<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
March 31, 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 25,558,564 shares outstanding of the Registrant's Common Stock,
par value $.01 per share, as of May 5, 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>
March 31, December 31,
2000 1999
------------ ------------
ASSETS (Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 13,966 $ 108
Franchise receivables - net of allowance for doubtful
accounts of $2,627 and $2,443, respectively 2,718 2,643
Other receivables 956 935
Franchise and other notes receivable 2,618 2,670
Inventories 1,880 1,995
Due from related parties 101 129
Prepaid expenses and other current assets 7,514 223
------------ ------------
Total Current Assets 29,753 8,703
Property and equipment, net 5,164 5,248
Franchise and other notes receivable - net of allowance for
doubtful accounts of $400 10,377 10,626
Intangible assets, net 3,892 4,014
Restricted cash 139 124
Other noncurrent assets 3,776 2,372
------------ ------------
Total Assets $ 53,101 $ 31,087
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 4,948 $ 6,637
Accounts payable and accrued liabilities 4,126 6,512
Accrual for store closings 82 349
Franchise related obligations 875 852
------------ ------------
Total Current Liabilities 10,031 14,350
Long-term debt 1,327 1,789
Deferred franchise income 67 70
Excess of fair value of assets acquired over cost 578 665
Minority interest 67 52
Commitments and contingencies (Note 4)
Shareholders' Equity:
Preferred Stock, $.01 par value per share; authorized
5,000,000 shares
Senior Convertible Preferred Stock, $.01 par value;
$100,000 liquidation preference per share;
3 and 21 shares issued and outstanding,
respectively 287 2,417
Series B Convertible Preferred Stock, $.01 par value;
$7.00 liquidation preference per share;
1,677,570 and -0- shares issued and
outstanding, respectively 7,495 -
Common stock, $.01 par value; authorized 28,000,000
shares; 22,203,424 and 16,676,630
shares issued and outstanding, respectively 222 167
Additional paid-in capital 107,650 55,023
Accumulated deficit (74,623) (43,446)
------------ ------------
Total Shareholders' Equity 41,031 14,161
------------ ------------
Total Liabilities and Shareholders' Equity $ 53,101 $ 31,087
============ ============
</TABLE>
See accompanying notes to Consolidated Condensed Financial Statements.
<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 Ended
March 31,
2000 1999
------------ ------------
<S> <C> <C>
Systemwide sales $ 36,542 $ 37,271
============ ============
Revenues:
Net sales $ 4,801 $ 6,248
Franchise royalties 2,377 2,226
Net gains and fees from the conveyance of
Company-owned store assets to franchisees - 327
Interest on franchise notes 327 410
Other income 75 135
------------ ------------
Total Revenues 7,580 9,346
------------ ------------
Costs and Expenses:
Cost of sales 1,312 1,800
Selling expenses 3,117 3,790
General and administrative expenses 3,758 2,869
Web-site development costs 1,071 -
Loss from managed stores 111 113
Interest expense 219 306
------------ ------------
Total Costs and Expenses 9,588 8,878
------------ ------------
(Loss) income before provision for income taxes
and minority interest (2,008) 468
Provision for income taxes - -
------------ ------------
(Loss) income before minority interest (2,008) 468
Minority interest in earning of subsidiary 33 -
------------ ------------
Net (loss) income $ (1,975) $ 468
============ ============
Per share information (Note 3): Net (loss) income per share:
Basic $ (1.67) $ .02
============ ============
Diluted $ (1.67) $ (.08)
============ ============
Shares used in computing net (loss) income per share:
Basic
18,714,000 15,060,000
============ ============
Diluted
18,714,000 16,085,000
============ ============
</TABLE>
See accompanying notes to Consolidated Condensed Financial Statements.
EMERGING VISION, INC. (f/k/a STERLING VISION, INC.) AND SUBSIDIARIES
-3-
<PAGE>
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (1,975) $ 468
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization 613 628
Provision for bad debts 226 190
Net gains from the conveyance of Company-owned
store assets to franchisees - (327)
Accrued interest 18 18
Accretion of fair value of assets acquired over cost (87) (87)
Changes in assets and liabilities:
Franchise receivables (320) (1,071)
Inventories 115 42
Prepaid expenses and other current assets (4) 104
Other noncurrent assets 1,086 (10)
Accounts payable and accrued liabilities (2,311) 155
Franchise related obligations 23 (25)
Deferred franchise income (3) (3)
Accrual for store closings (38) (32)
------------ ------------
Net cash (used in) provided by operating activities (2,657) 50
------------ ------------
Cash flows from investing activities:
Franchise notes receivable issued (197) (855)
Proceeds from repayment of franchise notes receivable 498 1,663
Purchases of property and equipment (635) (202)
Conveyances of property and equipment - 821
------------ ------------
Net cash (used in) provided by investing activities $ (334) $ 1,427
------------ ------------
</TABLE>
See accompanying notes to Consolidated Condensed Financial Statements.
EMERGING VISION, INC. (f/k/a STERLING VISION, INC.) AND SUBSIDIARIES
-4-
<PAGE>
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS -- Cont'd.
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from the exercise of options and warrants $ 7,692 $ -
Net proceeds from the issuance of Series B Convertible
Preferred Stock 10,618 -
Payments related to price protection guarantees - (99)
Repayment of borrowings under STI Loan Agreement (552) (850)
Repayment of other debt (1,848) (335)
Borrowings under additional loan agreements 939 61
------------ ------------
Net cash provided by (used in) financing activities 16,849 (1,223)
Net increase in cash and cash equivalents 13,858 254
Cash and cash equivalents - beginning of period 108 828
------------ ------------
Cash and cash equivalents - end of period $ 13,966 $ 1,082
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 219 $ 201
============ ============
Taxes $ 29 $ -
============ ============
Non-cash financing activities:
Issuance of common shares for
consulting services and other $ 9,808 $ -
============ ============
Extinguishment of related party debt $ 727 $ -
============ ============
</TABLE>
See accompanying notes to Consolidated Condensed Financial Statements.
-5-
<PAGE>
EMERGING VISION, INC. (f/k/a STERLING VISION, INC.) AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 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
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance - December 31, 1999 - $ - 21 $ 2,417 16,676,630
Issuance of common shares upon
conversion of Senior Convertible - - (18) (2,130) 2,468,334
Preferred Stock
Exercise of stock options and warrants - - - - 2,048,460
Issuance of common shares for
consulting services - - - - 1,010,000
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 - 7,495 - - -
Extinguishment of related party debt - - - - -
Net loss - - - - -
------------ ------------ ------------ ------------ ------------
Balance - March 31, 2000 1,677,570 $ 7,495 3 $ 287 22,203,424
============ ============ ============ ============ ============
<CAPTION>
Additional Total
Common Stock Paid-In Accumulated Shareholders'
Amount Capital Deficit Equity
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance - December 31, 1999 $ 167 $ 55,023 $ (43,446) $ 14,161
Issuance of common shares upon
conversion of Senior Convertible 25 23,812 (21,707) -
Preferred Stock
Exercise of stock options and warrants 20 7,672 - 7,692
Issuance of common shares for
consulting services 10 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 - - (7,495) -
Extinguishment of related party debt - 727 - 727
Net loss - - (1,975) (1,975)
------------ ------------ ------------ ------------
Balance - March 31, 2000 $ 222 $ 107,650 $ (74,623) $ 41,031
============ ============ ============ ============
</TABLE>
See accompanying notes to Consolidated Condensed Financial Statement.
-6-
<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 -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
-7-
<PAGE>
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 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.
-8-
<PAGE>
NOTE 3 - Per Share Information
The following table sets forth the computation of basic and diluted (loss)
income per share:
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
2000 1999
------------ ------------
<S> <C> <C>
Numerator:
Net (loss) income $ (1,975,000) $ 468,000
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 (7,495,000) -
------------ ------------
Numerator for basic (loss) income per share -
(loss) income (attributable) available to common (31,177,000) 232,000
shareholders
Effect of dilutive securities:
Senior Convertible Preferred Stock dividends - 83,000
Effect of the assumed conversion of Senior
Convertible Preferred Stock (*) (1,568,000)
------------ ------------
Numerator for diluted loss per share - loss
attributable to common shareholders $(31,177,000) $ (1,253,000)
============ ============
Denominator:
Denominator for basic (loss) income per share -
weighted average shares outstanding 18,714,000 15,060,000
Effect of dilutive securities:
Options and warrant (*) 75,000
Effect of assumed conversion of Senior
Convertible Preferred Stock (*) 950,000
------------ ------------
Dilutive potential common shares - 1,025,000
Denominator for diluted loss per share -
adjusted weighted-average shares outstanding 18,714,000 16,085,000
============ ============
Basic (loss) income per share $ (1.67) $ .02
============ ============
Diluted loss per share $ (1.67) $ (.08)
============ ============
</TABLE>
- -----------
(*) In 2000, basic and diluted earnings per share were the same because the
inclusion of convertible securities would have been anti-dilutive.
-9-
<PAGE>
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.
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 volumes. 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 March 31, 2000, the Company's 66.67% owned subsidiary, Insight Laser
Centers, Inc., held leases for six excimer lasers (two of which are being sublet
to an unrelated third party) and ancillary equipment expiring in various years
through 2002. 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 5 - Company-Managed Stores
For the three months ended March 31, 2000 and 1999, the Company managed a
total of 5 franchised locations under management agreements which 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 attributable thereto.
For the three months ended March 31, 2000 and 1999, net sales from the
operation of Company-managed stores were approximately $433,000 and $463,000,
respectively, and total costs and expenses were approximately $544,000 and
$576,000, respectively. The net result of the Company's operation of such
franchised stores (being managed by the Company) is classified as a loss from
managed stores in the accompanying Consolidated Condensed Statements of
Operations.
NOTE 6 - 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 will automatically be 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 will initially be 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
Warrant (to the extent not previously exercised) will become 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 Ratio,"
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.
-10-
<PAGE>
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 embedded in the
Series B Preferred Stock. This discount is 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 (Note 11).
In connection with the private placement, the Company issued to the
placement agents, 500,000 warrants, to purchase the Company's Common Stock,
having an exercise price of $7.59, and expiring 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 its new Internet business.
NOTE 7 - 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 Statement of
Shareholders' Equity.
NOTE 8 -Web-Site Development Initiatives
The Company accounts for 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. 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 a certain Professional Services
Master Agreement (the "Agreement") with 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 a cash fee of
$1,000,000 in December 1999. Of the above-mentioned consideration (valued in the
aggregate at $10,750,000), $2,420,000 has been capitalized as web-site
development costs and reflected in other noncurrent assets on the accompanying
Consolidated Condensed Balance Sheets as of March 31,2000. The remaining
$7,259,000 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 2000, 1,000,000 of the December 1999 warrants were exercised at
$2.00 per share. The remaining warrants were outstanding as of March 31, 2000.
-11-
<PAGE>
NOTE 9 - Segment Information
The Company follows the provision of 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 three months ended March 31, 2000 and 1999, the Company's operations
were classified in four principal industry segments:
INTERNET DIVISION: The Internet division, whereby the Company is in the
process of developing and implementing an Internet-based,
business-to-business portal for the sale of optical products;
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;
LASER SURGERY: The laser surgery segment, whereby the Registrant's 66.67%
owned subsidiary, Insight Laser Centers, Inc. ("Insight") owns and operates
laser surgery centers and provides access, for a fee, to affiliated
ophthalmologists who utilize Insight's excimer lasers in offering laser vision
correction procedures; and
AMBULATORY SURGERY: The ambulatory surgery segment, whereby the Company owns
the tangible assets located in a full service ambulatory surgery center located
in Garden City, New York, and provides administrative and consulting services to
the owner of the New York State license for this facility.
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 three months
ended March 31, 2000 and 1999, is shown in the following tables (in thousands):
OPERATIONS BY INDUSTRY SEGMENT
<TABLE>
<CAPTION>
Retail Insight Ambulatory
Optical(1) Laser(2) Surgery (3) Total
---------- -------- ----------- -----
<S> <C> <C> <C> <C>
2000
Sales $ 3,754 $ 862 $ 185 $ 4,801
Franchise-related and other 2,779 - - 2,779
Total Revenues 6,533 862 185 7,580
Operating Profit 44 285 43 372
Capital Expenditures 168 467 - 635
Depreciation and Amortization 349 220 44 613
1999
Sales $ 5,102 $ 943 $ 203 $ 6,248
Franchise-related and other 3,098 - - 3,098
Total Revenues 8,200 943 203 9,346
Operating Profit 255 330 73 658
Capital Expenditures 202 - - 202
Depreciation and Amortization 386 212 30 628
</TABLE>
-12-
<PAGE>
(1) Geographic area: 26 states, the District of Columbia, U.S. Virgin Islands
and Ontario, Canada.
(2) Geographic area: Metropolitan New York City.
(3) Geographic area: Long Island, New York.
There were no intersegment sales for either of the three months ended March
31, 2000 or 1999. No single customer represented more than ten percent of
consolidated sales (applicable to any individual segment) for either of the
three months ended March 31, 2000 or 1999.
NOTE 10 - Reclassifications
Certain reclassifications have been made to prior years' financial
statements to conform with the current year presentation.
NOTE 11 - Subsequent Events
On April 17, 2000, the shareholders of the Company approved an amendment to
the Company's Amended and Restated Certificate of Incorporation whereby the
authorized number of shares of Common Stock of the Company was increased from
28,000,000 to 50,000,000. As a result, all shares of the Company's Series B
Preferred Stock (Note 6) automatically converted into Common Stock at a ratio of
1 to 2.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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 Months Ended March 31, 2000 compared to March 31, 1999
Systemwide sales, which represent combined retail sales generated by
Company-owned stores, as well as revenues generated: (i) by VisionCare of
California ("VCC"), a wholly-owned subsidiary of the Company licensed as a
specialized health care maintenance organization by the California Department of
Corporations; (ii) the Company's rendering of consulting and administrative
services to the licensee of an ambulatory surgery center, the tangible assets of
which are owned by the Company; and (iii) from the operation of Insight Laser
Center, Inc. ("Insight"), decreased by approximately $729,000, or 2.0%, to
$36,542,000 for the three months ended March 31, 2000, as compared to
$37,271,000 for the comparable period in 1999. This decrease was principally due
to a lower number of retail stores in operation, as described below, for the
three months ended March 31, 2000, as compared to the comparable period in 1999,
and a decrease in revenues generated from the operation of Insight, of $81,000,
or 8.6%, to $862,000 for the three months ended March 31, 2000, as compared to
$943,000 for the comparable period in 1999. As of March 31, 2000, there were 251
Sterling Stores in operation, consisting of 37 Company-owned stores (including
12 Company-owned stores being managed by franchisees) and 214 franchised stores
(including 5 franchised stores being managed by the Company on behalf of
franchisees), as compared to 289 Sterling Stores in operation as of March 31,
1999, consisting of 45 Company-owned stores (including 5 Company-owned stores
being managed by franchisees) and 244 franchised stores (including 5 stores
being managed by the Company on behalf of franchisees). On a
-13-
<PAGE>
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 March 31,
2000 and 1999), systemwide comparative sales increased by $1,677,000, or 5.7%,
to $31,066,000 for the three months ended March 31, 2000, as compared to
$29,389,000 for the comparable period in 1999. There were 211 stores that
operated as either a Company-owned, a Company-managed or franchised store during
the entirety of each of the three months ended March 31, 2000 and 1999.
Franchise royalties increased by $151,000, or 6.8%, to $2,377,000 for the
three months ended March 31, 2000, as compared to $2,226,000 for the comparable
period in 1999. This increase was principally due to an increase in franchise
comparable sales of approximately 6.6% and the impact, in 2000, of new
franchised stores opened during 1999, that were in operation for a full year in
the first quarter 2000.
Net gains and fees from the conveyance of Company-owned store assets to
franchisees decreased by $327,000, or 100%, to $-0- for the three months ended
March 31, 2000, as compared to $327,000 for the comparable period in 1999. This
decrease was principally due to the conveyance of the assets of no Company-owned
stores to franchisees for the three months ended March 31, 2000, as compared to
the conveyance of the assets of four Company-owned stores to franchisees during
the comparable period in 1999.
Interest on franchise notes decreased by $83,000, or 20.2%, to $327,000 for
the three months ended March 31, 2000, as compared to $410,000 for the
comparable period in 1999. This decrease was principally due to certain
franchisees voluntarily prepaying their notes prior to the scheduled maturity
dates thereof.
The Company's gross profit margin increased by 1.4%, to 72.6% for the three
months ended March 31, 2000, as compared to 71.2% for the three months ended
March 31, 1999. 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 $3,117,000, or 64.9% of net sales, for the
three months ended March 31, 2000, as compared to $3,790,000, or 60.7% of net
sales, for the comparable period in 1999. This percentage increase was
principally due to a decrease in net sales as described above for the three
months ended March 31, 2000, as compared to the comparable period in 1999. The
dollar decrease is principally due to a decrease in the number of Company stores
in operation for the three months ended March 31, 2000, as compared to the
comparable period in 1999.
General and administrative expenses (including depreciation and interest
expense) increased by $889,000, or 31.0% of total revenues, to $3,758,000 for
the three months ended March 31, 2000, as compared to $2,869,000 for the
comparable period in 1999. This increase was principally attributable to an
increase in costs related to the Company's e-commerce (Internet) development
activities, an increase in costs related to the expansion of Insight's laser
vision correction business, additional expenses related to the issuance of
warrants to consultants, and an increase in professional fees.
The Company incurred a net loss of $1,975,000 for the three months ended
March 31, 2000, as compared to net income of $468,000 for the comparable period
in 1999. This decrease in net income was principally attributable to a decrease
in gains on the conveyance of the assets of Company-owned stores to franchisees
due to a lower number of stores transferred to franchisees, an increase in costs
related to e-commerce (Internet) development costs, an increase in costs related
to the expansion of Insight's laser vision correction business, and an increase
in expenses related to the issuance of warrants to consultants.
Basic and diluted earnings per share decreased $1.69 and $1.59,
respectively, to a loss per share of $(1.67) for the three months ended March
31, 2000, as compared to $.02 and $(.08), respectively, for the comparable
period in 1999. This decrease was principally due to total non-cash charges of
$(29,202,000) related to the effect of the induced conversion of Senior
Convertible Preferred Stock, and accretion of dividends on Series B Convertible
Preferred Stock. Such noncash charges reduced income available to common
shareholders. Additionally, the Company incurred expenses of $1,071,000 during
the three months ended March 31, 2000 related to the web site development. Had
these non-cash charges and expenses not occurred, basic and diluted loss
per share for the three months ended March 31, 2000 would have been $(.05).
Shareholders' equity increased $26,870,000 to $41,031,000 for the three
months ended March 31, 2000, as compared to $14,161,000 for the year ended
December 31, 1999. This increase was principally due to conversion of Senior
Convertible Preferred Stock, the exercise of stock options and warrants, the
issuance of common shares for consulting services, the issuance of Series B
Convertible Preferred Stock and the issuance of warrants in connection with the
Series B Convertible Preferred Stock.
-14-
<PAGE>
Liquidity and Capital Resources
The Company incurred a net loss of approximately $1,975,000 for the three
months ended March 31, 2000, and had working capital of $19,722,000 as of March
31, 2000.
For the three months ended March 31, 2000, cash flows used in operating
activities were $2,657,000, as compared to cash flows provided by operating
activities of $50,000 for the three months ended March 31, 1999. This reduction
in cash flows (used in operating activities) was principally due to a reduction
in accounts payable and accrued liabilities.
For the three months ended March 31, 2000, cash flows used in investing
activities were $334,000, as compared to cash provided by investing activities
of $1,427,000 for the comparable period in 1999. This reduction in cash flows
provided by investing activities was principally due to a decrease in the
conveyance of property and equipment for the three months ended March 31, 2000,
as compared to the comparable period in 1999.
For the three months ended March 31, 2000, cash flows provided by financing
activities were $16,849,000. The increase in cash flows provided by financing
activities was 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, in part, by the repayment of other
debt.
The Company believes that, in the furtherance of its business strategies,
the Company's future capital requirements will include upgrading of the
Company's management information systems. In addition, the Company 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 us and, even if available, that the terms thereof will be acceptable to us.
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 immediate receipt of cash relating to
the sales of such assets.
The Company believes that it has and will continue to improve cash flows
during 2000 based on the following factors, among others: (i) the private
placement of shares of the Series B Preferred Stock completed by the Company in
March 2000 (see Note 6); (ii) the proceeds from the exercise of stock options
and warrants; (iii) the sale of the assets of certain under-performing
Company-owned stores; (iv) the improvement in store profitability through
increased monitoring of store by store operations and actual results as compared
to expected results; and (v) a reduction of administrative overhead expenses, if
necessary.
As of March 31, 2000, the Company was not in compliance with the financial
covenants of its loan agreement with STI Credit Corporation ("STI"), although it
presently has sufficient cash assets to discharge and satisfy such loan in full.
Accordingly, all debt held by STI has been classified as short-term. On May 12,
2000, the Company received, from STI, a Notice of Default as a result of such
non compliance, which will be addressed by the Company in the immediate future.
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.
-15-
<PAGE>
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 whould have a negative impact on future earnings per
share calculations.
-16-
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. Not applicable.
Item 2. Changes in Securities. Not applicable.
Item 3. Defaults Upon Senior Securities. Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders. Not applicable.
Item 5. Other Information. Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits
EXHIBIT INDEX
Exhibit Number
27. Financial Data Schedule.
10.94 - 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.
-17-
<PAGE>
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 24, 2000, the Registrant filed a Report on Form 8-K with respect to
the change of the Company's name and other matters.
-18-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this Report to be signed on its behalf
by the undersigned hereunto duly authorized.
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: May 18, 2000
-19-
<PAGE>
EXHIBIT 11.01
EMPLOYMENT AGREEMENT
THIS AGREEMENT, dated as of the 29th day of February, 2000, is between
Sterling Vision, Inc., a New York corporation having an office at 1500 Hempstead
Turnpike, East Meadow, New York 11554 (the "Company"), and Joseph Silver, an
individual residing at 12 South Drive, Great Neck, New York 11021 (the
"Employee").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Company desires to obtain the services of the Employee, on its
own behalf and on behalf of all existing and future affiliated entities (defined
as any corporation or other business entity or entities that, directly or
indirectly, controls, is controlled by, or is under common control with the
Company), and the Employee desires to be employed by the Company upon the terms
and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual agreements and
understandings set forth herein, and for the other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
Company and the Employee hereby agree as follows:
1. Term of Employment.
The Company hereby employs the Employee to render services to the
Company in the position and with the duties and responsibilities described in
Section 3 hereof commencing on March 1, 2000 (the "Effective Date") and
continuing thereafter for a period of one (1) year, unless earlier terminated in
accordance with the provisions of Section 6 hereof, or extended by the Company
in accordance with the provisions of Section 2 hereof. For purposes of this
Agreement, the "Term of Employment" shall be the one (1) year period commencing
on the Effective Date, subject to earlier termination pursuant to the provisions
of Section 6 hereof, and extension and renewal pursuant to Section 2 hereof.
2. Renewal Term.
It is expressly understood and agreed that the Company shall have the
sole right and option to extend the Term of Employment for an additional period
of one (1) year; and in the event the Company, not less than thirty (30) days
prior to the expiration of the then current Term of Employment, does not notify
the Employee, in writing, of its election to terminate the then current Term of
Employment, this Agreement shall automatically be deemed renewed for such one
(1) year renewal Term of Employment. In the event the Company shall so elect to
renew the then current Term of Employment: (i) the salary set forth in
Subsection 4(a) hereof shall automatically be deemed increased by an amount
equal to five (5%) percent of the salary payable to the Employee (pursuant to
the provisions of Subsection 4(a) hereof) as of the expiration date of the
current Term of Employment; and (ii) notwithstanding the Company's election to
so extend said Term of Employment, the Employee may, at any time during such
renewal Term of Employment, elect to terminate this Agreement by serving upon
the Company not less than ninety (90) days' prior written notice thereof.
3. Position, Duties, Responsibilities.
a. Position. The Employee hereby accepts such employment and agrees to
serve as the Company's and each of its subsidiaries' Secretary, Executive Vice
President - Legal Affairs and General Counsel, or in such other position(s) as
the Board of Directors (the "Board") of the Company, at any time, may designate;
provided, however, that the duties associated with such other position(s) shall
be substantially the same as those duties contemplated to be rendered pursuant
to this Agreement. The Employee shall devote his reasonable, good faith efforts
to the performance of the services customarily incidental to such office and to
such other services as may be reasonably requested by the Board. The Company
shall retain reasonable direction and control over the means and methods by
-21-
<PAGE>
which the Employee shall perform the above services and of the place(s) at which
such services are to be rendered, subject, however, to the Employee's sole and
absolute discretion with respect to the exercise of, and control over, his
professional and ethical legal conduct, whether or not related to the Employee's
duties and responsibilities hereunder. With respect to the foregoing, it is
expressly understood and agreed that the Employee shall not be required to (but
may, at his option) relocate his personal residence outside of Nassau County,
New York.
b. Other Activities. Except upon the prior written consent of the Board,
the Employee, during the Term of Employment, will not: (i) accept any other
employment; (ii) serve on the board of directors of any other corporation
(except that he may serve, in any capacity, with any civic, professional,
educational or charitable organization or governmental entity or trade
association); or (iii) engage, directly or indirectly, in any other business
activity (whether or not pursued for pecuniary advantage) that is or may
reasonably be competitive with, or that might reasonably place him in a
competing position to that of, the Company or any of its affiliated entities.
Notwithstanding the foregoing and/or anything contained in this Agreement to the
contrary, it is expressly understood and agreed that: (i) the Employee may
render legal assistance to third parties, provided (x) he does not receive any
compensation therefor, (y) that said assistance is rendered only during
non-business hours, and (z) the same does not interfere with the Employee's
performance of his duties hereunder; and (ii) simultaneously herewith, the
Employee and Sterling Vision of California, Inc. ("SVCI"), a wholly owned
subsidiary of the Company, are entering into a Legal Fee Retainer Agreement(the
"Other Agreement"), and nothing herein contained shall be deemed to limit and/or
otherwise restrict the Employee from entering into, rendering services to,
and/or receiving legal fee compensation from SVCI pursuant to the Other
Agreement.
4. Salary, Benefits, Expenses.
a. Salary. In consideration of the services to be rendered hereunder, the
Employee, in addition to the legal fees to become payable to him pursuant to the
Other Agreement, during the initial twelve (12) months of the Term of
Employment, shall be paid a salary computed at the rate of One Hundred
Twenty-Six Thousand Two Hundred ($126,200) Dollars per annum, payable in
substantially equal, semi-monthly installments.
b. Benefits and Other Arrangements. In addition to the salary set forth in
Subsection 4(a) hereof: (i) the Employee shall be entitled to participate in any
plan, arrangement or policy of the Company providing for health benefits and/or
sick leave on substantially the same terms as are generally made available to
the other "senior" executives of the Company; and (ii) the Company, during the
Term of Employment, at its sole cost and expense, shall provide the Employee
with: (x) a $1 million policy of term life insurance; and (y) long term
disability insurance providing $7,875.00 of monthly benefits to the Employee.
c. Automobile. In addition to the salary set forth in Subsection 4(a)
hereof, the Company, during the Term of Employment, shall continue to provide
the Employee with: (i) the use of the same automobile presently being provided,
by the Company, to the Employee (provided, however that it is understood that
the Employee shall be responsible for the cost of insuring, repairing and
maintaining said automobile); and (ii) an automobile allowance of Four Hundred
($400) Dollars per month, it being understood that in the event of the
expiration or sooner termination of the Term of Employment, the Employee shall
have the right and option to assume the lease for said automobile.
d. Vacation. The Employee shall be entitled to a three (3) week, paid
vacation during each year of the Term of Employment, such vacation to: (i)
accrue at the rate of 1.25 days per month during each month of the Term of
Employment; and (ii) be subject to the Company's general policies, as the same
may be amended from time to time; provided, however, that if the Employee, due
to his work load, is restricted from taking said vacation (or any portion
thereof) during any year of the Term of Employment, said unused vacation days
shall carry over to the ensuing year. With respect to the foregoing, it is
understood and agreed that in the event the employment of the Employee shall
cease at a time when the Employee has earned, but has not used, vacation days
(including, but not limited to, any earned but unused vacation days for all
prior years during which the Employee was employed by the Company),
compensation, in an amount equal to the vacation to which the Employee shall be
entitled hereunder,
-22-
<PAGE>
shall be paid, by the Company to the Employee (based upon the salary then
payable to the Employee pursuant to Subsection 4(a) hereof) within ten (10)
business days thereafter.
e. Expenses. The Employee shall be entitled to reimbursement for all
ordinary and necessary business expenses incurred in the performance of his
duties hereunder (expressly including any and all expenses associated with the
Employee's use of a cellular and/or car telephone) subject to the Company's
receipt of reasonable substantiation and/or reasonable documentation thereof.
f. Annual Bonus. In addition to the salary set forth in Subsection 4(a)
hereof, the Employee shall be entitled to an annual bonus, in the amount of
Fifteen Thousand ($15,000) Dollars, payable on the 15th day of January of each
year of the Term of the Employment.
g. Professional Education; Membership Dues. The Company shall reimburse the
Employee, upon receipt of reasonable substantiation and/or reasonable
documentation thereof, for the following:
(i) the fees, costs and expenses, including, without limitation,
registration fees, costs of materials and local travel related expenses,
incurred in connection with the Employee's participation in professional legal
education programs for such numbers of hours per year as may be necessary for
the Employee to comply with such continuation legal education requirements
imposed by the New York State Bar Association;
(ii) the annual registration or maintenance fees for the
continuation of the Employee's privilege of practicing law in the State of
New York; and
(iii) the annual membership dues payable for the Employee's membership
in the New York State and Nassau County Bar Associations.
5. Severance Pay.
As a material inducement to the Employee in entering into this Agreement,
the Company, within ten (10) business days after the expiration or sooner
termination of the Term of Employment pursuant to, and in accordance with, the
terms hereof (but other than as a result of the Employee's death or the
Company's termination of this Agreement, for cause, pursuant to, and in
accordance with, the provisions of Subsection 6(d) hereof) shall be required to
pay to the Employee severance pay in an amount equal to the sum of: (i) the
salary that would have otherwise become payable to the Employee (pursuant to the
provisions of Subsection 3(a) hereof); and (ii) the legal fees which would have
otherwise become payable under the Other Agreement, in each case during the
ensuing six (6) month period (all as if this Agreement had not otherwise expired
or been sooner terminated), it additionally being specifically understood and
agreed that, upon the expiration or sooner termination of this Agreement (other
than as a result of the Company's termination of this Agreement for cause) any
and all employee stock options previously granted, to the Employee by the
Company, shall automatically vest, notwithstanding anything to the contrary
contained in any Non-Qualified Stock Option Agreement between the Employee and
the Company, it being understood that, in such event, the provisions of Section
3 (entitled "Vesting") of each such Stock Option Agreement shall thereafter be
deemed to be null, void and of no further force and/or effect.
6. Termination.
a. The employment of the Employee hereunder may be terminated by the
Company on not less than thirty (30) days' prior written notice to the Employee
in the event that the Employee is determined to be permanently disabled. As used
in this Section, the Employee shall be deemed to be "permanently disabled" if
the Employee has been substantially unable to discharge his duties and
obligations hereunder, by reason of illness, accident or disability, for a
period of ninety (90) or more consecutive days, it being understood that in the
event the Employee shall resume the full time performance of his duties
hereunder prior to the effective date of any such termination hereunder, the
Company's termination of this Agreement shall be deemed to be of no further
force
-23-
<PAGE>
and/or effect. In the event the employment of the Employee is terminated
because of a permanent disability, the Employee shall receive (net of all
benefits available to the Employee under any policy of disability insurance
provided to the Employee pursuant to Article 4 hereof) compensation until the
earlier of the date which is three (3) months after the date on which the
Employee first became disabled and the date on which the Term of Employment
shall expire pursuant to Section 1 hereof, payable at the rate and on the terms
provided herein as if he had not been terminated.
b. The employment of the Employee hereunder may be terminated by the
Company, at any time during the Term of Employment, without cause, by the
Company (with the approval of the majority of the members of its Board of
Directors) giving to the Employee not less than ninety (90) days' prior written
notice thereof.
c. The employment of the Employee hereunder shall automatically be deemed
terminated on the date of the Employee's death.
d. The employment of the Employee hereunder may be terminated by the
Company for cause, at any time during the Term of Employment, upon the
Employee's receipt of written notice from the Company documenting that: (i) the
Employee was convicted of a felony; or (ii) in the opinion of a majority of the
members of the Company's Board (other than the Employee, if he shall then be a
member of said Board), as determined at a Board meeting at which the Employee
and his counsel shall be given an opportunity to defend the allegations
contained in any such notice of default from the Company to the Employee, the
Employee shall have intentionally and wilfully refused or failed, or
demonstrated gross negligence in the performance of his assigned duties
hereunder, after not less than ten (10) days' prior written notice (to the
Employee) setting forth the specific conduct complained of and that such
refusal, failure and/or gross negligence would constitute a default hereunder,
to perform, in any material respect, any of his material duties hereunder, other
than any such failure resulting from the Employee's incapacity due to illness or
injury, and the Employee shall have failed to have cured such default(s) within
said ten (10) day period.
With respect to the foregoing, it is expressly understood that: (i) no
act or failure to act on the part of the Employee shall give rise to the
Company's right to terminate this Agreement (pursuant to this Subsection 6(d))
if such act or failure to act was due primarily to an error in judgement and/or
negligence (but not gross negligence) on the part of the Employee.
e. The employment of the Employee hereunder may be terminated by the
Employee, at any time during any renewal Term of Employment, by the Employee
giving to the Company not less than ninety (90) days' prior written notice
thereof.
f. The employment of the Employee hereunder shall automatically be deemed
terminated in the event the SVCI shall elect to terminate the Other Agreement
for any reason whatsoever.
g. If the Employee's employment hereunder is terminated pursuant to this
Section 6, the Employee shall be entitled to, and the Company's obligation shall
be limited to: (i) all compensation accrued, to date, under the Other Agreement
and under each of the provisions of Section 4 hereof to the date of such
termination or, in the case of a termination as a result of the Employee's
disability, to the date specified in Subsection 6(a) hereof; and (ii)in the case
of a termination (other than a termination as a result of the Employee's death,
or a termination, by the Company, of this Agreement for cause pursuant to, and
in accordance with, the provisions of Subsection 6(d) above, and in addition to
the amount payable pursuant to clause (i) above), all Severance Pay to become
due and payable to the Employee pursuant to the provisions of Section 5 hereof.
In addition, it is expressly understood that upon the expiration of the Term of
Employment hereunder, the Employee shall likewise be entitled to the amounts
then payable to the Employee pursuant to clause (i) of this Subsection 6(g),
plus all Severance Pay to become due and payable to the Employee pursuant to
Section 5 hereof.
-24-
<PAGE>
7. Confidentiality.
a. The Employee shall not, during the Term of Employment or at any time
thereafter, use (other than in the performance of his duties to the Company) or
disclose to any person, firm or corporation (except as required by law or with
the prior written approval of the Company) any confidential information
concerning the business, inventions, discoveries, clients, affairs or other
trade secrets of the Company that he may have acquired in the course of, or an
incident to, his employment by the Company.
b. The obligations of confidentiality and non-use set forth in Subsection
6(a) above shall not apply to information: (i) which is or becomes published in
any written document or otherwise is or becomes a part of the public domain
without breach of the aforementioned obligation by the Employee; or (ii) which
the Employee can establish was already in his possession and not subject to a
secrecy obligation at the time he encountered such information in the course of,
or as an incident to, his employment by the Company. Specific information shall
not be deemed published or otherwise in the public domain, or in the Employee's
prior possession, merely because it is encompassed by some general information
published, or in the public domain, or in the Employee's prior possession.
c. As a material inducement to the Company in entering into this Agreement,
and expressly in partial exchange for the performance of the Company's
obligations under this Agreement, the Employee hereby covenants and agrees that,
during the Term of Employment and for a period of six (6) months thereafter, he
will not, either on his own account, or directly or indirectly in conjunction
with or on behalf of any person, firm or company (other than by reason of the
Employee's equity ownership in any publicly traded firm or corporation provided
that such equity ownership shall not confer upon the Employee the right or
ability to influence or direct, directly or indirectly, the management of the
business and/or affairs of any such firm or corporation) solicit or employ, or
attempt to solicit or employ, any person who is then or has, within the six (6)
month period prior thereto, been an officer, director or employee of the Company
or any of its affiliates, whether or not such a person would commit a breach of
his or her contract of employment, if any, by reason of leaving the service of
the Company or any of its affiliates.
8. Mitigation.
The Company hereby acknowledges that it will be difficult, if not
impossible, for the Employee to find reasonably comparable employment following
the termination of this Agreement. Accordingly, the payment of any monies
hereunder (including, but not limited to, the Severance Pay to become payable to
the Employee pursuant to the provisions of Section 5 hereof) in accordance with
the terms of this Agreement is hereby acknowledged by the Company to be
reasonable; and the Employee will not be required to mitigate the amount of any
payment provided for in this Agreement by seeking other employment or otherwise,
nor will any of his profits, income, earnings or other benefits, from any source
whatsoever, create any mitigation.
9. Notices.
Any notice, request, claim, demand or other communication hereunder to any
party shall be effective upon receipt (or refusal of receipt) and shall be in
writing and delivered personally or sent by certified or registered mail, return
receipt requested, postage prepaid, as follows:
(i) If to the Company, addressed to its principal executive offices to the
attention of its President, with a copy to be simultaneously delivered, in care
of the Company, to its Chairman of the Board of Directors; or
(ii)If to the Employee, to him at the address set forth above; or
(iii) At any such other address as either party shall have specified by
written notice given to the other as herein provided.
-25-
<PAGE>
10. Entire Agreement.
The terms of this Agreement and the applicable terms of the Other Agreement
are intended by the parties to be the final expression of their agreement with
respect to the employment of the Employee by the Company (and the retention, of
the Employee, by SVCI) and may not be contradicted by evidence of any prior or
contemporaneous agreement.
11. Amendments; Waivers.
Except as otherwise set forth in Section 6 hereof, this Agreement may not
be modified, amended or terminated except by an instrument, in writing, signed
by the Employee and by the Company's President or Chairman. By an instrument in
writing similarly executed, either party may waive compliance by the other party
with any provision of this Agreement that such other party was or is obligated
to comply with or perform; provided, however, that such waiver shall not operate
as a waiver of, or estoppel with respect to, any other or subsequent failure. No
failure to exercise, and no delay in exercising, any right, remedy or power
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, remedy or power hereunder preclude any other or further
exercise thereof or the exercise of any other right, remedy or power provided
for herein, or by law, or in equity.
12. Severability; Enforcement.
If any provision of this Agreement, or the application thereof to any
person, place or circumstance, shall be held by a court of competent
jurisdiction to be invalid, unenforceable or void, the remainder to this
Agreement and such provisions as applied to other persons, places and
circumstances, shall remain in full force and effect.
13. Assignability.
a. In the event that the Company shall merge or consolidate with any other
corporation, partnership or business entity, such successor shall thereupon
succeed to, and be subject to, all rights, interests, duties and obligations of,
and shall thereafter be deemed for all purposes hereof to be, the Company
hereunder.
b. This Agreement is personal in nature, and none of the parties hereto
shall, without the prior written consent of the other, assign or transfer this
Agreement or any of its or his rights or obligations hereunder, except by
operation of law or pursuant to the terms of this Section 13.
c. Nothing expressed or implied herein is intended or shall be construed to
confer upon, or give to any person, other than the parties hereto (and, with
respect to the Employee, his heirs, executors, administrators and/or trustees)
any right, remedy or claim under, or by reason of, this Agreement, or of any
term, covenant or condition hereof.
14. Governing Law.
The validity, interpretation, enforceability and performance of this
Agreement shall be governed by, and construed and enforced in accordance with,
the laws of the State of New York.
15. Employee's Representation and Acknowledgment.
This Employee hereby represents that he is free to enter into this
Agreement and is not under any contractual restraint which would prohibit him
from satisfactorily performing his duties to the Company hereunder. The Employee
also acknowledges: (i) that he has consulted with or has had the opportunity to
consult with independent counsel of his own choice concerning this Agreement and
has been advised to do so by the Company; and (ii) that he has read and
understands this Agreement, is fully aware of its legal effects and has entered
into it freely, based
-26-
<PAGE>
upon his own judgment.
16. Arbitration.
Any controversy between the Employee and the Company, or any employee,
director or stockholder of the Company, involving the construction or
application of any of the terms, provisions or conditions of this Agreement or
otherwise arising out of, or related to, this Agreement, shall be settled by
arbitration in accordance with the then current commercial arbitration rules of
the American Arbitration Association, and judgment on the award rendered by the
arbitrator may be entered by any court having jurisdiction thereof.
17. Indemnification.
The Company shall indemnify, defend and hold harmless the Employee from and
against any and all losses, damages, liabilities, costs and expenses, including,
without limitation, reasonable attorneys' fees (collectively "Losses"),
resulting from, arising out of, or incident to any threatened, pending or
completed action, suit or proceeding to which the Employee may be made a party
or may be threatened to be made a party by reason of the Employee being or
having been an officer, employee or agent of the Company, or serving or having
served, at the request of the Company, as an officer, employee or agent of any
other person or entity, other than, and expressly excepting, any such Loss
resulting from the gross negligence and/or willful misconduct of the Employee.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the date first written above.
STERLING VISION, INC.
By: /s/ Alan Cohen
--------------------------------
Title: Alan Cohen
-----------------------
President
-----------------------
EMPLOYEE
/s/ Joseph Silver
--------------------------------
Joseph Silver
12 South Drive
Great Neck, New York 11021
-27-
<PAGE>
EXHIBIT 11.02
LEGAL FEE RETAINER AGREEMENT
THIS AGREEMENT, dated as of the 29th day of February, 2000, is between
Sterling Vision of California, Inc., a Delaware corporation having an office at
1500 Hempstead Turnpike, East Meadow, New York 11554 (the "Company"), and Joseph
Silver, an individual residing at 12 South Drive, Great Neck, New York 11021
(the "Attorney").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Company desires to retain the services of the Attorney and the
Attorney desires to be retained by the Company upon the terms and conditions
hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual agreements and understandings
set forth herein, and for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the Company and the Attorney hereby
agree as follows:
1. Term of Retention.
The Company hereby retains the Attorney to render legal services to the
Company, and to act as its General Counsel, commencing on March 1, 2000 (the
"Effective Date") and continuing thereafter for, during and throughout the Term
of Employment, as such term is defined in that certain Employment Agreement (the
"Employment Agreement"), dated the date hereof, between Sterling Vision, Inc., a
New York corporation ("SVI") and the Employee (the "Employment Agreement") it
being understood that, upon the expiration or sooner termination of the Term of
Employment under said Employment Agreement, this Agreement shall likewise expire
and/or terminate. For purposes of this Agreement, the "Term of Retention" shall
be the period commencing on the Effective Date, through and including the
expiration or sooner termination of the Term of Employment set forth in the
Employment Agreement.
2. Fees and Expenses.
(a) Fees. In consideration of the services to be rendered hereunder, the
Attorney, during the initial twelve (12) months of the Term of Retention, shall
be paid legal fees computed at the rate of One Hundred Thirty Eight Thousand
Eight Hundred ($138,800) Dollars per annum, and at the rate of One Hundred Forty
Five Thousand Seven Hundred ($145,700) Dollars per annum during the remaining
months of the Term of Retention, if any, payable, in each case, in substantially
equal, semi-monthly installments.
(b) Expenses. The Attorney shall be entitled to reimbursement for all
ordinary and necessary business expenses incurred in the performance of his
services hereunder, subject to the Company's receipt of adequate substantiation
and/or documentation thereof.
3. Termination.
(a) The retention of the Attorney hereunder shall automatically terminate
upon the date of the expiration or the sooner termination of the Term of
Employment, in each case, pursuant to, and in accordance with, the provisions of
the Employment Agreement.
(b) If the Attorney's retention is terminated pursuant to this Section 3 the
Attorney shall be entitled to, and the Company's obligation shall be limited to,
the payment of the legal fees accrued under Subsection 2(a) hereof to the date
of such termination.
-28-
<PAGE>
4. Confidentiality.
(a) The Attorney shall not, during the Term of Retention or at any time
thereafter, use (other than in the performance of his duties to the Company) or
disclose to any person, firm or corporation (except as required by law or with
the prior written approval of the Company) any information concerning the
business, inventions, discoveries, clients, affairs or other trade secrets of
the Company that he may have acquired in the course of, or as an incident to,
his retention by the Company.
(b) The obligations of confidentiality and non-use set forth in Subsection
(a) above shall not apply to information: (i) which is or becomes published in
any written document or otherwise is or becomes a part of the public domain
without breach of the aforementioned obligations by the Attorney; or (ii) which
the Attorney can establish was already in his possession and not subject to a
secrecy obligation at the time he encountered such information in the course of,
or as an incident to, his retention by the Company. Specific information shall
not be deemed published or otherwise in the public domain, or in the Attorney's
prior possession, merely because it is encompassed by some general information
published, or in the public domain, or in the Attorney's prior possession.
5. Notices.
Any notice, request, claim, demand or other communication hereunder to any
party shall be effective upon receipt (or refusal of receipt) and shall be in
writing and delivered personally or sent by telex, telecopy, or certified or
registered mail, return receipt requested, postage prepaid, as follows:
(a) If to the Company, addressed to its principal executive offices to the
attention of its President, with a copy to be simultaneously delivered, in care
of the Company, to the Chairman of its Board of Directors; or
(i) If to the Attorney, to him at the address set forth above.
6. Assignability.
(a) In the event that the Company shall merge or consolidate with any other
corporation, partnership or business entity, such successor shall thereupon
succeed to, and be subject to, all rights, interests, duties and obligations of,
and shall thereafter be deemed for all purposes hereof to be, the Company
hereunder.
(b) This Agreement is personal in nature, and none of the parties hereto
shall, without the prior written consent of the other, assign or transfer this
Agreement or any of its or his rights or obligations hereunder, except by
operation or law or pursuant to the terms of this Section 6.
(c) Nothing expressed or implied herein is intended or shall be construed to
confer upon, or give to any person, other than the parties hereto, any right,
remedy or claim under, or by reason of, this Agreement, or of any term, covenant
or condition hereof.
7. Governing Law.
The validity, interpretation, enforceability and performance of this
Agreement shall be governed by, and construed in accordance with, the laws of
the State of New York.
8. Indemnification.
The Company shall indemnify, defend and hold harmless the Employee from and
against any and all losses, damages, liabilities, costs and expenses, including,
without limitation, reasonable attorneys' fees (collectively "Losses"),
resulting from, arising out of, or incident to any threatened, pending or
completed action, suit or proceeding to which the Attorney may be made a party
or may be threatened to be made a party by reason of the Attorney being or
having been an officer, employee or agent of the Company, other than, and
expressly excepting,
-29-
<PAGE>
any such Losses resulting from the gross negligence and/or willful misconduct of
the Employee.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
date first written above.
STERLING VISION OF CALIFORNIA, INC.
By: /s/ Robert Cohen
----------------------------------
Title: Robert Cohen, Chairman
-------------------------------
ATTORNEY:
/s/ Joseph Silver
-------------------------------------
Joseph Silver
12 South Drive
Great Neck, New York 11021
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED CONDENSED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED
MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 13,966
<SECURITIES> 0
<RECEIVABLES> 19,797
<ALLOWANCES> 3,027
<INVENTORY> 1,880
<CURRENT-ASSETS> 29,753
<PP&E> 11,154
<DEPRECIATION> 5,990
<TOTAL-ASSETS> 53,101
<CURRENT-LIABILITIES> 10,031
<BONDS> 6,275
0
7,782
<COMMON> 222
<OTHER-SE> 33,027
<TOTAL-LIABILITY-AND-EQUITY> 53,101
<SALES> 4,801
<TOTAL-REVENUES> 7,580
<CGS> 1,312
<TOTAL-COSTS> 9,588
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 226
<INTEREST-EXPENSE> 219
<INCOME-PRETAX> (1,975)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,975)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,975)
<EPS-BASIC> (1.67)
<EPS-DILUTED> (1.67)
<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>
