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 September 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)
(formerly known as Sterling Vision, Inc.)
New York 11-3096941
------------ --------------
(State of Incorporation) (IRS Employer Identification No.)
1065 Avenue of the Americas, 31st Floor
New York, New York 10018
-----------------------------------------------------------
(Address of Principal Executive Offices, including Zip Code)
(646) 452-2500
(Registrant's Telephone Number, Including Area Code)
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 25,454,231 shares outstanding of the Registrant's Common Stock,
par value $.01 per share, as of November 7, 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>
September 30, December 31,
2000 1999
-------------- -------------
ASSETS (Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 8,315 $ 108
Receivables 36 -
Prepaid expenses and other current assets 4,743 -
Net assets of discontinued operations 4,564 69
-------- --------
Total Current Assets 17,658 177
Property and equipment, net 902 -
Other assets 2,176 1,000
Net assets of discontinued operations 16,273 19,506
-------- --------
Total Assets $ 37,009 $ 20,683
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 10,246 $ -
Current portion of long-term debt 1,065 5,824
-------- --------
Total Current Liabilities 11,311 5,824
-------- --------
Long-term debt - 698
-------- --------
Total Liabilities 11,311 6,522
-------- --------
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, at
September 30, 2000 and December 31, 1999, 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 50,000,000 shares;
25,559,231 and 16,676,630 shares issued and outstanding, at
September 30, 2000 and December 31, 1999, respectively 256 167
Additional paid-in capital 119,406 55,023
Accumulated deficit (94,251) (43,446)
-------- --------
Total Shareholders' Equity 25,698 14,161
-------- --------
Total Liabilities and Shareholders' Equity $ 37,009 $ 20,683
======== ========
See accompanying notes to Consolidated Condensed Financial Statements.
2
</TABLE>
<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 Nine Months
Ended September 30, Ended September 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Net revenues $ - $ - $ 108 $ -
-------- -------- -------- --------
Total revenues - - 108 -
-------- -------- -------- --------
Costs and Expenses:
Cost of sales - - 100 -
General and administrative expenses 1,308 - 2,307 -
Web site development costs 423 - 4,422 -
Interest income (157) - (189) -
-------- -------- -------- --------
Total costs and expenses 1,574 - 6,640 -
-------- -------- -------- --------
Loss before provision for income taxes (1,574) - (6,532) -
Provision for income taxes - - - -
-------- -------- -------- --------
Loss from continuing operations (1,574) - (6,532) -
(Loss) Income from discontinued operations (4,171) 112 (10,823) 872
-------- -------- -------- --------
Net (loss) income $ (5,745) $ 112 $(17,355) $ 872
======== ======== ======== ========
Per Share Information (Note 3):
Basic:
Loss from continuing operations $ (.06) $ - $ (1.73) $ (.02)
(Loss) Income from discontinued operations (.16) .01 (0.47) .06
-------- -------- -------- --------
Net (loss) income $ (.22) $ .01 $ (2.20) $ .04
======== ======== ======== ========
Diluted:
Loss from continuing operations $ (.06) $ (.09) $ (1.73) $ (.11)
(Loss) Income from discontinued operations (.16) .01 (0.47) .05
-------- -------- -------- --------
Net (loss) income $ (.22) $ (.08) $ (2.20) $ (.06)
======== ======== ======== ========
Shares used in computing per share information:
Basic 25,559 15,174 23,068 15,118
======== ======== ======== ========
Diluted 25,559 16,124 23,068 16,068
======== ======== ======== ========
See accompanying notes to Consolidated Condensed Financial Statements.
3
</TABLE>
<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 Nine Months Ended
September 30,
2000 1999
--------- ---------
Cash flows from operating activities:
<S> <C> <C>
Net loss from continuing operations $ (6,532) $ -
Adjustments to reconcile net loss from continuing operations to
net cash used in operating activities:
Depreciation and amortization 30 -
Non-cash compensation 47 -
Changes in assets and liabilities:
Other receivables (36) -
Prepaid expenses and other current assets 3,157 -
Other assets 674 -
Accounts payable and accrued liabilities 1,053 -
-------- --------
Net cash used in operating activities (1,607) -
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (932) -
-------- --------
Net cash used in investing activities (932) -
-------- --------
Cash flows from financing activities:
Proceeds from the exercise of stock options and warrants 7,692 -
Payment of price protection guarantee - (386)
Payments on long-term debt (4,730) (1,825)
Net proceeds from the issuance of Series B Convertible Preferred Stock 10,618 -
-------- --------
Net cash provided (used) by financing activities of continuing operations 13,580 (2,211)
-------- --------
Net cash provided (used) by continuing operations 11,041 (2,211)
-------- --------
Net cash (used in) provided by discontinued operations (2,834) 2,978
-------- --------
Net increase in cash and cash equivalents 8,207 767
Cash and cash equivalents - beginning of period 108 828
-------- --------
Cash and cash equivalents - end of period $ 8,315 $ 1,595
======== ========
See accompanying notes to Consolidated Condensed Financial Statements.
4
</TABLE>
<PAGE>
EMERGING VISION, INC. (f/k/a STERLING VISION, INC.) AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(Unaudited)
(In Thousands, Except Number of Shares)
<TABLE>
<CAPTION>
Series B Convertible Senior Convertible Additional Total
Preferred Stock Preferred Stock Common Stock Paid-In Accumulated Shareholders'
Shares Amount Shares Amount Shares Amount Capital Deficit Equity
----------- --------- ------ -------- ---------- ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1999 - $ - 21 $ 2,417 16,676,630 $167 $ 55,023 $(43,446) $ 14,161
Issuance of Common Stock upon
conversion of Senior Convertible
Preferred Stock - - (18) (2,130) 2,468,334 25 23,812 (21,707) -
Exercise of stock options and warrants - - - - 2,048,460 20 7,672 - 7,692
Issuance of Common Stock for
consulting services - - - - 1,010,000 10 9,798 - 9,808
Issuance of Series B Convertible
Preferred Stock 1,677,570 - - - - - 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 - 11,473 - - - - - (11,743) -
Issuance of Common Stock upon
conversion of Series B Convertible
Preferred Stock (1,677,570) (11,743) - - 3,355,140 34 11,709 - -
Issuance of Common Stock to
franchisees - - - - 667 - - - -
Stock-based compensation - - - - - - 47 - 47
Extinguishment of related party debt - - - - - - 727 - 727
Net loss - - - - - - - (17,355) (17,355)
----------- --------- ------ -------- ---------- ------ ---------- ----------- -------------
Balance - September 30, 2000 - $ - 3 $ 287 25,559,231 $256 $119,406 $(94,251) $ 25,698
=========== ========= ====== ======== ========== ====== ========== =========== =============
See accompanying notes to Consolidated Condensed Financial Statement.
5
</TABLE>
<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 Registrant'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 such segements of
the Company's business. 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.
In connection therewith, the Company has made an initial provision of
approximately $9,670,000 for the discontinued operations. This provision
included future operating losses, expenses associated with the sale of its
divisions and an estimate of loss upon disposition. As of September 30, 2000,
$9,265,000 of this provision remains accrued as part of accounts payable and
accrued liabilities on the accompanying Consolidated Condensed Balance Sheet.
6
<PAGE>
Summarized financial information for these discontinued operations is as
follows (in thousands):
FOR THE NINE MONTHS ENDED SEPTEMBER 30:
Retail Insight Ambulatory
Optical Laser Surgery Total
--------- -------- ---------- ---------
2000
Sales $ 9,623 $ 2,225 $ 559 $ 12,407
Franchise-related revenues 8,292 2 - 8,294
-------- ------- ----- --------
Total revenues 17,915 2,227 559 20,701
-------- ------- ----- --------
Loss before taxes (10,248) (541) (34) (10,823)
Income taxes - - - -
-------- ------- ----- --------
Net loss $(10,248) $ (541) $ (34) $(10,823)
======== ======= ===== ========
1999
Sales $ 13,702 $ 3,621 $ 598 $ 17,921
Franchise-related revenues 8,858 - - 8,858
-------- ------- ----- --------
Total revenues 22,560 3,621 598 26,779
-------- ------- ----- --------
Income before taxes 234 545 93 872
Income taxes - - - -
-------- ------- ----- --------
Net income $ 234 $ 545 $ 93 $ 872
======== ======= ===== ========
FOR THE THREE MONTHS ENDED SEPTEMBER 30:
Retail Insight Ambulatory
Optical Laser Surgery Total
--------- -------- ---------- ---------
2000
Sales $ 2,907 $ 635 $ 188 $ 3,730
Franchise-related revenues 2,751 - - 2,751
-------- ------- ----- --------
Total revenues 5,658 635 188 6,481
-------- ------- ----- --------
(Loss) income before taxes (3,943) (239) 11 (4,171)
Income taxes - - - -
-------- ------- ----- --------
Net (loss) income $ (3,943) $ (239) $ 11 $ (4,171)
======== ======= ===== ========
1999
Sales $ 4,092 $ 1,404 $ 193 $ 5,689
Franchise-related revenues 2,851 - - 2,851
-------- ------- ----- --------
Total revenues 6,943 1,404 193 8,540
-------- ------- ----- --------
(Loss) income before taxes (177) 266 23 112
Income taxes - - - -
-------- ------- ----- --------
Net (loss) income $ (177) $ 266 $ 23 $ 112
======== ======= ===== ========
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 Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
----------- ------------ ------------ ------------
Numerator:
<S> <C> <C> <C> <C>
Loss from continuing operations $(1,574,000) $ - $ (6,532,000) $ -
Senior Convertible Preferred Stock dividends - - - (83,000)
Effect of the induced conversion of Senior
Conertible Preferred Stock - - (21,707,000) (153,000)
Accretion of dividends on Series B Convertible
Preferred Stock - - (11,743,000) -
----------- ----------- ------------ -----------
Numerator for basic loss per share - loss
attributable to common shareholders (1,574,000) - (39,982,000) (236,000)
Effect of dilutive securities:
Senior Convertible Preferred Stock
dividends - - - (*)
Effect of the assumed conversion of Senior
Convertible Preferred Stock (*) (1,402,000) (*) (1,568,000)
----------- ----------- ------------ -----------
Numerator for diluted loss per share - loss
attributable to common shareholders (1,574,000) (1,402,000) (39,982,000) (1,804,000)
----------- ----------- ------------ -----------
Basic:
Loss attributable to common shareholders (1,574,000) - (39,982,000) (236,000)
(Loss) Income from discontinued operations (4,171,000) 112,000 (10,823,000) 872,000
----------- ----------- ------------ -----------
Net (loss) income (attributable) available to
common shareholders $(5,745,000) $ 112,000 $(50,805,000) $ 636,000
=========== =========== ============ ===========
Diluted:
Loss attributable to common shareholders (1,574,000) (1,402,000) (39,982,000) (1,804,000)
(Loss) Income from discontinued operations (4,171,000) 112,000 (10,823,000) 872,000
----------- ----------- ------------ -----------
Net (loss) income (attributable) available to
common shareholders $(5,745,000) $(1,290,000) $(50,805,000) $ (932,000)
=========== =========== ============ ===========
-------------------------------
(*) Excluded from calculation as the effect would have been anti-dilutive.
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
Denominator:
<S> <C> <C> <C> <C>
Denominator for basic per share information -
weighted-average shares outstanding 25,559,000 15,174,000 23,068,000 15,118,000
---------- ---------- ---------- ----------
Effect of dilutive securities:
Options and warrants (*) (*) (*) (*)
Effect of assumed conversion of Senior
Convertible Preferred Stock (*) 950,000 (*) 950,000
---------- ---------- ---------- ----------
Dilutive potential common shares - 950,000 - 950,000
---------- ---------- ---------- ----------
Denominator for diluted per share information -
adjusted weighted-average shares outstanding 25,559,000 16,124,000 23,068,000 16,068,000
========== ========== ========== ==========
Basic:
Loss from continuing operations $ (.06) $ - $ (1.73) $ (.02)
(Loss) Income from discontinued operations (.16) .01 (0.47) .06
---------- ---------- ---------- ----------
Net (loss) income $ (.22) $ .01 $ (2.20) $ .04
========== ========== ========== ==========
Diluted:
Loss from continuing operations $ (.06) $ (.09) $ (1.73) $ (.11)
(Loss) Income from discontinued operations (.16) .01 (0.47) .05
---------- ---------- ---------- ----------
Net (loss) income $ (.22) $ (.08) $ (2.20) $ (.06)
========== ========== ========== ==========
</TABLE>
------------------------------------
(*) Excluded from the calculation as the effect would have been anti-dilutive.
NOTE 4 - 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 condition 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 and
subsequently purchased 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
Statement 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
9
<PAGE>
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 to which they
relate. Amortization of capitalized costs begins at the point in time that the
web site becomes operational. Accordingly, amortization has not yet commenced
with respect to any 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), $4,275,000 has been expensed to date for various costs
associated with the Company's development of its web site and included as part
of web site development costs on the accompanying Consolidated Condensed
Statement of Operations for the nine months ended September 30, 2000.
Additionally, the Company has capitalized $1,850,000 as web site development
costs which is reflected within other assets on the accompanying Consolidated
Condensed Balance Sheet as of September 30, 2000. The remaining balance of
$4,625,000 has been reflected in prepaid expenses and other current assets to be
expensed as the Company progresses with the development of its e-commerce
initiatives.
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 September 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 redemption 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.
10
<PAGE>
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 eliminate 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 four remaining Original Holders entered into another amendment to their
Subscription Agreements, 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.
On December 7, 1999, the Company and each of the four remaining Original
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 September
30, 2000, there were 3 shares of Senior Convertible Preferred Stock outstanding
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 six-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 of $7.5875, 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
11
<PAGE>
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 to the current year presentation.
NOTE 9 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash, cash equivalents and accounts
receivable. Cash and cash equivalents are deposited with high quality financial
institutions. All highly liquid investments with an original maturity from date
of purchase of three months or less are considered to be cash equivalents. The
Company's cash and cash equivalents are invested in various investment-grade
money market accounts and recorded on the accompanying Consolidated Condensed
Balance Sheet in the amount of $8,315,000.
NOTE 10 - DEBT
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 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 the
Company be required to satisfy and discharge its loan from STI, in full, on or
prior to December 31, 2000.
NOTE 11 - SUBSEQUENT EVENT
On October 31, 2000, the Company announced a program to repurchase, in
accordance with the applicable requirements of the Securities Exchange Act of
1934, as amended, up to 1,000,000 shares of its Common Stock at prevailing
prices in open market transactions effected during the one-year period
commencing November 1, 2000. The Company intends to fund such stock repurchase
program from available working capital. As of November 7, 2000 the Company had
repurchased 105,000 shares of its Common Stock at an average price of $1.11 per
share.
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 to 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 such segments of the Company's
business.
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.
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FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements and information
relating to the Company that is based on the beliefs of the Company's management
as well as assumptions made by and information currently available to the
Company's management. When used in this Report, the words "anticipate",
"believe", "estimate", "expect", and similar expressions, as they relate to the
Company or the Company's management, are intended to identify forward-looking
statements. Such statements reflect the current view of the Company with respect
to future events, are not guarantees of future performance and are subject to
certain risks and uncertainties. These risks and uncertainties may include:
product demand and market acceptance risks; the feasibility of developing
commercially profitable optical e-commerce services; the effect of economic
conditions; user acceptance; success of transactions with third parties; the
impact of competitive products, services and pricing; product development,
commercialization and technological difficulties; the effect of government
regulation of the Internet or optical e-commerce services; the outcome of
litigation; and other risks described elsewhere herein, including those set
forth in "--Management's Discussion and Analysis of Financial Condition and
Results of Operations" below, and in the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1999. Should one or more of these risks
or uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described herein as anticipated,
believed, estimated, or expected. The Company does not intend to update these
forward-looking statements.
RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO SEPTEMBER 30,
1999
Revenues for the three and nine month periods ended September 30, 2000 were
$0 and $108,000, respectively, whereas the Internet division did not exist for
the comparable periods in 1999. The increase for the nine-month period ended
September 30, 2000 is due to the Company completing its first Internet sale
during the second quarter of fiscal year 2000.
General and administrative expenses were $1,308,000 and $2,258,000
respectively, for the three and nine- month periods ended September 30, 2000.
These amounts were principally related to payroll, payroll related costs, rent,
marketing and professional fees related to the Company's e-commerce (Internet)
development activities.
The Company's gross profit margin was 0% and 8% for the three and nine
month periods ended September 30, 2000, whereas the Internet division did not
exist for the comparable period in 1999.
Web site development costs were $423,000 and $4,471,000 for the three and
nine months ended September 30, 2000, whereas the Internet division did not
exist for the comparable period in 1999. This expense related to planning and
advertising costs of the Company's anticipated web site (see Note 6 to the
accompanying financial statements).
LIQUIDITY AND CAPITAL RESOURCES
The Company incurred a net loss from continuing operations of approximately
$(1,574,000) and $(6,532,000) for the three and nine month periods ended
September 30, 2000, respectively, and had cash and cash equivalents of
$8,315,000 as of September 30, 2000.
For the nine months ended September 30, 2000, cash flows used in operating
activities were $(1,607,000) whereas the Internet division did not exist for the
comparable period in 1999. This change was primarily due to the decrease in
prepaid assets related to amortization of the capitalized development and
advertising costs of the Company's proposed web site and an increase in accounts
payable and accrued liabilities.
For the nine months ended September 30, 2000, cash flows used in investing
activities were $(932,000), 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 during the nine month period ended September 30, 2000.
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For the nine months ended September 30, 2000, cash flows provided by
financing activities were $13,580,000, 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, offset by payments on long-term
debt.
Shareholders' equity increased by $11,537,000 to $25,698,000 at September
30, 2000, as compared to $14,161,000 as of 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.
On October 31, 2000, the Company announced a program to repurchase, in
accordance with the applicable requirements of the Securities Exchange Act of
1934, as amended, up to 1,000,000 shares of its Common Stock at prevailing
prices in open market transactions effected during the one-year period
commencing November 1, 2000. The Company intends to fund such stock repurchase
program from available working capital. As of November 7, 2000 the Company had
repurchased 105,000 shares of its Common Stock at an average price of $1.11 per
share.
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 its web-based strategies; 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 should 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 substantially all of 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 non-cash charges to equity, which would have a negative
impact on future per share calculations.
The Company is exposed to market risks from potential changes in interest
rates as they relate to the Company's investments in highly liquid marketable
debt securities. These investments are deposited with high quality financial
institutions. The Company believes that the amount of risk as it relates to its
investments is not material to the Company's financial condition or results of
operations because the Company does not use derivative financial instruments in
its investments.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
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 condition of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
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 Number
27. Financial Data Schedule.
B. Reports on Form 8-K
Not applicable.
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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 and
Chief Financial Officer
Dated: November 9, 2000
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