Agreement provided for the Shareholders to convey all of their
capital stock to the Company in exchange for shares of the Company's Common
Stock. In addition, the Shareholders pledged all their shares of the Company's
Common Stock to secure their obligations under the Singer Agreement, with
certain restrictions as to when the Shareholders could sell certain portions of
their Common Stock.
The Singer Agreement also required that the Company, under certain
circumstances, to pay to the Shareholders the difference between the market
price of the Company's Common Stock as of April 1, 1997, and the selling price
(net of 50% of commissions) of any such shares of Common Stock subsequently sold
by the Shareholders (the "Price Protection Guarantee").
On July 31, 1998, the Company and the Shareholders entered into a
Settlement Agreement, whereby the Company released to the Shareholders' all of
the remaining shares of Common Stock originally pledged to the Company.
Additionally, the parties agreed to reduce the Price Protection Guarantee from
$8.05 to $6.60, the Shareholders agreed to pay the Company the first $300,000 of
net proceeds realized by them in connection with their future sale of the
Company's Common Stock above the Price Protection Guarantee, and the Company
agreed to accelerate the time periods within which the Shareholders could sell
their remaining shares of Common Stock.
During 1998, the Company, pursuant to the settlement agreement, paid the
Shareholders approximately $285,000 in connection with the Price Protection
Guarantee and their sale of approximately 80,000 shares of the Company's Common
Stock.
For the six months ended June 30, 1999, the Company paid the Shareholders
approximately $172,000, pursuant to the Price Protection Guarantee in connection
with their sale of approximately 60,000 shares of the Company's Common Stock.
There were no sales of shares for the comparable period in 1998.
-9-
<PAGE>
NOTE 4 - Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Income available to common shareholders:
Net income (loss) $ 292,000 $ (4,093,000) $ 760,000 $ (5,064,000)
Dividends on Senior Convertible
Preferred Stock -- * (83,000) *
Effect of the induced conversion of
Senior Convertible Preferred Stock -- * (153,000) *
------------ ------------ ------------ ------------
Income available to common shareholders -
basic earnings (loss) per share 292,000 (4,093,000) 524,000 (5,064,000)
Effect of dilutive securities:
Dividends on Senior
Convertible Preferred Stock -- * 83,000 *
Effect of the assumed conversion of
Senior Convertible Preferred Stock (1,235,000) * (1,568,000) *
------------ ------------ ------------ ------------
Income available to common shareholders -
diluted (loss) per share $ (943,000) $ (4,093,000) $ (961,000) $ (5,064,000)
============ ============ ============ ============
Weighted average shares outstanding:
Weighted average shares outstanding - basic
earnings (loss) per share 15,119,000 14,571,000 15,089,000 14,382,000
Effect of dilutive securities:
Options and warrants 308,000 * 192,000 *
Effect of assumed conversion of Senior
Convertible Preferred Stock 950,000 * 950,000 *
------------ ------------ ------------ ------------
Dilutive potential common shares 1,258,000 -- 1,142,000 --
Weighted average shares outstanding -
diluted (loss) per share 16,377,000 14,571,000 16,231,000 14,382,000
========== ========== ========== ==========
Basic earnings (loss) per share $ .02 $ (.28) $ .04 $ (.35)
============ ============ ============ ============
Diluted (loss) per share $ (.06) $ (.28) $ (.06) $ (.35)
============ ============ ============ ============
</TABLE>
* In 1998, the impact of the inclusion of convertible securities would have
been antidilutive.
NOTE 5 - 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.
-10-
<PAGE>
The Company leases locations for the majority of both its Company-owned and
franchised stores. The Company holds the master lease on substantially all
franchised locations and, as part of the franchise agreement, sublets the
related premises to the franchisee. Most master leases require the payment of
additional rent in the form of common area maintenance charges, real estate
taxes and other items, as well as percentage rent based upon the store in
question exceeding certain established sales volume. As required by SFAS 13
"Accounting for Leases," the Company amortizes its rent expense on a
straight-line basis over the respective lives of the related leases.
As of June 30, 1999, the Company held leases for six excimer lasers and
ancillary equipment expiring through 2001 (see Note 9). 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 assets.
NOTE 6 - 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."
In connection with the adoption of EITF 97-2, the Company, as required,
deconsolidated the results of operations pertaining to those franchised stores
being operated by the Company under management agreements. In connection with
the adoption of EITF 97-2, the Company restated its Quarterly Report on Form
10-Q/A for the Six Months Ended June 30, 1998.
For the three months ended June 30, 1999 and 1998, net sales for
Company-managed stores were $409,000 and $1,251,000, respectively, and total
costs and expenses were $548,000 and $1,384,000, respectively. For the six
months ended June 30, 1999 and 1998, net sales for Company-managed stores were
$872,000 and $2,377,000, respectively, and total costs and expenses were
$1,124,000 and $2,437,000, respectively. The net result of the Company's
operation of such Company-managed franchised stores is classified as a gain or
loss from managed stores in the accompanying Consolidated Statements of
Operations.
For the three months and six months ended June 30, 1999 and 1998, the
Company managed a total of 5 and 13 franchised locations, respectively, under
management agreements. The agreements generally provide for the Company's
management of the operations of each location, with all operating decisions
being made primarily by the Company. The Company owns the inventory at each
location and is generally responsible for the collection of all revenues and the
payment of all expenses.
NOTE 7 - Segment Information
In the fourth quarter of 1998, the Company adopted SFAS No. 131,
"Disclosure About Segments of an Enterprise and Related Information." SFAS 131
establishes annual and interim reporting standards for an enterprise's operating
segments and related disclosures about its products, services, geographic areas
and major customers.
For the six months ended June 30, 1999 and 1998, the Company's operations
were classified in three principal industry segments:
RETAIL OPTICAL: The retail optical segment, whereby the Company owns and
operates, as well as franchises, a chain of retail optical stores which offer
eyecare products such as prescription and non-prescription eyeglasses, eyeglass
frames, ophthalmic lenses, contact lenses, sunglasses and a broad range of
ancillary items.
INSIGHT LASER: 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 the Company's other excimer lasers in offering PRK,
a procedure performed to correct certain degrees of myopia.
AMBULATORY SURGERY: The Ambulatory Surgery segment, whereby the Company
renders consulting and administrative services to the licensee of a full-service
ambulatory surgery center located in Garden City, New York.
-11-
<PAGE>
Prior to 1996, the Company's operations were limited to the retail optical
segment.
Summarized financial information concerning the industry segments and
geographic areas in which the Company operated for each of the six months ended
June 30, 1999 and 1998, is shown in the following tables (in thousands):
OPERATIONS BY INDUSTRY SEGMENT
<TABLE>
<CAPTION>
Retail Insight Ambulatory
Optical Laser Surgery Total
------- --------- --------- -------
<S> <C> <C> <C> <C>
1999
Revenues from sales $9,610 $2,217 $ 405 $12,232
Franchise-related and other 6,007 -- -- 6,007
------ ------ ------ -------
Total Revenues 15,617 2,217 405 18,239
Operating Profit 226 852 135 1,213
Capital Expenditures 492 -- -- 492
Depreciation and Amortization 802 424 59 1,285
1998
Revenues from sales 10,464 835 -- 11,299
Franchise-related and other 6,079 -- -- 6,079
------ ------ ------ ------
Total Revenues 16,543 835 -- 17,378
Operating Profit 436 57 -- 493
Capital Expenditures 465 -- -- 465
Depreciation and Amortization 727 488 -- 1,215
</TABLE>
There were no intersegment sales for either of the six months ended June
30, 1999 or 1998. No single customer represented more than 10% of consolidated
sales for either of the six months ended June 30, 1999 or 1998.
NOTE 8 - Reclassifications
Certain reclassifications have been made to prior year's financial
statements to conform with the current year presentation.
NOTE 9 - Subsequent Events
In July 1998, shareholders sold, pursuant to the terms of the Singer
Agreement, approximately 66,000 shares of the Company's stock, which the Company
will pay approximately $210,000.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
For the Three and Six Months Ended June 30, 1999 compared to June 30, 1998
Systemwide sales, which represent combined retail sales generated by
Company-owned stores, as well as revenues generated: (i) by VisionCare of
California ("VCC"), a specialized health care maintenance organization licensed
by the California Department of Corporations; (ii) the Company's rendering of
consulting and administrative services to the
-12-
<PAGE>
licensee of an ambulatory surgery center; and (iii) from the operation of
Insight Laser Center, Inc. ("Insight") decreased by approximately $2,579,000, or
6.6%, to $36,417,000 for the three months ended June 30, 1999, as compared to
$38,996,000 for the comparable period in 1998, and decreased by approximately
$2,813,000, or 3.7%, to $73,515,000 for the six months ended June 30, 1999, as
compared to $76,328,000 for the comparable period in 1998. These decreases were
principally due to a decrease in comparable unit sales, as described below, and
a lower number of stores in operation for both the three and six month periods
ended June 30, 1999, as compared to the comparable periods in 1998, offset, in
part, by an increase in the Insight Laser division's sales of $856,000 or 205%
to $1,274,000 for the three months ended June 30, 1999, as compared to $418,000
for the comparable period in 1998, and an increase in the Insight Laser
Division's sales of $1,382,000, or 166%, to $2,217,000 for the six months ended
June 30, 1999, as compared to $835,000 for the comparable period in 1998. As of
June 30, 1999, there were 284 Sterling Stores in operation, consisting of 41
Company-owned stores (including 5 Company-owned stores being managed by
franchisees) and 243 franchised stores (including 5 franchised stores being
managed by the Company on behalf of franchisees), as compared to 305 Sterling
Stores in operation as of June 30, 1998, consisting of 56 Company-owned stores
(including 6 Company-owned stores being managed by franchisees) and 249
franchised stores (including 13 stores being managed by the Company on behalf of
franchisees). These 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. 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 months ended June 30, 1999 and 1998), systemwide sales decreased by
$752,000, or 2.4%, to $30,430,000 for the three months ended June 30, 1999, as
compared to $31,182,000 for the comparable period in 1998, and decreased by
$1,080,000 or 1.7%, to $61,275,000 for the six months ended June 30, 1999, as
compared to $62,355,000 for the comparable period in 1998. There were 231 stores
that operated as either a Company-owned, a Company-managed or franchised store
during the entirety of both the three and six months ended June 30, 1999 and
1998.
Franchise royalties increased by $43,000, or 1.9%, to $2,344,000 for the
three months ended June 30, 1999, as compared to $2,301,000 for the comparable
period in 1998. Franchise royalties decreased by $116,000 or 2.5% to $4,570,000
for the six months ended June 30, 1999, as compared to $4,686,000 for the
comparable period in 1998.
Net gains and fees from the conveyance of Company-owned store assets to
franchisees increased by $123,000, or 384%, to $155,000 for the three months
ended June 30, 1999 as compared to $32,000 for the comparable period in 1998,
and increased by $397,000 or 238%, to $564,000 for the six months ended June 30,
1999, as compared to $167,000 for the comparable period in 1998. These increases
were principally due to the conveyance of the assets of one and five
Company-owned stores, respectively, to franchisees for the three and six months
ended June 30, 1999, as compared to the conveyance of the assets of one and
three Company-owned stores, respectively, to franchisees during the comparable
periods in 1998.
Other income (primarily interest on franchise notes) decreased by
approximately $261,000 or 38.9% to $410,000 for the three months ended June 30,
1999, as compared to $671,000 for the comparable period in 1998, and decreased
by approximately $353,000 or 28.8% to $873,000 for the six months ended June 30,
1999, as compared to $1,226,000 for the comparable period in 1998. These
decreases are principally due to certain franchisees voluntarily prepaying off
their notes prior to the scheduled maturity dates.
The Company's gross profit margin decreased by 6.1%, to 70.8% for the three
months ended June 30, 1999, as compared to 76.9% for the comparable period in
1998, and decreased by 2.2%, to 71.0% for the six months ended June 30, 1999, as
compared to 73.2% for the comparable period in 1998. In the future, the
Company's gross profit margin may fluctuate depending upon the extent and timing
of changes in the product mix in Company-owned stores, competition and
promotional incentives.
Selling expenses decreased to $3,681,000, or 61.5% of net sales, for the
three months ended June 30, 1999, as compared to $4,225,000, or 77.0% of net
sales, for the comparable period in 1998. Selling expenses decreased to
$7,471,000, or 61.1% of net sales, for the six months ended June 30, 1999, as
compared to $7,775,000, or 68.8% of net sales, for the comparable period in
1998. These percentage decreases were principally due to lower payroll costs at
the store level for the three and six month periods ended June 30, 1999, as
compared to the comparable period in 1998.
-13-
<PAGE>
General and administrative expenses (including depreciation and interest
expense) decreased by $2,801,000, or 50.1%, to $2,795,000 for the three months
ended June 30, 1999, as compared to $5,596,000 for the comparable period in
1998, and decreased by $3,080,000 or 35.2% to $5,664,000 for the six months
ended June 30, 1999, as compared to $8,744,000 for the comparable period in
1998. These improvements resulted principally from a decrease of approximately
$1,800,000 in the Company's provision for doubtful accounts. In addition,
charges were incurred in 1998 of approximately $175,000 in write-off of debt
issuance costs, related to the issuance of the 1998 Debentures, and $311,000 of
charges related to warrant conversion costs. No such charges were incurred in
1999.
Losses from the operation of managed stores increased by $6,000 or 4.5% to
$139,000 for the three months ended June 30, 1999, as compared to a loss of
$133,000 for the comparable period in 1998, and increased by $192,000 or 320% to
$252,000 for the six months ended June 30, 1999, as compared to a loss of
$60,000 for the comparable period in 1998.
Interest expense decreased by $284,000 or 54.4% to $238,000 for the three
months ended June 30, 1999, as compared to $522,000 for the comparable period in
1998 and decreased by $373,000 or 40.7% to $544,000 for the six months ended
June 30, 1999, as compared to $917,000 for the comparable period in 1998. These
improvements resulted from a decrease of debt issuance costs of approximately
$155,000 for the three and six months ended June 30, 1999, as compared to the
comparable period in 1998.
The Company's income before taxes increased by $4,385,000 or 107% to
$292,000 for the three months ended June 30, 1999, as compared to a loss of
$(4,093,000) for the comparable period in 1998, and increased by $5,824,000 or
115% to $760,000 for the six months ended June 30, 1999, as compared to a loss
of $(5,064,000) for the comparable period in 1998. These increases resulted from
a decrease of approximately $1,110,000 of amortization of debt discount costs, a
decrease of approximately $1,800,000 of provisions for doubtful accounts, a
decrease of $805,000 from the early retirement of debt, a decrease of $175,000
in write-off of debt issuance costs related to the issuance of the 1998
Debentures, and a decrease of $311,000 of debt conversion costs for the three
and six months ended June 30, 1999, as compared to the comparable period in
1998.
Liquidity and Capital Resources
For the six months ended June 30, 1999, cash flows provided by from
operating activities were $354,000, as compared to cash flows used in operating
activities of $(1,415,000) for the comparable period in 1998. This increase is
principally due to the increase in Net Income to $760,000 for the six months
ended June 30, 1999, as compared to a loss of $(5,064,000) for the comparable
period in 1998.
For the six months ended June 30, 1999, cash flows provided by investing
activities were $1,712,000, as compared to cash flows used in investing
activities of $(826,000) for the comparable period in 1998. This increase is
principally due to an increase in proceeds from repayment of franchise notes to
$2,338,000 and an increase in the conveyance of property and equipment to
$881,000 for the six months ended June 30, 1999, as compared to $1,443,000 and
$173,000, respectively for the comparable period in 1998.
For the six months ended June 30, 1999, cash flows used in financing
activities were $(2,044,000), as compared to cash flows provided of $2,671,000
for the comparable period in 1998. The decrease of $4,715,000 in cash flows used
in financing activities is principally due to 1998 reflecting the sale of Common
Stock and other capital contributions of $2,077,000 and the issuance of the 1998
Debentures of $3,500,000.
The Company believes that, in the furtherance of its business strategies,
the Company's future capital requirements will include renovating and/or
remodeling Company-owned stores, acquiring retail optical stores, subject to the
availability of qualified opportunities, and continued upgrading of the
Company's management information systems. Additionally, the Company is likely to
continue to provide purchase money financing in connection with its sale of
Company-owned store assets to franchisees, which is likely to defer the receipt
of cash relating to the sales of such assets.
-14-
<PAGE>
The Company believes that it will continue to improve cash flows during
1999, based on the following factors, among others: (i) closing certain poor
performing Company-owned stores, (ii) improvement in store profitability through
increased monitoring of store-by-store operations and actual results as compared
to expected results, (iii) an expected increase in operations and cash flows of
the Company's Insight Laser and ambulatory surgery businesses, and (iv) a
reduction of administrative overhead expenses, if necessary.
As of December 31, 1998, the Company was not in compliance with the
financial covenants of its loan agreement with STI Credit Corporation ("STI")
although STI, on April 13, 1999, waived all such defaults through December 31,
1999, agreed to the elimination of all prepayment penalties contained in the
Loan Agreement; and agreed to apply the balance of the Additional Funds
being held by STI for disbursement to the Company ($500,000 plus accrued
interest) to the balance of the loan, all in exchange for the Company's payment,
to STI, of a fee of $150,000, which fee was charged against the Additional Funds
to be credited to the balance of the loan. However, there can be no assurance
that the Company would be able to obtain such a waiver in future periods, should
such financial covenants not be met by the Company.
The Company believes, based on its current projections, that its liquid
assets, presently on hand, together with cash generated from operations, should
be sufficient for its presently contemplated operations. However, there can be
no assurance that the Company will be able to generate positive cash flows and,
if it does, that such cash flows will be sufficient to adequately fund its
ongoing operations and future plans. If the Company cannot generate sufficient
cash flows from operations, it may be required to seek alternative debt and/or
equity financing. However, there can be no assurance that such debt and/or
equity financing will be available to the Company when necessary, or at terms
that will be attractive to the Company.
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, thus causing disruption of operations. As a result, systems may
be unable to accurately process certain date-based information.
The Company has reviewed the Year 2000 issue with its management
information systems 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. However, the Company 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.
Forward Looking Statements
All statements contained herein (other than historical facts) are based
upon current expectations. These statements are forward looking in nature and
involve a number of risks and uncertainties. Actual results may differ
materially from 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.
-15-
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. Not applicable.
Item 2. Changes in Securities. Not applicable.
Item 3. Defaults Upon Senior Securities. Not applicable.
Item 4. Submission of 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.
10.84 First Amendment to Convertible Preferred Stock and Warrants
Subscription Agreement, dated January 4, 1999 (Incorporated by
reference to Exhibit 10.78 to the Company's Current Report on
Form 8-K, dated January 4, 1999).
10.85 Second Amendment to Convertible Preferred Stock and Warrants
Subscription Agreement, dated March 4, 1999 (Incorporated by
reference to Exhibit 10.79 to the Company's Current Report on
Form 8-K, dated March 4, 1999).
10.86 Waiver, dated April 13, 1999, to the Registrant's Loan
Agreement with STI Credit Corp., dated June 30, 1997, as
previously amended on October 9, 1997 and April 14, 1998.
-16-
<PAGE>
B. Reports on Form 8-K
1. On January 14, 1999, the Registrant filed a Report on Form 8-K with
respect to the First Amendment to its Convertible Preferred Stock and
Warrants Subscription Agreements.
2. On March 4, 1999, the Registrant filed a Report on Form 8-K with
respect to the Second Amendment to its Convertible Preferred Stock
and Warrants Subscription Agreement.
-17-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this Report to be signed on its behalf
by the undersigned hereunto duly authorized.
STERLING VISION, INC.
(Registrant)
BY: /s/ Robert Cohen
Robert Cohen
Chairman of the Board
BY: /s/William J. Young
William J. Young
Chief Financial Officer/Treasurer
Dated: August 16, 1999
-18-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED CONDENSED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 850
<SECURITIES> 0
<RECEIVABLES> 19,839
<ALLOWANCES> 2,362
<INVENTORY> 2,248
<CURRENT-ASSETS> 10,722
<PP&E> 13,228
<DEPRECIATION> 6,481
<TOTAL-ASSETS> 32,058
<CURRENT-LIABILITIES> 12,788
<BONDS> 0
0
3,277
<COMMON> 151
<OTHER-SE> 9,707
<TOTAL-LIABILITY-AND-EQUITY> 32,058
<SALES> 12,232
<TOTAL-REVENUES> 18,239
<CGS> 3,548
<TOTAL-COSTS> 17,479
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 379
<INTEREST-EXPENSE> 544
<INCOME-PRETAX> 760
<INCOME-TAX> 0
<INCOME-CONTINUING> 760
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 760
<EPS-BASIC> .04
<EPS-DILUTED> (.06)
<FN>
Amounts inapplicable or not disclosed as a separate line on the Statement
of Financial Position or Statement of Operations are reported as -0- herein.
* Notes and accounts receivable are reported net of allowances for doubtful
accounts on the Statement of Financial Position.
</FN>
</TABLE>
