<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, 2000
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
EMERGING VISION, INC.
(Exact name of Registrant as specified in its Charter)
New York 11-3096941
------------------------ ---------------------------------
(State of Incorporation) (IRS Employer Identification No.)
44 West 18th Street
New York, New York 10011
------------------------------------------------------------
(Address of Principal Executive Offices, including Zip Code)
(646) 638-9696
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
(formerly known as Sterling Vision, Inc.)
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 CORPORATE ISSUERS:
There were 25,559,231 shares outstanding of the Registrant's Common Stock,
par value $.01 per share, as of August 4, 2000.
<PAGE>
Item 1. Financial Statements
EMERGING VISION, INC. (f/k/a STERLING VISION, INC.) AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars In Thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---------- ------------
ASSETS (Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 11,828 $ 108
Other receivables 108 --
Prepaid expenses and other current assets 5,002 --
Net assets of discontinued operations 2,935 69
--------- ---------
Total Current Assets 19,873 177
Property and equipment, net 333 --
Other assets 2,153 1,000
Net assets of discontinued operations 17,919 19,506
--------- ---------
Total Assets $ 40,278 $ 20,683
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 6,017 $ --
Current portion of long-term debt 2,818 5,824
--------- ---------
Total Current Liabilities 8,835 5,824
--------- ---------
Long-term debt -- 698
Commitments and contingencies (Note 4)
Shareholders' Equity:
Preferred Stock, $.01 par value per share; authorized 5,000,000 shares
Senior Convertible Preferred Stock, $100,000 liquidation
preference per share; 3 and 21 shares issued and outstanding,
respectively 287 2,417
Series B Convertible Preferred Stock, $7.00 liquidation preference
per share; no shares issued or outstanding -- --
Common stock, $.01 par value; authorized 28,000,000 shares;
25,559,231 and 16,676,630 shares issued and outstanding,
respectively 256 167
Additional paid-in capital 119,406 55,023
Accumulated deficit (88,506) (43,446)
--------- ---------
Total Shareholders' Equity 31,443 14,161
--------- ---------
Total Liabilities and Shareholders' Equity $ 40,278 $ 20,683
========= =========
</TABLE>
See accompanying notes to Consolidated Condensed Financial Statements.
2
<PAGE>
EMERGING VISION, INC. (f/k/a STERLING VISION, INC.) AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2000 1999 2000 1999
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Revenues:
Net revenues $ 108 $ -- $ 108 $ --
-------- ---------- -------- ----------
Total revenues 108 -- 108 --
-------- ---------- -------- ----------
Costs and Expenses:
Cost of sales 100 -- 100 --
General and administrative expenses 874 -- 999 --
Web-site development costs 2,928 -- 3,999 --
Interest income (32) (32)
-------- ---------- -------- ----------
Total costs and expenses 3,870 -- 5,066 --
-------- ---------- -------- ----------
Loss before provision for income taxes (3,762) -- (4,958) --
Provision for income taxes -- -- -- --
-------- ---------- -------- ----------
Loss from continuing operations (3,762) -- (4,958) --
Discontinued Operations:
(Loss) Income from discontinued operations (5,873) 292 (6,652) 760
-------- ---------- -------- ----------
Net (loss) income $ (9,635) $ 292 ($11,610) $ 760
======== ========== ======== ==========
Per Share Information (Note 3):
Basic:
Loss from continuing operations $ (.32) $ .00 $ (1.76) $ (.02)
(Loss) Income from discontinued operations (.24) .02 (.31) .05
-------- ---------- -------- ----------
Net (loss) income $ (.56) $ .02 $ (2.07) $ .03
======== ========== ======== ==========
Diluted:
Loss from continuing operations $ (.32) $ (.08) $ (1.76) $ (.02)
(Loss) Income from discontinued operations (.24) .02 (.31) .05
-------- ---------- -------- ----------
Net (loss) income $ (.56) $ (.06) $ (2.07) $ .03
======== ========== ======== ==========
Shares used in computing per share information:
Basic 24,784 15,119 21,794 15,089
======== ========== ======== ==========
Diluted 24,784 16,069 21,794 15,089
======== ========== ======== ==========
</TABLE>
See accompanying notes to Consolidated Condensed Financial Statements.
3
<PAGE>
EMERGING VISION, INC. (f/k/a STERLING VISION, INC.) AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss from continuing operations $ (4,958) $ --
Adjustments to reconcile net loss from continuing operations
to net cash used in operating activities:
Depreciation and amortization 2 --
Non-cash compensation 47
Changes in assets and liabilities:
Other receivables (108) --
Prepaid expenses and other current assets 2,897 --
Other assets 697 --
Accounts payable and accrued liabilities 512 --
-------- --------
Net cash used in operating activities (911) --
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (335) --
-------- --------
Net cash used in investing activities (335) --
-------- --------
Cash flows from financing activities:
Proceeds from the exercise of stock options and warrants 7,692 --
Payments on long-term debt (2,977) --
Net proceeds from the issuance of Series B Convertible
Preferred Stock 10,618 --
-------- --------
Net cash provided by financing activities of continuing operations 15,333 --
-------- --------
Net cash provided by continuing operations 14,087
-------- --------
Net cash (used in) provided by discontinued operations (2,367) 22
-------- --------
Net increase in cash and cash equivalents 11,720 22
Cash and cash equivalents - beginning of period 108 828
-------- --------
Cash and cash equivalents - end of period $ 11,828 $ 850
======== ========
</TABLE>
See accompanying notes to Consolidated Condensed Financial Statements.
4
<PAGE>
EMERGING VISION, INC. (f/k/a STERLING VISION, INC.) AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(Unaudited)
(In Thousands, Except Number of Shares)
<TABLE>
<CAPTION>
Series B Convertible Senior Convertible
Preferred Stock Preferred Stock Common Stock
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1999 -- $ -- 21 $ 2,417 16,676,630 $ 167
Issuance of common shares upon
conversion of Senior Convertible
Preferred Stock -- -- (18) (2,130) 2,468,334 25
Exercise of stock options and warrants -- -- -- -- 2,048,460 20
Issuance of common shares for
consulting services -- -- -- -- 1,010,000 10
Issuance of Series B Convertible
Preferred Stock 1,677,570 -- -- -- -- --
Issuance of warrants in connection
with Series B Convertible Preferred
Stock -- -- -- -- -- --
Accretion of dividends on Series B
Convertible Preferred Stock -- 11,743 -- -- -- --
Issuance of common shares upon
conversion of Series B Convertible
Preferred Stock (1,677,570) (11,743) -- -- 3,355,140 34
Issuance of common shares to
franchisees -- -- -- -- 667 --
Stock-based compensation -- -- -- -- -- --
Extinguishment of related party debt -- -- -- -- -- --
Net loss -- -- -- -- -- --
--------- ---------- ------- ---------- ---------- ----------
Balance - June 30, 2000 -- $ -- 3 $ 287 25,559,231 $ 256
========= ========== ======= ========== ========== ==========
<CAPTION>
Additional Total
Paid-In Accumulated Shareholders'
Capital Deficit Equity
---------- ----------- -------------
<S> <C> <C> <C>
Balance - December 31, 1999 $ 55,023 $ (43,446) $ 14,161
Issuance of common shares upon
conversion of Senior Convertible
Preferred Stock 23,812 (21,707) --
Exercise of stock options and warrants 7,672 -- 7,692
Issuance of common shares for
consulting services 9,798 -- 9,808
Issuance of Series B Convertible
Preferred Stock 6,239 -- 6,239
Issuance of warrants in connection
with Series B Convertible Preferred
Stock 4,379 -- 4,379
Accretion of dividends on Series B
Convertible Preferred Stock -- (11,743) --
Issuance of common shares upon
conversion of Series B Convertible
Preferred Stock 11,709 -- --
Issuance of common shares to
franchisees -- -- --
Stock-based compensation 47 -- 47
Extinguishment of related party debt 727 -- 727
Net loss -- (11,610) (11,610)
---------- ---------- ----------
Balance - June 30, 2000 $ 119,406 $ (88,506) $ 31,443
========== ========== ==========
</TABLE>
See accompanying notes to Consolidated Condensed Financial Statement.
5
<PAGE>
EMERGING VISION, INC. (f/k/a STERLING VISION, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1
The accompanying Consolidated Condensed Financial Statements of Emerging
Vision, Inc. (formerly known as Sterling Vision, Inc.; hereinafter, 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, 1999. There have been no changes in significant accounting
policies since December 31, 1999.
NOTE 2 - Discontinued Operations
The Company previously announced its intentions to evolve from a retail
eye wear and vision services operation to an Internet-based portal supplying a
comprehensive supply-chain solution for manufacturers, distributors and
retailers in the optical industry.
As a result of the foregoing, on June 26, 2000, the Company's Board of
Directors approved a plan to sell the Company's Sterling Optical retail
division, its majority-owned subsidiary, Insight Laser Centers, Inc., and the
assets comprising its ambulatory surgery center business and subsequently
engaged an investment banking firm to assist in the sale of the businesses. In
addition, the Company has made a provision for approximately $5,505,000 of
expenses associated with the sale of its divisions, which is accrued as part of
accounts payable and accrued liabilities.
The net assets, operating results and cash flows of these divisions are
presented as discontinued operations in the accompanying Consolidated Condensed
Financial Statements for all periods presented.
6
<PAGE>
Summarized financial information for these discontinued operations is as
follows:
For the Six Months Ended June 30:
Retail Insight Ambulatory
Optical Laser Surgery Total
-------- -------- ----------- --------
2000
Sales $ 6,716 $ 1,590 $ 371 $ 8,677
Franchise-related 5,541 2 -- 5,543
-------- -------- -------- --------
Total revenues 12,257 1,592 371 14,220
-------- -------- -------- --------
Income before tax (6,305) (302) (45) (6,652)
Income taxes -- -- -- --
-------- -------- -------- --------
Net loss $ (6,305) $ (302) $ (45) $ (6,652)
======== ======== ======== ========
1999
Sales $ 9,610 $ 2,217 $ 405 $ 12,232
Franchise-related 6,007 -- -- 6,007
-------- -------- -------- --------
Total revenues 15,617 2,217 405 18,239
-------- -------- -------- --------
Income before tax 411 279 70 760
Income taxes -- -- -- --
-------- -------- -------- --------
Net loss $ 411 $ 279 $ 70 $ 760
======== ======== ======== ========
For the Three Months Ended June 30:
Retail Insight Ambulatory
Optical Laser Surgery Total
-------- -------- ----------- --------
2000
Sales $ 2,962 $ 728 $ 186 $ 3,876
Franchise-related 2,762 2 -- 2,764
-------- -------- -------- --------
Total revenues 5,724 730 186 6,640
-------- -------- -------- --------
Income before tax (5,595) (235) (43) (5,873)
Income taxes -- -- -- --
-------- -------- -------- --------
Net loss $ (5,595) $ (235) $ (43) $ (5,873)
======== ======== ======== ========
1999
Sales $ 4,508 $ 1,274 $ 202 $ 5,984
Franchise-related 2,909 -- -- 2,909
-------- -------- -------- --------
Total revenues 7,417 1,274 202 8,893
-------- -------- -------- --------
Income before tax 47 220 25 292
Income taxes -- -- -- --
-------- -------- -------- --------
Net loss $ 47 $ 220 $ 25 $ 292
======== ======== ======== ========
7
<PAGE>
NOTE 3 - Per Share Information
The following table sets forth the computation of basic and diluted per
share information:
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Numerator:
Loss from continuing operations $ (3,762,000) $ -- $ (4,958,000) $ --
Senior Convertible Preferred Stock dividends -- -- -- (83,000)
Effect of the induced conversion of Senior
Convertible Preferred Stock -- -- (21,707,000) (153,000)
Accretion of dividends on Series B Convertible
Preferred Stock (4,248,000) -- (11,743,000) --
------------ ------------ ------------ ------------
Numerator for basic loss per share - loss
attributable to common shareholders (8,010,000) -- (38,408,000) (236,000)
Effect of dilutive securities:
Senior Convertible Preferred Stock
dividends -- -- -- (*)
Effect of the assumed conversion of Senior
Convertible Preferred Stock (*) (1,235,000) (*) (*)
------------ ------------ ------------ ------------
Numerator for diluted loss per share - loss
attributable to common shareholders (8,010,000) (1,235,000) (38,408,000) (236,000)
------------ ------------ ------------ ------------
Basic:
Loss attributable to common shareholders (8,010,000) -- (38,408,000) (236,000)
(Loss) Income from discontinued operations (5,873,000) 292,000 (6,652,000) 760,000
------------ ------------ ------------ ------------
Net (loss) income (attributable) available to
common shareholders $(13,883,000) $ 292,000 $(45,060,000) $ 524,000
============ ============ ============ ============
Diluted:
Loss attributable to common shareholders (8,010,000) (1,235,000) (38,408,000) (236,000)
(Loss) Income from discontinued operations (5,873,000) 292,000 (6,652,000) 760,000
------------ ------------ ------------ ------------
Net (loss) income (attributable) available to
common shareholders $(13,883,000) $ (943,000) $(45,060,000) $ 524,000
============ ============ ============ ============
</TABLE>
-----------
(*) Excluded from calculation as the effect would have been anti-dilutive.
8
<PAGE>
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30,
2000 1999 2000 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Denominator:
Denominator for basic per share information -
weighted average shares outstanding 24,784,000 15,119,000 21,794,000 15,089,000
Effect of dilutive securities:
Options and warrants (*) (*) (*) (*)
Effect of assumed conversion of Senior
Convertible Preferred Stock (*) 950,000 (*) (*)
-------------- -------------- -------------- -------------
Dilutive potential common shares -- 950,000 -- --
Denominator for diluted per share information -
adjusted weighted average shares outstanding 24,784,000 16,069,000 21,794,000 15,089,000
============== ============== ============== ==============
Basic:
Loss from continuing operations $ (.32) $ .00 $ (1.76) $ (.02)
(Loss) Income from discontinued operations (.24) .02 (.31) .05
-------------- -------------- -------------- --------------
Net (loss) income $ (.56) $ .02 $ (2.07) $ .03
============== ============== ============== ==============
Diluted:
Loss from continuing operations $ (.32) $ (.08) $ (1.76) $ (.02)
(Loss) Income from discontinued operations (.24) .02 (.31) .05
-------------- -------------- -------------- --------------
Net loss (income) $ (.56) $ (.06) $ (2.07) $ .03
============== ============== ============== ==============
</TABLE>
-----------
(*) Excluded from calculation as the effect would have been anti-dilutive.
NOTE 4 - 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.
NOTE 5 - Related Party Transaction
During the first quarter of 2000, Broadway Partners (a partnership owned
by certain of the children of certain of the Company's principal shareholders')
accepted, from the Company, its $550,000 offer to purchase a certain debenture
(previously issued by the Company in connection with its acquisition of
substantially all of the assets of Benson Optical Co., Inc. and affiliates)
previously acquired by Broadway Partners and having a then discounted present
value of approximately $1,277,000. The resulting gain of $727,000 is reflected
as a capital contribution in the accompanying Consolidated Condensed Statements
of Shareholders' Equity.
NOTE 6 -Web Site Development Initiatives
The Company accounts for its web site development costs in accordance with
EITF Issue 00-02, "Accounting for Web Site Development Costs." This issue
provides that, under certain circumstances, the accounting for specific web site
development costs be based on a model consistent with AICPA Statement of
Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use." Under SOP 98-1, costs are expensed or capitalized
according to the stage and related process of web-site development that they
relate to. Amortization of capitalized costs begins at the point in time that
the web site becomes operational. Accordingly, amortization has not commenced
with respect to such costs, as the related web sites are not yet operational.
On February 11, 2000, the Company issued 1,000,000 shares of its Common
Stock to Rare Medium, Inc. ("Rare"), pursuant to the terms of a certain
Professional Services Master Agreement (the "Agreement") entered into between
Rare and the Company. Under the terms of this Agreement, Rare will provide
professional services to assist the Company with its web based business
strategy, including the development of multiple web sites, operations planning
and other services related to building its Internet business. The terms of the
Agreement afford Rare a price protection guarantee on any such shares sold in
the open market at a price of less than $3.00 per share, and contain certain
"lock-up" provisions regarding the ability to sell such shares prior to certain
dates. Additionally, the Company paid to Rare a cash fee of $1,000,000 in
December 1999. Of the above-mentioned consideration (valued in the aggregate
at $10,750,000), $3,999,000 has been expensed to date for various costs
associated with the development of its website, and $1,850,000 has been
capitalized as website development
9
<PAGE>
costs and reflected in other assets on the accompanying Condensed Consolidated
Balance Sheet as of June 30, 2000. The remaining $4,900,000 has been reflected
in prepaid expenses and other current assets.
In December 1999, the Registrant issued to MY2000, LLC (the "Holder")
warrants to purchase 2,500,000 shares of its Common Stock in exchange for such
Holder's oral agreement to render advisory services to the Company's Board of
Directors with respect to its new Internet business and strategies. During the
first quarter of 2000, 1,000,000 of these warrants were exercised at $2.00 per
share. The remaining warrants were outstanding as of June 30, 2000.
NOTE 7 - Preferred Stock
1998 Debentures/Senior 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 (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.
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 (approximately $4,025,000 fair value) of a series of the Company's
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,
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 registered shares of Common Stock)
calculated at the rate of 10% per annum, commencing May 17, 1998. Additionally,
the Company at its option, from and after February 17, 1999, was required to
either 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, or thereafter 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.
On January 4, 1999, the Company and the original Holders entered into an
amendment to the original subscription agreements 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 eliminating
the price protection guarantee provision originally applicable to the Senior
Convertible Preferred Stock.
On March 4, 1999, effective as of February 11, 1999, the Company and each
of the 4 remaining original Holders entered into another amendment to their
subscription agreement, whereby the conversion price of all then outstanding
shares of Senior Convertible Preferred Stock was reduced from $5.00 to $3.00,
the date by which the Company was required to redeem all outstanding Senior
Convertible Preferred Stock was extended from February 17, 1999 to February 17,
2000, the requirement for the Company to pay dividends on the Senior Convertible
Preferred Stock from and after February 17, 1999 was eliminated, and the
exercise price of the outstanding new Warrants was reduced from $5.00 to $4.00.
On January 13, 1999 and March 26, 1999, certain of the original Holders
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.
10
<PAGE>
On December 7, 1999, the Company and each of the 4 remaining holders
entered into a further amendment to the Subscription Agreements which served to
reduce the conversion price of all outstanding shares of Senior Convertible
Preferred Stock from $3.00 to $.75, reduce the exercise price of the outstanding
New Warrants from $4.00 to $2.00, eliminate the requirement that the Company
redeem the Senior Convertible Preferred Stock (at 105% of the then stated value
thereof) on February 20, 2000, and eliminate the price protection guarantee
previously afforded the original holders with respect to any shares of Common
Stock sold by any holder within the 180 day period following the conversion of
the Senior Convertible Preferred Stock into Common Stock.
During the first quarter of 2000, certain of the original holders of the
Company's Senior Convertible Preferred Stock exercised their right to convert an
aggregate of $1,851,250 stated value of Senior Convertible Preferred Stock, into
an aggregate of 2,468,334 shares of the Company's Common Stock. As of June 30,
2000, there were 3 shares of Senior Convertible Preferred Stock with a stated
value of $287,000.
Series B Convertible Preferred Stock
During the first quarter of 2000, the Company completed a private
placement pursuant to which it sold an aggregate of 1,677,570 units (the
"Units"), each Unit consisting of one share of the Company's Series B
Convertible Preferred Stock, par value $.01 per share, with a liquidation
preference of $7.00 per share (the "Series B Preferred Stock"), and one warrant
(the "Series B Warrant") to purchase one-half share of Series B Preferred Stock
at an exercise price, per one-half share, equal to $7.5875, exercisable from and
after the expiration of the 6 month period following the date of the first
issuance of such Series B Warrants, for a period of 5 years thereafter.
Each share of Series B Preferred Stock was automatically converted into
two shares of the Company's Common Stock upon the Company's filing of an
amendment to its certificate of incorporation (the "Amendment") increasing its
authorized Common Stock to 50,000,000 shares, which was subject to the Company's
receipt of the approval of a majority of its shareholders. Such approval was
obtained on April 17, 2000. Each Series B Warrant was initially exercisable for
one-half share of Series B Preferred Stock; however, upon the automatic
conversion of the Series B Preferred Stock into Common Stock, the Series B
Warrants (to the extent not previously exercised) became exercisable, at the
same exercise price, for one share of Common Stock.
In accordance with EITF 98-05, "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios,"
the net proceeds received in the private placement (approximately $10,618,000)
were allocated based on the relative fair values of the Series B Preferred Stock
and the Series B Warrants. Accordingly, approximately $6,239,000 was allocated
to the Series B Preferred Stock and $4,379,000 was allocated to the Series B
Warrants. The approximately $11,743,000 liquidation value of the 1,677,570
shares of Series B Preferred Stock was recorded net of issuance costs of
approximately $1,125,000, and net of a full discount, of which approximately
$4,379,000 was attributable to the fair value of the Series B Warrants issued in
connection therewith, and approximately $6,239,000 was attributable to the
beneficial conversion feature embodied in the Series B Preferred Stock. This
discount was being accreted as preferred dividends through April 17, 2000, the
date on which all of the Series B Preferred Stock automatically converted into
shares of the Company's Common Stock, pursuant to the aforementioned increase in
authorized Common Stock, at a ratio of 1 to 2.
In connection with the private placement, the Company issued to the
placement agents 500,000 warrants to purchase shares of the Company's Common
Stock at an exercise price of $7.59, which warrants will expire on February 13,
2005. The fair value of these warrants was treated as part of the issuance
costs.
The net proceeds from such private placement are intended to be used by
the Company in connection with the development of its new Internet business.
NOTE 8 - Reclassifications
Certain reclassifications have been made to prior years' financial
statements to conform with the current year presentation.
11
<PAGE>
NOTE 9 - Subsequent Events
On July 19, 2000, the Company and STI Credit Corporation ("STI") entered
into a further amendment to the Loan Agreement dated June 30, 1997, as amended
between the Company and STI, which provided that: (i) STI waive the default
resulting from the Company's failure, as of December 31, 1999, to comply with
certain financial covenants as originally contained in the Loan Agreement; and
(ii) the Company be required to satisfy and discharge its loan from STI, in
full, on or prior to December 31, 2000.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Company previously announced its intentions to evolve from a retail
eye wear and vision services operation to an Internet-based portal supplying a
comprehensive supply-chain solution for manufacturers, distributors and
retailers in the optical industry.
As a result of the foregoing, on June 26, 2000, the Company's Board of
Directors approved a plan to sell the Company's Sterling Optical division, its
majority-owned subsidiary, Insight Laser Centers, Inc., and the assets
comprising its ambulatory surgery center business and subsequently engaged an
investment banking firm to assist in the sale of the businesses.
The net assets, operating results and cash flows of these divisions are
presented as discontinued operations in the accompanying Consolidated Condensed
Financial Statements for all periods presented, and consequently there are no
discussions related to these operations in management's discussion and analysis
of financial condition and results of operations for the periods presented.
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.
Results of Operations
For the Three and Six Months Ended June 30, 2000 compared to June 30, 1999
Sales were $108,000 for the three and six month periods ended June 30,
2000, whereas the Internet division did not exist for the comparable period in
1999. This increase is due to the Company completing its first Internet sale.
General and administrative expenses were $874,000 and $999,000,
respectively, for the three and six month periods ended June 30, 2000. These
amounts were principally related to payroll, payroll related costs and
professional fees related to the Company's e-commerce (Internet) development
activities.
The Company's gross profit margin was 8% for the three and six months
ended June 30, 2000, whereas the Internet division did not exist for the
comparable period in 1999.
Web site development costs were $2,928,000 and $3,999,000 for the three
and six months ended June 30, 2000, whereas the Internet division did not exist
for the comparable period in 1999. This expense related to advertising and
planning costs of the website (Note 6).
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Liquidity and Capital Resources
The Company incurred a net loss from continuing operations of
approximately $(3,762,000) and $(4,958,000) for the three and six months ended
June 30, 2000, and had cash and cash equivalents of $11,828,000 as of June 30,
2000.
For the six months ended June 30, 2000, cash flows used in operating
activities were $(911,000), whereas the Internet division did not exist for
the comparable period in 1999.
For the six months ended June 30, 2000, cash flows used in investing
activities were $(335,000), whereas the Internet division did not exist for the
comparable period in 1999. This cash outflow was due to the purchases of
property and equipment for the six months ended June 30, 2000.
For the six months ended June 30, 2000, cash flows provided by financing
activities were $15,333,000, whereas the Internet division did not exist for the
comparable period in 1999. The cash flows provided by financing activities were
principally due to proceeds received from the exercise of options and warrants,
as well as the proceeds received from the Company's private placement, completed
in March 2000.
Shareholders' equity increased $17,282,000 to $31,443,000 for the six
months ended June 30, 2000, as compared to $14,161,000 for the year ended
December 31, 1999. This increase was principally due to the conversion of the
Company's Senior Convertible Preferred Stock, the exercise of stock options and
warrants, the issuance of shares of the Company's Common Stock in partial
consideration of consulting services to be rendered to the Company, the issuance
of Series B Convertible Preferred Stock and the issuance of warrants in
connection with the Series B Convertible Preferred Stock.
The Company believes that, in the furtherance of its business strategies,
the Company's future capital requirements will require substantial additional
capital in order to implement this web-based strategy; and there can be no
assurance that such additional capital will become available to it and, even if
available, that the terms thereof will be acceptable to the Company.
Additionally, the Company is in the process of selling its non-Internet assets
which generate additional cash flow.
The Company believes that, based on its current cash position and the
implementation of the plans described above, sufficient resources will be
available for the Company to continue in operation through the next 12 months.
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 on terms that are attractive to the Company. Additionally, as
previously announced, the Company intends to sell its non-Internet related
assets, however, there can be no assurance that such sale will be completed or
that any such sale will be completed on terms reasonably satisfactory to the
Company.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company maintains certain equity instruments with beneficial
conversion terms and certain contractual price protection provisions that are
indexed to the performance of the Company's Common Stock. Accordingly, the
Company may bear a financial risk in the form of future cash or stock payments
made to equalize any stock price declines that are indexed to a specific
contractual stock price floor. Additionally, as a result of the above, the
Company could incur noncash charges to equity which would have a negative impact
on future earnings per share calculations.
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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.
10.94 - Form of Certificate of Amendment of the Certificate of
Incorporation of the Company, dated February 8, 2000 (Incorporated
by reference to Exhibit 10.94 to the Company's Current Report on
Form 8-K, dated February 8, 2000).
10.95 - Press Release, dated February 15, 2000, with respect to the
Agreement entered into with RMI (incorporated by reference to
Exhibit 10.95 to the Company's Current Report on Form 8-K, dated
February 8, 2000).
10.96 - Form of Certificate of Amendment of the Certificate of
Incorporation of the Company, dated February 4, 2000 (incorporated
by reference to Exhibit 10.96 to the Company's Current Report on
Form 8-K, dated February 8, 2000).
10.97 - Employment Agreement dated as of February 22, 2000, between
Sterling Vision, Inc. and Gregory T. Cook (incorporated by
reference to Exhibit 10.97 to the Company Current Report on Form
8-K, dated February 22, 2000).
10.98 - Employment Agreement dated as of February 22, 2000, between
Sterling Vision, Inc. and Sara Traberman (incorporated by reference
to Exhibit 10.98 to the Company Current Report on Form 8-K, dated
February 22, 2000).
10.99 - Employment Agreement dated as of February 22, 2000, between
Sterling Vision, Inc. and James Ewer (incorporated by reference to
Exhibit 10.99 to the Company Current Report on Form 8-K, dated
February 22, 2000).
11.00 - Press Release, dated March 30, 2000, with respect to the Engagement
Letter entered into with McDonald Investments (incorporated by
reference to Exhibit 11.00 to the Company Current Report on Form
8-K, dated March 23, 2000).
11.01 - Employment Agreement dated February 29, 2000, between the
Registrant and Joseph Silver.
11.02 - Legal Fee Retainer Agreement dated February 29, 2000, between
Sterling Vision of California, Inc. and Joseph Silver.
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B. Reports on Form 8-K
1) On January 10, 2000, the Registrant filed a Report on Form 8-K/A with
respect to: (i) the form of Engagement Letter, dated December 16, 1999,
between the Registrant and Rare Medium, Inc.; (ii) the Company's Press
Release, dated December 17, 1999; and (iii) the Form of Warrant, dated
December 16, 1999, in favor of MY2000, LLC.
2) On February 18, 2000, the Registrant filed a Report on Form 8-K with
respect to: (i) the form of Certificate of Amendment of the Certificate of
Incorporation of the Registrant, dated February 8, 2000; (ii) Press
Release, dated February 15, 2000, with respect to the Agreement entered
into with Rare Medium, Inc.; and (iii) the form of Certificate of
Amendment of the Certificate of Incorporation of the Registrant, dated
February 4, 2000.
3) On March 7, 2000, the Registrant filed a Report on Form 8-K with respect
to: (i) the Private Placement of securities; and (ii) its internet
initiatives.
4) On March 17, 2000, the Registrant filed a Report on Form 8-K with respect
to Employment Agreements between the Company and each of Mr. Gregory T.
Cook, Ms. Sara V. Traberman and Mr. James E. Ewer.
5) On April 4, 2000, the Registrant filed a Report on Form 8-K with respect
to a Press Release regarding the Registrant's retention of McDonald
Investments, Inc.
6) On April 25, 2000, the Registrant filed a Report on Form 8-K with respect
to the change of the Company's name and other matters.
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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.
EMERGING VISION, INC.
(Registrant)
BY: /s/ Gregory T. Cook
--------------------------------------------
Gregory T. Cook
President and Chief Executive Officer
BY: /s/ Sara V. Traberman
--------------------------------------------
Sara V. Traberman
Senior Vice President/Chief Financial
Officer
Dated: August 14, 2000
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