U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-SB/A
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS UNDER SECTION 12(b)
OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
EYECITY.COM, INC.
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(Name of Small Business Issuer in Its Charter)
Delaware 11-3327465
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(State or Other Jurisdiction of Incorporation (I.R.S. Employer
or Organization) Identification No.)
79 Express Street
Plainview, New York 11803
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(Address of Principal Executive Offices) (Zip Code)
(516) 822-5000
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(Issuer's Telephone Number)
Securities to be registered under Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which
to be so Registered Each Class is to be Registered
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NONE NONE
Securities to be registered under Section 12(g) of the Act:
Common Stock, $.001 par value per share
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(Title of Class)
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
EyeCity.com, Inc. ("EyeCity") is engaged in the marketing, distribution
and retail sale over the Internet of a broad range of eyewear products and
optical accessories, including brand name sunglasses, contact lenses,
binoculars, prescription eyewear, telescopes, sports and lifestyle eyewear and
hunting glasses. The annual United States optical product market is estimated at
$15.8 billion. EyeCity is in the process of effecting an acquisition strategy
within the highly fragmented Internet optical industry, and has recently closed
on the acquisition of three companies retailing optical products over the
Internet. Through this strategy, as well as internal expansion, EyeCity intends
to become the leading e-commerce retailer of eyewear and optical accessories and
related content on the Internet, providing one-stop shopping for domestic and
international customers in an easy-to-shop environment, 24 hours a day, seven
days a week. EyeCity intends to acquire additional complementary businesses as
opportunities arise from time to time.
EyeCity believes that its websites, including Peepers.com,
EyeGlassPlace.com, OpticalSite.com, SunglassSite.com and Abeam.com offer the
largest online selection of brand name sunglasses.
EyeCity coordinates and processes order fulfillment and customer service
for all of its websites through EyeCity's centralized Minnesota distribution
facility. We believe optical product retailing is well positioned to benefit
from the attractive cost structures of online retail operations. While
traditional store-based optical retailers must make significant investments in
inventory, real estate and personnel for each store location, online retailers
such as EyeCity incur significantly lower related costs. Additionally, while
traditional retailers are constrained in the amount of inventory they can carry
at each store and are therefore required to focus on a smaller selection, online
retailers such as EyeCity can offer consumers a broader range of product
offerings without having to incur as significant an investment in inventory
because on line retailers do not need to fill store shelves with merchandise
which can lead to overstocking and can result in slower inventory turn and
strains on cash flow.
EyeCity is in the process of designing and constructing its Internet
SuperSite, which will complement EyeCity's family of existing e-commerce web
sites. Each site targets various eyewear consumer niche markets. The new site,
www.eyecity.com, is anticipated to be launched in early 2000. In the short term,
the SuperSite will offer consumers one of the broadest online selections of
brand-name sunglasses, contact lenses, prescription eyewear and optical
products, as well as an extensive selection of lifestyle eyewear for golfing,
fishing and extreme sports and informative content relating to eyecare and
optical fashion and health. As part of its long term strategy, EyeCity also
intends to expand its online prescription lenses fulfillment service and,
subject to identifying and obtaining rights to the appropriate technology, may
in the future offer innovative "Try It On" technology, which mirrors the
in-store browsing experience by allowing consumers to choose the eyeglasses best
suited to the shape of their face. EyeCity expects to generate online traffic to
its SuperSite primarily by establishing strategic partnerships with traditional
optical companies and with major online retailers of non-optical merchandise and
by enhancing and expanding its existing portal relationships with heavily
trafficked online portals and search engines.
In addition, in September 1999 EyeCity acquired a non-exclusive three year
license from Yahoo! Inc. to use the "Yahoo!" name and logo for the distribution
and marketing of
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eyewear and eyewear accessories throughout the United States. Contemporaneously
with this transaction, EyeCity entered into a distributor agreement with Sun
Optics d/b/a Insight Eyeworks, Inc. under which Insight will manufacture, market
and distribute the Yahoo! eyewear and eyewear accessories in traditional retail
channels in the United States other than through the Internet and other
e-commerce channels.
The SuperSite will also carry EyeCity's patented EyeTools computer
eyeglasses, which were developed to relieve Computer Vision Syndrome ("CVS"), a
potentially debilitating condition that results in headaches, blurred vision and
eyestrain often associated with CVS. EyeTools computer eyeglasses feature a
patented lens technology that enables the computer user to focus more clearly by
minimizing glare and equalizing all sources of ambient lighting, such as from
windows and overhead sources.
From EyeCity's inception through December 1998, EyeCity's business
strategy was to become a leading producer, distributor and marketer of ergonomic
computer eyewear products designed to alleviate health related problems
associated with CVS. In January 1999, EyeCity refocused its business strategy to
capitalize on the internet retailing opportunities associated with the optical
product industry. In this regard, in 1999 EyeCity acquired Eye Glass Place.com,
Inc., Peeper's Sunglasses and Accessories, Inc. and SunSource Technology, Inc.
See Note 5 of "Notes to Financial Statements" for additional information
regarding these acquisitions.
Effective November 17, 1999, EyeCity's common stock was delisted by NASDAQ
from quotation on the Over The Counter Bulletin Board. EyeCity's common stock is
anticipated to be quoted on the "pink sheets", assuming market makers are
willing to make a market in EyeCity's common stock. Following final
effectiveness of this Form 10, EyeCity intends to reapply for listing of its
securities on the Over The Counter Bulletin Board. There can be no assurance
that such market makers will make markets in EyeCity's stock, or that the stock
will again be listed on the Bulletin Board.
EyeCity was incorporated in May 1996 in New York under the name
Ergovision, Inc., and reincorporated in Delaware in April 1997 under the name
Ergovision, Inc. In May 1999, Ergovision, Inc. changed its name to EyeCity.com,
Inc. EyeCity's principal executive offices are located at 79 Express Street,
Plainview, New York 11803, and its telephone number is 516-822-5000.
Optical Industry Overview
General. EyeCity believes that a substantial opportunity exists for
expanding retail sales of optical products on the Internet. The United States
optical industry serves approximately 161 million Americans with refractive
needs, approximately 101 million of whom made eyewear-related purchases within
the last year. According to the Jobson Optical Group Data Base ("Jobson"), U.S.
retail eyewear sales were approximately $15.4 billion in 1997, representing a
5.5% increase over the $14.6 billion that was spent in 1996, which 1996 sales
reflected a 5.5% increase over 1995. According to Jobson, U.S. retail sales of
optical products increased to approximately $15.8 billion in 1998, representing
a 2.6% increase over 1997.
EyeCity believes that current demographic trends, technological
innovation, medical advances and relatively attractive profit margins are
fueling the optical industry's growth. EyeCity believes that as the United
States population ages and grows in size, the demand for vision correction and
eyewear products will increase. Moreover, EyeCity believes that advances in
optical technology will spur consumer interest in high-performance optical
products.
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Sunglasses. According to Jobson, United States retail sunglass sales were
approximately $3 billion in 1997, an increase of 2% and 10% over 1996 and 1995,
respectively.
EyeCity believes that growth in sunglass sales has been primarily driven
by:
o Enhanced Fashion Lines by well-known fashion designers who have
added sunglass lines and promoted sunglasses as a key fashion
accessory;
o Heightened Health Concerns due to awareness of the harmful effects
of ultraviolet light and the further depletion of the Earth's ozone
layer, causing consumers to seek additional eye protection;
o Increased Variety of Specialized Sunglass Products to serve growing
consumer demand for specially designed sunglasses for a variety of
sports and activities; and
o Continuous Product Replacement by consumers who must continually
replace lost, stolen or broken sunglasses.
Contact Lenses. According to Jobson, in 1998 there were approximately 33
million contact lens wearers in the United States, generating domestic sales of
approximately $2.2 billion. Contact lenses have become a convenient, cost
effective alternative to eyeglasses and the number of contact lens wearers is
expected to increase as technology further improves the convenience, comfort and
fit of contact lenses. Growth in this market is due largely to the shift away
from traditional soft lenses, which generally are replaced on an annual basis,
to disposable lenses, which are replaced on a daily, weekly, or bi-weekly basis.
Traditionally, contact lenses were almost exclusively sold to consumers by
eyecare practitioners, including ophthalmologists and optometrists. Eyecare
practitioners would typically supply a patient with his or her initial pair of
contact lenses in connection with providing the patient an eye examination and
all replacement lenses, regardless of whether the patient was given or required
another eye examination. Because the initial fitting of contact lenses requires
a prescription written by an eyecare practitioner, the initial sale of contact
lenses still takes place primarily in this manner.
Over the last decade, however, a number of alternative sellers of
replacement contact lenses have emerged, including direct marketers. Purchasing
replacement contact lenses from a direct marketer offers the convenience of
shopping at home, rapid home delivery, quick and easy telephone or Internet
ordering and competitive pricing. In addition, the growth in popularity of
disposable contact lenses, which require patients to purchase replacement lenses
more frequently, has contributed to the growth of the direct marketing channel.
Prescription Eyeglasses. The prescription eyeglass industry is highly
fragmented. In the last decade, general merchandise chains - both large discount
stores and warehouse clubs such as Wal-Mart, Price Club/Costco and Sam's
Distributors - entered the optical industry. EyeCity believes the increase in
market share of the warehouse club segment has caused both the superstore and
non-superstore chains to experience lower margins. Some chains have downsized
physically - the superstores of the late 1980's (those containing a surfacing
laboratory and offering one-hour service) have, in many instances, been replaced
by smaller stores that do not contain a surfacing laboratory to provide such
service. Accordingly, EyeCity believes non-superstore formats, including online
optical retailers, have been gaining market share at the superstores' expense.
See "Government Regulation" and "Competition" for a discussion of certain
industry practices which may adversely impact the direct marketing of contact
lenses and prescription eyeglasses, including online marketing.
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Business Strategy
EyeCity's business strategy includes the following key elements:
o Offer Largest Online Selection of Optical Products and Related
Merchandise: EyeCity intends to offer consumers one of the broadest
online selections of optical products including sunglasses, contact
lenses, prescriptions eyewear, lifestyle eyewear, reading glasses
and over-the-counter eyecare pharmaceuticals and related items in an
interactive and personalized environment.
o Implement E-commerce Expansion through Acquisitions: EyeCity intends
to continue to seek selective acquisitions of online optical product
retailers in order to further build market share, broaden its
product line and to benefit from operating efficiencies and
economies of scale.
o Create Strong Brand Awareness of, and Customer Loyalty Towards, the
EyeCity.com SuperSite: EyeCity believes that building brand
awareness of, and strong customer loyalty towards, its SuperSite
will be critical to attracting and expanding EyeCity's consumer
base. EyeCity intends to promote its brand identity through online
and traditional media and event sponsorships, by providing
informative content and by establishing strategic relationships with
other websites to act as their online optical retailer and related
content provider. EyeCity expects that brand awareness will also be
reinforced through sub-branding opportunities on its specialty niche
websites.
In order to foster customer loyalty, EyeCity will strive to
offer its customers compelling value through innovative use of
simple and efficient navigation and search technology, broad product
selection, high-quality content, competitive pricing and
personalized customer service. EyeCity intends to increase market
share and encourage customers to make repeat purchases through a
Frequent Buyer's Club program that will reward customers with points
that can be used as credits towards future purchases.
o Develop Strategic Industry, Website and Portal Alliances: EyeCity
intends to establish strategic alliances with global optical
companies and with online retailers of non-optical products to
attract additional users to, and increase brand awareness of, the
www.eyecity.com SuperSite. EyeCity also intends to expand and
enhance its existing relationships with online portals and search
engines to generate increased online traffic to the SuperSite.
There can be no assurance that EyeCity will be able to
identify, negotiate or obtain financing for future acquisitions, or
to integrate the acquisitions with its current business, or that the
process of integrating an acquired business, technology, service or
product into EyeCity will not result in unforeseen operating
difficulties and expenditures or that the anticipated benefits of
any acquisition will be realized. EyeCity cannot guarantee that its
branding efforts and alliance strategies will be successful.
Products
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EyeCity currently operates the following Web sites, offering the following
products:
WebSites Products
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Peepers.com Brand name sunglasses
Eyeglassplace.com Brand name sunglasses
Sunglassite.com Brand name sunglasses
Abeam.com Brand name sunglasses
Opticalsite.com Prescription lenses; contact lenses;
brand name sunglasses
Binoculars.com Binoculars, telescopes, concert
glasses, night vision goggles and
riflescopes
Ergovision.com Computer glasses and eyedrops
Foggles.com Sports and lifestyle glasses
EyeCity's principal merchandising strategy is to distinguish its websites
by offering a larger and more focused selection of optical products than its
competitors. EyeCity currently carries the following merchandise lines:
o Sunglasses. EyeCity offers a wide variety of function, sport and
fashion sunglasses. The term "function" sunglasses generally refers
to the industry's more traditional and well-recognized brands and
styles, including Ray-Ban's "Wayfarer" and classic aviator
sunglasses, as well as the leading Serengeti, Revo and Vuarnet
lines. In the sports category, EyeCity sells specialized lightweight
and impact resistant sunglasses for cycling, skiing and a variety of
other sports and activities. EyeCity also offers a broad selection
of designer fashion frames for men, women and children.
o Prescription Eyeglasses. EyeCity, through its Peepers.com and
Opticalsite.com websites, offers prescription eyeglasses to online
consumers in a wide variety of fashion frames.
o Recreational Products. EyeCity's Binoculars.com website offers an
array of brand-name vision enhancing recreational products including
binoculars, telescopes, concert glasses, night vision goggles and
riflescopes, as well as specialized eyewear for hunters and aviation
pilots.
o Contact Lenses. Contact lenses can be divided into two categories,
soft lenses and hard lenses, which represent approximately 80% and
20% of U.S. wearers, respectively. EyeCity offers substantially all
of the soft and hard contact lenses produced by the leading contact
lens manufacturers, including Johnson & Johnson, CIBAVision, Wesley
Jessen/Barnes-Hind, Bausch & Lomb and CooperVision.
o EyeTools Computer Eyewear Products. EyeCity offers three different
styles of its patented EyeTools computer glasses. EyeTools are
intended to relax the eyes and ameliorate visual discomfort, focus
difficulties, headaches and other related problems associated with
CVS. EyeCity also offers EyeTools computer eye drops which are
designed to treat dry eye syndrome caused by prolonged computer use.
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o Accessories. EyeCity sells cords, cleaning cloths, eyeglass cases
and other related optical accessories. EyeCity intends to increase
its optical accessory sales by devoting additional resources to
improve the quality, breadth and visual presentation of such
merchandise.
The EyeCity.com SuperSite
www.eyecity.com, EyeCity's umbrella SuperSite, which is anticipated to be
launched in early 2000, is being designed to provide consumers with an
attractive, easy-to-shop, content-rich online optical shopping experience. As
with a physical retail store, online customers will be able to browse the
various departments of EyeCity, search for specific optical needs, view
specially promoted products, obtain product information, order products and
obtain customer service. In contrast to a physical retail store, however, an
EyeCity consumer's optical shopping experience will be had in the comfort and
convenience of his or her home or office. In addition, EyeCity intends that its
online SuperSite will have separate departments that cater to individual
interests, hobbies and lifestyles.
The SuperSite, as well as the separate niche websites operated by EyeCity,
are linked to EyeCity's centralized Minnesota distribution facility, which
handles all purchasing, order processing, fulfillment, customer service and
inventory control. Customers will be able to satisfy their eyewear needs by
visiting the Peepers.com, Eyeglassplace.com, Sunglasssite.com, Abeam.com,
Opticalsite.com, Binoculars.com, Ergovision.com and Foggles.com websites and
directly through the EyeCity SuperSite when launched. See "Distribution
Fulfillment and Inventory".
The SuperSite is being designed to provide the following:
o Browsing Section: EyeCity will organize its optical product
offerings into a simple set of departments and sub-departments. By
clicking on the department name, the consumer will quickly target
products of interest. This feature will also include special
categories containing bestsellers and manufacturers' best picks.
o Searching Section: The SuperSite will provide an interactive search
engine and a selection of search tools that will allow customers to
find items based on pre-selected criteria such as manufacturer,
product model number, style, brand, price and frame or lens color.
o Personalized Customer Section: The SuperSite will welcome customers
to the site, where they can provide demographic information which
will be used to recommend a choice of eyewear customized for that
particular user. EyeCity will automatically e-mail order
confirmations thanking the customer for the order. Customers also
will be given the option of being informed of new products and
special promotional offers.
o Contest Giveaway Section: This section of eyecity.com will feature a
contest offering giveaways of optical products. Browsers will enter
their e-mail addresses in this section and be notified by email if
they have won. The winner's name will be posted daily in this
section. EyeCity believes that this contest giveaway will increase
overall online traffic to, and enhance the brand awareness of,
EyeCity.
o Ask the Doctor Section: EyeCity intends to make available an "Ask
the Doctor" content section which will provide consumers with
product information and with the opportunity to engage in Q&A
sessions with
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eyecare professionals, including optometrists and ophthalmologists.
These eyecare professionals will provide customers with general
information regarding eye disorders, eyecare, laser vision
correction and contact lens usage, and with answers to
product-specific questions. Articles relating to these and other
topics will be prominently featured on this portion of the website.
o Children's Forum Section: EyeCity's "Children's Forum" section will
contain eyecare tests and interactive games intended to educate
children about their eyes and eye care. Children will have the
opportunity to ask questions, post messages and interact with one
another.
o "Try it on" Section: EyeCity intends, subject to identifying and
obtaining rights to the appropriate technology, to license or
independently develop technology that will allow users to scan their
photographs and to superimpose any style of glasses from EyeCity's
vast product line onto the scanned photograph. This feature is
intended to provide the online consumer with a true "in-store"
experience. This software package will also enable the customer to
try on multiple pairs of glasses simultaneously, a feature that
cannot be achieved in a physical store.
o Donate a Pair Section: EyeCity will seek charitable partners to
distribute used eyeglasses that are donated by EyeCity customers.
Customers will donate their old eyeglasses and receive a gift
certificate redeemable for purchases at EyeCity. The old eyeglasses
will then be issued, free of charge, to those in need.
See "Technology and Security" for a discussion of customer security and
privacy protocols.
Eye City believes that the aggregate costs which it will incur in
connection with developing the initial launch of the SuperSite will be
approximately $565,000; these costs to date have been approximately $165,000.
There can be no assurance that the implementation of the SuperSite or other
contemplated expansions of EyeCity's operations will be completed in a
cost-effective or timely manner, that consumers will react positively to
EyeCity's sales strategy, SuperSite or family of websites or that any such plans
will be successful. Expansion of EyeCity's operations would also require
significant additional financing and operating expenses and could strain
EyeCity's management, financial and operational resources. Furthermore, any new
business or service launched by EyeCity that is not favorably received by
consumers could have an adverse effect on EyeCity's reputation and diminish the
value of its brand name.
Marketing and Promotion
EyeCity's marketing plan is to distinguish itself by offering the largest
variety of products, shopping convenience, ease-of-use and more advanced
technology than any current online optical retailer, an enhanced user experience
as compared to in-store purchasing, strategic partnerships with major online
retailers and portal relationships with exclusive key words to build significant
site traffic, and additional marketing strategies discussed below.
EyeCity's marketing strategy includes promoting and increasing EyeCity's
brand visibility and acquiring new customers by developing distribution
alliances with major portal sites, advertising on leading sites and other
traditional media, expanding EyeCity's affiliates
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network, and targeting linking programs and direct marketing to existing and
potential customers. EyeCity may determine in the future to continue the flow of
traffic to the acquired sites or to point all traffic to the www.eyecity.com
SuperSite.
The key features of EyeCity's marketing strategy are:
o Customer Retention: EyeCity intends to implement a Frequent Buyer's
Club program, allowing members to receive discounts and free
merchandise based on a certain volume of purchases. This program
will also provide EyeCity with the ability to collect user
demographics to facilitate targeted marketing of a member's on-line
optical purchases. A key strategy is to incentivise contact lens
users to purchase other optical products. EyeCity intends to use an
existing technology known as a "cookie," to track basic user actions
and sessions on the EyeCity website. The "cookie" technology will be
able to restore a customer's shopping basket and on-line session
even if the customer leaves EyeCity and returns later. EyeCity
believes that the use of this technology will facilitate and
encourage customers to spontaneously visit and return to EyeCity's
website.
o Consumer Database Marketing. EyeCity will use database marketing to
learn its customers' lifestyle and preferences. After collecting
consumer data, EyeCity will send customers e-mail messages
containing discount coupons, information regarding new product
releases and special sales, in each case geared towards the
customer's previous purchasing and browsing patterns. EyeCity
intends to implement collaborative filtering software to personalize
the EyeCity website to each individual customer and provide product
recommendations derived from each customer's historical buying and
browsing patterns.
o Online and Traditional Advertising: EyeCity intends to direct online
traffic to www.eyecity.com by advertising on other websites,
including HotBot, Yahoo, Excite, Lycos and Infoseek. EyeCity intends
to use ad-server technology which will allow it to change its
advertising by delivering program code directly to the websites
hosting EyeCity's ads. Advertising websites will be chosen based on
their cost relative to their ability to generate traffic for EyeCity
and the likely audience to be targeted by advertising on such
websites. Additionally, EyeCity intends to participate in numerous
in-house and manufacturer sponsored promotions. EyeCity expects that
these promotions will be web-based and will be geared to specific
manufacturers, product categories and buyer segments. In the longer
term, EyeCity will also utilize more traditional advertising,
including television, radio and print.
o Linking and Affiliate Programs: To direct traffic to
www.eyecity.com, EyeCity intends to aggressively expand and enhance
its existing marketing linking program to create inbound links to
its website from other sites on the Web. These links allow potential
customers to simply click on the link and be connected to EyeCity
from other search engines, manufacturers' websites, community and
affinity sites and home pages. Affiliates become registered through
entering into contractual referral arrangements with EyeCity.
Registered affiliates are generally paid a referral of 5% of the net
invoice amount of any sale generated via the affiliate's link to
EyeCity.
o Direct Internet Marketing: EyeCity intends to implement various
direct marketing programs that will allow it to communicate on a
regular basis with
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its customers. These programs will be custom tailored to its
customers' demographic profiles. An e-mail will be sent out to all
customers on a regular basis informing them of product specials and
new product arrivals. This proactive marketing approach will allow
EyeCity to alert existing customers to new buying opportunities.
EyeCity also participates in an "in the box" marketing program in which
EyeTools direct-sell marketing materials are inserted in Hewlett Packard
shipping packages containing new computers. This program has already begun to
generate orders from Hewlett Packard end users. EyeCity also sells the EyeTools
product line via the Internet to major corporations, and sells its Foggles
optical products for the aviation, hunting and shooting industries through
distributors, catalogues, direct advertising, retail stores and the Internet.
EyeCity believes that continuing to strengthen the EyeCity brand is
critical to achieving widespread acceptance, particularly in light of the
competitive nature of EyeCity's market. In order to implement this strategy,
EyeCity will need to effect additional significant financings. However, there
can be no assurance that EyeCity will be able to obtain financing or will be
able to do so on favorable terms. See "Management's Discussion and Analysis or
Plan of Operation" There can be no assurance that the foregoing marketing and
brand promotion activities will yield increased revenues or that any such
revenues would offset the expenses incurred by EyeCity in building this brand.
Further, there can be no assurance that any new users attracted to the SuperSite
will conduct transactions through the SuperSite or EyeCity's family of websites
on a regular basis. If EyeCity fails to promote and maintain its brand or if it
incurs substantial expenses in an attempt to promote and maintain its brand
without generating significant revenues, or if EyeCity's existing or future
strategic relationships fail to increase brand awareness, EyeCity's business,
results of operations and financial condition could be materially adversely
affected.
Distribution, Fulfillment and Inventory
EyeCity utilizes a centralized order processing, distribution,
fulfillment, customer service and warehousing facility located in Duluth,
Minnesota.
During early 2000, the acquired sites and the completed SuperSite will be
linked with one back end, which is currently under construction as part of the
SuperSite initiative. The back end will store all marketing intelligence, order
processing, inventory needs and financial data for all of EyeCity's divisions
and specific niche sites. This back end will allow for complete monitoring of
the sites. EyeCity intends to use an integrated packing and shipping system with
an on-line connection to EyeCity's management information system. This system
will monitor the in-stock status of each item ordered, process the order and
generate warehouse selection tickets and packing slips for order fulfillment
operations.
Currently, EyeCity's websites operate as independent entities and orders
are accumulated and processed by a single point of sale order fulfillment
system. Under the present system, once an order is received, EyeCity's
point-of-sale computer system checks the order against its inventory. If the
item ordered is in stock, the point-of-sale system prints an order request and a
mailing label, which are retrieved by EyeCity's staff on an ongoing basis during
business hours. Orders are shipped through one of several channels, as selected
by the customer, including regular U.S. mail, United Parcel Service, second-day
air or overnight courier, with shipping charges varying by the carrier selected.
Orders are shipped the same day that they are placed if the product is in stock.
An e-mail is also sent the same day thanking the customer for shopping at
EyeCity. If the product is not in stock, the customer is notified on the website
and alternative product suggestions are offered. If the
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customer desires to order the currently out-of-stock product anyway, the product
is back-ordered and is shipped to the customer as soon as it is available.
EyeCity expects that it generally will purchase product directly from
manufacturers and distributors on an as-needed basis to fill orders. EyeCity has
analyzed its customers' buying patterns and will carry a minimal level of
inventory, stocking only the most popular items to ensure timely delivery to the
customer. EyeCity currently purchases the limited inventory it does carry
primarily directly from manufacturers, including Ray-Ban Sun-Optics, a Luxottica
Group Company, and Canon and, to a lesser extent, from buying groups and
distributors. To the extent that EyeCity needs inventory not in stock at the
time, EyeCity contacts the manufacturer, buying group or distributor which
supplies the product and it is shipped to EyeCity. EyeCity believes that this
inventory and distribution strategy enables it to achieve favorable pricing and
optical product availability. One supplier, Ray-ban Sun-Optics, accounted for
approximately 33.3% of EyeCity's retail sales revenues in 1998 and 28.0% of
EyeCity's retail sales revenues for the first nine months of 1999. EyeCity does
not have contractual fulfillment arrangements with its suppliers and purchases
product in the ordinary course of business on a purchase order basis. In the
event that any of these suppliers could no longer supply EyeCity with optical
products, EyeCity may not be able to secure other adequate sources of supply on
a timely basis, or may not be able to obtain its inventory on terms as favorable
to EyeCity as its current supply. Either circumstance could adversely affect
EyeCity by increasing its costs or, in the event adequate replacement supply
cannot be secured, could cause EyeCity to lose sales and customers.
EyeCity fulfills orders for prescription eyeglasses through eyeglass
grinding laboratories in the United States with whom EyeCity has non-contractual
arrangements. When an order is placed with EyeCity, EyeCity provides the
laboratory with the prescription information provided by the customer and the
frames that have been selected by the customer. Lenses are usually manufactured
by the laboratory within two to three business days if the necessary materials
are in stock; otherwise, orders are processed as soon as possible after the
materials become available.
EyeCity cannot assure you that it has anticipated all of the changing
demands that its expanding operations will impose on its receiving and
distribution system or that events beyond EyeCity's control, such as disruptions
in operations due to labor disagreements, shipping problems, fires or natural
disasters, will not result in a material adverse effect on EyeCity's business,
results of operations and financial condition.
EyeCity's success depends, in part, on its ability to provide prompt,
accurate and complete service to its customers on a competitive basis, and its
ability to purchase and promote products, manage inventory, ship products,
manage sales and marketing activities and maintain efficient operations through
its management information systems and particularly its various websites. A
significant disruption in EyeCity's management information systems or websites
could adversely affect EyeCity's relations with its customers and its ability to
manage its operations and would have a material adverse effect on EyeCity's
business, financial condition and results of operations. EyeCity's ability to
compete effectively and to manage future growth, if any, will require EyeCity to
continue to improve its financial and management controls and its reporting
systems and procedures on a timely basis and to expand, train and manage its
employee base. EyeCity's failure or inability to accomplish any of these goals
could have a material adverse effect on its business, financial condition and
results of operations.
Customer Service
EyeCity intends to offer state of the art customer service to generate
repeat customers and grow market share. The Customer Service area of the
SuperSite will contain
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extensive information about shopping for, ordering and returning products.
Shipping charges, payment options, and other policies will be explained for the
customer. Help buttons on every page of the site will take customers to the
specific customer service topic they need. Customers will be able to track the
current status of their orders, including getting the shipper tracking numbers.
Because the concept of Internet retail is new to many people, EyeCity will
prominently display its toll-free number throughout the site. Customer service
agents currently are and will be available to answer customer questions about
products and the shopping process.
EyeCity is also considering implementing, subject to obtaining appropriate
financing, commercially available technology which will enable the end user to
communicate via the internet live with customer service representatives during
specially posted hours. This interactive customer service feature will enable
real time communication with the end user and allow for one to one customer
service and marketing. The system will allow the customer service representative
to respond to all customer questions asked by the customer as well as to push
certain web pages to the customer to answer all of their questions.
Currently, customers of EyeCity's websites order products by accessing
EyeCity's websites via the World Wide Web on the Internet. Once there, a
customer selects the category of products that they wish to browse (e.g.,
sunglasses, binoculars, etc.). A list of brands is then presented, from which
the customer chooses one to browse. Within each page devoted to a brand will be
either pictures and descriptions of products or a list of "catalogs," each
containing pictures and descriptions of a particular brand's products. If a
customer does not see a product that they like in a given catalog, they can
easily go back to the list of catalogs, the list of brands or to the main page
of the site. Customers who have selected all of the products that they wish to
purchase are prompted to confirm their selection and to provide billing and
shipping information through a secure Internet connection.
When ordering prescription products, customers can either enter their
prescription information online, with their doctor's name and number so that an
EyeCity employee can attempt to confirm the prescription, or the customer may
fax or mail a hard copy of their doctor's written prescription. Once the
prescription information is confirmed, if the customer is ordering prescription
eyeglasses, the frames selected by the customer are shipped to an eyeglass
grinding laboratory, where the lenses are cut, glazed, and inserted into the
frames and then shipped back to EyeCity. EyeCity then ships the finished product
to the customer.
EyeCity maintains a toll-free telephone number for taking orders, handling
customer service (including assisting customers and suggesting styles or brands
of products that might suit the customer's taste) and receiving credit card
information from those customers who choose not to provide this information via
the internet. EyeCity also accepts orders by fax and accepts payments by money
order or check.
EyeCity ships products to customers by United States mail and other
overnight delivery and surface services. In addition, EyeCity uses direct
mailings to advertise its products and receives a majority of its payments from
customers using credit cards. Any increases in shipping, postal or credit card
processing rates could have an adverse effect on EyeCity's operating results as
EyeCity may not be able to effectively pass such increases on to its customers.
Similarly, strikes or other service interruptions by these shippers could
adversely affect EyeCity's ability to market or deliver its products on a timely
basis.
Once the merchandise is delivered, the customer may return it for a full
refund for any reason if it is shipped back to EyeCity within seven days, and
for a credit against other purchases if it is shipped back within thirty days.
To date, returns have not been material to EyeCity's results of operations.
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Technology and Security
Subject to obtaining additional financing, EyeCity intends to license
additional commercially available technology and integrate such technology with
EyeCity's proprietary technology solutions. EyeCity will focus its efforts on
automating as many processes as possible and increasing customer satisfaction.
In connection with the development of the SuperSite and the integration of
the back end, EyeCity's management information system is being designed to
provide the following:
o Selling System. EyeCity's Internet site will use a packaged
e-commerce solution that will be customized to handle transactional
events, queries and updates to the database. All transactions will
be secured by using Secure Sockets Layer ("SSL") encryption which
will protect information while it is transmitted between the
customer and EyeCity's website.
o Ordering System. EyeCity's ordering system will retrieve ordering
information from its selling system, validate credit cards, process
orders, create and issue purchase orders to manufacturers and handle
all post-sale marketing efforts. The ordering system will also
permit orders to be taken over the telephone. The ordering system
software will be designed by EyeCity to give customer service
representatives instant access to all customer information, to
automatically update all changes to a customer's order and to inform
the customer of order status by automated e-mail communications. The
customer service and marketing departments will be able to access
this customer profile information to search and analyze customer
demographics and buying patterns in order to suggest new product
offerings to customers. The ordering system will also communicate
with EyeCity's warehousing facilities in real time for updates on
order shipments and inventory status.
o Publishing System. The publishing system will contain information
about all products offered on EyeCity's websites, including retail
price, cost, color and size characteristics, group information and
all manufacturer related information.
EyeCity employs systems administrators and network managers to monitor and
operate EyeCity's Internet site, network operations and transaction-processing
systems. The continued uninterrupted operation of EyeCity's Internet site and
transaction-processing systems is essential to its business, and failure of
these systems would have a material adverse effect on EyeCity. EyeCity expects
that its Internet connectivity will be supplied by a provider who will be
capable of offering scaleable business solutions to high volume Internet sites.
A critical issue for the success of online retailing is maintaining the
integrity of information, particularly the security of credit card numbers
furnished by consumers. EyeCity intends to secure credit card numbers while they
travel over phone lines by using SSL encryption. To deter the theft of credit
card numbers residing in EyeCity's information systems, EyeCity intends to
employ secure "fire walls" installed in EyeCity's hardware. EyeCity believes
that these fire walls will protect EyeCity's systems against "hacker" break-ins,
although there can be no assurance that these precautions will be effective.
However, any penetration of EyeCity's network security or other misappropriation
of its customers' personal information could subject EyeCity to liability.
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Competition
The optical retail industry is very competitive and fragmented. EyeCity
has a variety of competitors, including ophthalmologists and optometrists in
private practice, traditional optical retail stores, including national optical
chains such as Sunglass Hut, Pearle Vision Center, Sterling Optical,
LensCrafters and National Vision Association and mass merchandisers such as
Wal-Mart, Sam's and Costco. In addition, EyeCity expects to compete with
non-traditional optical retailers, such as television retailers, mail order
catalogs, direct marketers such as 1-800 Contacts, and with other online optical
retailers such as Shades.com, a subsidiary of Sunglass Hut. EyeCity expects
there to be many more online competitors in the future, as barriers to entry are
minimal, and new competitors can launch competing websites at a relatively low
cost.
EyeCity believes that the principal competitive factors in its online
market are brand recognition, product selection, convenience, price,
accessibility, customer service, quality of search tools, quality of site
content and reliability and speed of fulfillment. Many of EyeCity's current and
potential competitors have longer operating histories, larger customer bases,
greater brand recognition and significantly greater financial, marketing and
other resources than EyeCity. In addition, competitive online optical retailers
may be acquired by, receive investments from, or enter into other commercial
relationships with, larger, well-established and well-financed companies as use
of the Internet and other online services increases. Certain of EyeCity's
competitors may be able to secure merchandise from manufacturers on more
favorable terms, devote greater resources to marketing and promotional
campaigns, adopt more aggressive pricing, inventory availability and delivery
policies and devote substantially more resources to website and systems
development than EyeCity. Increased competition may result in reduced operating
margins, loss of market share and a diminished brand franchise. New technologies
and the expansion of existing technologies may increase the competitive
pressures on EyeCity.
Historically, sales of contact lenses by direct marketers have been
impeded by eyecare practitioners and contact lens manufacturers. Many eyecare
practitioners have been reluctant to provide patients with a copy of their
prescription or to release such information to direct marketers upon request,
thereby prohibiting such patients from purchasing lenses from a direct marketer.
In addition, substantially all of the major manufacturers of contact lenses have
historically refused to sell contact lenses directly to direct marketing
companies and have sought to prohibit their distributors from doing so. These
traditional barriers to the direct marketing of contact lenses may be reduced or
eliminated in the future, although there can be no assurance of that result. The
Federal Trade Commission has solicited comments regarding whether eyecare
practitioners should be required to release contact lens prescriptions to their
patients. In addition, the Attorneys General for more than 30 states have joined
in a lawsuit against the major contact lens manufacturers and certain eyecare
practitioners and their trade associations alleging that the manufacturers'
policy not to sell to direct marketers was adopted in conspiracy with eyecare
practitioners to eliminate alternative channels of trade from the contact lens
market.
EyeCity's prescription eyewear operations also compete with alternative
technologies such as surgical refractive procedures, including new refractive
laser procedures such as PRK, or photo refractive keratectomy, and LASIK, or
laser in situ keratomileusis. If surgical refractive procedures become
increasingly accepted as an effective and safe technique for permanent vision
correction, they could substantially reduce the demand for prescription eyewear
by enabling patients to avoid the ongoing cost and inconvenience of prescription
eyewear, which could have a material adverse affect on EyeCity's prescription
eyewear business.
Government Regulation
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General. EyeCity is not currently subject to direct federal, state or
local regulation or laws or regulations applicable to access to or commerce on
the Internet, other than as discussed below and other than regulations
applicable to businesses generally. However, due to the increasing popularity
and use of the Internet and other online services, it is possible that a number
of laws and regulations may be adopted with respect to the Internet or other
online services covering issues such as user privacy, freedom of expression,
pricing, content, quality of products and services, taxation, advertising,
intellectual property rights and information security. The adoption of any such
laws or regulations might decrease the rate of growth of Internet use, which in
turn could decrease the demand for EyeCity's products or increase its cost of
doing business or in some other manner have a material adverse effect on
EyeCity's business, results of operations and financial condition. In addition,
applicability to the Internet of existing laws governing issues such as
regulatory licensing or permit requirements, property ownership, copyrights and
other intellectual property issues, taxation, libel, obscenity and personal
privacy is uncertain. The vast majority of such laws were adopted prior to the
advent of the Internet and related technologies and, as a result, do not
contemplate or address the unique issues of the Internet and related
technologies.
At present, EyeCity does not collect sales or other similar taxes in
connection with the sale of its products to consumers located outside the state
of Minnesota. From time to time, various states have sought to impose state
sales tax collection obligations on out-of-state direct marketing or
internet-based companies such as EyeCity. A successful assertion by one or more
states that EyeCity should have collected or should be collecting sales taxes on
the sale of its products could result in additional costs and administrative
expenses to EyeCity and corresponding price increases to its customers, which
could adversely affect EyeCity's business, financial condition and results of
operations.
Several states have also proposed legislation that would limit the uses of
personal user information gathered online or require online services to
establish privacy polices. The Federal Trade Commission has also initiated
action against at least one online service regarding the manner in which
personal information is collected from users and provided to third parties.
Changes to existing laws or the passage of new laws intended to address these
issues, including some recently proposed changes, could create uncertainty in
the marketplace that could reduce demand for EyeCity's products or increase the
cost of doing business as a result of litigation costs or increased costs, or
could in some other manner have a material adverse effect on EyeCity's business,
results of operations and financial condition.
In addition, because EyeCity's websites can be accessed worldwide and
EyeCity intends to sell goods to consumers worldwide, other jurisdictions may
claim that EyeCity is subject to taxes or is required to qualify to do business
as a foreign corporation in a particular state or foreign country. EyeCity has
filed the requisite documentation to be qualified to do business as a foreign
corporation (i.e., a corporation organized under the laws of another state,
Delaware) in New York and its Peeper's subsidiary has filed the requisite
documentation to be qualified to do business as a foreign corporation in
Minnesota, and failure by EyeCity to qualify as a foreign corporation in a
jurisdiction where it is required to do so could subject EyeCity to penalties
for the failure to qualify and could result in the inability of EyeCity to
enforce contracts in such jurisdictions. At this time, EyeCity has not applied
to be qualified to do business in any other jurisdiction. Any such new
legislation or regulation, or the application of laws or regulations of
jurisdictions whose laws do not currently apply to EyeCity's business, could
have a material adverse effect on EyeCity's business, results of operations and
financial condition.
Further, several telecommunications carriers have requested the Federal
Communications Commission to regulate telecommunications over the Internet. Due
to the increasing use of the Internet and the burden it has placed on the
current telecommunications infrastructure, telephone carriers have requested the
FCC to regulate Internet service providers and impose access fees on those
providers. If the FCC imposes
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access fees, the costs of using the Internet could increase dramatically. This
could result in the reduced use of the Internet as a medium for commerce, which
could adversely affect EyeCity's business operations.
Federal Regulation of Prescription Eyewear. Contact lenses and eyeglasses
are separately regulated by the Federal government. Contact lenses are regulated
by the Food and Drug Administration as "medical devices." The Food and Drug
Administration classifies medical devices as Class I, Class II or Class III and
regulates them to varying degrees, with Class I medical devices subject to the
least amount of regulation and Class III medical devices subject to the most
stringent regulations. Generally, contact lenses are classified as Class II
medical devices if intended only for daily wear and as Class III medical devices
if intended for extended wear. These regulations generally apply only to
manufacturers of contact lenses, and therefore do not directly impact EyeCity.
Federal regulations also require the labels on "medical devices" to contain
adequate instructions for their safe and proper use. However, there is an
exemption from this requirement for medical devices the use of which is not safe
except under the supervision of a practitioner licensed by law to direct the use
of such device. Devices which fall in this exception must contain as part of
their labeling the statement "Caution: Federal law restricts this device to sale
by or on the order of ," the blank to be filled in with the word physician or
other practitioner authorized by the law of the state in which the practitioner
practices to use or order the use of the device. EyeCity believes that this
exception is often misconstrued as being a federal requirement that the device
be sold only pursuant to a prescription. The Food and Drug Administration
considers contact lenses to qualify for this labeling exemption; however, there
is no federal law that requires that contact lenses be sold only pursuant to a
prescription.
Federal law requires that all dress eyewear (i.e., sunglasses or
prescription eyeglasses) be tested for impact resistance. This testing is
generally conducted by the lens manufacturer, but eyewear must be retested if a
protective or other coating is applied after initial manufacture. So long as a
retailer or optician does not manufacture or coat the eyewear, the retailer or
optician is entitled to rely on representations from the manufacturer or
laboratory, as applicable, as to the completion of all necessary impact
resistance tests on any given piece of eyewear. EyeCity's operating practice has
been to rely on these types of representations from manufacturers or
laboratories, as applicable.
State Regulation of Prescription Eyewear. Because there is no applicable
federal law that regulates the distribution of prescription eyewear, the sale
and delivery of prescription eyewear to the consumer is subject to state laws
and regulations. EyeCity intends to sell prescription eyewear to customers in
all 50 states and each sale may be subject to the laws of the state where the
customer is located. The laws and regulations governing the sale and delivery of
prescription eyewear vary from state to state, but generally can be classified
in four categories: (i) laws that require prescription eyewear only be dispensed
pursuant to a prescription; (ii) laws that require the dispenser to be licensed
by the state as an optician, optometrist, ophthalmologist or other professional
authorized to dispense prescription eyewear; (iii) laws that require
prescription eyewear be dispensed only in a face-to-face transaction and (iv)
laws with requirements that are unclear or do not specifically address the sale
and delivery of prescription eyewear. Many of the states requiring that
prescription eyewear be dispensed in face-to-face meetings or by a person
licensed by such state to dispense prescription eyewear also require that
prescription eyewear only be dispensed pursuant to a valid prescription.
The laws and regulations in a significant number of states require that
prescription eyewear only be sold to a consumer pursuant to a valid
prescription. In some states, satisfying this prescription requirement obligates
the dispenser only to verify the customer's prescription with the customer's
prescriber, while other states specifically require that a
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written prescription (which, in some states, must be an original) be obtained
before providing the prescription eyewear to the customer or that the
prescription must have been written within a specified period (e.g., two years)
prior to fulfillment. EyeCity's operating practice will be to attempt to obtain
a valid prescription from each of its customers or his/her eyecare practitioner.
If the customer does not have a copy of his/her prescription, EyeCity will
attempt to contact the customer's doctor to obtain a copy of, or verify the
customer's prescription. With respect to contact lenses, if EyeCity is unable to
obtain a copy of or verify the customer's prescription, EyeCity intends to
complete the sale and ship the lenses to the customer based on the prescription
information provided by the customer. EyeCity intends to retain copies of the
written prescriptions that it will receive and maintain records of its
communications with the customer's prescriber.
EyeCity expects that its ability to comply with state laws and regulations
requiring a valid prescription will be hampered because EyeCity's customers will
often be unable to get a copy of their prescription. EyeCity believes that
optometrists, ophthalmologists and other contact lens prescribers have
historically refused to release copies of a patient's contact lens prescription
to the patient. In addition, such providers have refused to release or verify
prescriptions at the request of mail order companies. Federal law requires
prescribers to release prescriptions for eyeglasses to a patient, but the issue
of whether or not a prescriber must release a contact lens prescription to the
patient, or at the patients request, is currently governed by state law. There
are approximately 22 states that require contact lens prescribers to release the
prescriptions for contact lenses to the patient. However, even in states with a
mandatory release law, EyeCity believes that many prescribers will continue to
refuse to release prescriptions to their patients or to online or mail order
contact lens distributors, including EyeCity.
In addition to requiring a valid prescription, a substantial number of
states also require that prescription eyewear only be dispensed by a person
licensed to do so under that state's laws. A dispenser may be required to be
licensed as an optometrist, ophthalmologist, optician, ophthalmic dispenser or
prescription eyewear dispenser, depending on the state in which the customer is
located. Also, certain states require that prescriptions only be filled in
facilities registered with such states. EyeCity currently employs an optician at
its Duluth, Minnesota facility; however, neither EyeCity nor any of its
employees is a licensed or registered dispenser of contact lenses in any of the
other states in which EyeCity expects to do business nor are any of EyeCity's
facilities registered with any state in connection with the dispensing of
prescription eyewear. EyeCity has not initiated the application or registration
process in any jurisdiction, but it intends to do so where appropriate. The laws
in a number of states effectively prohibit the sale of prescription eyewear
through the mail by requiring that a person licensed under that state's law to
dispense prescription eyewear be in personal attendance at the place of sale.
Lastly, there are several states in which the laws and regulations do not
specifically address the issue of who may dispense prescription eyewear or are
unclear with respect to the requirements for dispensing prescription eyewear.
For many of the laws described in this paragraph, it is not clear whether some
or all of these laws would be applicable to EyeCity or whether the states that
have enacted these laws would have jurisdiction over EyeCity.
Any action brought against EyeCity based on its failure to comply with
applicable state laws and regulations could result in significant fines or
criminal penalties to EyeCity, EyeCity being prohibited from making sales in a
particular state and/or EyeCity being required to comply with such laws. Such
required compliance could result in: (i) increased costs to EyeCity; (ii) the
loss of a substantial portion of customers for whom EyeCity is unable to obtain
or verify their prescription; and (iii) the inability to sell to customers at
all in a particular state if EyeCity cannot comply with such state's laws. The
occurrence of any of the above results could have a material adverse effect on
EyeCity's ability to sell prescription eyewear and continue to operate
profitably. Furthermore, there can be no assurance that
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states will not enact or impose laws or regulations that prohibit mail order or
online dispensing of prescription eyewear or otherwise impair EyeCity's ability
to sell prescription eyewear and continue to operate profitably. EyeCity has not
obtained an opinion of counsel with regard to its compliance with applicable
state laws and regulations, and information contained herein regarding EyeCity's
compliance with applicable state laws and regulations should not be construed as
being based on an opinion of counsel.
EyeCity has received a marketing clearance (as a device substantially
equivalent to an existing category of ophthalmic device) for its EyeTools(TM)
line of computer glasses from the Federal Food and Drug Administration following
a "Section 510(k) Submission."
Intellectual Property
EyeCity holds rights, title and interest to five U.S. patents for various
specialized eyeglasses, as set forth in Table I below.
EyeCity holds rights, title and interest in the United States to two
registered trademarks (Beamblockers and Design #1,196,550, filed October 13,
1998; Foggles #1,210,355 filed September 18, 1982), and to 21 trademark
applications pending in the U.S. Patent and Trademark Office, used or intended
to be used in connection with its products and services, or for which it has
obtained rights at common-law, based on use in interstate commerce, including
the "Peeper's" mark (see Table III below). EyeCity believes that such marks
represent significant value and goodwill to the company in marketing its
products and services. EyeCity has entered into confidentiality and invention
assignment agreements with its employees and contractors, and nondisclosure
agreements with parties with whom it conducts business, in order to limit access
to and disclosure of its proprietary information. However, there can be no
assurance that these contractual arrangements or the other steps taken by
EyeCity will prove sufficient to prevent misappropriation of EyeCity's
technology or to deter independent third-party development of similar
technologies.
EyeCity has rights in over thirteen domain names, certain of which it
presently uses to market its services, as set forth below in Table III. EyeCity
believes that such domain names represent significant value and goodwill to the
company in marketing its products and services. If third parties obtain rights
to use similar domain names, these third parties may confuse EyeCity's customers
and cause its customers to inadvertently place orders with these third parties,
which could result in lost sales for EyeCity and could damage its brand. Due to
the unique nature of domain names, EyeCity may have only limited proprietary
rights in its domain names, except to the extent greater protection is granted
under trademark or tradename law. As a result, EyeCity cannot assure you that it
will be able to retain the use of certain of its domain names, which could have
a material adverse affect on EyeCity's business.
EyeCity is not aware of any material adverse claims regarding any of its
trademarks or domain names with the exception of its "Peeper's" mark and
peepers.com domain name. Rights in this mark and domain name have been
challenged by American Eyewear, Inc. in an action alleging trademark
infringement filed in federal court in Dallas, Texas in July 1999. Although the
action has been filed, the parties have been discussing settlement; the
complaint has not formally been served and EyeCity therefore has not responded.
If American Eyewear elects to proceed with the action, EyeCity believes that it
has substantial defenses and may counter-claim to limit American Eyewear's
claimed rights in the trademark Peeper's. It is premature to assess the likely
outcome of the proceeding.
The following tables set forth a list of EyeCity's material intellectual
properties:
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TABLE I
PATENTS
Title Issued Expiration Patent Number
Eyewear With Translucent 9/11/84 1/11/02 4,470,673
Superior field of view
Eyewear With Translucent 9/24/85 9/24/02 4,542,964
Superior Field of View
Visual Occlusion 10/6/87 10/6/04 4,698,022
Apparatus For Pilot
Training
Eyewear Having 7/11/95 1/10/14 5,432,568
Translucent Superior And
Inferior Fields of View
Night Driving Glasses 6/27/95 6/27/12 5,428,409
TABLE II
PENDING TRADEMARK APPLICATIONS
Mark Name App #
App. Date
ABEAM Pending
August 16, 1999
E AND DESIGN 75/555004
September 18, 1998
EYECITIES 75/682277
April 13, 1999
EYECITIES.COM 75/682278
April 13, 1999
EYECITY 75/673817
April 05, 1999
EYECITY.COM 75/673816
April 05, 1999
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EYETOOLS 75/527195
July 29, 1998
EYETOOLS 75/459288
March 30, 1998
ICITY 75/673815
April 05, 1999
ICITY.COM 75/673814
April 05, 1999
INTERNET EYES 75/525354
July 24, 1998
INTERNET GLASSES 75/525355
July 24, 1998
ON-LINE 75/527196
July 29, 1998
OPTICAL DEPOT 75/579290
October 29, 1998
OPTICALDEPOT.COM 75/650961
February 26, 1999
OPTICALSITE 75/721891
June 4, 1999
SOLUTIONS IN SIGHT 75/545184
August 31, 1998
SUNGLASSSITE Pending
August 16, 1999
GOLF 75/566222
October 06, 1998
PILOT 75/566221
October 06,1998
SHOOTING 75/566223
October 06, 1998
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TABLE III
DOMAIN NAMES PRESENTLY USED
abeam.com foggles.com
binoculars.com icity.com
ergovision.com opticalsite.com
eyecity.com peepers.com
eyeglassplace.com sunglasssite.com
eyeopticalzone.com
In addition, EyeCity recently acquired a three year non-exclusive license
from Yahoo! Inc. to use the "Yahoo!" name and logo for the distribution and
marketing of eyewear and eyewear accessories throughout the United States. In
connection with this license, EyeCity is required to pay to Yahoo! Inc. an
amount equal to the greater of (i) a percentage-based royalty, or (ii) a minimum
guaranteed royalty. Contemporaneously with this transaction, EyeCity entered
into a distributor agreement with Sun Optics d/b/a Insight Eyeworks, Inc., under
which Insight will manufacture, market and distribute the Yahoo! eyewear and
eyewear accessories in traditional retail channels in the United States other
than through the Internet and other e-commerce channels.
Employees
As of September 30, 1999, EyeCity employed 42 full-time employees.
None of EyeCity's employees are covered by collective bargaining agreements and
EyeCity believes that its relations with its employees are good. EyeCity is
dependent to a large degree on the services of its senior management team,
particularly Mark H. Levin, its President and Chief Executive officer, Mark R.
Suroff, its Chief Operating Officer, Executive Vice President, Secretary and
Treasurer, and Daniel D. Thralow, its Vice President of Operations. The loss of
any of EyeCity's key executives could have a material adverse effect on EyeCity.
See "Executive Compensation--Employment Contracts" for a description of the
employment contracts with EyeCity's executives. EyeCity does not maintain key
man insurance coverage on any of its employees.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
General
EyeCity is engaged in the online marketing, distribution and retail sale
over the Internet of a broad range of eyewear products and optical accessories,
including brand name sunglasses, contact lenses, binoculars, prescription
eyewear, telescopes, sports and lifestyle eyewear, and hunting glasses. The
annual United States optical product market is estimated at $15.8 billion.
EyeCity is in the process of effecting an acquisition strategy within the highly
fragmented Internet optical industry, and has recently closed on the acquisition
of three companies retailing optical products over the Internet. Through this
strategy, as well as internal expansion, EyeCity intends to become the leading
retailer of eyewear and optical accessories on the Internet, providing one-stop
shopping for domestic and international customers in an easy-to-shop
environment, 24 hours a day,
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seven days a week. EyeCity intends to acquire additional complementary
businesses as opportunities arise from time to time.
Overview
From EyeCity's inception through December 1998, its business strategy
primarily focused on becoming a leading producer, distributor and marketer of
ergonomic computer eyewear products designed to alleviate health related
problems associated with Computer Vision Syndrome and, to a lesser extent, on
becoming a leading producer, distributor and marketer of Foggles(R) branded
optical products designed for the aviation, hunting and shooting industries.
In January 1999, EyeCity refocused its business strategy to capitalize on
the Internet retailing opportunities associated with the optical product
industry. In this regard, EyeCity acquired EyeGlassPlace.com, Inc., Peeper's
Sunglasses and Accessories, Inc. and SunSource Technology, Inc. in March 1999,
May 1999 and June 1999, respectively. In connection with these acquisitions,
EyeCity recorded goodwill of approximately $4.2 million which will be amortized
over three years from the dates of such acquisitions. In addition, in September
1999 EyeCity acquired certain assets of Impact Eyewear, LLC, including a
non-exclusive license from Yahoo! Inc. to use the "Yahoo!" name and logo for the
distribution and marketing of eyewear and eyewear accessories throughout the
United States, and recorded additional goodwill in the amount of $620,000 which
will be amortized over three years from the closing. Amortization of goodwill
will have an adverse effect on EyeCity's statement of operations for such
periods. In July 1999 EyeCity caused its EyeGlassPlace.com and SunSource
subsidiaries to be merged into its Peeper's subsidiary (references herein to the
performance of EyeCity's Peeper's subsidiary give effect to this merger).
Eye City has incurred substantial losses and has significant negative cash
flow since its inception. The independent auditor's report included in this Form
10-SB/A raises issues about EyeCity as a going concern due to recurring losses
from operations and a working capital deficiency. EyeCity's independent auditors
have included an explanatory paragraph in their report on EyeCity's financial
statements as of December 31, 1998, raising concern about EyeCity's ability to
continue as a going concern without additional financing. See Note 1 of "Notes
to Financial Statements". Although EyeCity has obtained financing in the past,
EyeCity will require additional funding to cover current operations and enable
it to fund its business plan. EyeCity is currently negotiating with various
investors and underwriters for additional financing, but there is no assurance
that such financing will be sufficient or available, or if available, will be
available on acceptable terms.
Although EyeCity was formed in May 1996, it only initiated its current
business plan for online retail distribution of optical products in the first
quarter of 1999. Further, EyeCity only closed on the acquisitions forming the
core components of this current business during the second quarter of 1999.
EyeCity's SuperSite, www.eyecity.com, is
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not anticipated to launch until early 2000. As a result, there is only limited
currently relevant financial and operating information available for a potential
investor to evaluate an investment in EyeCity's common stock. In addition,
EyeCity's limited operating history and recent growth in net sales since
effecting its acquisition strategy make it difficult to forecast future
operating results and reduce the relevance of historical annual and
quarter-to-quarter comparisons.
EyeCity cannot predict whether the recent rate of growth in net sales will
decrease in future periods, which could have an adverse effect on EyeCity's
performance to the extent significant anticipated increased expenses do not
generate commensurate increases in sales.
In this regard, EyeCity expects to incur significant losses in the near
term as a result of, among other things, substantially higher general and
administrative expenses. In addition, in order to promote EyeCity's brand, it
will need to increase its marketing expenditures and otherwise increase its
financial commitment to creating and maintaining brand loyalty among users,
which will further adversely affect profitability. There can be no assurance
that EyeCity will be able to obtain requisite financing.
EyeCity's gross profit on sunglasses are significantly higher than its
gross profit on its other products. As EyeCity implements its business plan to
increase the scope of its product offerings, to the extent sales of such other
products become a greater portion of total sales, EyeCity's gross profits could
be adversely affected.
Results of Operations - EyeCity
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998.
Net Revenues. EyeCity's net revenues in the nine months ended September
30, 1999 (the "1999 Period") were $1,531,159 as compared to $23,469 in the nine
months ended September 30, 1998 (the "1998 Period"), an increase of $1,507,690.
This increase was due primarily to EyeCity's August 1998 acquisition of Foggles
Inc., a producer, distributor and marketer of optical products for the aviation,
hunting and shooting industry, EyeCity's May 1999 acquisition of Peeper's
Sunglasses and Accessories, Inc., an online optical product retailer, and
EyeCity's June 1999 acquisition of SunSource Technology, Inc., an online optical
product retailer. Sales of Foggles branded products and sales attributable to
EyeCity's Peeper's subsidiary accounted for $138,841 and $1,341,831,
respectively, of EyeCity's net revenues for the 1999 Period.
Cost of Revenues. EyeCity's cost of revenues in the 1999 Period was
$1,089,328 as compared to $17,195 in the 1998 Period, an increase of $1,072,133.
This increase was due primarily to costs associated with EyeCity's increased
sales volume and costs associated with product sales by EyeCity's Foggles and
Peeper's subsidiaries.
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<PAGE>
Gross Profit. EyeCity's gross profit for the 1999 Period was $441,831, as
compared to $6,274 in the 1998 Period, an increase of $435,557. This increase
was due primarily to EyeCity's increased sales levels and costs associated with
product sales by EyeCity's Foggles and Peeper's subsidiaries. The gross profit
margin in the 1999 Period increased to 28.9% from 26.7% in the 1998 Period.
Operating and Other Expenses. EyeCity had marketing and sales expenses of
$244,575, general and administrative expenses of $2,175,611, depreciation and
amortization expenses of $591,779, technology and development expenses of
$177,357 and interest expenses of $120,943 in the 1999 Period as compared to
marketing and sales expenses of $339,063, general and administrative expenses of
$453,539, depreciation and amortization expenses of $10,181, technology and
development expenses of $0 and interest expenses of $2,771 in the 1998 Period.
The decrease in marketing and sales expenses resulted primarily from decreases
in consulting fees of $170,000 offset by increases in marketing and advertising
expenses of $89,000. The general and administrative expense increases were
primarily attributable to increases in consulting fees of $506,000, increases in
salaries and related expenses of $375,000, increases in legal and professional
fees of $585,000, increases in office related expenses of $142,000 and increases
in travel and related costs of $56,000. The increase in depreciation and
amortization expense is primarily attributable to amortization of goodwill
resulting from EyeCity's May 1999 acquisition of Peeper's and June 1999
acquisition of SunSource. The foregoing increases are primarily attributable to
EyeCity having acquired the operations of Foggles, Peeper's and SunSource, and
in the case of professional and consulting fees to EyeCity's acquisition and
financing activities in 1999. The increase in interest expenses was primarily
the result of interest relating to the subordinated convertible promissory notes
issued by EyeCity during 1998, as well as accretion recorded on the discount of
the non-interest bearing promissory notes issued in conjunction with EyeCity's
acquisitions of Peeper's and SunSource. See "Liquidity and Capital Resources."
Net Loss. As a result of the above, EyeCity had a net loss of ($2,861,692)
in the 1999 Period ($.43 loss per share on 6,650,508 weighted average basic and
fully diluted outstanding shares) as compared to a net loss of ($799,280) in the
1998 Period ($.19 loss per share on 4,165,846 weighted average basic and fully
diluted outstanding shares).
Fiscal Year Ended December 31, 1998 Compared to Fiscal Year Ended December 31,
1997.
Net Revenues. EyeCity's net revenues in the fiscal year ended December 31,
1998 ("Fiscal 1998") were $95,974 as compared to $25,947 in the fiscal year
ended December 31, 1997 ("Fiscal 1997"), an increase of $70,027. This increase
was due primarily to EyeCity's August 1998 acquisition of Foggles, Inc., a
producer, distributor and marketer of optical products for the aviation, hunting
and shooting industries. Sales
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<PAGE>
of Foggles branded products accounted for $65,550 of EyeCity's net revenues for
Fiscal 1998.
Cost of Revenues. EyeCity's cost of revenues in Fiscal 1998 was $44,576 as
compared to $17,000 in Fiscal 1997, an increase of $27,576. This increase was
due primarily to costs associated with EyeCity's increased sales volume.
Gross Profit. EyeCity's gross profit for Fiscal 1998 was $51,398, as
compared to $8,947 in Fiscal 1997, an increase of $42,451. This increase was due
primarily to EyeCity's increased sales levels. The gross profit margin in Fiscal
1998 increased to 53.6% from 34.5% in Fiscal 1997. This increase was due
primarily to the higher gross profit margins associated with the Foggles branded
products as compared to the gross profit margins of the EyeTools branded
products.
Operating and Other Expenses. EyeCity had marketing and sales expenses of
$779,525, general and administrative expenses of $657,832, depreciation and
amortization expenses of $24,754 and interest expenses of $10,473 in fiscal 1998
as compared to marketing and sales expenses of $217,792, general and
administrative expenses of $252,489, depreciation and amortization expenses of
$597 and interest expenses of $4,542 in Fiscal 1997. The increase in marketing
and sales expenses resulted primarily from increases in consulting fees of
$492,000 and increases in the cost of product samples of $54,000, but was offset
by decreases in other related costs. The general and administrative expense
increases were primarily attributable to increases in non-cash charges of
$205,000 in consideration for consulting services, increases in salaries and
related costs of $122,000, increases in travel and related costs of $47,000 and
increases in office related expenses of $40,000. The increase in depreciation
and amortization expense is primarily attributable to amortization of goodwill
resulting from EyeCity's August 1998 acquisition of Foggles, Inc. The increase
in interest expense was primarily the result of interest relating to the
subordinated convertible promissory notes issued by EyeCity during 1998. See
"Liquidity and Capital Resources."
Net Loss. As a result of the above, EyeCity had a net loss of ($1,410,324)
in Fiscal 1998 ($.33 loss per share on 4,259,773 weighted average basic and
fully diluted outstanding shares) as compared to a net loss of ($466,473) in
Fiscal 1997 ($.14 loss per share on 3,264,831 weighted average basic and fully
diluted outstanding shares).
Liquidity and Capital Resources
EyeCity believes that its currently available funds will be sufficient to
meet its anticipated needs for working capital through at least December 1999.
Thereafter, EyeCity will need to raise substantial additional funds to implement
anticipated capital expenditures and business expansion.
Historically, EyeCity has financed its cash requirements primarily through
private placements of its securities. As of September 30, 1999, EyeCity has
raised $1.0 million in a 1997-1998 offering of its common stock and $2,407,004
in private placements of shares of its common stock. The proceeds of the private
placements are
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being or have been used to complete the acquisitions of Peepers.com,
Binoculars.com, EyeGlassPlace.com, SunglassSite.com, OpticalSite.com, Abeam.com
and certain assets of Impact Eyewear, to build the EyeCity SuperSite, for
initial marketing and advertising of the SuperSite, as well as general corporate
purposes.
During 1998, EyeCity issued $362,500 of subordinated convertible
promissory notes (the "Convertible Notes"). The Convertible Notes bear interest
at a rate of 10% per annum, payable quarterly, commencing January 1, 1999. The
Convertible Notes are convertible into EyeCity's common stock at a price of
$1.25 per share at the option of the holder at any time after October 1, 1999
(the "Conversion Date"). EyeCity has the right to call, redeem and prepay the
Convertible Notes if the market price of EyeCity's common stock equals or
exceeds $2.50 per share for ten consecutive trading days at any time after the
Conversion Date. The Convertible Notes are repayable in twelve quarterly
principal payments commencing on October 1, 2000. In March 1999, $25,000 of the
Convertible Notes was repaid prior to maturity.
A portion of the consideration paid by EyeCity in connection with its
acquisition of Peeper's Sunglasses and Accessories, Inc. and SunSource
Technology, Inc. was in the form of promissory notes in the amounts of $875,000
and $212,500, respectively. The $875,000 note accrues no interest, is secured by
certain assets formerly owned by Peeper's Sunglasses and Accessories, Inc. and
is immediately due and payable on the earlier of May 7, 2000 or the consummation
by EyeCity of a public financing transaction which results in gross proceeds in
excess of $10,000,000. The $212,500 note accrues no interest, is unsecured and
is immediately due and payable on the earlier of June 30, 2000 or the
consummation by EyeCity of a public financing transaction which results in gross
proceeds in excess of $10,000,000. There can be no assurance that EyeCity will
have available funds to satisfy these notes at maturity, in which event the
holders could claim that EyeCity is in breach of its obligations. Such holders
could commence proceedings against EyeCity, which could have a material adverse
affect on EyeCity's operations.
EyeCity will need to raise in the short term approximately $550,000 in
additional funds to satisfy its current obligations, an additional amount of
approximately $2,400,000 for it to continue its current operations through June
2000, and approximately $1,350,000 in supplementary funds to further fund its
business plan. There is no assurance that such funds will be available, or if
available, will be on terms satisfactory to EyeCity.
Statement of Cash Flows
EyeCity used $1,368,000 in cash to fund operations during the nine months
ended September 30, 1999, principally to fund its net loss as well an increase
in inventories. This use of cash was offset in part by increases in depreciation
and amortization, accounts payable and accrued expenses, due primarily to the
acquisitions of EyeGlassPlace.com, Inc., Peeper's Sunglasses and Accessories,
Inc. and SunSource Technology, Inc. and EyeCity's revenue growth. EyeCity used
$442,000 and $597,000 in cash to fund operations in 1997 and 1998, respectively.
EyeCity used $1,325,000 in cash for investing activities in the nine
months ended September 30, 1999, primarily to acquire Peeper's Sunglasses and
Accessories, Inc. ($774,000, net of cash acquired), SunSource Technology, Inc.
($164,000, net of cash
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<PAGE>
acquired) and the rights, title and interest in and to certain assets of Impact
Eyewear LLC ($120,000). EyeCity used $6,000 and $10,000 in cash for investing
activities in 1997 and 1998, respectively.
EyeCity generated $2,723,000 in cash from financing activities in the nine
months ended September 30, 1999, primarily from the sale of common stock.
EyeCity generated $532,000 and $748,000 from financing activities in 1997 and
1998, respectively.
As of September 30, 1999, EyeCity had $255,000 of cash and cash
equivalents. As of September 30, 1999, EyeCity's principal commitments consisted
of:
o non-interest bearing promissory notes issued to sellers in
connection with prior acquisitions by EyeCity in the aggregate
amount of $1.1 million which mature at the earlier of dates ranging
from May 7, 2000 to June 30, 2000 or consummation by EyeCity of a
public financing transaction or transactions for gross proceeds in
excess of $10,000,000;
o $338,000 of 10% subordinated convertible promissory notes, due
October 1, 2003;
o $334,000 of deferred salary for officers. Included in this amount is
$45,000 owed to Robert Greenberg for severance pay and deferred
salaries owed to Mark Levin of $137,000, Mark Suroff of $137,000 and
Daniel Thralow of $15,000;
o $11,000 outstanding on a non-interest bearing note issued in
connection with the acquisition of certain patent display technology
payable in equal monthly installments commencing June 15, 1999; and
o obligations outstanding under operating leases. See "Description of
Property".
As of September 30, 1999, EyeCity had a working capital deficiency of
$1,402,433. EyeCity will need to raise additional funds in order to satisfy
EyeCity's current obligations and to fund its business plan, including more
rapid expansion, to develop new or enhanced services or products, to respond to
competitive pressures or to acquire complementary products, businesses or
technologies. If EyeCity raises additional funds through the issuance of equity
or convertible debt securities, the percentage ownership of its current
stockholders will be reduced, its stockholders may experience additional
dilution and such securities may have rights, preferences and privileges senior
to those of its common stock. There can be no assurance that additional
financing will be available on terms favorable to EyeCity or at all. If adequate
funds are not available or are not available on acceptable terms, EyeCity may
not be able to meet its financial obligation or to continue to implement its
business plan. This inability could have a material adverse effect on EyeCity's
business, results of operations and financial condition.
Seasonality
EyeCity believes that its results of operations are somewhat seasonal in
nature, with the highest volume of purchases by consumers occurring in the
second and fourth quarters. EyeCity's limited operating history makes it
difficult to fully assess the impact of seasonality or whether or not EyeCity's
business is susceptible to cyclical fluctuations in the U.S. economy. In
addition, EyeCity believes that its rapid growth may have overshadowed whatever
seasonal or cyclical factors might have influenced its business to
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<PAGE>
date. EyeCity intends to expense all advertising costs, including all
direct-mail advertising costs, when the advertising first takes place. As a
result, quarter-to-quarter comparisons will be impacted by the timing of
advertisements and related expenses within and between quarters. There can be no
assurance that seasonal or cyclical variations in EyeCity's operations will not
become more pronounced over time or that they will not materially adversely
affect its results of operations in the future.
Year 2000 Compliance
Many currently installed computer systems and software products are coded
to accept or recognize only two digit entries in the date code field. These
systems and software products will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and software used by many companies and governmental agencies may need
to be upgraded to comply with Year 2000 requirements or risk system failure or
miscalculations causing disruptions of normal business activities.
EyeCity's State of Readiness. EyeCity has made a preliminary assessment of
the state of its operating and administrative systems, including its
telecommunications systems, its order processing and data collection systems and
its Internet-related systems, to assess its state of Year 2000 readiness.
EyeCity's assessment plan consists of:
o Evaluating its date dependent code, software and hardware and
evaluating external dependencies;
o Quality assurance testing of its internally developed software and
systems; and
o Obtaining assurances or warranties from third-party vendors and
licensors of material hardware, software and services that are
related to the delivery of its services.
As part of EyeCity's effort to assess its Year 2000 readiness, EyeCity
identified its suppliers and vendors and is in the process of sending letters
requesting Year 2000 compliance statements and recording their responses, and
investigating alternative products and services for those suppliers not prepared
for Year 2000. EyeCity anticipates that it will complete this process by
December 1, 1999.
EyeCity's critical systems fall into five categories: transaction
processing, telecommunications, fulfillment, finance and interactive
applications. The core transaction processing and infrastructure systems are
internally maintained and hosted. EyeCity's websites are hosted at third party
hosting services located in Florida, California and New York. To date, EyeCity's
assessment has determined that these critical business systems are all Year 2000
compliant except for the service hosting the Sunglassite.com, Opticalsite.com
and Abeam.com websites, which, according to that service's proprietors, will be
Year 2000 compliant by November 15, 1999.
EyeCity's non-critical and non-information technology systems, which
include postage processing, have been tested and/or represented to EyeCity as
Year 2000 compliant.
All material commercial software and hardware on which EyeCity depends is
either Year 2000 compliant or will be upgraded to be compliant in the normal
course of business through the installation of upgrades or replacements.
EyeCity's material hardware, software and service vendors have informed EyeCity
that the products it uses, or will be using as upgrades or replacements, to
support EyeCity's operations are Year 2000 compliant.
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EyeCity's website hosting services, CCI Industries, CNI Web and Visual Data,
have represented to EyeCity that their respective hardware and software systems
are Year 2000 compliant. EyeCity's internal critical business systems are
dependent on the software and hardware products of two vendors: Microsoft and
Dell. Dell has represented to EyeCity that their products are Year 2000
compliant. EyeCity's in the process of migrating its current Microsoft software
applications to Year 2000 compliant software released by Microsoft, which
EyeCity expects to be completed by November 15, 1999.
EyeCity has contacted its major suppliers of inventory for their Year 2000
compliance. EyeCity expects to complete its assessment of these suppliers by
November 15, 1999. EyeCity's business is not dependent on any one supplier. If
one or more of these suppliers is not Year 2000 compliant, EyeCity will obtain
its inventory from alternative suppliers that are Year 2000 compliant.
Costs to Address Year 2000 Issues. To date, EyeCity has not incurred any
significant costs attributable to Year 2000 compliance. EyeCity's recent
information technology investments have been in support of its expanding
operating and decision support requirements and to the extent they involved a
replacement of an existing system, also accommodated Year 2000 compliance.
EyeCity does, however, expect to incur approximately $10,000 in the fourth
calendar quarter to make all systems Year 2000 compliant. Other than these
costs, EyeCity is not currently aware of any material operational issues or
costs associated with preparing its systems for the Year 2000. Nonetheless,
EyeCity may experience material unexpected costs caused by undetected errors or
defects in the technology used in its systems or because of the failure of a
material vendor to be Year 2000 compliant.
Risks Associated with Year 2000 Issues. Notwithstanding EyeCity's Year
2000 compliance efforts, the failure of a material system or vendor, or the
Internet generally, to be Year 2000 compliant could harm the operation of
EyeCity's systems or have other unforeseen, material adverse consequences to it.
EyeCity is also subject to external Year 2000-related failures or disruptions
that might generally affect industry and commerce, such as utility or
transportation company Year 2000 compliance failures and related service
interruptions. All of these factors could materially adversely affect EyeCity's
business.
Contingency Plans. EyeCity has developed a contingency plan based on the
results of its evaluation of its year 2000 readiness. This plan includes:
o preparing staff to be on call during critical times;
o preparing for communications of problems with employees and business
partners;
o monitoring external factors affecting our systems;
o designating and testing alternative communications; and
o identifying alternative sources for key services and products.
Based on EyeCity's assessment done to date, EyeCity believes that the
reasonable likely worst-case scenario with respect to Year 2000 issues could be
the difficulty for customers to place orders or EyeCity to fulfill orders in the
event of disruption of power or communication facilities. Although these events
could have an adverse effect on EyeCity's business in the short-term, EyeCity
does not believe that Year 2000 issues will materially and adversely affect its
business, results of operations or financial condition over the long-term. No
assurances can be given that EyeCity's expectations will be realized.
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ITEM 3. DESCRIPTION OF PROPERTY
EyeCity maintains its corporate headquarters in approximately 4,405 square
feet of commercial office space at 79 Express Street in Plainview, New York,
pursuant to a five year lease providing for rent at a rate (excluding common
charges) of $49,550 per annum for the first year, with annual percentage
increases during the term, for a rate of $58,000 in the fifth year. EyeCity has
one option to extend the lease for 2 years. The rent for the extension period is
$5,027.86 per month for the first 12 months and $5,228.98 per month for the
second 12 months.
EyeCity, through its wholly-owned subsidiary, Peeper's, Inc., maintains
approximately 10,770 square feet of office and warehouse space at 1203 London
Road in Duluth, Minnesota, pursuant to a five year lease providing for rent at
an annual rate of $51,156 through June 30, 2000, at an annual rate of $61,927
through June 30, 2001 and at a rate of $72,696 through June 30, 2004. This space
is used for customer service, sales, warehousing, shipping, order fulfillment
and general office purposes. EyeCity has five options to extend the lease for
consecutive 3-year terms each. During the renewal terms, the rent shall increase
4% annually on July 1st of each year.
ITEM 4. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of November 15, 1999, certain
information concerning the beneficial ownership of the common stock of EyeCity
by (i) any person (including any "group" as that term is used in Section
13(d)(3) of the Securities Exchange Act of 1934, as amended) known to be the
beneficial owner of more than 5% of such common stock, (ii) each director of
EyeCity, (iii) each of the executive officers named in the Summary Compensation
Table in this document and (iv) all directors and executive officers of EyeCity
taken as a group. Each of the stockholders has sole voting and investment power
for the shares listed as beneficially owned by them.
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Amount Percent
Beneficially of
Name and Address of Beneficial Owner(1) Owned Class
- --------------------------------------- ------------ -------
Mark H. Levin 1,350,000(2) 15.07%
Nikos P. Mouyiaris(3) 1,350,000 15.34%
Daniel D. Thralow 1,210,159 13.75%
Mark R. Suroff 1,000,000(4) 11.17%
James J. Armenakis(5) 640,000(6) 6.92%
Robert B. Greenberg(7) 97,500(8) 1.11%
Barbara Novick(9) 91,000 1.03%
--------- -----
All executive officers and directors
as a group (six persons): 5,098,659(10) 55.77%
- ----------
(1) Except as specifically set forth, addresses for all of the listed
beneficial owners and management are care of EyeCity at its corporate
headquarters in Plainview, New York.
(2) Includes options to purchase 150,000 shares of common stock at an exercise
price of $1.10 per share under EyeCity's 1997 stock option plan.
(3) Nikos P. Mouyiaris' address is c/o Mana Products, Inc. 32-02 Queens
Boulevard, Long Island City, New York 11101.
(4) Includes options to purchase 150,000 shares of common stock at an exercise
price of $1.10 per share under EyeCity's 1997 stock option plan.
(5) James J. Armenakis' address is c/o Armenakis & Armenakis, 65 Bleecker
Street, New York, New York 10012.
(6) Includes options to purchase 450,000 shares of common stock at an exercise
price of $1.00 per share under EyeCity's 1998 stock option plan, 60,000
shares of common stock at an exercise price of $1.75 per share under
EyeCity's 1998 stock option plan, 15,000 shares of common stock at an
exercise price of $1.50 per share and 105,000 shares of common stock at an
exercise price of $3.00 per share under EyeCity's 1999 stock option plan.
(7) Robert B. Greenberg's address is 58 Starling Court, Roslyn, New York
11576.
(8) Includes 7,500 shares in the name of his minor children.
(9) Barbara Novick's address is c/o Mana Products, Inc. 32-02 Queens Blvd.,
Long Island City, New York 11101.
(10) Includes 340,000 options to purchase common stock.
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ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
EyeCity's directors and executive officers are as follows:
Name Age Position
---- --- --------
Mark H. Levin 27 President, Chief Executive
Officer and Director
Mark R. Suroff 26 Chief Operating Officer, Executive
Vice President, Secretary,
Treasurer and Director
Daniel D. Thralow 35 Vice President of Operations
and Director
Jon Agnes 37 Chief Technology Officer
Thomas B. Seltzer 38 Chief Merchandising Officer
Nikos P. Mouyiaris 54 Director
Barbara Novick 62 Director
Mark H. Levin serves as EyeCity's President, Chief Executive Officer and as a
member of EyeCity's Board of Directors. Mr. Levin has served as EyeCity's
President since its formation in May 1996. He also served as Chief Executive
Officer of EyeCity from inception until July 1998 at which time he became Chief
Operating Officer. In December 1998, Mr. Levin was re-elected as Chief Executive
Officer. Mr. Levin received his BBA and MBA in Marketing from Hofstra
University. From May 1993 until May 1996 Mr. Levin was President of F.M.B.
Associates, Inc., a marketing consulting firm specializing in market analysis,
competitive analysis, market research, marketing plans and management
consulting. Mr. Levin has worked with manufacturers, healthcare providers,
participants in the entertainment industry and others in a variety of service
related industries. Mr. Levin is a member of the business advisory committee of
North Shore University Hospital, Manhasset, New York.
Mark R. Suroff serves as EyeCity's Executive Vice President, Chief Operating
Officer, Secretary and Treasurer and as a member of EyeCity's Board of
Directors. Mr. Suroff has served as EyeCity's Executive Vice President,
Secretary and Treasurer since its formation in May, 1996. He also served as
Chief Operating Officer from EyeCity's inception until July, 1998. In December
1998, Mr. Suroff was re-elected as Chief Operating Officer. From September 1993
to May 1996, Mr. Suroff served as president of Card Displays, Inc., a company
that sold space for businesses to advertise in high traffic locations in Nassau,
Suffolk, and Queens counties, New York.
Daniel D. Thralow has served as EyeCity's Vice President of Operations and a
member of EyeCity's Board of Directors since May 1999. Beginning in January
1990, Mr. Thralow served as president of Peeper's Sunglasses and Accessories,
Inc. Previously, Mr. Thralow was president of two privately held traditional
retail companies: The Funk Chic Boutique
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and Peeper's Sunglasses. Mr. Thralow graduated from the Honors Program at the
University of North Dakota.
Jon Agnes has served as EyeCity's Chief Technology Officer since July 1999.
Prior thereto, Mr. Agnes was President of Visual Data Systems Inc., a technology
consulting firm founded in March 1994 which has been active in the development
of e-commerce projects in the barter and telecommunications industries. Mr.
Agnes received an M.S. degree in Accounting and a B.S. degree in Computer
Science from Long Island University.
Thomas Seltzer has served as EyeCity's Chief Merchandising Officer since
September 1999. From 1996 until September 1999, Mr. Seltzer was a founder and
member of Impact Eyewear, LLC, a company which specialized in sales and
distribution of branded fashion sunglasses and reading glasses to retail stores.
From 1993 to 1996, Mr. Seltzer served as a consultant for Mespo/Christian Dior
in the fashion accessory industry. Previously, Mr. Seltzer was employed by
Lantis Eyewear Corporation to develop retail partnerships between large
department stores and fashion sunglass companies, and held other management
positions in the retail industry. Mr. Seltzer received a B.A. degree from
Syracuse University.
Nikos P. Mouyiaris has served as a director of EyeCity since May 1999. Mr.
Mouyiaris has been President of Mana Products, Inc., a manufacturer of cosmetic
products, since 1972.
Barbara Novick has served as a director of EyeCity since May 1999. Ms. Novick
has been Executive Vice President of Mana Products, Inc., a manufacturer of
cosmetic products, since 1980.
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ITEM 6. EXECUTIVE COMPENSATION
The following table summarizes all plan and non-plan compensation awarded
to, earned by or paid to EyeCity's chief executive officer and each of the other
executive officers for the fiscal year ended December 31, 1998. No bonuses or
long term payouts were awarded in the periods presented.
<TABLE>
<CAPTION>
Long Term
Compensation
Awards
------------
Annual Restricted Securities
Compensation Stock Underlying
Name and Principal Position Year Salary Award(s) Options
--------------------------- ---- ------ -------- -------
<S> <C> <C> <C> <C>
Mark H. Levin 1998 $82,500 $0 100,000
President and Chief Executive Officer(1)
Mark R. Suroff(2)
Executive Vice President, Chief Operating 1998 $82,500 $0 100,000
Officer, Secretary and Treasurer
Robert B. Greenberg
Former Chief Executive Officer(3) 1998 $84,000(4) $50,000 50,000
</TABLE>
- ----------
(1) Mr. Levin served as Chief Executive Officer from EyeCity's inception
through July 1, 1998, and has served as Chief Executive Officer since
December 31, 1998. To date, the salary indicated has been accrued, and not
been paid, except for $11,538 paid in 1998 for salary earned in 1997. See
"Employment Contracts" and Note 11 of Notes to Financial Statements.
(2) To date, salary indicated has been accrued, and not been paid, except for
$11,538 paid in 1998 for salary earned in 1997. See "Employment Contracts"
and Note 11 of Notes to Financial Statement.
(3) Mr. Greenberg served as Chief Executive Officer from July 1, 1998 through
December 31, 1998. See "Employment Contracts".
(4) This amount includes $9,000 in compensation received by Mr. Greenberg as a
consultant prior to becoming an employee of EyeCity on July 1, 1998.
In addition, in 1999 the Company entered into an employment agreement with
Daniel Thralow (Vice President of Operations), Jon Agnes (Chief Technology
Officer) and Thomas Seltzer (Chief Merchandising Officer). See "Employment
Agreements" for a description of their compensation arrangements.
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OPTION/SAR GRANTS IN LAST FISCAL YEAR
(Individual Grants)
Number of Percent of
Securities Total
Underlying Options/SARs
Options/SARs Granted to Exercise Or
Granted Employees in Base Price
Name # Fiscal Year ($/Sh) Expiration Date
---- ------------ ------------ ------------ ---------------
Mark H. Levin 100,000 40% $1.10 February 1, 2003
Mark R. Suroff 100,000 40% $1.10 February 1, 2003
Robert B. Greenberg 50,000 20% $1.00 March 31, 2000
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-
END OPTION/SAR VALUES
Number of
Securities Value of
Underlying Unexercised
Unexercised In-The-Money
Shares Options/SARs At Options/SARs
Acquired Value FY-End (#) at FY-End ($)
on Exercise Received Exercisable/ Exercisable/
Name # $ Unexercisable Unexercisable(1)
---- ----------- -------- ------------- ----------------
Mark H. Levin 0 - 50,000/50,000 $23,000/$23,000
Mark R. Suroff 0 - 50,000/50,000 $23,000/$23,000
Robert B. Greenberg 0 - 50,000/0 $28,000/0
There were no long-term incentive plans in effect at the end of the last fiscal
year. EyeCity does not compensate its directors for any services performed as
directors. EyeCity does not have a compensation committee of its Board of
Directors. All members of EyeCity's Board of Directors are involved in making
executive compensation decisions, subject to recusal by a director from voting
on matters in which he/she is personally interested.
- ----------
(1) Fair market value of securities underlying the option (based on $1.56
public trading price on the OTC Bulletin Board) minus the exercise price
of the options at fiscal year end.
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Employment Contracts
Mark H. Levin entered into an employment agreement with EyeCity dated as of July
1, 1998 and effective through June 30, 2004. Under this agreement, Mr. Levin is
EyeCity's President and Chief Operating Officer, as well as a director on our
board of directors (on December 31, 1998, by unanimous consent of EyeCity's
board of directors, Mr. Levin was named Chief Executive Officer). Under his
agreement, Mr. Levin is entitled to receive a total base salary for 1998 and
1999 (and through the end of the contract term) at an annual rate of $82,500 and
$100,000 respectively. Mr. Levin's base salary may be further increased, and he
may be eligible for bonuses, in the discretion of our board of directors. Mr.
Levin is entitled to be reimbursed for costs of an automobile approved by
EyeCity. Under the Agreement, if Mr. Levin dies or is unable to perform his
duties, he or his estate will be paid, in addition to any previously earned but
unpaid salary, three months' total base salary.
Mark R. Suroff entered into an employment agreement with EyeCity, dated as of
July 1, 1998 and effective through June 30, 2004. Under this agreement, Mr.
Suroff is EyeCity's Executive Vice President, Secretary and Treasurer, as well
as a director on our board of directors (on December 31, 1998, by unanimous
consent of EyeCity's board of directors, Mr. Suroff was also named Chief
Operating Officer). Under his agreement, Mr. Suroff is entitled to receive a
total base salary for 1998 and 1999 (and through the end of the contract term)
at an annual rate of $82,500 and $100,000 respectively. Mr. Suroff's base salary
may be further increased, and he may be eligible for bonuses, in the discretion
of our board of directors. Mr. Suroff is entitled to be reimbursed for the costs
of an automobile approved by EyeCity. Under this Agreement, if Mr. Suroff dies
or is unable to perform his duties, he or his estate will be paid, in addition
to any previously earned but unpaid salary, three months' total base salary.
Daniel D. Thralow entered into an employment agreement, dated as of May 7, 1999
and effective through May 6, 2002. Under this agreement, Mr. Thralow will serve
as EyeCity's Vice President of Operations. Under Mr. Thralow's employment
agreement, Mr. Thralow is entitled to receive a total base salary for 1999 (and
through the end of the contract term) at an annual rate of $100,000. Mr.
Thralow's base salary may be further increased, and he may be eligible for
bonuses, at the option and in the discretion of our board of directors. Mr.
Thralow is entitled to be reimbursed for the costs of an automobile approved by
EyeCity. Under this agreement, if Mr. Thralow dies or is unable to perform his
duties, he or his estate will be paid, in addition to any previously earned but
unpaid salary, three months' total base salary.
Jon Agnes entered into an employment agreement with EyeCity dated as of July 12,
1999 and effective through July 12, 2002. Under this agreement, Mr. Agnes will
serve as EyeCity's Chief Technology Officer. Under his agreement, Mr. Agnes is
entitled to receive a total base salary as follows: $125,000 per annum through
January 12, 2000; $150,000 per annum from January 13, 2000 through July 11,
2000; $155,000 per annum from July 12, 2000 through July 11, 2001; and $160,000
per annum from July 12, 2001 through July 12, 2002. Mr. Agnes' base salary may
be further increased, and he may be eligible for bonuses, at the option and in
the discretion of our board of directors. Mr. Agnes is also entitled to receive
240,000 options to purchase common stock of EyeCity, which are exercisable until
June 12, 2009 at an exercise price of $4.50 per share of which 40,000 options
have already vested with the balance vesting in 20,000 option
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increments on the 12th day of every third month during the term of the agreement
until all such options have vested. Under this agreement, Mr. Agnes is also
entitled to term life insurance during the term of the agreement in the amount
of $150,000.
Thomas B. Seltzer entered into an employment agreement with EyeCity dated as of
September 28, 1999 and effective through September 27, 2002. Under this
agreement, Mr. Seltzer will serve as EyeCity's Chief Merchandising Officer.
Under his agreement, Mr. Seltzer is entitled to receive a total base salary as
follows: $130,000 per annum from September 28, 1999 through September 27, 2000;
$160,000 per annum from September 28, 2000 through September 27, 2001; and
$180,000 per annum from September 28, 2001 through September 27, 2002. Mr.
Seltzer's base salary may be further increased, and he may be eligible for
bonuses, at the option and in the discretion of our board of directors. Mr.
Seltzer is also entitled to receive 270,000 options to purchase shares of common
stock of EyeCity, which are exercisable until September 28, 2009 at an exercise
price of $3.75 per share, of which 22,500 options have vested with the balance
vesting in 22,500 option increments on the first day of every three-month period
during the term of the agreement. Under this agreement if Mr. Seltzer dies or is
unable to perform his duties, he or his estate will be paid, in addition to any
previously earned but unpaid salary, three months' total base salary.
Robert B. Greenberg entered into an employment agreement with EyeCity dated July
1, 1998 and effective through June 30, 2001. Under this employment agreement,
Mr. Greenberg was EyeCity's Chief Executive Officer and chairman of its board of
directors. This employment agreement and his directorship were terminated and
replaced with a severance and consultancy agreement dated as of December 31,
1998 as amended on July 1, 1999 and which was terminated on September 30, 1999.
Under Mr. Greenberg's current arrangements with EyeCity, Mr. Greenberg is
entitled to receive $75,000 as full settlement of his employment agreement, of
which $5,000 has been paid $35,000 has been credited toward the exercise of
certain stock options (as set forth below), with the balance payable in
installments commencing October 1, 1999 at the rate of $5,000 per month for
seven months. Mr. Greenberg retained 50,000 options to purchase EyeCity common
stock, which were exercisable until March 31, 2000 at an exercise price of $1.00
per share, of which 10,000 were exercised in July 1999 (reducing the $75,000
settlement by $10,000) and 40,000 were exercised in September 1999 (reducing the
$75,000 settlement by $25,000).
1997 Stock Option Plan
The EyeCity 1997 Stock Option Plan was adopted by our board of directors
on April 25, 1997 and approved by our shareholders on April 25, 1997. A total of
500,000 shares of our common stock are reserved for issuance upon the exercise
of stock options. As of September 30, 1999, options for 400,000 of these shares
have been granted. Options may be granted under the 1997 Stock Option Plan to
employees (including directors and officers who are employees) and consultants
of EyeCity and our present and future subsidiaries. The 1997 Stock Option Plan
is administered by our board of directors, which may choose to delegate its
authority to a committee of two or more outside directors. Subject to the
provisions of the 1997 Stock Option Plan, the board of directors (or, if
applicable, the committee) has the discretion to determine the optionees, the
type of options to be granted (incentive stock options, non-qualified stock
options, or a combination thereof), the vesting provisions, the terms of the
option grants and such other related provisions as are consistent with the 1997
Stock Option Plan. The exercise
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price of an incentive stock option shall be determined by our board of directors
(or, if applicable, the committee) and may not be less than the fair market
value of our common stock on the date of grant or, in the case of an optionee
who beneficially owns 10% or more of the total combined voting power of all
classes of our stock, not less than 110% of fair market value per share on the
date of grant. The exercise price of a non-qualified stock option shall be
determined by our board of directors (or, if applicable, the committee) in its
discretion. No employee may be granted options for more than 100,000 shares of
our common stock during any calendar year. In addition, no employee may be
granted an option which is an incentive stock option for shares of our common
stock with a fair market value in excess of $100,000 which first become
exercisable during any calendar year. Options terminate at such time as may be
determined by our board of directors, subject to earlier termination upon the
optionee's death, disability or termination of employment (except that the term
of options which are incentive stock options may not have a term in excess of 10
years, or five years in the case of options granted to holders of 10% or more of
the total combined voting power of all classes of our stock). Options are not
assignable or otherwise transferable except by will or the laws of descent and
distribution. In the event of a stock dividend, split-up, combination,
reclassification, merger in which EyeCity is the surviving corporation or other
exchange of shares, the number of shares of our common stock subject to each
outstanding option and the exercise price for each such option, shall be
adjusted appropriately by our board of directors in its discretion. In the event
of a liquidation or dissolution of EyeCity or a merger in which EyeCity is not
the surviving corporation, then, unless a provision is made for the outstanding
options in such transaction, all such options shall terminate. The 1997 Stock
Option Plan will terminate on April 24, 2007 unless terminated sooner by our
board of directors. Our board of directors has determined that no additional
options will be granted under the 1997 Stock Option Plan.
1998 Non-Qualified Stock Option Plan
The EyeCity 1998 Stock Option Plan was adopted by our board of directors
on April 15, 1998. A total of 1,500,000 shares of our common stock are reserved
for issuance upon the exercise of stock options. As of September 30, 1999,
options have been granted for 1,498,250 of these shares. Options may be granted
under the 1998 Stock Option Plan to employees (including directors and officers
who are employees) and consultants of EyeCity and our present and future
subsidiaries. The 1998 Stock Option Plan is administered by our board of
directors, which may choose to delegate its authority to a committee of two or
more outside directors. Subject to the provisions of the 1998 Stock Option Plan,
the board of directors (or, if applicable, the committee) has the discretion to
determine the optionees, the vesting provisions, the terms of the option grants
and such other related provisions as are consistent with the 1998 Stock Option
Plan. The exercise price of an option shall be determined by our board of
directors (or, if applicable, the committee) in its discretion. Options
terminate such time as determined by our board of directors (or, if applicable,
the committee), subject to earlier termination upon the optionee's death,
disability or termination of employment. Options are not assignable or otherwise
transferable except by will or the laws of descent and distribution. In the
event of a stock dividend, split-up, combination, reclassification, merger in
which EyeCity is the surviving corporation or other exchange of shares, the
number of shares of our common stock subject to each outstanding option and the
exercise price for each option, shall be adjusted appropriately by our board of
directors in its discretion. In the event of a liquidation or dissolution of
EyeCity or a merger in which EyeCity is not the surviving corporation, then,
unless a provision is made for the outstanding options in such transaction, all
such options shall terminate. The 1998 Stock Option Plan will terminate at such
time as it may be terminated by our board of directors.
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1999 Non-Qualified Stock Option Plan
The EyeCity 1999 Stock Option Plan was adopted by our board of directors
on February 5, 1999. A total of 1,500,000 shares of our common stock are
reserved for issuance upon the exercise of stock options. As of September 30,
1999, options have been granted for 684,000 of these shares. Options may be
granted under the 1999 Stock Option Plan to employees (including directors and
officers who are employees) and consultants of EyeCity and our present and
future subsidiaries. The 1999 Stock Option Plan is administered by our board of
directors, which may choose to delegate its authority to a committee of two or
more outside directors. Subject to the provisions of the 1999 Stock Option Plan,
the board of directors (or, if applicable, the committee) has the discretion to
determine the optionees, the vesting provisions, the terms of the option grants
and such other related provisions as are consistent with the 1999 Stock Option
Plan. The exercise price of an option shall be determined by our board of
directors (or, if applicable, the committee) in its discretion. Options
terminate at such time as provided by our board of directors (or, if applicable,
the committee), subject to earlier termination upon the optionee's death,
disability or termination of employment. Options are not assignable or otherwise
transferable except by will or the laws of descent and distribution. In the
event of a stock dividend, split-up, combination, reclassification, merger in
which EyeCity is the surviving corporation or other exchange of shares, the
number of shares of our common stock subject to each outstanding option and the
exercise price for each option, shall be adjusted appropriately by our board of
directors in its discretion. In the event of a liquidation or dissolution of
EyeCity or a merger in which EyeCity is not the surviving corporation, then,
unless a provision is made for the outstanding options in such transaction, all
such options shall terminate. The 1999 Stock Option Plan will terminate at such
time as it may be terminated by our board of directors.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Until August 1999, EyeCity maintained 2,000 square feet of commercial
office space at One Fairchild Court in Plainview, New York. This office space
was subleased from a corporation owned by Mark R. Suroff, the Executive Vice
President, Chief Operating Officer, Secretary and Treasurer of EyeCity, and a
member of its board of directors, at a cost of approximately $1,600 per month.
This corporation was paid $16,607 and $9,000 by EyeCity under such sublease in
fiscal 1998 and for the six months ended June 30, 1999, respectively.
In February 1998, Robert B. Greenberg, the former Chief Executive Officer
of EyeCity, and a former member of its board of directors, was granted options
to purchase 140,000 shares of its common stock at an exercise price of $1.00 per
share under the 1997 Stock Option Plan in exchange for his consulting services
before becoming an employee of EyeCity. In July 1998, Mr. Greenberg received a
grant of options to purchase an additional 835,000 shares of the common stock of
EyeCity at an exercise price of $1.00 per share under the 1998 Stock Option Plan
in connection with his entering into an employment agreement to become EyeCity's
Chief Executive Officer. Pursuant to a Severance and Consultancy Agreement
between Mr. Greenberg and EyeCity, dated as of December 31, 1998, 925,000 of Mr.
Greenberg's options were terminated leaving Mr. Greenberg with options to
purchase an aggregate of 50,000 shares at an exercise price of $1.00 per share
under the 1998 Stock Option Plan, of which 10,000 were exercised in July 1999
and 40,000 were exercised in September 1999.
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In April 1998, Leonard W. Suroff, counsel to and a consultant for EyeCity,
was granted options to purchase 100,000 shares of the common stock of EyeCity at
an exercise price of $1.00 per share under the 1998 Stock Option Plan. In
February 1999, Leonard W. Suroff was granted options to purchase an additional
100,000 shares of the common stock of EyeCity at an exercise price of $1.00 per
share under the 1998 Stock Option Plan. Mr. Suroff is the father of Mark R.
Suroff, a director and an executive officer of EyeCity.
In March 1999, EyeCity entered into a Finders Agreement with James J.
Armenakis, a beneficial owner of over 5% of EyeCity's common stock (by virtue of
the option described below). This agreement provides that Mr. Armenakis will be
entitled to receive options to purchase 50,000 shares of the common stock of
EyeCity for every $250,000 in private equity investments in EyeCity that are
made by persons who are introduced to EyeCity by Mr. Armenakis. The exercise
price of the options to be granted to Mr. Armenakis shall be equal to the price
per share paid to EyeCity by the equity investors introduced by him. To date,
Mr. Armenakis has received under this agreement immediately exercisable options
under the 1998 and 1999 Stock Option Plans for 420,000 shares, including 300,000
shares at an exercise price of $1.00 per share which expire in March 2002,
15,000 shares at $1.50 per share which expire in June 2002, 98,000 shares at an
exercise price of $3.00 per share which expire in June 2002 and 7,000 shares at
an exercise price of $3.00 per share which expire in August, 2002.
In March 1999, EyeCity entered into a Consulting Agreement with James J.
Armenakis. Under this one-year agreement, Mr. Armenakis provides non-exclusive
legal consulting services to EyeCity in exchange for options to purchase 150,000
shares of EyeCity's common stock at an exercise price of $1.00 per share under
the 1998 Stock Option Plan. These options are immediately exercisable and expire
in March 2002. Mr. Armenakis also received options to purchase 60,000 shares of
EyeCity's common stock at an exercise price of $1.75. These options are
immediately exercisable and expire in March 2002.
In May 1999, Nikos P. Mouyiaris, a member of the board of directors of
EyeCity, was granted certain registration rights, including the right to demand
that EyeCity file a specific registration statement with respect to all or a
portion of his shares and that his shares be registered by EyeCity in connection
with a registration effected for the benefit of the Company and/or third parties
(in each case, subject to certain limitations on exceptions), in connection with
his purchase of 1,000,000 shares of common stock of EyeCity as well as the right
to nominate two members of EyeCity's board of directors. At least one of Mr.
Mouyiaris' board nominees must approve any of the following transactions:
o any merger of EyeCity into another company where EyeCity is
not the surviving company and where the stockholders of
EyeCity do not comprise the voting majority of the surviving
company;
o a sale of all or substantially all of the assets of EyeCity;
o acquisitions by EyeCity for aggregate consideration of
$1,000,000 or more;
o the incidence or assumption by EyeCity of any obligation, debt
or guaranty to any bank or financial institution of $1,000,000
or more;
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o the voluntary declaration of bankruptcy or consent to
receivership by EyeCity or similar actions by EyeCity to seek
protection from its creditors;
o authorization or issuance of shares of its common stock, or
securities convertible into common stock, at a price
(including amounts paid upon conversion or exercise) less than
$1.00 per share; or
o the entering into certain types of transactions with related
parties.
Mr. Mouyiaris' right to nominate members of EyeCity's board of directors, and
the rights of those directors to approve the transactions set forth above, will
terminate upon the earlier to occur of (x) such time as Mr. Mouyiaris is the
beneficial owner of less than 825,000 shares of the common stock of EyeCity or
(y) the consummation by EyeCity of an underwritten public offering of its
securities for gross proceeds of at least $7,500,000.
In May 1999, Barbara Novick, a member of the board of directors of EyeCity
(and one of Mr. Mouyiaris' nominees to the Board), was granted certain
registration rights in connection with her purchase of 90,000 shares of common
stock of EyeCity. These registration rights include unlimited piggy-back
registration rights.
In May 1999, Apostolos Mouyiaris was granted certain registration rights
in connection with his purchase of 25,000 shares of common stock of EyeCity.
These registration rights include unlimited piggy-back registration rights. Mr.
Mouyiaris is the brother of Nikos P. Mouyiaris, a member of the board of
directors of EyeCity.
In May 1999, James J. Armenakis was granted certain registration rights in
connection with his purchase of 10,000 shares of common stock of EyeCity. These
registration rights include unlimited piggy-back registration rights.
In May 1999, Daniel D. Thralow, the Vice President of Operations of
EyeCity and a member of its board of directors, was paid $875,000 in cash
(including a $25,000 deposit made in March 1999), $875,000 in the form of a
secured promissory note and 1,210,159 shares of common stock of EyeCity in
connection with the merger of Peeper's Sunglasses and Accessories, Inc., all of
whose outstanding capital stock was owned by Mr. Thralow, with and into
Peeper's, Inc., a wholly owned subsidiary of EyeCity. The promissory note is
payable in one year and is secured by a first priority interest in all of the
intellectual and intangible property that was owned by Peepers Sunglasses and
Accessories, Inc. prior to the merger. As part of this transaction, EyeCity
agreed to have Mr. Thralow elected as a member of its board of directors and
entered into an employment agreement with him.
In September 1999, EyeCity acquired certain assets of Impact Eyewear, LLC,
one of whose members was Thomas B. Seltzer, EyeCity's Chief Merchandising
Officer, in exchange for $120,000 in cash and 166,667 shares of common stock of
EyeCity.
EyeCity believes that the transactions discussed in this section were on
terms at least as favorable to EyeCity as those that could have been secured in
arm's length transactions.
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ITEM 8. DESCRIPTION OF CAPITAL STOCK
General
EyeCity is authorized by its Certificate of Incorporation to issue
20,000,000 shares of common stock, par value $.001 per share, of which 8,802,931
were outstanding and held of record by 96 stockholders on November 15, 1999; and
1,000,000 shares of Preferred Stock, par value $.001 per share, of which no
shares are outstanding (collectively, the "Capital Stock").
EyeCity may not subdivide or combine any shares of its common stock, or
pay any dividend or retire any share or make any other distribution on any share
of its common stock, or accord any other payment, benefit or preference to any
share of its common stock, except by extending such subdivision, combination,
distribution, payment, benefit or preference equally to all shares of common
stock.
The common stock does not entitle holders to any preemptive rights upon
the issuance of other securities of EyeCity.
Common Stock
Holders of common stock are entitled to one vote per share on all matters
to be voted on by stockholders and are entitled to receive such dividends as may
be declared by the board of directors out of funds legally available therefore
and to share pro rata in any distribution to holders of Capital Stock. Except
under certain circumstances, holders of common stock do not have the power to
act by written consent. Actions required or permitted to be taken by EyeCity's
stockholders may be taken at a duly called annual or special meeting of the
stockholders or, under certain circumstances, by written consent of EyeCity's
stockholders. In the event of a liquidation, dissolution, or winding-up of
EyeCity, holders of common stock will be entitled to share pro rata in the
distribution to holders of Capital Stock of all of EyeCity's remaining assets
after the payment of all debts, liabilities, and obligations of EyeCity and the
preference distributions, if any, to holders of EyeCity's Preferred Stock.
As of November 15, 1999, Messrs. Levin, Suroff, Thralow, Mouyiaris and Ms.
Novick (each directors of EyeCity) own 4,701,159 shares of EyeCity common stock
and control approximately 56% of the aggregate voting power of all shares.
Acting together, these stockholders can effectively control substantially all
actions taken by EyeCity's stockholders, including the election of directors. In
addition, Mr. Mouyiaris has approval rights on significant corporate actions in
his capacity as a director. See "Certain Relationships and Related
Transactions". Such concentration of ownership could also have the effect of
delaying, deterring or preventing a change in control of EyeCity that might
otherwise be beneficial to stockholders and may also discourage acquisition bids
for EyeCity and limit the amount certain investors may be willing to pay for
shares of the common stock.
Preferred Stock
Pursuant to EyeCity's Certificate of Incorporation, the board of directors
has the authority to issue up to 1,000,000 shares of Preferred Stock in one or
more series with such designations, rights and preferences as may be determined
from time to time by the board of directors. Accordingly, the board of directors
is empowered, without stockholder approval, to issue Preferred Stock with
dividend, liquidation, conversion, voting or other rights that
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may adversely affect the voting power or other rights of the holders of
EyeCity's common stock. In the event of issuance, the Preferred Stock could be
utilized, under certain circumstances, to discourage, delay or prevent an
acquisition or change of control of EyeCity. EyeCity does not currently intend
to issue any shares of its Preferred Stock.
Dividends
EyeCity has never paid any cash dividends on its Capital Stock. For the
foreseeable future, EyeCity intends to retain all of its future earnings to
finance its operations and does not anticipate paying cash dividends.
Certain Provisions of Delaware Law
EyeCity is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law (the "DGCL"). In general, Section 203 prevents
an "interested stockholder" (defined generally as a person owning 15% or more of
EyeCity's outstanding voting stock) from engaging in a "business combination"
(as defined in Section 203) with EyeCity for three years following the date that
person became an interested stockholder unless: (i) before that person became an
interested stockholder, the board of directors approved the transaction in which
the interested stockholder became an interested stockholder or approved the
business combination, (ii) upon completion of the transaction that resulted in
the interested stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of EyeCity outstanding at the
time the transaction commenced (excluding stock held by directors who are also
officers of EyeCity and by employee stock plans that do not provide employees
with the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer) or (iii) on or following
the date on which that person became an interested stockholder, the business
combination is approved by EyeCity's board of directors and authorized at a
meeting of stockholders by the affirmative vote of the holders of at least 66
2/3% of the outstanding voting stock of EyeCity not owned by the interested
stockholder.
Under Section 203, these restrictions do not apply to certain business
combinations proposed by an interested stockholder following the announcement or
notification of one of certain extraordinary transactions involving EyeCity and
a person who was not an interested stockholder during the previous three years
or who became an interested stockholder with the approval of a majority of
EyeCity's directors, if that extraordinary transaction is approved or not
opposed by a majority of the board of directors (but not less than one) who were
directors before any person became an interested stockholder in the previous
three years or who were recommended for election or elected to succeed such
directors by a majority of such directors then in office.
Under Section 162 of the DGCL, EyeCity's board of directors can, without
stockholder approval, issue authorized but unissued shares of Capital Stock,
which may have the effect of delaying, deferring or preventing a change of
control of EyeCity. EyeCity has no current plan or arrangement for the issuance
of any shares of Capital Stock other than in the ordinary course pursuant to the
Stock Option Plans.
PART II
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ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER STOCKHOLDER MATTERS
Effective November 17, 1999, EyeCity's common stock was delisted by NASDAQ
from quotation on the Over The Counter Bulletin Board. EyeCity's common stock is
anticipated to be quoted on the "pink sheets", assuming market makers are
willing to make a market in EyeCity's common stock. Following final
effectiveness of this Form 10, EyeCity intends to reapply for listing of its
securities on the Over The Counter Bulletin Board. There can be no assurance
that such market makers will make markets in EyeCity's stock, or the stock will
again be listed on the Bulletin Board. Trading of EyeCity's common stock on the
over-the-counter market commenced in March 1998. The following table reflects
the high and low bid prices for EyeCity's common stock for each quarterly period
ended since trading commenced in March 1998. These quotations are based on
information supplied by market makers of EyeCity's common stock. These
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.
1999 1998
Price Range Price Range
----------- -----------
Low High Low High
--- ---- --- ----
$ $ $ $
1st Quarter 0.625 6.125 0.875 1.000
2nd Quarter 3.125 9.875 0.875 1.5625
3rd Quarter 3.063 6.750 0.6875 1.625
4th Quarter 1.688 4.625 0.6875 1.875
As of November 15, 1999, there are 96 holders of record of EyeCity's
common stock and 8,802,931 shares of common stock outstanding, of which
6,662,106 are restricted securities under the Securities Act of 1933, as amended
(the "Securities Act"). As of November 15, 1999, the date hereof, 2,388,175
restricted securities are eligible for sale in the public market. The remaining
4,273,931 restricted securities will be eligible for sale from time to time
thereafter in compliance with Rule 144 under the Securities Act of 1933.
Further, holders of 1,760,000 of these restricted shares have so-called
"piggy-back" registration rights which require these shares of common stock to
be registered for sale in EyeCity's future registrations, subject to certain
restrictions. In addition, as of November 15, 1999, there were outstanding
options to purchase 2,522,250 shares of EyeCity common stock, substantially all
of which are exercisable for prices significantly less than the current trading
price of EyeCity common stock. Sales of substantial amounts of EyeCity common
stock (including shares issued upon the exercise of outstanding options) in the
public market in the future could adversely affect the market price of EyeCity
common stock. These sales also might make it more difficult for EyeCity to sell
equity or equity-related securities in the future at a time and price that
EyeCity thinks appropriate.
The common stock is subject to certain penny stock rules promulgated by
the Securities and Exchange Commission (the "Commission"). The penny stock rules
require a broker-dealer, prior to a transaction in a penny stock not otherwise
exempt from the rules, to deliver a standardized risk disclosure document
prepared by the Commission that provides information about penny stocks and the
nature and level of risks in the penny stock market. The broker-dealer must also
provide the customer with current bid and offer quotations for the penny stock,
the compensation of the broker-dealer and its salesperson in the transaction and
monthly account statements showing the market value
44
<PAGE>
of each penny stock held in the customer's account. In addition, the penny stock
rules require that prior to a transaction in a penny stock not otherwise exempt
from such rules, the broker-dealer must make a special written determination
that the penny stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction. These disclosure requirements
may have the effect of reducing the level of trading activities in the secondary
market for stock that becomes subject to the penny stock rules. If the Common
Stock becomes subject to the penny stock rules, investors may find it more
difficult to sell their Common Stock.
EyeCity has never declared any dividends and is not likely to do so in the
near future.
ITEM 2. LEGAL PROCEEDINGS
Rights in EyeCity's "Peeper's" mark and peepers.com domain name have been
challenged by American Eyewear, Inc. in an action alleging trademark
infringement filed in federal court in Dallas, Texas in July 1999. Although the
action has been filed, the parties have been discussing settlement; the
complaint has not formally been served and EyeCity therefore has not responded.
If American Eyewear elects to proceed with the action, EyeCity has substantial
defenses and may counter-claim to limit American Eyewear's claimed rights in the
trademark Peeper's. It is premature to assess the likely outcome of the
proceeding.
A wholly owned subsidiary of EyeCity, Peeper's Sunglasses & Accessories,
Inc., was named as a defendant in an action entitled Oakley, Inc. v. Peepers
Sunglasses & Accessories Inc., Son Dad Boards Ltd. d/b/a Freestyle of Duluth and
Larry Leege, which was commenced in October 1999 in the Superior Court of
California, Orange County. In this action, plaintiff Oakley, a manufacturer of
high quality sport sunglasses, alleges that Peeper's intentionally and
negligently interfered with Oakley's contractual relations. Specifically, Oakley
alleges that it has agreements with authorized dealers permitting the dealers to
purchase and sell Oakley products, but prohibiting them from selling the
products to entities which they expect will resell the products. Oakley alleges
that Peeper's, by purchasing and/or seeking to purchase Oakley products from
authorized dealers for resale, interfered with Oakley's contractual relations
with the authorized Oakley dealers. Oakley seeks compensatory, consequential,
incidental and punitive damages in unspecified amounts. It is premature to
assess the likely outcome of the proceeding.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
Under its 1997, 1998 and 1999 Stock Option Plans, EyeCity has granted an
aggregate of 2,572,250 options to various consultants and employees to purchase
shares of EyeCity's common stock at exercise prices ranging from $1.00 to $7.75.
No commissions were paid in connection with those grants. EyeCity relied on
exemptions from registration under Section 4(2) of the Securities Act of 1933.
1996
There were no sales of unregistered securities by EyeCity in 1996.
45
<PAGE>
1997
In October 1997, EyeCity completed a non-underwritten private sale of
550,000 shares of its common stock to 74 individual investors. These shares were
sold at a price of $1.00 per share pursuant to Rule 504 of Regulation D of the
Securities Act of 1933.
1998
In February 1998, EyeCity privately issued 300,000 shares of its common
stock to Carousel Consulting Inc. in consideration for the provision of
marketing consulting services valued at approximately $195,000. EyeCity relied
on exemptions from registration under Section 4(2) of the Securities Act of
1933.
In April 1998, EyeCity completed a non-underwritten private sale of
450,000 shares of its common stock to 10 individual investors. These shares were
sold at a price of $1.00 per share pursuant to Rule 504 of Regulation D of the
Securities Act of 1933.
In August 1998, EyeCity privately issued 214,000 shares of its common
stock in connection with the acquisition of all of the outstanding capital stock
of Foggles, Inc. by EyeCity. These shares of EyeCity were issued in equal
amounts to the four individual stockholders of Foggles, Inc. EyeCity relied on
exemptions from registration under Section 4(2) of the Securities Act of 1933.
In August 1998, EyeCity privately sold $362,500 of subordinated
convertible promissory notes in a non-underwritten offering to seven individual
investors (EyeCity later repurchased $25,000 of the notes held by two of these
investors at their request). These notes may be converted on or after October 1,
1999 into shares of common stock of EyeCity at a conversion price of $1.25 per
share. EyeCity relied on Rule 506 of Regulation D under the Securities Act of
1933. All of these individual investors represented that they were accredited
investors as defined under Rule 501 of Regulation D under the Securities Act of
1933.
In September 1998, EyeCity privately issued 15,000 shares of its common
stock in connection with the acquisition of all of the outstanding capital stock
of Gilead Enterprises, Inc. by EyeCity. These shares of EyeCity were issued in
equal amounts to the three individual stockholders of Gilead Enterprises, Inc.
EyeCity relied on exemptions from registration under Section 4(2) of the
Securities Act of 1933.
In November 1998, EyeCity privately issued 10,000 shares of its common
stock to Adam Levin Consulting in consideration for the provision by Levin
Consulting of marketing consulting services valued at approximately $10,000.
EyeCity relied on exemptions from registration under Section 4(2) of the
Securities Act of 1933.
In March 1999, EyeCity privately issued 100,000 shares of its common stock
in connection with the acquisition of all of the outstanding capital stock of
EyeGlassPlace.com, Inc. by EyeCity. These shares of EyeCity were issued to the
one individual stockholder of EyeGlassPlace.com, Inc. EyeCity relied on
exemptions from registration under Section 4(2) of the Securities Act of 1933.
In March 1999, EyeCity privately issued 20,000 shares of its common stock
to Rosenman & Colin LLP, counsel to EyeCity, in consideration for the provision
of legal services valued at approximately $20,000. EyeCity relied on exemptions
from registration under Section 4(2) of the Securities Act of 1933.
In March 1999, EyeCity privately issued 250,000 shares of its common stock
to Nikos Mouyiaris. These shares were sold for $1.00 per share, for a total
offering price of $250,000. EyeCity relied on exemptions from registration under
Section 4(2) of the Securities Act of 1933. Mr. Mouyiaris represented that he
was an accredited investor as defined under Rule 501 of Regulation D of the
Securities Act of 1933.
46
<PAGE>
In April 1999, EyeCity privately issued 10,000 shares of its common stock,
valued at $10,000, to Jerrold S. Pine in partial consideration for the exercise
of EyeCity's option to grant to EyeCity an exclusive license to use certain
patented computer security technology. EyeCity relied on exemptions from
registration under Section 4(2) of the Securities Act of 1933.
In May 1999, EyeCity privately issued 130,000 shares of its common stock
to Stanley Altschuler and 130,000 shares of its common stock to Richard Cooper
in consideration for services rendered by Strategic Growth International, Inc,
valued at approximately $260,000. EyeCity relied on exemptions from registration
under Section 4(2) of the Securities Act of 1933.
In May 1999, EyeCity privately issued 1,210,159 shares of its common stock
as partial consideration for all of the capital stock of Peeper's Sunglasses and
Accessories, Inc. in connection with the merger of Peeper's Sunglasses and
Accessories, Inc. with and into Peeper's, Inc, a wholly owned subsidiary of
EyeCity. These shares of EyeCity were issued to the one individual stockholder
of Peeper's Sunglasses and Accessories, Inc. EyeCity relied on exemptions from
registration under Section 4(2) of the Securities Act of 1933.
In May 1999, EyeCity privately issued 2,105 shares of its common stock
valued at approximately $3,000 to Thomas Gilligan as partial consideration for
an assignment of all of Mr. Gilligan's rights to an internet domain name.
EyeCity relied on exemptions from registration under Section 4(2) of the
Securities Act of 1933.
In May 1999, EyeCity privately sold 1,500,000 shares of its common stock
to 11 individual investors at a price of $1.00 per share for a total offering
price of $1,500,000. In connection with these sales, EyeCity paid to James J.
Armenakis a commission in the form of options to purchase 300,000 shares of
EyeCity common stock at an exercise price of $1.00 per share under the 1998
Stock Option Plan. EyeCity relied on exemptions from registration under Section
4(2) of the Securities Act of 1933. Each of these investors represented that he
or she was an accredited investor as defined under Rule 501 of Regulation D of
the Securities Act of 1933.
In June, 1999, EyeCity privately issued 283,334 shares of its common stock
as partial consideration for all of the capital stock of SunSource Technology,
Inc. in connection with the merger of SunSource Technology, Inc. with and into
SunglassSite, Inc., a wholly owned subsidiary of EyeCity. These shares of
EyeCity were issued to the one individual stockholder of SunSource Technology,
Inc. EyeCity relied on exemptions from registration under Section 4(2) of the
Securities Act of 1933.
In June 1999, EyeCity privately sold 50,000 shares of its common stock to
one individual investor. These shares were sold for $1.50 per share for a total
offering price of $75,000. EyeCity paid James J. Armenakis a commission in the
form of options to purchase 15,000 shares of EyeCity common stock at an exercise
price of $1.50 per share under the 1998 Stock Option Plan. EyeCity relied on
exemptions from registration under Section 4(2) of the Securities Act of 1933.
Such individual investor represented that he was an accredited investor as
defined under Rule 501 of Regulation D of the Securities Act of 1933.
In June 1999, EyeCity privately sold 230,000 shares of its common stock to
10 individual investors. These shares were sold for $3.00 per share, for a total
offering price of $690,000. In connection with the sale of $490,000 of these
shares, EyeCity paid to James J. Armenakis a commission in the form of options
to purchase 98,000 shares of EyeCity common stock at an exercise price of $3.00
per share under the 1999 Stock Option Plan. EyeCity relied on exemptions from
registration under Section 4(2) of the Securities Act of 1933. Each of these
investors represented that he or she was an
47
<PAGE>
accredited investor as defined under Rule 501 of Regulation D of the Securities
Act of 1933.
In July 1999, EyeCity privately issued 13,000 shares of its common stock
to the 1996 Joel Lebovitz Trust and 13,000 shares of its common stock to Manley
Goldfine in connection with certain improvements, valued at approximately
$78,000, to certain real estate in Duluth, Minnesota leased by EyeCity through
its wholly owned subsidiary, Peeper's, Inc. EyeCity relied on exemptions from
registration under Section 4(2) of the Securities Act of 1933.
In July and August 1999, EyeCity privately sold 47,334 shares of its
common stock to seven individual investors. These shares were sold for $3.00 per
share, for a total offering price of $142,004. In connection with the sale of
$35,000 of these shares, EyeCity will pay to James J. Armenakis a commission in
the form of options to purchase 7,000 shares of EyeCity common stock at an
exercise price of $3.00 per share under the 1999 Stock Option Plan. EyeCity
relied on exemptions from registration under Section 4(2) of the Securities Act
of 1933. Each of these investors represented that he or she was an accredited
investor as defined under Rule 501 of Regulation D of the Securities Act of
1933.
In August 1999, EyeCity privately issued 10,000 shares of its common stock
in connection with the exercise of stock options at $1.00 per share by Robert B.
Greenberg. These shares of EyeCity were issued in equal amounts to four family
members of Mr. Greenberg. EyeCity relied on exemptions from registration under
Section 4(2) of the Securities Act of 1933.
In August 1999, EyeCity privately issued 15,000 shares of its common stock
to Rosenman & Colin LLP, counsel to EyeCity, in consideration for the provision
of legal services valued at approximately $45,000. EyeCity relied on exemptions
from registration under Section 4(2) of the Securities Act of 1933.
In September 1999, EyeCity privately issued 166,667 shares of its common
stock valued at approximately $500,000 as partial consideration for certain
assets of Impact Eyewear, LLC. These shares of EyeCity were issued to Impact
Eyewear, LLC. EyeCity relied on exemptions from registration under Section 4(2)
of the Securities Act of 1933.
In September 1999, EyeCity privately issued 40,000 shares of its common
stock in connection with the exercise of stock options at $1.00 per share by
Robert B. Greenberg. EyeCity relied on exemptions from registration under
Section 4(2) of the Securities Act of 1933.
In October 1999, EyeCity privately issued 33,333 shares of its common
stock to one individual investor. These shares were sold for $3.00 per share for
a total offering price of $100,000. EyeCity relied on exemptions from
registration under Section 4(2) of the Securities Act of 1933. The investor
represented that he was an accredited investor as defined under Rule 501 of
Regulation D of the Securities Act of 1933.
In October 1999, one of the investors in the subordinated convertible
promissory notes sold in EyeCity's August 1998 offering converted $12,500 of his
notes into 10,000 shares of EyeCity common stock. EyeCity relied on exemptions
from registration under Section 4(2) of the Securities Act of 1933. Such
individual investor represented that he was an accredited investor as defined
under Rule 501 of Regulation D of the Securities Act of 1933.
In November 1999, EyeCity privately issued 160,000 shares of its common
stock to Rosenman & Colin LLP, counsel to EyeCity, in consideration for the
provision of legal services valued at approximately $160,000. EyeCity relied on
exemptions from registration under Section 4(2) of the Securities Act of 1933.
48
<PAGE>
In the case of the transactions referred to above as relying on the
Section 4(2) exemption, EyeCity did not engage in any general solicitation or
advertising; the investors were either accredited investors or experienced and
sophisticated investors or sellers in sale of business transactions or service
providers, there were a small number of investors overall, and the investors
were known to EyeCity or its advisors.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
EyeCity's Certificate of Incorporation provides that, except to the extent
prohibited by the Delaware General Corporation Law, EyeCity's officers and
directors shall not be personally liable to EyeCity or its stockholders for
monetary damages for any breach of fiduciary duty as directors of EyeCity. Under
the DGCL, the directors have a fiduciary duty to EyeCity which is not eliminated
by this provision of the Certificate of Incorporation and, in appropriate
circumstances, equitable remedies such as injunctive or other forms of
nonmonetary relief will remain available. In addition, each director will
continue to be subject to liability under the DGCL for breach of the director's
duty of loyalty to EyeCity, for acts or omissions which are found by a court of
competent jurisdiction to be not in good faith or which involve intentional
misconduct, or knowing violations of law, for actions leading to improper
personal benefit to the director, and for payment of dividends or approval of
stock repurchases or redemptions that are prohibited by the DGCL. This provision
also does not affect the directors' responsibilities under any other laws, such
as the Federal securities laws or state or Federal environmental laws.
Section 145 of the DGCL empowers a corporation to indemnify its directors
and officers and to purchase insurance with respect to liability arising out of
their capacity or status as directors and officers, provided that this provision
shall not eliminate or limit the liability of a director: (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) arising under Section 174 of the DGCL, or (iv)
for any transaction from which the director derived an improper personal
benefit. The DGCL provides further that the indemnification permitted thereunder
shall not be deemed exclusive of any other rights to which the directors and
officers may be entitled under the corporation's bylaws, any agreement, a vote
of stockholders or otherwise. The Certificate of Incorporation provides that
EyeCity shall, to the fullest extent permitted by the DGCL, indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding (whether civil, criminal,
administrative or investigative) by reason of the fact that such person is or
was a director or officer of EyeCity, or is or was serving at the request of
EyeCity as a director or officer of another corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted.
49
<PAGE>
EyeCity.com, Inc. and Subsidiaries
Financial Statements
Contents
EyeCity.com, Inc.
Report of Independent Auditors............................................. F-1
Consolidated Balance Sheets as of December 31, 1998 and
September 30, 1999 (Unaudited).......................................... F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1997 and 1998 and the Nine Months Ended
September 30, 1998 and 1999 (Unaudited)................................. F-4
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
for the Years Ended December 31, 1997 and 1998 and the Nine Months
Ended September 30, 1999 (Unaudited).................................... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997 and 1998 and the Nine Months Ended
September 30, 1998 and 1999 (Unaudited)................................. F-6
Notes to Consolidated Financial Statements................................. F-7
Peeper's Sunglasses and Accessories, Inc.
Report of Independent Auditors............................................. F-24
Balance Sheets as of December 31, 1998 and May 7, 1999 (Unaudited)......... F-25
Statements of Income for the Years Ended December 31, 1997 and 1998
and the Period from January 1, 1999 to May 7, 1999 (Unaudited).......... F-26
Statements of Stockholder's Equity for the Years Ended December 31, 1997
and 1998 and the Period from January 1, 1999 to May 7, 1999 (Unaudited). F-27
Statements of Cash Flows for the Years Ended December 31, 1997 and 1998
and the Period from January 1, 1999 to May 7, 1999 (Unaudited).......... F-28
Notes to Financial Statements.............................................. F-29
50
<PAGE>
EyeCity.com, Inc. and Subsidiaries
Financial Statements (continued)
Contents
SunSource Technology, Inc.
Report of Independent Auditors............................................. F-32
Balance Sheets at December 31, 1998 and June 30, 1999 (Unaudited).......... F-33
Statements of Operations for the Period from June 13, 1997 (inception) to
December 31, 1997, the Year Ended December 31, 1998 and the Six Months
Ended June 30, 1999 (Unaudited)......................................... F-34
Statements of Stockholder's Equity for the Period from June 13, 1997
(inception) to December 31, 1997, the Year Ended December 31, 1998
and the Six Months Ended June 30, 1999 (Unaudited)...................... F-35
Statements of Cash Flows for the Period from June 13, 1997 (inception) to
December 31, 1997, the Year Ended December 31, 1998 and the Six Months
Ended June 30, 1999 (Unaudited)......................................... F-36
Notes to Financial Statements.............................................. F-37
Foggles, Inc.
Report of Independent Auditors............................................. F-40
Balance Sheet as of August 5, 1998......................................... F-41
Statements of Operations for the Year Ended December 31, 1997 and the
Period for January 1, 1998 to August 5, 1998............................ F-42
Statements of Stockholders' Equity for the Year Ended December 31, 1997
and the Period from January 1, 1998 to August 5, 1998................... F-43
Statements of Cash Flows for the Year Ended December 31, 1997 and the
Period from January 1, 1998 to August 5, 1998........................... F-44
Notes to Financial Statements.............................................. F-45
Unaudited Pro Forma Consolidated Statements of Operations
Unaudited Pro Forma Consolidated Statement of Operations for the Year
Ended December 31, 1998................................................. F-48
Unaudited Pro Forma Consolidated Statement of Operations for the Nine
Months Ended September 30, 1999......................................... F-49
Notes to Unaudited Pro Forma Consolidated Statements of Operations......... F-50
51
<PAGE>
Report of Independent Auditors
The Stockholders
EyeCity.com, Inc.
We have audited the accompanying consolidated balance sheet of EyeCity.com, Inc.
and subsidiaries as of December 31, 1998, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for each
of the two years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of EyeCity.com, Inc.
and subsidiaries at December 31, 1998, and the consolidated results of its
operations and its cash flows for each of the two years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company's
recurring losses from operations and working capital deficiency raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans as to these matters are also described in Note 1. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
New York, New York
September 28, 1999
F-1
<PAGE>
EyeCity.com, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, September 30,
1998 1999
------------ -------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 224,748 $ 255,261
Accounts receivable, net of allowance of $1,050 in
1998 and 1999 41,147 31,114
Inventories 100,763 583,857
Prepaid expenses 17,085 21,393
---------- ----------
Total current assets 383,743 891,625
Furniture and equipment, net of accumulated
depreciation of $2,863 in 1998 and $16,187 in 1999 16,714 280,980
Intangibles, net of accumulated amortization of
$22,488 in 1998 and $600,943 in 1999 141,892 4,400,075
---------- ----------
Total assets $ 542,349 $5,572,680
========== ==========
See accompanying notes.
F-2
<PAGE>
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
(Unaudited)
<S> <C> <C>
Liabilities and stockholders' (deficit) equity
Current liabilities:
Accounts payable and accrued expenses $ 265,083 $ 913,481
Accrued payroll and related taxes 94,687 103,988
Deferred salary to officers 165,000 289,052
Current portion of notes payable -- 987,537
Current portion of subordinated convertible
promissory notes 25,000 --
----------- -----------
Total current liabilities 549,770 2,294,058
Subordinated convertible promissory notes 337,500 337,500
----------- -----------
Total liabilities 887,270 2,631,558
----------- -----------
Commitments
Stockholders' (deficit) equity:
Preferred stock--$.001 par value: authorized,
1,000,000 shares; no shares issued and outstanding -- --
Common stock--$.001 par value, 20,000,000 shares
authorized, shares issued and outstanding:
4,539,000 in 1998 and 8,759,599 in 1999 4,539 8,759
Additional paid-in capital 1,756,728 8,124,188
Accumulated deficit (1,942,969) (4,804,661)
Unamortized compensation component of stock options (163,219) (387,164)
----------- -----------
Total stockholders' (deficit) equity (344,921) 2,941,122
----------- -----------
Total liabilities and stockholders' (deficit) equity $ 542,349 $ 5,572,680
=========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE>
EyeCity.com, Inc. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended December 31, Nine months ended September 30,
----------------------------- ------------------------------
1997 1998 1998 1999
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net revenues $ 25,947 $ 95,974 $ 23,469 $ 1,531,159
Cost of revenues 17,000 44,576 17,195 1,089,328
----------- ----------- ----------- -----------
Gross profit 8,947 51,398 6,274 441,831
----------- ----------- ----------- -----------
Operating expenses:
Marketing and sales 217,792 779,528 339,063 244,575
General and administrative 252,489 657,832 453,539 2,175,611
Depreciation and amortization 597 24,754 10,181 591,779
Technology and development -- -- -- 177,357
----------- ----------- ----------- -----------
Total operating expenses 470,878 1,462,114 802,783 3,189,322
----------- ----------- ----------- -----------
Operating loss (461,931) (1,410,716) (796,509) (2,747,491)
Other income (expense):
Interest and investment income -- 10,865 -- 6,742
Interest expense (4,542) (10,473) (2,771) (120,943)
----------- ----------- ----------- -----------
Total other income (expense) (4,542) 392 (2,771) (114,201)
----------- ----------- ----------- -----------
Net loss $ (466,473) $(1,410,324) $ (799,280) $(2,861,692)
=========== =========== =========== ===========
Basic and diluted net loss per
common share $(.14) $(.33) $(.19) $(.43)
=========== =========== =========== ===========
Shares used in the calculation of basic
and diluted net loss per common share 3,264,831 4,259,773 4,165,846 6,650,508
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE>
EyeCity.com, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity (Deficit)
Years ended December 31, 1997 and 1998 and the
nine months ended September 30, 1999 (unaudited)
<TABLE>
<CAPTION>
Unamortized
Compensation Total
Common Stock Additional Component Stockholders'
------------------------- Paid-In Accumulated of Stock Equity
Shares Amount Capital Deficit Options (Deficit)
----------- ----------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 3,000,000 $ 3,000 $ 3,000 $ (66,172) -- $ (60,172)
Issuance of common stock for cash, net of
expenses of $18,500 550,000 550 530,950 -- -- 531,500
Net loss for the year ended December 31,
1997 -- -- -- (466,473) -- (466,473)
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1997 3,550,000 3,550 533,950 (532,645) -- 4,855
Issuance of common stock for cash, net of
expenses of $14,736 450,000 450 434,814 -- -- 435,264
Issuance of common stock for consulting
services 310,000 310 204,690 -- -- 205,000
Issuance of common stock in connection
with acquisitions 229,000 229 173,204 -- -- 173,433
Issuance of stock options -- -- 410,070 -- (410,070) --
Amortization of compensation component of
stock options -- 246,851 246,851
Net loss for the year ended December 31,
1998 -- -- -- (1,410,324) -- (1,410,324)
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1998 4,539,000 4,539 1,756,728 (1,942,969) (163,219) (344,921)
Issuance of common stock for cash net of
$160,000 of expenses (unaudited) 2,077,334 2,077 2,494,925 -- -- 2,497,002
Issuance of common stock for services
(unaudited) 321,000 321 402,679 -- -- 403,000
Issuance of common stock in connection
with acquisitions (unaudited) 1,772,265 1,772 2,874,599 -- -- 2,876,371
Issuance of stock options (unaudited) -- -- 545,307 -- (545,307) --
Exercise of stock options (unaudited) 50,000 50 49,950 -- -- 50,000
Amortization of compensation component of
stock options (unaudited) -- -- -- -- 321,362 321,362
Net loss for the nine months ended
September 30, 1999 (unaudited) -- -- -- (2,861,692) -- (2,861,692)
----------- ----------- ----------- ----------- ----------- -----------
Balance at September 30, 1999 (unaudited) 8,759,599 $ 8,759 $ 8,124,188 $(4,804,661) (387,164) $ 2,941,122
=========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
EyeCity.com, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31, Nine months ended September 30,
----------------------------- -------------------------------
1997 1998 1998 1999
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net loss $ (466,473) $(1,410,324) $ (799,280) $(2,861,692)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 597 24,754 10,181 591,779
Provision for doubtful accounts 1,050 -- -- --
Amortization of discount -- -- -- 95,207
Amortization of compensation component of stock options -- 246,851 183,420 321,362
Issuance of stock for consulting services -- 205,000 195,000 193,000
Changes in operating assets and liabilities,
excluding the effect of acquisitions:
Accounts receivable (2,352) (32,710) (10,013) 14,557
Inventories (37,336) (60,547) (9,480) (398,729)
Prepaid expenses (21,308) 4,558 (44,021) (3,224)
Accounts payable and accrued expenses 61,387 188,059 (15,053) 546,457
Accrued payroll and related taxes 22,227 71,860 (3,853) 9,301
Deferred salary to officers -- 165,000 112,212 124,052
----------- ----------- ----------- -----------
Net cash used in operating activities (442,208) (597,499) (380,887) (1,367,930)
----------- ----------- ----------- -----------
Cash flows from investing activities
Purchase of intangibles -- -- -- (14,000)
Cash paid for acquisitions, net of cash acquired -- 3,443 3,443 (1,087,857)
Purchases of furniture and equipment (5,981) (13,596) (9,203) (223,032)
----------- ----------- ----------- -----------
Net cash used in investing activities (5,981) (10,153) (5,760) (1,324,889)
----------- ----------- ----------- -----------
Cash flows from financing activities
Exercise of stock options -- -- -- 50,000
Repayment of note payable -- (50,000) (50,000) --
Repayment of convertible subordinated notes -- -- -- (25,000)
Proceeds from issuance of stock, net of expenses 531,500 435,264 435,264 2,657,002
Proceeds from issuance of convertible
subordinated notes -- 362,500 275,000 --
Proceeds from line of credit/note payable -- -- -- 41,330
Proceeds from loan payable--related party 40,000 -- -- --
Repayment of loan payable--related party (40,000) -- -- --
----------- ----------- ----------- -----------
Net cash provided by financing activities 531,500 747,764 660,264 2,723,332
----------- ----------- ----------- -----------
Net increase in cash and cash equivalents 83,311 140,112 273,617 30,513
Cash and cash equivalents--beginning of period 1,325 84,636 84,636 224,748
----------- ----------- ----------- -----------
Cash and cash equivalents--end of period $ 84,636 $ 224,748 $ 358,253 $ 255,261
=========== =========== =========== ===========
Supplemental disclosures
Cash paid for interest $ 4,520 $ -- $ -- $ 26,270
=========== =========== =========== ===========
Cash paid for income taxes $ 438 $ -- $ -- $ --
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE>
EyeCity.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Information as of September 30, 1999 and for the nine months
ended September 30, 1998 and 1999 is unaudited)
1. Description of Business
EyeCity.com, Inc. and its subsidiaries (collectively "EyeCity") are engaged in
one business segment: the online marketing, distribution and sale of a broad
range of optical products and accessories, including brand name sunglasses,
contact lenses, binoculars, prescription eyewear, telescopes, sports and
lifestyle eyewear and hunting glasses.
EyeCity has incurred operating losses since its inception and its working
capital is insufficient to cover continuing operating expenses. Accordingly,
EyeCity requires additional funding from financing or other sources to cover
operating expenses until sufficient revenues are generated to cover such
expenses. The foregoing conditions raise substantial doubt as to EyeCity's
ability to continue as a going concern. The accompanying financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
EyeCity.com, Inc. and its wholly-owned subsidiaries, Foggles, Inc., Gilead
Enterprises, Inc., EyeGlassPlace.com, Inc., Peeper's, Inc. (formerly Peeper's
Sunglasses and Accessories, Inc.) and SunglassSite, Inc. (formerly SunSource
Technology, Inc.) (see Note 5). All material intercompany balances and
transactions have been eliminated in consolidation.
Interim Financial Statements
The financial statements as of September 30, 1999 and for the nine months ended
September 30, 1999 have been prepared by EyeCity without audit. In the opinion
of management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position as of September 30, 1999 and
the results of operations and cash flows for the nine months ended September
30,1999 have been made. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or eliminated. The results of
operations for the nine months ended September 30, 1999 are not necessarily
indicative of the results to be expected for any future interim period or for
the year ending December 31, 1999.
F-7
<PAGE>
EyeCity.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 1999 and for the nine months
ended September 30, 1998 and 1999 is unaudited)
2. Summary of Significant Accounting Policies (continued)
Cash Equivalents
EyeCity considers all highly liquid investments with a maturity of three months
or less at the date of purchase to be cash equivalents.
Revenue Recognition
Net revenues are generated by online and retail operations and primarily consist
of the selling price of merchandise, net of returns and credits, and shipping
charges. Net revenues are recognized upon shipment of the order to the
recipient. EyeCity provides an allowance for sales returns in the period of sale
based upon historical experience.
Costs of Revenues
Costs of revenues include the cost of merchandise sold from inventory and the
associated costs of inbound freight and outbound shipping.
Concentration of Credit Risk
EyeCity sells its products to a broad range of customers throughout the United
States. A significant portion of customers pay for their products through the
use of major credit cards. The timing of the cash realization and related fees
are determined based upon agreements with such major credit card companies.
Accordingly, credit losses related to the sale of merchandise are limited.
Inventories
Inventories are stated at the lower of cost (using the first-in, first-out
method of accounting) or market.
F-8
<PAGE>
EyeCity.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 1999 and for the nine months
ended September 30, 1998 and 1999 is unaudited)
2. Summary of Significant Accounting Policies (continued)
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed by the
straight-line method over the estimated useful lives of the related assets,
ranging from 5 to 7 years.
Intangibles
Intangibles consist of: (i) goodwill- the excess of the purchase price over the
fair value of the net assets acquired, (ii) display technology, (iii) patents
and trademarks, (iv) internet domain names and (v) licenses. Amortization
expense relating to such intangibles is amortized on a straight-line basis over
three years.
Long-Lived Assets
EyeCity follows the provisions of Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." This standard establishes the accounting
for the impairment of long-lived assets, certain identifiable intangibles and
the excess of cost over net assets acquired, related to those assets to be held
and used in operations, whereby impairment losses are required to be recorded
when indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the assets' carrying
amount. SFAS No. 121 also addresses the accounting for long-lived assets and
certain identifiable intangibles that are expected to be disposed of.
When impairment indicators are present, EyeCity reviews the carrying value of
its assets in determining the ultimate recoverability of their unamoritized
values using future undiscounted cash flow analysis expected to be generated by
the asset. If such assets are considered impaired, the impairment recognized is
measured by the amount by which the carrying amount of the assets exceeds the
future discounted cash flows. Assets to be disposed of are reported at the lower
of the carrying amount or fair value, less costs to sell.
EyeCity evaluates the periods of amortization continually in determining whether
later events and circumstances warrant revised estimates of useful lives. If
estimates are changed, the unamortized costs will be allocated to the increased
or reduced number of remaining periods in the revised useful life.
Technology and Development
Technology and development costs consist of expenses associated with the design
and development of the EyeCity.com SuperSite. The useful life of technology and
development costs is less than one year and, accordingly, are expensed as
incurred.
F-9
<PAGE>
EyeCity.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 1999 and for the nine months
ended September 30, 1998 and 1999 is unaudited)
2. Summary of Significant Accounting Policies (continued)
Advertising Costs
EyeCity's policy is to expense advertising costs as incurred. For the years
ended December 31, 1997 and 1998, and the nine months ended September 30, 1998
and 1999, advertising expense was approximately $59,000, $12,000, $12,000 and
$84,000, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Income Taxes
Income taxes are provided using the liability method. Accordingly, deferred tax
assets and liabilities are recognized for future tax consequences attributable
to differences between the carrying amount of assets and liabilities for
financial statement and income tax purposes, as determined under enacted tax
laws and rates that will be in effect when the differences are expected to
reverse.
Stock-Based Compensation
EyeCity accounts for its stock-based employee compensation agreements in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and complies with the disclosure
provisions of Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation ("SFAS 123").
F-10
<PAGE>
EyeCity.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 1999 and for the nine months
ended September 30, 1998 and 1999 is unaudited)
3. Basic and Diluted Net Loss per Share
The following sets forth the computation of basic and diluted net loss per
share:
<TABLE>
<CAPTION>
Year ended December 31, Nine months ended September 30,
------------------------------ -------------------------------
1997 1998 1998 1999
------------ ----------- --------- -----------
<S> <C> <C> <C> <C>
Numerator:
Net loss $ (466,473) $(1,410,324) $(799,280) $(2,861,692)
============ =========== ========= ===========
Denominator for basic and diluted
net loss per share--weighted
average shares 3,264,831 4,259,773 4,165,846 6,650,508
============ =========== ========= ===========
Basic and diluted net loss per share $(.14) $(.33) $(.19) $(.43)
============ =========== ========= ===========
</TABLE>
The calculation of diluted net loss per share excludes the effect of employee
stock options (see Note 9), as the effect of such exercises would be
antidilutive.
4. Subordinated Convertible Promissory Notes
During 1998, EyeCity issued $362,500 of subordinated convertible promissory
notes. The notes bear interest at 10% per annum and interest is payable
quarterly commencing January 1, 1999. The notes may be converted into shares of
EyeCity common stock at the option of the holder at a conversion price of $1.25
per share any time after October 1, 1999 (the "Conversion Date"). EyeCity has
the right to call, redeem or prepay the notes if the market price of EyeCity
common stock equals at least $2.50 per share for ten consecutive trading days at
any time after the Conversion Date. The notes are payable in 12 quarterly
principal payments commencing on October 1, 2000. EyeCity repaid $25,000 of such
notes in March 1999.
F-11
<PAGE>
EyeCity.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 1999 and for the nine months
ended September 30, 1998 and 1999 is unaudited)
4. Subordinated Convertible Promissory Notes (continued)
Principal payments for years ending on December 31 are as follows:
1999 $ 25,000
2000 28,125
2001 112,500
2002 112,500
2003 84,375
--------
$362,500
========
5. Acquisitions
EyeCity has closed on the acquisitions described below, each of which has been
accounted for as a purchase. Accordingly, the consolidated financial statements
include the operating results of each business from the respective date of
acquisition.
On April 24, 1998, EyeCity entered into a one-year agreement whereby it licensed
the use of certain patented display technology for an initial cash payment of
$10,000 and monthly payments of $350. On April 30, 1999, EyeCity acquired such
technology for a cash payment of $10,000, the issuance of 10,000 shares of
common stock and 15 monthly payments of $1,000 beginning on June 15, 1999. In
connection with the acquisition of this technology, EyeCity recorded an
intangible asset of $35,000. Had this acquisition been consummated on January 1,
1997 or on January 1, 1998, the unaudited pro forma consolidated net revenues
and results of operations would not have been considered material for the years
ended December 31, 1997 or 1998.
On August 5, 1998, EyeCity acquired the common stock of Foggles, Inc.
("Foggles") in exchange for 214,000 shares of EyeCity's common stock. Foggles is
a distributor of specialty eyeglasses that are used in the aviation and sporting
industry. The fair value of EyeCity's common stock issued to Foggles
shareholders was approximately $165,000. The purchase has been allocated to the
assets acquired and the liabilities assumed based on the fair values at the date
of acquisition. The excess of the purchase price over the estimated fair values
of the net assets acquired of approximately $156,000 has been recorded as
goodwill.
F-12
<PAGE>
EyeCity.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 1999 and for the nine months
ended September 30, 1998 and 1999 is unaudited)
5. Acquisitions (continued)
On September 17, 1998, EyeCity acquired all the common stock of Gilead
Enterprises, Inc. ("Gilead") in exchange for 15,000 shares of EyeCity's common
stock and options to purchase 2,500 shares of common stock at an exercise price
of $3.00 per share. (The exercise price of the options was in excess of the fair
value of the common stock on the date of grant). Gilead's assets primarily
consist of a patent and trademark relating to night driving glasses. The fair
value of EyeCity's common stock and options issued to Gilead shareholders was
approximately $8,000. Accordingly, the entire purchase price of approximately
$8,000 has been recorded as intangibles. Had this acquisition been consummated
on January 1, 1997 or on January 1, 1998, the unaudited pro forma consolidated
net revenues and results of operations would not have been considered material
for the years ended December 31, 1997 or 1998.
On March 12, 1999, EyeCity acquired all of the outstanding shares of
EyeGlassPlace.com, Inc., an Internet retailer of optical products and
accessories, for 100,000 shares of EyeCity common stock. The fair value of
EyeCity's common stock issued in connection with this acquisition was
approximately $94,000. As the acquired entity had minimal operating assets and
liabilities, the entire purchase price has been recorded as goodwill. Had this
acquisition been consummated on January 1, 1998 or on January 1, 1999, the
unaudited pro forma consolidated net revenues and results of operations would
not have been considered material for the year ended December 31, 1998 or the
nine months ended September 30, 1999.
On May 7, 1999, Peeper's Sunglasses and Accessories, Inc. ("Peeper's") merged
into Peeper's, Inc., a wholly-owned subsidiary of EyeCity, for merger
consideration consisting of a cash payment of $875,000, issuance of a
non-interest bearing secured promissory note of $875,000 (see Note 6) and the
issuance of 1,210,159 shares of common stock. Peeper's is an Internet retailer
of eyewear, optical products and accessories. The total consideration paid in
connection with this merger was approximately $3,244,000. The merger
consideration has been allocated to the assets acquired and the liabilities
assumed based on the fair values at the date of merger. The excess of the merger
consideration over the estimated fair values of the net assets acquired of
$3,116,000 has been recorded as goodwill.
F-13
<PAGE>
EyeCity.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 1999 and for the nine months
ended September 30, 1998 and 1999 is unaudited)
5. Acquisitions (continued)
In May 1999, EyeCity acquired the rights to an Internet domain name in exchange
for the issuance of 2,105 shares of common stock and a cash payment of $30,000.
The total consideration paid in connection with this acquisition was
approximately $33,000 and has been recorded as intangibles.
On June 30, 1999, the SunSource Technology, Inc. ("SunSource") merged into
SunglassSite, Inc., a wholly-owed subsidiary of EyeCity. Pursuant to the
agreement, all issued and outstanding shares of SunSource common stock were
converted in exchange for the following merger consideration: cash of $212,500,
a promissory note in the amount of $212,500 (see Note 6) and the issuance of
283,334 shares of common stock; for total consideration of $953,000. The merger
consideration has been allocated to the assets acquired and the liabilities
assumed based on the fair values at the date of merger and, accordingly, EyeCity
recorded $939,000 of goodwill.
On September 28, 1999, EyeCity entered into an agreement with Impact EyeWear,
LLC whereby it acquired the rights, title and interest in and to certain assets,
including a merchandise license agreement with Yahoo!, Inc. for $120,000 in cash
and the issuance of 166,667 shares of EyeCity common stock. The total
consideration paid in connection with this acquisition was approximately
$620,000 and has been recorded as intangibles. Simultaneously, the Company
entered into a distributor agreement with Sun Optics d/b/a Insight Eyeworks,
Inc. ("Insight") under which Insight will manufacture, market and distribute the
Yahoo! eyewear and eyewear accessories.
The following table summarizes the intangibles recorded related to the
above-described acquisitions:
December 31, September 30,
1998 1999
------------ -------------
Foggles, Inc. $ 156,000 $ 156,000
Gilead Enterprises, Inc. 8,000 8,000
EyeGlassPlace.com, Inc. -- 94,000
Peeper's Sunglasses and Accessories, Inc. -- 3,116,000
SunSource Technology, Inc. -- 939,000
Impact EyeWear license agreement et al. -- 620,000
Other acquisitions -- 68,000
---------- ----------
164,000 5,001,000
Less accumulated amortization 22,000 601,000
---------- ----------
$ 142,000 $4,400,000
========== ==========
F-14
<PAGE>
EyeCity.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 1999 and for the nine months
ended September 30, 1998 and 1999 is unaudited)
5. Acquisitions (continued)
The following table reflects unaudited pro forma results of operations of
EyeCity on the basis that the Foggles, Peeper's and SunSource acquisition and
mergers had taken place at the beginning of the period prior to the acquisition:
<TABLE>
<CAPTION>
Nine months
ended
Year ended December 31, September 30,
------------------------------ -------------
1997 1998 1999
----------- ------------- -----------
<S> <C> <C> <C>
Net sales $ 163,463 $ 1,834,185 $ 2,560,092
=========== ============= ===========
Net loss $ (443,946) $ (2,949,130) $(3,392,802)
=========== ============= ===========
Basic and diluted net loss per share $(.14) $(.50) $(.46)
=========== ============= ===========
Shares used in calculation of basic and
diluted net loss per share 3,264,831 5,880,493 7,393,106
=========== ============= ===========
</TABLE>
In management's opinion, the unaudited pro forma results of operations are not
indicative of the actual results that would have occurred had the acquisition
and mergers been consummated on January 1, 1997, January 1, 1998 or January 1,
1999 or of the future operations of the combined companies under the management
of EyeCity.
6. Long-Term Debt
EyeCity's long-term debt obligations at September 30, 1999 are as follows:
Note payable to vendor (1) $ 41,330
Seller financed acquisition and merger obligations (2) 946,207
--------
Total--included in current liabilities $987,537
========
(1) In 1999, EyeCity issued a note payable to a vendor in return for
advertising services. The note is payable as follows: $1,330 on October 1,
1999 and the remaining $40,000 in equal monthly installments of $10,000
commencing November 1, 1999.
F-15
<PAGE>
EyeCity.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 1999 and for the nine months
ended September 30, 1998 and 1999 is unaudited)
6. Long-Term Debt (continued)
(2) In connection with the acquisition of certain patented display technology
on April 30, 1998 (see Note 5), EyeCity issued a $15,000 non-interest
bearing note. The note is payable in 15 equal monthly installments
commencing June 15, 1999. The balance outstanding at September 30, 1999 is
$11,000.
In connection with the merger of Peeper's in May 1999 (see Note 5),
EyeCity issued a secured promissory note in the amount of $875,000. The
note is non-interest bearing and is due upon the earlier of the
anniversary date or the consummation of a public offering resulting in
gross proceeds in excess of $10,000,000. The carrying value of the note is
recorded net of the unamortized discount of $200,000 which is being
amortized over the term of the note. For the nine months ended September
30, 1999, $83,332 of amortization expense has been recorded.
In connection with the merger of SunSource in June 1999 (see Note 5),
EyeCity issued a secured promissory note in the amount of $212,500. The
note is non-interest bearing and is due upon the earlier of the
anniversary date or the consummation of a public offering resulting in
gross proceeds in excess of $10,000,000. The carrying value of the note is
recorded net of the unamortized discount of $47,500 which is being
amortized over the term of the note. For the nine months ended September
30, 1999, $11,875 of amortization expense has been recorded.
7. Stockholders' Equity
EyeCity is authorized to issue 21,000,000 shares of stock, of which 20,000,000
is designated as common stock, par value $.001 per share, and 1,000,000 is
designated as preferred stock, par value $.001 per share. As of September 30,
1999, EyeCity has not issued any shares of preferred stock.
During 1997, EyeCity sold 550,000 shares of its common stock to several
investors at a price of $1.00 per share for net proceeds of approximately
$532,000.
F-16
<PAGE>
EyeCity.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 1999 and for the nine months
ended September 30, 1998 and 1999 is unaudited)
7. Stockholders' Equity (continued)
During 1998, EyeCity issued 310,000 shares of its common stock as consideration
for marketing services; the total of the consideration paid was $205,000. In
April 1998, EyeCity completed a private placement of 450,000 shares of its
common stock to several investors at a price of $1.00 per share, resulting in
net proceeds of approximately $435,000.
During 1998, EyeCity entered into several agreements with one consultant,
whereby EyeCity exchanged 300,000 shares of common stock, in addition to 12
monthly cash payments of $3,000, in return for consulting services. EyeCity
estimated the total value of the stock consideration paid to be $195,000. The
agreement commenced on February 1, 1998 and terminated on January 31, 1999. In
addition, 10,000 shares of common stock were issued to another consultant and
the consideration paid was valued at approximately $10,000.
On March 12, 1999, EyeCity sold 250,000 shares of its common stock, at a price
of $1.00 per share, for proceeds of $250,000.
In May 1999, EyeCity sold 1,500,000 shares of its common stock to several
investors at a price of $1.00 per share for proceeds of $1,500,000. In
connection with this transaction, EyeCity issued 300,000 options to an
investment advisor to purchase common stock at an exercise price of $1.00 per
share.
In June 1999, EyeCity sold 50,000 shares to one investor at a price of $1.50 per
share, for proceeds of $75,000. In connection with this transaction, EyeCity
issued 15,000 options to an investment advisor to purchase common stock at an
exercise price of $1.50 per share.
In June 1999, EyeCity sold 230,000 shares of its common stock to several
investors. These shares were sold at a price of $3.00 per share, for proceeds of
approximately $690,000. In connection with this transaction, EyeCity issued
98,000 options to an investment advisor to purchase common stock at an exercise
price of $3.00 per share.
In July and August 1999, EyeCity privately sold 47,334 shares of its common
stock to seven individual investors. These shares were sold for $3.00 per share,
for a total offering price of $142,000.
F-17
<PAGE>
EyeCity.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 1999 and for the nine months
ended September 30, 1998 and 1999 is unaudited)
7. Stockholders' Equity (continued)
During 1999 and in connection with the private placements, EyeCity issued
160,000 shares of common stock and stock options to purchase 420,000 shares of
common stock at exercise prices ranging from $1.00 to $3.00 per share, in return
for consulting and finders services. In addition, during 1999, EyeCity issued
161,000 shares of common stock and options to purchase 375,000 shares of common
stock at exercise prices ranging from $1.00 to $4.38 per share in return for
legal, consulting services and leasehold improvements for the Minnesota office
space for total consideration of approximately $1,391,000.
8. Stock Options
EyeCity has three stock option plans (the "Plans")--The 1997 Stock Option Plan
(the "1997 Plan") provides for the granting of either incentive stock options or
nonstatutory stock options, and the 1998 and 1999 Stock Option Plans provide for
the granting of nonstatutory stock options. The 1997 Plan provides for the
granting of up to 500,000 options and the 1998 and 1999 Plans each provide for
the granting of 1,500,000 options to key employees of EyeCity (including
directors and officers) and consultants (including members of EyeCity's advisory
board) for the purchase of EyeCity common stock. Stock options granted under the
Plans may vest immediately and have a term not greater than ten years from the
date of grant or five years for a holder of more than 10% of EyeCity common
stock. Incentive stock options may be granted at an exercise price not less than
the fair market value of the underlying shares at the date of grant or for the
1997 Plan, less than 110% of the fair market value for a holder of more than 10%
of EyeCity common stock at the date of grant. The per share price of
nonstatutory stock options granted to Non-Insiders (as defined) shall be
determined by the Board of Directors. All options under the above plans have
been granted at exercise prices equal to or greater than the fair market value
of the underlying common shares at the date of grant.
F-18
<PAGE>
EyeCity.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 1999 and for the nine months
ended September 30, 1998 and 1999 is unaudited)
8. Stock Options (continued)
The following table summarizes activity in stock options:
<TABLE>
<CAPTION>
Nine Months ended
Year ended December 31, 1998 September 30, 1999
---------------------------------- -----------------------------------
Weighted
Shares under Average Shares under Weighted Average
Options Exercise Price Options Exercise Price
---------------------------------- -----------------------------------
<S> <C> <C> <C> <C>
Balance, beginning of period -- $ -- 752,000 $1.06
Granted 1,677,000 $1.03 1,830,250 $2.32
Forfeitures/expirations 925,000 $1.00 -- --
Exercised -- -- 50,000 $1.00
--------- ---------
Balance, end of period 752,000 $1.06 2,532,250 $1.97
========= =========
Weighted-average fair value of
options issued during the
period $ .67 $ .79
</TABLE>
The following tables summarize information about the stock options outstanding
at December 31, 1998 and September 30, 1999:
<TABLE>
<CAPTION>
December 31, 1998 September 30, 1999
- ----------------------------------------------------------------- -----------------------------------------------
Weighted- Weighted-
Average Average
Remaining Remaining
Exercise Options Contractual Options Options Contractual Options
Price Outstanding Life Exercisable Outstanding Life Exercisable
- ----------------- --------------- --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 508,500 8.5 years 213,000 1,273,500 6.6 years 903,500
$1.10 200,000 4.1 years 100,000 400,000 3.9 years 300,000
$1.50 41,000 9.5 years 23,000 56,000 7.1 years 56,000
$1.75 -- -- -- 60,000 2.5 years 60,000
$3.00 2,500 9.7 years 2,500 107,500 3.0 years 107,500
$3.75 -- -- -- 270,000 10.0 years 22,500
$4.38 -- -- -- 5,000 9.5 years 40,000
$4.50 -- -- -- 325,000 9.8 years --
$7.75 -- -- -- 35,250 9.7 years --
---------- ----------- ------------ -----------
752,000 338,500 2,532,250 1,489,500
========== =========== ============ ===========
</TABLE>
EyeCity has reserved 3,720,000 shares of common stock for issuance of all
options and the conversion of subordinated convertible promissory notes at
September 30, 1999.
F-19
<PAGE>
EyeCity.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 1999 and for the nine months
ended September 30, 1998 and 1999 is unaudited)
8. Stock Options (continued)
Fair Value Disclosures
Pro forma information regarding net loss and net loss per share is required by
SFAS 123, which also requires that the information be determined as if EyeCity
has accounted for its stock options under the fair value method of that
statement. The fair value for these options was estimated using the
Black-Scholes method with the following assumptions: no dividend yield,
weighted-average expected life of the option of five years, volatility factor of
the expected market price of the common stock of .46, and risk-free interest
rates of 5% for the year ended December 31, 1998.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. EyeCity's pro forma
financial information is as follows:
Year ended December 31,
-------------------------------
1997 1998
--------- -----------
Net loss
As reported $(466,473) $(1,410,324)
========= ===========
Pro forma $(466,473) $(1,501,014)
========= ===========
Net loss per share
As reported $(.14) $(.33)
========= ===========
Pro forma $(.14) $(.35)
========= ===========
F-20
<PAGE>
EyeCity.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 1999 and for the nine months
ended September 30, 1998 and 1999 is unaudited)
9. Income Taxes
Deferred tax assets and liabilities are recognized for future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted rates expected to be recovered
or settled. Significant components of EyeCity's deferred tax assets are as
follows:
December
31, 1998
---------
Net operating loss carryforward $ 512,000
Other 81,000
---------
Total deferred tax assets 593,000
Valuation allowance for deferred tax assets (593,000)
---------
Net deferred tax assets $ --
=========
As a result of losses from operations, at December 31, 1998, EyeCity has
available a net operating loss carryforward ("NOL") of approximately $1,280,000
for Federal income tax purposes that expire in 2017 to 2018. At December 31,
1996 and 1997, EyeCity had a valuation allowance for deferred tax assets of
approximately $26,000 and $213,000, respectively.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the period in
which the NOL's can be utilized and the temporary differences become deductible.
Since EyeCity has incurred losses since inception, EyeCity has established a
valuation allowance for deferred tax assets at December 31,1998.
F-21
<PAGE>
EyeCity.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 1999 and for the nine months
ended September 30, 1998 and 1999 is unaudited)
10. Related Party Transactions
EyeCity leased office space on a month-to-month basis from a related entity. A
major stockholder of EyeCity also is a major stockholder of this entity. Rent
expense paid to the related entity for the years ended December 31, 1997 and
1998 and the nine months ended September 30, 1998 and 1999 was approximately
$14,000, $16,000, $12,000 and $11,000, respectively. During August 1999, EyeCity
relocated its operations and no longer leases office space from such related
entity.
11. Commitments
Employment Contracts
On July 1, 1998 and December 31, 1998, EyeCity amended and extended its existing
employment contracts with its president and executive vice president,
respectively, through June 30, 2004. The contracts provide for each executive to
receive a minimum annual salary of $82,500 for the year ended December 31, 1998
and a minimum annual salary of $100,000 for each year thereafter. Officer
salaries for 1998 in the amount of $165,000 have been accrued at December 31,
1998 and an additional $94,000 has been accrued for the six months ended June
30, 1999.
Additionally, during May, July and September 1999, EyeCity entered into
three-year employment agreements with three executives with base salaries
ranging from $100,000 - $130,000 per annum, increasing to $100,000 - $180,000 in
the final year.
EyeCity entered into a severance and consulting agreement with a former officer
effective December 31, 1998 and amended July 1, 1999 and September 15, 1999. The
former officer received $75,000 as full settlement of his employment agreement;
cash of $40,000 payable in equal monthly installments of $5,000 commencing
October 1, 1999, and a $35,000 credit against the exercise of 35,000 options. In
addition, in consideration for consulting services provided, EyeCity paid
$45,000 in cash and $15,000 was credited against the exercise of 15,000 options.
The former officer had retained options to purchase 50,000 shares of common
stock at an exercise price of $1.00 per share that expires on March 31, 2000
(10,000 of which have been exercised pursuant to the amended agreement on July
1, 1999 and 40,000 of which have been exercised pursuant to the amended
agreement on September 30, 1999) and options to purchase 925,000 shares of
common stock were canceled.
F-22
<PAGE>
EyeCity.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Information as of September 30, 1999 and for the nine months
ended September 30, 1998 and 1999 is unaudited)
11. Commitments (continued)
Employment Contracts (continued)
In connection with the extension of the expiration date of the vested options to
the former officer, EyeCity recorded a compensation charge of $75,000 resulting
from the new measurement date.
Leases
The Company has entered into various building leases which expire at various
times through 2004. The minimum annual rental payments under the provisions of
these leases for years ending December 31 are as follows:
October 1, 1999 to December 31, 1999 $ 25,000
2000 107,000
2001 120,000
2002 127,000
2003 130,000
Thereafter 65,000
--------
$574,000
========
Rent expense, including amounts paid to a related entity (see Note 10), was
approximately $14,000, $17,000, $12,000 and $47,000 for the years ended December
31, 1997 and 1998 and for the nine months ended September 30, 1998 and 1999,
respectively.
F-23
<PAGE>
Report of Independent Auditors
The Stockholder
Peeper's Sunglasses and Accessories, Inc.
We have audited the accompanying balance sheet of Peeper's Sunglasses and
Accessories, Inc. as of December 31, 1998, and the related statements of income,
stockholder's equity and cash flows for each of the two years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Peeper's Sunglasses and
Accessories, Inc. at December 31, 1998, and the results of its operations and
its cash flows for each of the two years in the period ended December 31, 1998,
in conformity with generally accepted accounting principles.
New York, New York
July 30, 1999
F-24
<PAGE>
Peeper's Sunglasses and Accessories, Inc.
Balance Sheets
December May
31, 1998 7, 1999
-------- ----------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 14,156 $101,067
Inventories 147,536 69,264
Prepaid expenses 281 179
-------- --------
Total current assets 161,973 170,510
Property and equipment:
Equipment 56,272 58,844
Furniture and fixtures 4,977 4,977
-------- --------
61,249 63,821
Less accumulated depreciation 9,749 14,584
-------- --------
Net property and equipment 51,500 49,237
-------- --------
Total assets $213,473 $219,747
======== ========
Liabilities and stockholder's equity
Current liabilities:
Accounts payable $ 17,987 $ 87,619
Accrued expenses 5,215 3,332
-------- --------
Total current liabilities 23,202 90,951
Stockholder's equity:
Common stock, par value $1.00; 100 shares
authorized, issued and outstanding 100 100
Additional paid-in capital 7,887 7,887
Retained earnings 182,284 120,809
-------- --------
Total stockholder's equity 190,271 128,796
-------- --------
Total liabilities and stockholder's equity $213,473 $219,747
======== ========
See accompanying notes.
F-25
<PAGE>
Peeper's Sunglasses and Accessories, Inc.
Statements of Income
Period from
January
Year ended December 31, 1, 1999
------------------------ to May
1997 1998 7, 1999
---------- ---------- -----------
(Unaudited)
Net revenues $ 402,328 $1,457,114 $ 735,537
Cost of revenues 227,369 1,037,125 525,835
---------- ---------- ----------
Gross profit 174,959 419,989 209,702
Operating expenses:
Sales and marketing 8,655 105,763 54,126
General and administrative 80,612 176,583 88,763
Depreciation and amortization 2,040 7,709 4,965
Technology and development 5,703 1,280 --
---------- ---------- ----------
Total operating expenses 97,010 291,335 147,854
---------- ---------- ----------
Operating income 77,949 128,654 61,848
Interest income -- 2,044 2,012
---------- ---------- ----------
Net income $ 77,949 $ 130,698 $ 63,860
========== ========== ==========
See accompanying notes.
F-26
<PAGE>
Peeper's Sunglasses and Accessories, Inc.
Statements of Stockholder's Equity
Years ended December 31, 1997 and 1998 and the
period from January 1, 1999 to May 7, 1999 (unaudited)
<TABLE>
<CAPTION>
Additional
Common Paid-In Retained
Stock Capital Earnings Total
--------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Balance at January 1, 1997 $ 100 $ 7,887 $ -- $ 7,987
Net income for year ended
December 31, 1997 -- -- 77,949 77,949
--------- --------- --------- ---------
Balance at December 31, 1997 100 7,887 77,949 85,936
Net income for year ended
December 31, 1998 -- -- 130,698 130,698
Distributions -- -- (26,363) (26,363)
--------- --------- --------- ---------
Balance at December 31, 1998 100 7,887 182,284 190,271
Net income for the period from
January 1, 1999 to
May 7, 1999 -- -- 63,860 63,860
Distributions -- -- (125,335) (125,335)
--------- --------- --------- ---------
Balance at May 7, 1999 $ 100 $ 7,887 $ 120,809 $ 128,796
========= ========= ========= =========
</TABLE>
See accompanying notes.
F-27
<PAGE>
Peeper's Sunglasses and Accessories, Inc.
Statements of Cash Flows
Period from
January
Year ended December 31 1, 1999
------------------------- to May
1997 1998 7, 1999
--------- --------- -----------
(Unaudited)
Operating activities
Net income $ 77,949 $ 130,698 $ 63,860
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation 2,040 7,709 4,965
Changes in operating assets
and liabilities:
Prepaid expenses -- (281) 102
Inventories (27,765) (79,513) 78,272
Accounts payable 15,065 (14,133) 69,632
Accrued liabilities (13,825) 3,824 (1,883)
--------- --------- ---------
Net cash flows provided by
operating activities 53,464 48,304 214,948
Investing activities
Purchase of property and
equipment (21,608) (39,641) (2,702)
--------- --------- ---------
Net cash flows used in
investing activities (21,608) (39,641) (2,702)
Financing activities
Distributions to shareholders -- (26,363) (125,335)
--------- --------- ---------
Net cash flows used in
financing activities -- (26,363) (125,335)
--------- --------- ---------
Net increase (decrease) in cash 31,856 (17,700) 86,911
Cash and cash equivalents at
beginning of period -- 31,856 14,156
--------- --------- ---------
Cash and cash equivalents at
end of period $ 31,856 $ 14,156 $ 101,067
========= ========= =========
See accompanying notes.
F-28
<PAGE>
Peeper's Sunglasses and Accessories, Inc.
Notes to Financial Statements
(Information as of May 7, 1999 and the period
from January 1, 1999 to May 7, 1999 is unaudited)
1. Description of Business
Peeper's Sunglasses and Accessories, Inc. ("Peeper's") was incorporated on
January 1, 1997. Peeper's operates a retail optical store located in Duluth,
Minnesota and also sells optical products online through its Internet site.
2. Summary of Significant Accounting Policies
Interim Financial Statements
The financial statements for the period January 1, 1999 to May 7, 1999 have been
prepared by Peeper's without audit. In the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the results of operations and cash flows for the aforementioned
period have been made. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or eliminated. The results of
operations for the period January 1, 1999 to May 7, 1999, are not necessarily
indicative of the results to be expected for any future interim period or for
the year ending December 31, 1999.
Cash Equivalents
Peeper's considers all highly liquid investments with a maturity of three months
or less at the date of purchase to be cash equivalents.
Revenue Recognition
Net revenues are generated by online and retail operations and consist of the
selling price of merchandise, net of returns and credits, and shipping charges.
Net revenues are recognized upon shipment. Peeper's provides an allowance for
sales returns in the period of sale, based upon historical experience.
Costs of Revenues
Costs of revenues include the cost of merchandise sold from inventory and the
associated costs of inbound freight and outbound shipping.
F-29
<PAGE>
Peeper's Sunglasses and Accessories, Inc.
Notes to Financial Statements (continued)
(Information as of May 7, 1999 and the period
from January 1, 1999 to May 7, 1999 is unaudited)
2. Summary of Significant Accounting Policies (continued)
Concentration of Credit Risk
Peeper's sells its products to a broad range of customers throughout the United
States. Generally, customers pay for their products through the use of cash or
major credit cards. The timing of the cash realization and related fees are
determined based upon agreements with such major credit card companies.
Accordingly, credit losses related to the sale of merchandise are limited.
Inventories
Inventories are stated at the lower of cost (using the first-in, first-out
method of accounting) or market.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed by the
straight-line method over the estimated useful lives of the related assets,
ranging from 5 to 7 years.
Technology and Development
Technology and development costs consist of expenses associated with the
designing and development of Peeper's websites. The useful life of technology
and development costs is less than one year and, accordingly, are expensed as
incurred.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
F-30
<PAGE>
Peeper's Sunglasses and Accessories, Inc.
Notes to Financial Statements (continued)
(Information as of May 7, 1999 and the period
from January 1, 1999 to May 7, 1999 is unaudited)
2. Summary of Significant Accounting Policies (continued)
Advertising Costs
Peeper's policy is to expense advertising costs as incurred. For the years ended
December 31, 1997 and 1998 and the period from January 1, 1999 to May 7, 1999,
advertising expense was approximately $9,000, $71,000 and $40,000, respectively.
Income Taxes
For federal income tax purposes, Peeper's has elected to file as an S
corporation under the provisions of the Internal Revenue Code. A similar
election was made for Minnesota state purposes. As a result, income of Peeper's
is taxed directly to the shareholder and, accordingly, no provision for income
taxes has been made in the accompanying financial statements.
3. Merger of Business
On May 7, 1999, Peeper's merged into Peeper's, Inc. (a wholly-owed subsidiary of
EyeCity.com, Inc.) for merger consideration consisting of a cash payment of
$875,000, a promissory note in the amount of $875,000, due upon the earlier of
the anniversary date or the consummation of a public financing resulting in
gross proceeds in excess of $10,000,000, and the issuance of 1,210,159 shares of
restricted common stock.
F-31
<PAGE>
Report of Independent Auditors
Stockholder and Directors
SunSource Technology, Inc.
We have audited the accompanying balance sheet of SunSource Technology, Inc. as
of December 31, 1998, and the related statements of income, stockholder's equity
and cash flows for the year ended and the period from June 13, 1997 (inception)
to December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SunSource Technology, Inc. at
December 31, 1998, and the results of its operations and its cash flows for the
year ended and the period from June 13, 1997 (inception) to December 31, 1997,
in conformity with generally accepted accounting principles.
New York, New York
July 30, 1999
F-32
<PAGE>
SunSource Technology, Inc.
Balance Sheets
December June
31, 1998 30, 1999
-------- -----------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $29,619 $48,577
Accounts receivable 2,851 4,524
Inventories 8,496 15,101
Other assets 268 905
------- -------
Total current assets 41,234 69,107
Furniture and equipment, net of accumulated
depreciation of $227 and $639, respectively 2,042 5,322
------- -------
Total assets $43,276 $74,429
======= =======
Liabilities and stockholder's equity
Current liabilities:
Accounts payable $22,217 $60,182
Accrued expenses and other 5,627 709
------- -------
Total current liabilities 27,844 60,891
Stockholder's equity:
Common stock, par value $25; 1,500 shares
authorized, 50 shares issued and outstanding 1,250 1,250
Retained earnings 14,182 12,288
------- -------
Total stockholder's equity 15,432 13,538
------- -------
Total liabilities and stockholder's equity $43,276 $74,429
======= =======
See accompanying notes.
F-33
<PAGE>
SunSource Technology, Inc.
Statements of Operations
<TABLE>
<CAPTION>
Period from
June 13, 1997
(inception) Year ended Six months
to December December ended June
31, 1997 31, 1998 30, 1999
------------- ---------- ----------
(Unaudited)
<S> <C> <C> <C>
Net revenues $ 6,196 $ 195,791 $ 293,396
Cost of revenues 4,954 149,163 218,024
--------- --------- ---------
Gross profit 1,242 46,628 75,372
Operating expenses:
Sales and marketing 454 12,030 19,925
General and administrative 1,322 15,938 57,740
Depreciation -- 227 412
--------- --------- ---------
Total operating expenses 1,776 28,195 78,077
--------- --------- ---------
Operating income (loss) (534) 18,433 (2,705)
Interest income (expense) -- (138) 11
--------- --------- ---------
Income (loss) before income taxes (534) 18,295 (2,694)
Provision (benefit) for income
taxes -- 3,579 (800)
--------- --------- ---------
Net income (loss) $ (534) $ 14,716 $ (1,894)
========= ========= =========
</TABLE>
See accompanying notes.
F-34
<PAGE>
SunSource Technology, Inc.
Statements of Stockholder's Equity
Period from June 13, 1997 (inception) to December 31, 1997, year ended
December 31, 1998 and six months ended June 30, 1999 (unaudited)
<TABLE>
<CAPTION>
Common Retained
Stock Earnings Total
-------- -------- --------
<S> <C> <C> <C>
Issuance of common stock on June 13, 1997 $ 1,250 $ -- $ 1,250
Net loss for year ended December 31, 1997 -- (534) (534)
-------- -------- --------
Balance at December 31, 1997 1,250 (534) 716
Net income for year ended December 31, 1998 -- 14,716 14,716
-------- -------- --------
Balance at December 31, 1998 1,250 14,182 15,432
Net loss for the six months ended June 30, 1999
(unaudited) -- (1,894) (1,894)
-------- -------- --------
Balance at June 30, 1999 (unaudited) $ 1,250 $ 12,288 $ 13,538
======== ======== ========
</TABLE>
See accompanying notes.
F-35
<PAGE>
SunSource Technology, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Period from
June 13, 1997 Year ended Six months
(inception)
to December December ended June
31, 1997 31, 1998 30, 1999
------------- ---------- ----------
(Unaudited)
<S> <C> <C> <C>
Operating activities
Net income (loss) $ (534) $ 14,716 $ (1,894)
Adjustments to reconcile net
income (loss) to net cash
provided by operating activities:
Depreciation -- 227 412
Changes in operating assets
and liabilities:
Accounts receivable (229) (2,622) (1,673)
Other assets (125) (143) (637)
Inventories (3,388) (5,108) (6,605)
Accounts payable and
accrued expenses 1,255 26,589 33,047
Due to stockholder 3,996 (3,996) --
-------- -------- --------
Net cash flows provided by
operating activities 975 29,663 22,650
Investing activities
Purchases of property and
equipment -- (2,269) (3,692)
-------- -------- --------
Net cash flows used in
investing activities -- (2,269) (3,692)
Financing activities
Proceeds from sale of common
stock 1,250 -- --
-------- -------- --------
Net cash flows provided by
financing activities 1,250 -- --
-------- -------- --------
Net increase in cash 2,225 27,394 18,958
Cash and cash equivalents at
beginning of period -- 2,225 29,619
-------- -------- --------
Cash and cash equivalents at
end of period $ 2,225 $ 29,619 $ 48,577
======== ======== ========
</TABLE>
See accompanying notes.
F-36
<PAGE>
SunSource Technology, Inc.
Notes to Financial Statements
(Information as of June 30, 1999 and for the six
months ended June 30, 1999 is unaudited)
1. Description of Business
SunSource Technology, Inc. ("SunSource") was incorporated in Florida on June 13,
1997. SunSource sells sunglasses, prescription eyewear and contact lenses online
through its Internet site.
2. Summary of Significant Accounting Policies
Interim Financial Statements
The financial statements for the six months ended June 30, 1999 have been
prepared by SunSource without audit. In the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the results of operations and cash flows for the six months ended
June 30, 1999 have been made. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or eliminated. The results of
operations for the six months ended June 30, 1999, are not necessarily
indicative of the results to be expected for any future interim period or for
the year ending December 31, 1999.
Cash Equivalents
SunSource considers all highly liquid investments with a maturity of three
months or less at the date of purchase to be cash equivalents.
Revenue Recognition
Net revenues are generated by online operations and primarily consist of the
selling price of merchandise, net of returns and credits, and shipping charges.
Net revenues are recognized upon shipment of the order to the recipient.
Costs of Revenues
Costs of revenues include the cost of merchandise sold from inventory and the
associated costs of inbound freight and outbound shipping.
F-37
<PAGE>
SunSource Technology, Inc.
Notes to Financial Statements (continued)
(Information as of June 30, 1999 and for the six
months ended June 30, 1999 is unaudited)
2. Summary of Significant Accounting Policies (continued)
Concentration of Credit Risk
SunSource sells its products to a broad range of customers throughout the United
States. The Company does not extend credit to its customers as substantially all
sales are to customers over the Internet using major credit cards. Credit losses
relating to customers have been consistently within management's expectations.
Inventories
Inventories are stated at the lower of cost (using the first-in, first-out
method of accounting) or market.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed by the
straight-line method over the estimated useful lives of the related assets,
ranging from 5 to 7 years.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Advertising Costs
SunSource's policy is to expense all advertising costs when incurred. For the
year ended December 31, 1998 and the six months ended June 30, 1999, advertising
expense was approximately $3,000 and $3,000, respectively. There were no
advertising costs for the year ended December 31, 1997.
F-38
<PAGE>
SunSource Technology, Inc.
Notes to Financial Statements (continued)
(Information as of June 30, 1999 and for the six
months ended June 30, 1999 is unaudited)
2. Summary of Significant Accounting Policies (continued)
Income Taxes
For federal income tax purposes, SunSource has elected to file as a C
corporation under the provisions of the Internal Revenue Code.
3.Income Taxes: Deferred tax assets and liabilities are recognized for future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted rates
expected to be recovered or settled. The deferred tax assets and liabilities
were not material as of December 31, 1998 and June 30, 1999.
Significant components of the provision (benefit) for income taxes are as
follows:
Year Ended Six Months
December 31, 1998 Ended June 30, 1999
----------------- -------------------
Current
Federal $2,698 $ (800)
State 881
------ ------
Total $3,579 $ (800)
====== ======
The effective income tax rate differs from the federal statutory income tax rate
of 34% primarily due to the federal surtax exemption.
4. Merger of Business
On June 30, 1999, the Company merged into SunglassSite, Inc. (a wholly-owed
subsidiary of EyeCity.com, Inc.). As per the merger agreement all issued and
outstanding shares of SunSource common stock was converted into the right to
receive the following merger consideration: cash of $212,500, a promissory note
in the amount of $212,500, due upon the earlier of the anniversary date or the
consummation of a public financing resulting in gross proceeds in excess of
$10,000,000, and the issuance of 283,334 shares of restricted common stock,
66,667 of which will be held in escrow for a period of six months following the
closing date as security for the representations, warranties and covenants made
by Rob Wilson (former owner) and SunSource.
F-39
<PAGE>
Report of Independent Auditors
The Stockholders
Foggles, Inc.
We have audited the accompanying balance sheet of Foggles, Inc. as of August 5,
1998, and the related statements of operations, stockholders' equity and cash
flows for the year ended December 31, 1997 and the period from January 1, 1998
to August 5, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Foggles, Inc. at August 5,
1998, and the results of its operations and its cash flows for the year ended
December 31, 1997 and the period from January 1, 1998 to August 5, 1998, in
conformity with generally accepted accounting principles.
New York, New York
July 30, 1999
F-40
<PAGE>
Foggles, Inc.
Balance Sheet
August 5, 1998
Assets
Current assets:
Cash and cash equivalents $ 3,443
Accounts receivable 7,135
Inventories 2,880
Other assets 335
-------
Total assets $13,793
=======
Liabilities and stockholders' equity
Current liabilities:
Accrued expenses $ 4,097
Other liabilities 43
-------
Total current liabilities 4,140
Stockholders' equity:
Capital stock 600
Retained earnings 9,053
-------
Total stockholders' equity 9,653
-------
Total liabilities and stockholders' equity $13,793
=======
See accompanying notes.
F-41
<PAGE>
Foggles, Inc.
Statements of Operations
<TABLE>
<CAPTION>
Period from
Year Ended January 1, 1998
December to
31, 1997 August 5, 1998
---------- ---------------
<S> <C> <C>
Net revenues $ 137,516 $ 85,306
Cost of revenues 81,672 33,755
--------- ---------
Gross profit 55,844 51,551
Operating expenses:
Sales and marketing 31,478 16,584
General and administrative 7,175 71,750
Depreciation and amortization 2,685 --
Technology and development 4,196 --
--------- ---------
Total operating expenses 45,534 88,334
--------- ---------
Operating income (loss) 10,310 (36,783)
Investment income 994 905
Interest expense (348) (185)
Gain (loss) on sale of marketable securities 11,571 (16,705)
--------- ---------
Net income (loss) $ 22,527 $ (52,768)
========= =========
</TABLE>
See accompanying notes.
F-42
<PAGE>
Foggles, Inc.
Statements of Stockholders' Equity
Year ended December 31, 1997 and the
period from January 1, 1998 to August 5, 1998
<TABLE>
<CAPTION>
Accumulated
Other
Common Comprehensive Retained
Stock Income Earnings Total
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Balance at January 1, 1997 $ 600 $ -- $ 206,144 $ 206,744
Distributions -- -- (16,000) (16,000)
Unrealized loss on marketable securities -- (12,478) -- (12,478)
Net income for year ended December 31, 1997 -- -- 22,527 22,527
---------
Total comprehensive income -- -- -- 10,049
--------- --------- --------- ---------
Balance at December 31, 1997 600 (12,478) 212,671 200,793
Distributions -- -- (150,850) (150,850)
Unrealized gain on marketable securities -- 12,478 -- 12,478
Net loss for the period from January 1, 1998
to August 5, 1998 -- -- (52,768) (52,768)
---------
Total comprehensive loss -- -- -- (40,290)
--------- --------- --------- ---------
Balance at August 5, 1998 $ 600 $ -- $ 9,053 $ 9,653
========= ========= ========= =========
</TABLE>
See accompanying notes.
F-43
<PAGE>
Foggles, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Period from
Year Ended January 1, 1998
December to
31, 1997 August 5, 1998
--------- ---------
<S> <C> <C>
Operating activities
Net income (loss) $ 22,527 $ (52,768)
Adjustments to reconcile to net income (loss) to cash
provided by operating activities:
Depreciation and amortization 4,828 --
Loss (gain) on sale of marketable securities (11,571) 16,705
Changes in operating assets and liabilities:
Accounts receivable 7,349 (1,828)
Inventories (3,666) 1,586
Other assets 372 (335)
Note receivable -- 136,238
Accounts payable and accrued liabilities (3,518) (3,595)
--------- ---------
Net cash flows provided by operating activities 16,321 96,003
Investing activities
Proceeds from sale of marketable securities 54,196 61,356
Purchase of marketable securities (54,668) (4,043)
--------- ---------
Net cash flows (used in) provided by investing activities (472) 57,313
Financing activities
Distributions to shareholders (16,000) (150,850)
--------- ---------
Net cash flows used in financing activities (16,000) (150,850)
--------- ---------
Net (decrease) increase in cash (151) 2,466
Cash and cash equivalents at beginning of period 1,128 977
--------- ---------
Cash and cash equivalents at end of period $ 977 $ 3,443
========= =========
</TABLE>
See accompanying notes.
F-44
<PAGE>
Foggles, Inc.
Notes to Financial Statements
August 5, 1998
1. Description of Business
Foggles, Inc. ("Foggles") was incorporated on August 11, 1981 in the state of
Ohio. Foggles is a distributor of optical devices for pilots, hunters, etc.
2. Summary of Significant Accounting Policies
Cash Equivalents
Foggles considers all highly liquid investments with a maturity of three months
or less at the date of purchase to be cash equivalents.
Revenue Recognition
Net revenues are generated by wholesale operations and consist of the selling
price of merchandise, net of returns and credits, and include shipping charges.
Net revenues are recognized upon shipment.
Costs of Revenues
Costs of revenues include the cost of merchandise inventory and the associated
costs of inbound freight and outbound shipping.
Concentration of Credit Risk
Foggles sells it products to a broad range of customers throughout the United
States. The Company performs periodic credit evaluations of its customers'
financial condition and generally does not require collateral. Receivables are
due within 30 days. Credit losses relating to customers have been consistently
within management's expectations.
Inventories
Inventories are stated at the lower of cost (using the first-in, first-out
method of accounting) or market.
F-45
<PAGE>
Foggles, Inc.
Notes to Financial Statements (Continued)
August 5, 1998
2. Summary of Significant Accounting Policies (continued)
Technology and Development
Technology and development costs consist of expenses associated with the
designing and development of Foggles' website. The useful life of technology and
development costs is less than one year and, accordingly, are expensed as
incurred.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Advertising Costs
Foggles policy is to expense advertising costs as incurred. For the year ended
December 31, 1997 and the period from January 1, 1998 to August 5, 1998,
advertising expense approximated $17,000 and $7,000, respectively.
Income Taxes
For federal income tax purposes, Foggles has elected to file as an S corporation
under the provisions of the Internal Revenue Code. A similar election was made
for Ohio state purposes. As a result, income of Foggles is taxed directly to the
shareholders and, accordingly, no provision for income taxes has been made in
the accompanying financial statements.
F-46
<PAGE>
Foggles, Inc.
Notes to Financial Statements (Continued)
August 5, 1998
2. Summary of Significant Accounting Policies (continued)
Comprehensive Income
Effective January 1, 1997, Foggles adopted Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income. Statement 130 establishes new
rules for the reporting and display of comprehensive income and its components;
however, the adoption of this statement has no impact on Foggles' net income
(loss) or stockholders' equity (deficit). Statement 130 requires unrealized
gains or losses on Foggles' available-for-sale securities, which prior to
adoption was reported separately in stockholders' equity, to be included in
comprehensive income. The related tax effect on comprehensive income is not
material for the periods presented. Prior year consolidated financial statements
have been restated to conform to the requirements of Statement 130.
3. Sale of Business
On August 5, 1998, all issued and outstanding shares of Foggles common stock was
sold to EyeCity.com, Inc., a New York corporation, in exchange for 214,000
common shares of EyeCity.com, Inc.
F-47
<PAGE>
EyeCity.com, Inc. and Subsidiaries
Unaudited Pro Forma Consolidated Statement of Operations
Year Ended December 31, 1998
<TABLE>
<CAPTION>
Peeper's
Sunglasses and SunSource Pro Forma
EyeCity.com, Inc. Foggles, Inc. Accessories, Inc. Technology, Inc. Adjustments Pro Forma
----------------- ------------- ----------------- ---------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net revenues $ 95,974 $ 85,306 $ 1,457,114 $ 195,791 $ -- $ 1,834,185
Cost of revenues 44,576 33,755 1,037,125 149,163 -- 1,264,619
----------- ----------- ----------- ----------- ----------- -----------
Gross profit 51,398 51,551 419,989 46,628 -- 569,566
Operating expenses:
Marketing and sales 779,528 16,584 105,763 12,030 -- 913,905
General and administrative 657,832 71,750 176,583 15,938 -- 922,103
Depreciation and
amortization 24,754 -- 7,709 227 1,383,952 1,416,642
Technology and
development -- -- 1,280 -- -- 1,280
----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses 1,462,114 88,334 291,335 28,195 1,383,952 3,253,930
----------- ----------- ----------- ----------- ----------- -----------
Operating income (loss) (1,410,716) (36,783) 128,654 18,433 (1,383,952) (2,684,364)
Other income (expense):
Interest and investment
income 10,865 905 2,044 -- -- 13,814
Interest expense (10,473) (185) -- (138) (247,500) (258,296)
Loss on sale of marketable
securities -- (16,705) -- -- -- (16,705)
----------- ----------- ----------- ----------- ----------- -----------
Total other income (expense) 392 (15,985) 2,044 (138) (247,500) (261,187)
Provision for income taxes -- -- -- 3,579 -- 3,579
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) $(1,410,324) $ (52,768) $ 130,698 $ 14,716 $(1,631,452) $(2,949,130)
=========== =========== =========== =========== =========== ===========
Basic and diluted net loss
per common share $(.33) $(.50)
=========== ===========
Shares used in the calculation
of basic and diluted net loss
per common share 4,259,773 5,880,493
=========== ===========
</TABLE>
See accompanying notes.
F-48
<PAGE>
EyeCity.com, Inc. and Subsidiaries
Unaudited Pro Forma Consolidated Statement of Operations
Nine Months Ended September 30, 1999
<TABLE>
<CAPTION>
Peeper's Sunglasses SunSource Pro Forma
EyeCity.com, Inc. and Accessories, Inc. Technology, Inc. Adjustments Pro Forma
----------------- --------------------- ---------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Net revenues $ 1,531,159 $ 735,537 $ 293,396 $ -- $ 2,560,092
Cost of revenues 1,089,328 525,835 218,024 -- 1,833,187
----------- ----------- ----------- ----------- -----------
Gross profit 441,831 209,702 75,372 -- 726,905
Operating expenses:
Marketing and sales 244,575 54,126 19,925 -- 318,626
General and administrative 2,175,611 88,763 57,740 -- 2,320,580
Depreciation and amortization 591,779 4,965 412 502,659 1,101,349
Technology and development 177,357 -- -- -- 177,357
----------- ----------- ----------- ----------- -----------
Total operating expenses 3,189,322 147,854 78,077 502,659 3,917,912
----------- ----------- ----------- ----------- -----------
Operating income (loss) (2,747,491) 61,848 (2,705) (502,659) (3,191,007)
Other income (expense):
Interest and investment income 6,742 2,012 11 -- 8,765
Interest expense (120,943) -- -- (90,417) (211,360)
----------- ----------- ----------- ----------- -----------
Total other income (expense) (114,201) 2,012 11 (90,417) (202,595)
Benefit for income taxes -- -- 800 -- 800
----------- ----------- ----------- ----------- -----------
Net income (loss) $(2,861,692) $ 63,860 $ (1,894) $ (593,076) $(3,392,802)
=========== =========== =========== =========== ===========
Basic and diluted net loss per
common share $(.43) $(.46)
=========== ===========
Shares used in the calculation of
basic and diluted net loss per
common share 6,650,508 7,393,106
=========== ===========
</TABLE>
See accompanying notes.
F-49
<PAGE>
EyeCity.com, Inc. and Subsidiaries
Notes to Unaudited Pro Forma Consolidated
Statements of Operations
Year Ended December 31, 1998 and
the Nine Months Ended September 30, 1999
1. Basis of Presentation
The unaudited pro forma statement of operations for the year ended December 31,
1998 gives effect to EyeCity's acquisitions of Foggles, Inc. ("Foggles")
Peeper's Sunglasses and Accessories, Inc. ("Peeper's") and SunSource Technology,
Inc. ("SunSource") as if they occurred on January 1, 1998. Such unaudited pro
forma financial statement sets forth the historical results of operations of
EyeCity, Peeper's and SunSource for the year ended December 31, 1998 and Foggles
for the period January 1, 1998 to August 5, 1998. The operations of Foggles for
the period August 6, 1998 to December 31, 1998 are included in the operations of
EyeCity.
The unaudited pro forma statement of operations for the nine months ended
September 30, 1999 gives effect to EyeCity's acquisitions of Peeper's and
SunSource as if they occurred on January 1, 1999. Such unaudited pro forma
financial statement sets forth the historical results of operations of EyeCity
and SunSource for the six months ended June 30, 1999 and Peeper's for the period
January 1, 1999 to May 7, 1999. The operations of Peeper's for the period May 8,
1999 to June 30, 1999 are included in the operations of EyeCity.
The unaudited pro forma statement of operations has been prepared by management
and should be read in conjunction with the historical financial statements of
EyeCity, Peeper's, Foggles and SunSource. This statement does not purport to be
indicative of the results of operations that might have occurred if the Foggles,
Peeper's and SunSource acquisitions were consummated on January 1, 1998 or
January 1, 1999, and does not purport to be indicative of future results.
Management believes additional synergies and operational improvements, not
reflected in the accompanying unaudited pro forma statements of operations, will
be realized by the combined companies. Such amounts cannot be reasonably
quantified and, therefore, are not reflected in the unaudited pro forma
statements of operations.
F-50
<PAGE>
EyeCity.com, Inc. and Subsidiaries
Notes to Unaudited Pro Forma Consolidated
Statement of Operations (continued)
Year Ended December 31, 1998 and
the Nine Months Ended September 30, 1999
2. Pro Forma Adjustments
The pro forma adjustments for the year ended December 31, 1998 reflect the
additional amortization required for a full year's amortization of the
intangibles acquired, as well as the accretion of interest on the non-interest
bearing promissory notes issued in connection with the acquisition of Peeper's
and SunSource. Total intangibles were approximately $4,211,000 which was
allocated to goodwill with a life of 3 years. The annual amortization of
intangibles totals $1,404,000. The accretion of interest in the amount of
$247,500 of amortization has been recorded as interest expense related to the
discount on the non-interest bearing promissory notes for the year ended
December 31, 1998.
The pro forma adjustments for the nine months ended September 30, 1999 reflect
the additional amortization required for a full nine month's amortization of the
intangibles acquired, as well as the additional accretion of interest for a full
nine months of the discount on the non-interest bearing promissory notes issued
in connection with the acquisitions of Peeper's and SunSource. Total intangibles
were approximately $4,055,000 which was allocated to goodwill with a life of 3
years. The amortization of intangibles for nine months totals $1,042,000. The
accretion of interest in the amount of $186,000 of amortization has been
recorded as interest expense related to the discount on the non-interest bearing
promissory notes for the nine months ended September 30, 1999.
3. Net Loss per Share Applicable to Common Stockholders
Pro forma net loss per share applicable to common stockholders adjusts the
weighted average shares outstanding of EyeCity's historical financial statements
for the shares issued to Foggles, Peeper's and SunSource stockholders as if such
shares were outstanding for the respective periods.
F-51
<PAGE>
PART III
Item 1. Index to Exhibits
2. a. Certificate of Incorporation
b. Amendment to Certificate of Incorporation
c. Bylaws, as amended
3. Instruments Defining the Rights of Security Holders:
a. Form of Subscription Agreement used in connection with offering of
450,000 and 550,000 shares of common stock under Rule 504 of
Securities Act of 1933
b. Form of Subscription Agreement used in connection with offering of
10% Subordinated Convertible Promissory Notes
c. Form of 10% Subordinated Convertible Promissory Note
d. Purchase and Investment Agreement with Nikos P. Mouyiaris
e. Form of Purchase and Investment Agreement with other investors in
May 1999 $1,500,000 offering
f. Form of Purchase and Investment Agreement with investors in June
1999 $690,000 offering
6. a. Stock Purchase Agreement between Ergovision, Inc. and shareholders
of Foggles, Inc.
b. Stock Purchase Agreement between Ergovision, Inc. and shareholders
of Gilead Enterprises, Inc.
c. Stock Purchase Agreement by and between Ergovision, Inc. and
EyeGlassPlace.com, Inc.
d. Severance and Consultancy Agreement with Robert B. Greenberg
e. Amendments to Severance and Consultancy Agreement with Robert B.
Greenberg
f. Agreement and Plan of Merger by and among Ergovision, Inc., Peeper's
Sunglasses and Accessories, Inc., Peeper's, Inc. and Daniel D.
Thralow
g. Purchase Agreement between EyeCity.com, Inc. and StarSystems
h. Agreement and Plan of Merger by and among EyeCity.com, Inc.,
SunglassSite, Inc., SunSource Technology, Inc. and G. Robert Wilson
i. Asset Purchase and Assignment Agreement by and among EyeCity.com,
Inc., Impact Eyewear, LLC and Thomas Seltzer
j. Intentionally omitted
k. Intentionally omitted
F-52
<PAGE>
l. Agreement between EyeCity.com and IEM, Inc.
m. Employment Agreement between Ergovision Inc. and Mark H. Levin
n. Amendment to Employment Agreement between Ergovision, Inc. and Mark
H. Levin
o. Employment Agreement between Ergovision Inc. and Mark R. Suroff
p. Amendment to Employment Agreement between Ergovision, Inc. and Mark
R. Suroff
q. Employment Agreement between Ergovision Inc. and Daniel D. Thralow
r. Finders Agreement between Ergovision, Inc. and James J. Armenakis
s. Consulting Agreement between Ergovision, Inc. and James J. Armenakis
t. Amendment to Consulting Agreement between Ergovision, Inc. and James
J. Armenakis
u. Employment Agreement between EyeCity.com, Inc. and Jon Agnes
v. Employment Agreement between EyeCity.com, Inc. and Thomas B. Seltzer
w. 1997 Qualified Stock Option Plan
x. 1998 Stock Option Plan
y.. 1999 Stock Option Plan
z. Lease between First Industrial, LP. and EyeCity.com, Inc.
aa. Lease between Plaza Associates and Peeper's, Inc.
F-53
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
EyeCity.com, Inc.
Dated: November 18, 1999 By /s/ Mark H. Levin
-----------------------------------------
Name: Mark H. Levin
Title: President and Chief Executive Officer
F-54
