U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10 - QSB
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-27561
EYECITY.COM, INC.
(Exact name of Small Business Issuer as specified in its charter)
DELAWARE 11-3327465
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
79 Express Street, Plainview, New York 11803
(Address of Principal Executive Offices)
(516) 822-5000
(Issuer's Telephone Number, Including Area Code)
Indicate by checkmark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
As of August 10, 2000, there were outstanding 12,324,214 shares of
the issuer's common stock, $.001 par value per share.
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EYECITY.COM, INC. AND SUBSIDIARIES
FORM 10-QSB
SIX MONTHS ENDED JUNE 30, 2000
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page
----
Item 1. Financial Statements:
Consolidated BalanceSheet ...................................... 2
Consolidated Statements of Operations .......................... 3
Consolidated Statements of Cash Flows .......................... 4
Notes to Consolidated Financial Statements ..................... 5
Item 2. Management's Discussion and Analysis
or Plan Of Operation ...................................... 7
Investment Considerations....................................... 13
Part II - OTHER INFORMATION
Item 1. Legal proceedings .............................................. 25
Item 2. Sales of Unregistered Securities................................ 25
Item 4. Submission of Matters to a Vote of Security Holders............. 26
Item 6. Exhibits and Reports on Form 8-K................................ 27
SIGNATURES.................................................................. 28
1
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EYECITY.COM, INC. AND SUBISDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited)
JUNE 30, 2000
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,795
Accounts receivable, net of allowance of $9,150 38,494
Inventories 347,167
Prepaid expenses and other current assets 129,017
------------
Total current assets 524,473
Property and equipment, net of accumulated
depreciation of $92,170 366,728
Intangibles, net of accumulated
amortization of $1,881,540 3,211,264
Website development costs, net of
accumulated amortization of $9,222 156,778
Security deposits 13,022
------------
Total assets $ 4,272,265
============
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 985,932
Accrued payroll and related taxes 27,417
Deferred salaries to officers 199,878
Current portion of capital lease obligations 25,996
Current portion of notes payable 1,097,759
Current portion of subordinated convertible promissory notes 50,000
------------
Total current liabilities 2,386,982
Capital lease obligations, less current portion 58,528
Subordinated convertible promissory notes, less current portion 150,000
------------
Total liabilities 2,595,510
------------
Stockholders' equity:
Preferred stock - $.001 par value: authorized, 1,000,000
shares: no shares issued and outstanding --
Common stock - $.001 par value: 100,000,000 shares authorized,
11,718,714 shares issued and outstanding 11,719
Additional paid-in capital 10,298,447
Accumulated deficit (8,615,141)
Unamortized compensation component of stock options (18,270)
------------
Total stockholders' equity 1,676,755
------------
Total liabilities and stockholders' equity $ 4,272,265
============
</TABLE>
See accompanying notes.
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EYECITY.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
---------------- ------------------
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues $ 1,376,340 $ 551,937 $ 760,909 $ 480,799
Cost of revenues 959,175 380,121 536,968 355,993
------------ ------------ ------------ ------------
Gross profit 417,165 171,816 223,941 124,806
------------ ------------ ------------ ------------
Operating expenses:
Marketing and sales 254,448 126,474 168,824 75,841
General and administrative 1,506,944 1,092,316 763,088 717,862
Depreciation and amortization 901,783 221,946 456,167 205,881
Technology and development 162,576 125,924 80,227 125,924
------------ ------------ ------------ ------------
Total operating expenses 2,825,751 1,566,660 1,468,306 1,125,508
------------ ------------ ------------ ------------
Operating loss (2,408,586) (1,394,844) (1,244,365) (1,000,702)
------------ ------------ ------------ ------------
Other income (expense):
Interest and investment income 2,844 5,968 329 5,968
Interest expense 135,598) (50,082) (63,826) (40,640)
------------ ------------ ------------ ------------
Net other expense (132,754) (44,114) (63,497) (34,672)
------------ ------------ ------------ ------------
Net loss $ (2,541,340) $ (1,438,958) $ (1,307,862) $ (1,035,374)
============ ============ ============ ============
Basic and diluted net loss
per common share $ (.24) $ (.25) $ (.12) $ (.15)
============ ============ ============ ============
Shares used in the calculation of
basic and diluted net loss per
common share 10,536,413 5,690,845 11,012,478 6,750,671
============ ============ ============ ============
</TABLE>
See accompanying notes.
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EYECITY.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
----------------
June 30,
--------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities
Net loss $(2,541,340) $(1,438,958)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 901,783 221,946
Amortization of discount 58,542 33,332
Amortization of compensation component of stock options 41,382 365,626
Issuance of stock for consulting and marketing services 60,000 80,002
Issuance of stock for consideration of extending note 15,000 --
Changes in operating assets and liabilities:
Accounts receivable (13,712) 18,821
Inventories 141,073 (247,929)
Prepaid expenses and other current assets (37,366) 7,735
Accounts payable and accrued expenses (224,394) 176,394
Accrued payroll and related taxes (45,152) 14,072
Deferred salary to officers (126,660) 94,011
----------- -----------
Net cash used in operating activities (1,770,844) (674,948)
----------- -----------
Cash flows from investing activities
Capitalized website development costs (150,000) --
Purchases of property and equipment (41,600) (61,029)
Purchase of intangibles -- (11,000)
Cash paid for acquisitions, net of cash acquired -- (967,856)
Security deposits (4,763) --
----------- -----------
Net cash used in investing activities (196,363) (1,039,885)
----------- -----------
Cash flows from financing activities
Repayment of convertible subordinated notes -- (25,000)
Repayment of notes payable (44,516) --
Proceeds from issuance of common stock, net of expenses 1,860,250 2,515,000
Proceeds from line of credit/note payable -- 16,000
Repayment of capital lease obligations (13,887) --
----------- -----------
Net cash provided by financing activities 1,801,847 2,506,000
----------- -----------
Net (decrease)/increase in cash and cash equivalents (165,360) 791,167
Cash and cash equivalents at beginning of year 175,155 224,748
----------- -----------
Cash and cash equivalents at end of period $ 9,795 $ 1,015,915
----------- -----------
Supplemental disclosures
Cash paid for interest $ 27,500 $ 17,764
----------- -----------
</TABLE>
See accompanying notes.
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EYECITY.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
SIX MONTHS ENDED JUNE 30, 2000
1. Basis of Presentation
The interim financial statements furnished reflect all adjustments which are, in
the opinion of management, necessary to present a fair statement of the
financial position and results of operations for the three and six month periods
ended June 30, 2000 and 1999. The financial statements should be read in
conjunction with the summary of significant accounting policies and notes to
financial statements included in the Company's Form 10-KSB for the fiscal year
ended December 31, 1999. The results of operations for the six and three month
periods ended June 30, 2000 are not necessarily indicative of the results to be
expected for the full year.
2. Stockholders' Equity
During the six months ended June 30, 2000, EyeCity sold 1,745,000 shares of its
common stock to 63 investors at a price of $1.00 per share, 50,000 shares of its
common stock at a price of $0.75 per share and 580,000 shares of its common
stock at a price of $0.50 per share resulting in aggregate gross proceeds of
$2,072,500. The investors who purchased 580,000 shares of common stock at $0.50
per share also received three year warrants to purchase 580,000 shares of common
stock at an exercise price of $1.00 per share.
During the six months ended June 30, 2000, EyeCity issued 197,283 shares of its
common stock with a value of $186,900 in exchange for legal, accounting,
consulting and marketing services.
During the six months ended June 30, 2000, holders converted $125,000 of
subordinated convertible promissory notes into 100,000 shares of EyeCity common
stock.
During the six months ended June 30, 2000, EyeCity issued 10,000 shares of its
common stock with a value of $10,000 in exchange for furniture and fixtures.
During the six months ended June 30, 2000, EyeCity issued 30,000 shares of its
common stock with a value of $15,000 in consideration for the holder of a
promissory note agreeing to extend the maturity date of such promissory note.
During the six months ended June 30, 2000, EyeCity issued 13,500 shares of its
common stock with a value of $13,500 to an investment advisor in connection with
financing transactions.
3. Subsequent Events
On August 3, 2000, $150,000 of EyeCity's 10% subordinated convertible promissory
notes were converted into 300,000 shares of EyeCity common stock and 150,000
three year warrants exercisable at $1.00 per share, thereby reducing the
principal balance of the 10% subordinated convertible promissory notes to
$50,000.
In August 2000, EyeCity engaged an NASD registered broker dealer to act as
its exclusive placement agent for the purpose of offering (the "Unit Offering")
to certain accredited investors on a
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"best efforts" basis a minimum of $1,000,000 and a maximum of $15,000,000 of
units ("Units"), each Unit consisting of a $100,000 10% Secured Convertible
Debenture due 2003 ("Debenture") and warrants ("Warrants") to purchase 200,000
shares of EyeCity's common stock. The Warrants will be exercisable for common
stock at $1.00 per share, subject to anti - dilution protection. The Warrants
will, under certain circumstances, be redeemable by EyeCity for $.05 per
warrant. EyeCity can require conversion of the Debentures under certain
circumstances, and the Debentures will be redeemable at EyeCity's option. The
Units will be offered by EyeCity on a "best efforts, all or none" basis as to
the first ten Units and on a "best efforts" basis as to the remaining 140 Units.
The Unit Offering will commence on the date of distribution of a confidential
offering memorandum and will expire, unless terminated or extended by EyeCity
and the placement agent, (x) on the earlier of (i) 90 days from the date of the
confidential offering memorandum or (ii) November 30, 2000 (the "Initial
Offering Period") if an aggregate of 10 Units are not sold during the Initial
Offering Period and (y) if an aggregate of 10 Units are sold during the Initial
Offering Period, on the earlier of (i) such date as an aggregate of 150 Units
are sold and (ii) 90 days following the Initial Offering Period. Shares of
common stock underlying the Debentures and Warrants will be required to be
registered within 120 days from the final closing of the Unit Offering. See
"Management's Discussion and Analysis or Plan of Operation--Liquidity and
Capital Resources."
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MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION
This report contains certain forward looking statements, which may involve known
and unknown material risks, uncertainties and other factors not under EyeCity's
control including, without limitation, its ability to operate as a going
concern, the need for additional financing, the impact of competition, the
management of growth, compliance with applicable regulatory requirements,
EyeCity's ability to implement its long term business plan for acquiring
complementary businesses and EyeCity's ability to enter into agreements with
marketing or distribution partners, which may cause actual results, performance
and achievements of EyeCity to be materially different from EyeCity's
expectations.
The following is intended to update the information contained in EyeCity's
Annual Report on Form 10-KSB for the year ended December 31, 1999 and presumes
that readers have access to, and will have read, "Management's Discussion and
Analysis or Plan of Operation" contained in such Form 10-KSB.
General
EyeCity is currently 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 United States optical product market is estimated at $15.8 billion
for 1998. EyeCity has effected an acquisition strategy within the highly
fragmented Internet optical industry, and in 1999 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, seven days a week. EyeCity intends to acquire
additional complementary businesses as opportunities arise from time to time.
In addition, EyeCity announced earlier this year that it intends to
establish a turnkey business-to-business ("B2B") and business-to-professional
("B2P") electronic exchange providing end-to-end B2B and B2P e-commerce
solutions to the eyecare professional. In this regard, EyeCity expects to offer
a suite of services, including, e-commerce store design and fulfillment services
to professional eye care providers including ophthalmologists, optometrists, and
opticians who want to create their own customized online stores, providing full
e-commerce capabilities for their patients and customers. Subject to obtaining
appropriate financing, EyeCity plans to provide the tools and systems necessary
for eye care providers to function in e-commerce markets, including merchandise
selection and sourcing, storefront creation, hosting, advertising, customer
service, credit card processing and fulfillment services.
In furtherance of implementing its B2B and B2P business model, EyeCity has
recently signed a non-binding letter of intent to acquire, subject to
negotiating definitive agreements and to obtaining necessary financing, a
professional optical buying group that has in excess of 2,000 optometrists in
its network. However, there can be no assurance that this transaction will be
consummated. EyeCity hopes to provide these optometrists with a fully integrated
transaction network, linking manufacturers, suppliers, service providers,
distributors of eye and healthcare products and services, practices and
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patients, thereby enabling eyecare professionals to achieve lower operating
costs, greater productivity and a superior level of patient service. See
"Investment Considerations."
EyeCity's B2B and B2P e-commerce model is also intended to help such eye
care providers retain customer relationships and increase sales. Unlike
traditional affiliate programs that refer customers to other web sites to shop,
EyeCity's B2B and B2P program is intended to enable eye care providers to drive
traffic to their own stores, thereby building loyalty and repeat sales. With
EyeCity's planned suite of e-commerce service, such eye care providers will be
able to customize their online store to the unique interests of their audience.
Products offered for sale would be available through EyeCity's extensive
database, with transaction processing that creates a single unified shopping
experience that is seamless to the customer. See "Investment Considerations."
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 an intangible asset in the amount of $646,000 which
will be amortized over three years from the closing. In August 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).
EyeCity has incurred substantial losses and has had significant negative
cash flow since its inception. The independent auditor's report included in
EyeCity's Form 10-KSB for the year ended December 31, 1999 included an
explanatory paragraph regarding substantial doubt about EyeCity's ability to
continue as a going concern without additional financing due to recurring losses
from operations and a working capital deficiency. Although EyeCity has obtained
financing in the past, EyeCity will require additional funding to cover current
operations, repay indebtedness and enable it to fund its business plan. EyeCity
is currently seeking additional financing, but there is no assurance that such
financing will be sufficient or available, or if available, will be available on
acceptable terms. See "Liquidity and Capital Resources."
Although EyeCity was formed in May 1996, it initiated its business plan
for online retail distribution of optical products in the first quarter of 1999
and initiated its business plan for establishing an electronic exchange
providing end-to-end B2B and B2P e-commerce solutions to the eyecare
professional in the second quarter of 2000. Further, EyeCity only closed on the
acquisitions forming the core components of its current online retail business
during the second quarter of 1999. EyeCity's SuperSite, www.eyecity.com was
launched in April 2000. As a result, there is only limited current relevant
financial and operating information available to evaluate an investment in
EyeCity's
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common stock. In addition, EyeCity's limited operating history and recent growth
in net sales since implementing 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 rate of growth in annual net sales in
1999 will decrease in future periods, which could have an adverse effect on
EyeCity's performance.
In this regard, EyeCity expects to continue to incur significant losses as
a result of, among other things, substantially higher general and administrative
expenses attributable to growth in overhead as EyeCity expands its business, and
increased depreciation and amortization expense attributable to its
acquisitions. 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 or achieve profitability.
EyeCity's gross profits 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 and to establish a B2B and B2P
electronic exchange for eyecare professionals, to the extent sales of such other
products and/or services become a greater portion of total sales, EyeCity's
gross profits could be adversely affected.
Results of Operations
Net revenues for the six and three month periods ended June 30, 2000 were
approximately $1,376,000 and $761,000, respectively, as compared to
approximately $552,000 and $481,000 in the corresponding periods in the prior
year. The increase in revenues is principally attributable to the acquisitions
of Peeper's in May 1999, and SunSource Technology, Inc. ("SunSource") in June
1999. Peeper's and SunSource are online optical product retailers whose
aggregate revenues for the six and three month periods ended June 30, 2000 were
approximately $1,258,000 and $693,000, respectively.
Cost of revenues for the six and three month periods ended June 30, 2000
were approximately $959,000 and $537,000, respectively, as compared to
approximately $380,000 and $356,000 in the corresponding periods in the prior
year. The increase is due primarily to costs associated with increased sales
volume and costs associated with product sales by Peeper's.
Gross profit amounted to approximately $417,000 (30.3% of net revenues)
and $224,000 (29.4% of net revenues) in the six and three month periods ended
June 30, 2000, respectively, as compared to $172,000 (31.1% of net revenues) and
$125,000 (26.0% of net revenues) in the corresponding periods in the prior year.
The dollar increase in gross profits was primarily due to increased sales
levels.
General and administrative expenses approximated $1,507,000 and $763,000
for the six and three month periods ended June 30, 2000, respectively, as
compared to approximately $1,092,000 and $718,000 for the corresponding periods
in 1999. The increase in general and administrative expenses was primarily due
to increases in salaries and related expenses due to an increase in headcount.
Depreciation and amortization expenses were approximately $902,000 and
$456,000 for the six and three month periods ended June 30, 2000, respectively,
as compared to approximately $222,000 and $206,000 in the corresponding periods
in 1999. The increase is principally attributable to
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amortization of goodwill and other intangible assets resulting from various
acquisitions including Peeper's and SunSource.
Technology and development expenses were approximately $163,000 and
$80,000 for the six and three month periods ended June 30, 2000, respectively,
as compared to approximately $126,000 and $126,000 in the corresponding periods
in 1999. These expenses related to the development of the eyecity.com SuperSite.
Interest expense was approximately $136,000 and $64,000 for the six and
three month period ended June 30, 2000, respectively, as compared to
approximately $50,000 and $41,000 in the corresponding periods in 1999. This
increase is primarily related to the accretion recorded on the discount of the
non-interest bearing promissory notes issued in conjunction with the
acquisitions of Peeper's and SunSource. See "Liquidity and Capital Resources".
Liquidity and Capital Resources
As of June 30, 2000, EyeCity had negative working capital (total current
assets minus total current liabilities) of approximately $1,863,000. EyeCity
believes that its currently available funds will be sufficient to meet its
anticipated working capital needs through the end of August 2000. Thereafter,
EyeCity will need to raise substantial additional funds to implement anticipated
capital expenditures and business expansion and repay indebtedness and other
obligations due in the second half of fiscal 2000. If EyeCity is unable to raise
additional funds, EyeCity will have to cease its operations.
In this regard, EyeCity expects that it will need to raise in the near
term $500,000 to continue its current operations through September 2000,
approximately $1,500,000 to satisfy its current obligations, and approximately
$5,000,000 to fund its refocused business plan. EyeCity is seeking to raise such
funds through the Unit Offering, but there is no assurance that such funds will
be available, or if available, will be available on the terms proposed in the
Unit Offering.
As of June 30, 2000, EyeCity had approximately $10,000 of cash and cash
equivalents. As of June 30, 2000, EyeCity's principal commitments consisted of:
o accounts payable of approximately $985,000;
o interest bearing promissory notes issued to sellers in connection
with prior acquisitions by EyeCity in the aggregate amount of $1.1
million which mature in whole or in part at the earlier of dates
ranging from July 15, 2000 to May 23, 2002 (the Company is currently
in compliance with its payment obligations under these notes);
o $50,000 of 10% subordinated convertible promissory notes, due
October 1, 2003 (On June 30, 2000, the principal balance of the 10%
subordinated convertible promissory notes was $200,000);
o $200,000 of deferred salary for officers. Included in this amount is
deferred salaries owed to Mark Levin of $92,000, Mark Suroff of
$92,000 and Daniel Thralow of $16,000. (Subsequent to June 30, 2000,
each of Messrs. Levin and Suroff agreed to convert $50,000 of the
$92,000 owed to them into 100,000 shares of EyeCity's common stock
and agreed that the remaining approximately $42,000 would be paid to
each of them by EyeCity in 24 equal monthly installments, together
with interest at 8% per annum);
o $2,000 outstanding on a non-interest bearing note issued in
connection with the acquisition of certain patent display technology
payable in equal monthly installments commencing
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June 15, 1999 (the Company is currently in compliance with its
payment obligations under this note);
o obligations outstanding under operating leases; and
o obligations outstanding under capital leases.
In addition, in connection with EyeCity's establishing an electronic
exchange providing end-to-end B2P and B2B e-commerce solutions for eyecare
professionals, EyeCity recently signed a non-binding letter of intent to acquire
a professional optical buying group that has in excess of 2000 optometrists in
its network.
During 1998, EyeCity issued $362,500 of subordinated convertible
promissory notes. The notes bear interest at a rate of 10% per annum, payable
quarterly. The 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. EyeCity has the right
to prepay the 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. The notes
are repayable in twelve quarterly principal payments commencing on October 1,
2000. In March 1999, $25,000 of the notes was repaid prior to maturity. Between
October 1999 and April 2000, $137,500 of the notes were converted into 110,000
shares of common stock. On August 3, 2000, $150,000 of the notes were converted
into 300,000 shares of EyeCity common stock and 150,000 three-year warrants
exercisable at $1.00 per share. The current outstanding principal balance of the
notes is $50,000.
A portion of the consideration paid by EyeCity in connection with its
acquisitions of Peeper's and SunSource was in the form of promissory notes in
the amounts of $875,000 and $212,500, respectively. On May 23, 2000 the maturity
date of the secured $875,000 note was extended to May 23, 2002 with principal
payments of $25,000 due on July 15, 2000, $150,000 due on August 31, 2001 and 5%
of the first $2,000,000 of gross proceeds, and 10% of all gross proceeds above
$2,000,000 raised by EyeCity in a financing transaction or series of financing
transactions, in each case, payable within 7 days of closing. The note now
accrues interest at a rate of 7% per annum. On June 30, 2000, EyeCity and the
holder of the $212,500 note amended it to provide that $3,000 of principal will
be due and payable on each of July 15, 2000, August 15, 2000, September 15,
2000, October 15, 2000, and November 15, 2000, and $197,500 will be due and
payable on December 31, 2000, provided that if EyeCity consummates a public or
private offering of debt or equity securities, four percent of the net proceeds
in excess of $2,000,000 of such offering shall be paid on account of the then
outstanding principal balance of such note. In addition, the amended $212,500
note has accrued interest from July 1, 2000 at Chase Bank's prime rate. There
can be no assurance that EyeCity will have available funds to satisfy these
notes at maturity, in which event the holders of these notes could claim that
EyeCity is in breach of its obligations. Such holders could commence proceedings
against EyeCity, including seeking to foreclose on the note collateral
(including the domain names, toll-free phone numbers, contract rights, website
content and certain intellectual properties formerly owned by Peeper's and
acquired by EyeCity in the Peeper's acquisition), which would have a material
adverse affect on EyeCity's operations.
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For the six months ended June 30, 2000, EyeCity used approximately
$1,771,000 in connection with its operating activities, principally to fund its
net loss before non-cash charges of approximately $2,541,000, as well as
increases in operating assets such as prepaid expenses and decreases in
operating liabilities such as accounts payable and accrued expenses.
For the six months ended June 30, 2000, net cash used in investing
activities approximated $196,000. This is primarily attributable to cash paid
for the development of the website and the purchase of property and equipment.
For the six months ended June 30, 2000, net cash provided by financing
activities approximated $1,802,000, primarily from the sale of common stock.
Financing Activity
Historically, EyeCity has financed its cash requirements primarily through
private placements of its securities. As of June 30, 2000, EyeCity has raised
gross proceeds of $1.0 million in a 1997-1998 offering of shares of its common
stock and gross proceeds of $4,859,500 in private placements of its common stock
in 1999-2000. The proceeds of the private placements are 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.com SuperSite, for initial marketing and
advertising of the SuperSite, as well as general corporate purposes.
In August 2000, EyeCity engaged an NASD registered broker dealer to act as
its exclusive placement agent for the purpose of offering (the "Unit Offering")
to certain accredited investors on a "best efforts" basis a minimum of
$1,000,000 and a maximum of $15,000,000 of units ("Units"), each Unit consisting
of a $100,000 10% Secured Convertible Debenture due 2003 ("Debenture") and
warrants ("Warrants") to purchase 200,000 shares of EyeCity's common stock. The
Warrants will be exercisable for common stock at $1.00 per share, subject to
anti - dilution protection. The Warrants will, under certain circumstances, be
redeemable by EyeCity for $.05 per warrant. EyeCity can require conversion of
the Debentures under certain circumstances, and the Debentures will be
redeemable at EyeCity's option. The Units will be offered by EyeCity on a "best
efforts, all or none" basis as to the first ten Units and on a "best efforts"
basis as to the remaining 140 Units. The Unit Offering will commence on the date
of distribution of a confidential offering memorandum and will expire, unless
terminated or extended by EyeCity and the placement agent, (x) on the earlier of
(i) 90 days from the date of the confidential offering memorandum or (ii)
November 30, 2000 (the "Initial Offering Period") if an aggregate of 10 Units
are not sold during the Initial Offering Period and (y) if an aggregate of 10
Units are sold during the Initial Offering Period, on the earlier of (i) such
date as an aggregate of 150 Units are sold and (ii) 90 days following the
Initial Offering Period. Shares of common stock underlying the Debentures and
Warrants will be required to be registered within 120 days from the final
closing of the Unit Offering. There can be no assurance that the Unit Offering
will be consummated. If the Unit Offering is not consummated and if EyeCity is
unable to raise additional funds, EyeCity will have to cease its operations.
If EyeCity raises additional funds through the issuance of equity or
convertible debt securities (including Units), the percentage ownership of its
current stockholders will be reduced, its stockholders may experience additional
dilution and such securities may, and in the case of Units will, 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
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obligations 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 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.
Impact of Year 2000
EyeCity is not aware of any material problems resulting from Year 2000
issues, either with its products, its internal systems, or the products and
services of third parties. EyeCity will continue to monitor its mission critical
computer applications and those of its suppliers and vendors throughout the year
2000 to ensure that any latent Year 2000 matters that may arise are addressed
promptly.
INVESTMENT CONSIDERATIONS
This Form 10-QSB contains certain forward looking statements, which may
involve known and unknown material risks, uncertainties and other factors not
under the Company's control including without limitation its ability to operate
as a going concern, the need for additional financing, the impact of
competition, the management of growth, compliance with applicable regulatory
requirements, the Company's ability to implement its long term business plan for
acquiring complementary businesses and the Company's ability to enter into
agreements with marketing or distribution partners, which may cause actual
results, performance and achievements of the Company to be materially different
from the Company's expectations.
In analyzing an investment in the Company, one should carefully consider
the investment considerations described below, as well as the other matters
referred to in the Company's Form 10-KSB for the year ended December 31, 1999.
If any of the matters contemplated by the following investment considerations
occur, our business, financial condition or results of operations could be
materially adversely affected.
Investment Considerations Relating To Our Business
We have limited operating history.
Although we were formed in May 1996, we initiated our business plan for
online retail distribution of optical products in the first quarter of 1999 and
initiated planning of our proposed turnkey business to professional e-commerce
initiative in the second quarter of 2000. Further, we only closed on the
acquisitions forming the core components of our online optical product
distribution
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business during the second quarter of 1999. Our website, www.eyecity.com, was
launched in April 2000, and our www.peepers.com website began operations in
January 1999. As a result, there is only limited financial and operating
information available for a potential investor to evaluate an investment in us.
In addition, our limited operating history and recent growth in net sales since
effecting our acquisition strategy make it difficult to forecast future
operating results and reduce the relevance of quarter-to-quarter comparisons.
We may not be able to continue operating as a "going concern" without additional
capital through public or private offerings.
The independent auditor's report included in the Form 10-KSB for the year
ended December 31, 1999 raises issues about EyeCity as a going concern,
including issues regarding recurring losses from operations and working capital
deficiency. As of June 30, 2000, EyeCity had negative working capital of
approximately $1,863,000.
We believe that our currently available funds will be sufficient to meet
our anticipated working capital needs through the end of August 2000.
Thereafter, we may need to raise additional funds. We may need to raise
additional funds sooner in order to fund our 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 we raise additional funds through the issuance of equity or
convertible debt securities (including through the issuance of Units), the
percentage ownership of our current stockholders will be reduced, our
stockholders may experience additional dilution and such securities may (and in
the case of the Units, will) have rights, preferences and privileges senior to
those of our Common Stock. There can be no assurance that the Unit Offering will
be consummated or that if the Unit Offering is not consummated that additional
financing will be available on terms favorable to us or at all. If adequate
funds are not available or are not available on acceptable terms, we may not be
able to continue to implement our business plan. This inability could have a
material adverse effect on our business, results of operations and financial
condition.
Losses.
The Company has incurred significant losses from operations for the years
ended December 31, 1998 and 1999 and for the six months ended June 30, 2000
($1,410,324, $4,130,832 and $2,541,340, respectively), and there can be no
assurance the Company will not continue to incur such losses or will ever
generate revenues at levels sufficient to support profitable operations. The
Company's working capital deficit was approximately $166,000, $2,092,000 and
$1,863,000 as of December 31, 1998, 1999 and June 30, 2000, respectively.
We cannot assure you that our sales growth will continue at historical rates.
Since our formation in May 1996, and especially since our acquisitions
effected in the second quarter of 1999, we have experienced net sales growth
increasing from approximately $26,000 in 1997 to approximately $96,000 in 1998
and approximately $2,633,000 in 1999. Unaudited net sales were approximately
$1,376,000 for the six months ended June 30, 2000. However, we cannot predict
whether the rate of growth in net sales will decrease in future periods, which
would have an adverse effect on profitability.
We obtain a large percentage of our inventory from a limited number of
suppliers.
Our top three suppliers accounted for approximately 23.5% and 11.6% of our
inventory in 1999 and the six months ended June 30, 2000, respectively. In the
event that any of these suppliers, or other
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significant suppliers, could no longer supply us with optical products, or
refused to ship us product for any reason, including credit concerns or concerns
regarding the Company's future viability, we may not be able to secure other
adequate sources of supply, or may not be able to obtain our inventory on terms
as favorable to us as our current supply. Either circumstance could adversely
affect us by increasing our costs or, in the event adequate replacement supply
cannot be secured, could cause us to lose sales and customers and would have a
material adverse effect on our business.
There are risks associated with new services, features and functions that
EyeCity may choose to pursue.
We are currently engaged in the marketing, distribution and retail sale
over the Internet of a broad range of eyewear products. We are in the process of
refocusing our business model from online retail distribution of optical
products to establishing an electronic exchange providing end-to-end B2B and B2P
e-commerce solutions to eyecare professionals. We plan to further expand our
operations by developing and promoting new or complementary services, products
or features or expanding the breadth and depth of services. There can be no
assurance that we will be able to expand our operations in a cost-effective or
timely manner or that any such plans will be successful. Furthermore, any new
business or service launched by us (including our turnkey B2B and B2P e-commerce
initiative) that is not favorably received could damage our reputation and
diminish the value of our brand name. Because eyecare professionals are
generally relatively slow to adopt new technologies (including the Internet) and
services, no assurance can be given that eyecare professionals will perceive a
need for or utilize the Company's proposed B2B and B2P e-commerce initiative.
Expansion of our operations in this manner will also require significant
additional expenses and development, operations and other resources and could
strain our management, financial and operational resources. The lack of market
acceptance of new services or our inability to generate satisfactory revenues
from these expanded services to offset their cost could have a material adverse
effect on our business, results of operations and financial condition.
Our continued success will be dependent on increasing awareness of EyeCity's
brand.
We expect to incur significant expenditures in order to increase awareness
of our B2B and B2P e-commerce initiative, and the EyeCity and www.eyecity.com
brand names, through sales and marketing and other promotional activities. We
expect to incur significant losses in the near term as a result of marketing
expenditures. However, we believe that continuing to strengthen the EyeCity
brand is critical to achieving widespread acceptance, particularly in light of
the competitive nature of our market. Promoting and positioning this brand will
depend largely on the success of our efforts to obtain additional funding, our
marketing efforts and our ability to provide high quality services.
In order to promote our brand, we will need to increase our marketing
budget and otherwise increase our financial commitment to creating and
maintaining brand loyalty among users. There can be no assurance that brand
promotion activities will yield increased revenues or that any such revenues
would offset the expenses incurred by us in building this brand. If we fail to
promote and maintain our brand or if our existing or future strategic
relationships fail to increase brand awareness, our business, results of
operations and financial condition could be materially adversely affected.
We are dependent on our management information systems in order to manage
growth.
Our success depends, in part, on our ability to provide prompt, accurate
and complete service to our customers on a competitive basis, and our ability to
purchase and promote products, manage inventory, ship products, manage sales and
marketing activities and maintain efficient operations
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through our management information systems and particularly our various
websites. A significant disruption in our management information systems or
websites could adversely affect our relations with our customers and our ability
to manage our operations and would have a material adverse effect on our
business, financial condition and results of operations. Our ability to compete
effectively and to manage future growth, if any, will require us to continue to
improve our financial and management controls and our reporting systems and
procedures on a timely basis and to expand, train and manage our employee base.
Our failure or inability to accomplish any of these goals could have a material
adverse effect on our business, financial condition and results of operations.
There is no assurance that our prior or future acquisitions will have a
positive effect on our business, or that we will not experience future
unforeseen difficulties in connection with these acquisitions.
If appropriate opportunities present themselves from time to time, we
intend to acquire businesses, technologies, services or products that we believe
are strategic to our business. There can be no assurance that we will be able to
identify, negotiate or finance future acquisitions successfully, or to integrate
the acquisitions with our current business. The process of integrating an
acquired business, technology, service or product into EyeCity may result in
unforeseen operating difficulties and expenditures and may absorb significant
management attention that would otherwise be available for ongoing development
of our business. Moreover, there can be no assurance that the anticipated
benefits of any acquisition will be realized. Future acquisitions could involve
our issuance of additional equity securities which could have a dilutive effect
on current stockholders, the incurrence of debt, contingent liabilities and/or
amortization expenses related to goodwill and other intangible assets, which
could materially adversely affect our business, results of operations and
financial condition. Any future acquisitions of other businesses, technologies,
services or products might require us to obtain additional equity or debt
financing, which might not be available on terms favorable to us, or at all, and
such financing, if available, might dilute those shares of common stock
currently held by our stockholders.
A portion of our sales may not comply with applicable state laws and regulations
governing the delivery and sale of contact lenses and prescription eyewear.
The sale and delivery of contact lenses and prescription eyewear are
generally governed by state laws and regulations. We sell to customers in all 50
states and each sale may be impacted by the laws of the state where the customer
is located. The laws and regulations relating to the delivery and sale of
contact lenses and prescription eyewear vary from state to state, but can
generally be classified into five categories:
laws that require contact lenses and prescription eyewear to be dispensed
only pursuant to a valid prescription;
laws that require the dispenser to be licensed by the state as an
optometrist, ophthalmologist or other professional authorized to dispense
lenses;
laws that require contact lenses and prescription eyewear be dispensed
only in a face-to-face transaction;
laws with requirements that are unclear or do not specifically address the
sale and delivery of contact lenses or prescription eyewear; and
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laws that we believe place no restrictions on the dispensing of contact
lenses or prescription eyewear.
Many of the states requiring that contact lenses and prescription eyewear
be dispensed in face-to-face meetings or by a person licensed by such state to
dispense contact lenses and prescription eyewear also require that such products
only be dispensed pursuant to a valid prescription. One of our employees is
certified by the American Board of Opticianry as an optician.
Our operating practice is to attempt to obtain a valid prescription from
each customer or his/her eyecare practitioner. If we are unable to obtain a copy
of or verify the customer's prescription, it is our practice to ship the product
to the customer based on the information that the customer has provided.
Any action brought against us based on our failure to comply with
applicable state laws and regulations could result in us being subject to
significant fines, being prohibited from making sales in a particular state
and/or being required to comply with such laws. Such required compliance could
result in:
increased costs to us;
the loss of a substantial portion of our customers for whom we are unable
to obtain or verify their prescription; and
the inability to sell to customers at all in a particular state if we
cannot comply with such state's laws.
The occurrence of any of the above results could have a material adverse
effect on our ability to sell contact lenses and prescription eyewear and to
operate profitably. Furthermore, we cannot assure you that states will not enact
or impose laws or regulations that prohibit online dispensing of contact lenses
and prescription eyewear or otherwise impair our ability to sell contact lenses
and prescription eyewear and continue to operate profitably. We have not
obtained an opinion of counsel with regard to our compliance with applicable
state laws and regulations, and information contained herein regarding our
compliance with applicable state laws and regulations should not be construed as
being based on an opinion of counsel.
We cannot assure you that third parties will not infringe on our intellectual
property rights or that third parties will not claim we infringe on their
intellectual property rights.
We regard the protection of our intellectual property rights as critical
to our future success and we rely on a combination of copyright, trademark,
service mark and trade secret laws and contractual restrictions to establish and
protect our intellectual property rights in products and services. We have
entered into confidentiality and invention assignment agreements with our
employees and contractors, and nondisclosure agreements with parties with whom
we conduct business in order to limit access to and disclosure of our
proprietary information. There can be no assurance that these contractual
arrangements or the other steps taken by us will prove sufficient to prevent
misappropriation of our technology or to deter independent third-party
development of similar technologies.
Third parties have commenced legal proceedings alleging that certain of
our tradenames and URL's infringe on the proprietary rights of third parties.
See "Legal Proceedings."
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The retail sale of eyewear is highly competitive. Certain of our competitors are
large, national optical chains that have greater resources than we have.
The retail sale of eyewear is a highly competitive and fragmented
industry. Our principal competitors include ophthalmologists and optometrists in
private practice and retail chain stores. We also compete with 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. We also compete with other direct marketers of
eyewear such as 1800 Contacts and online retailers such as Shades.com (a
subsidiary of Sunglass Hut). We may face increased competition in the future
from new entrants in the direct marketing business, which may include national
optical chains and mass merchandisers, some of which may have significantly
greater resources than we have.
The demand for prescription eyewear could be substantially reduced if
alternative technologies to permanently correct vision gain in popularity.
Our prescription eyewear operations 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.
Accordingly, we cannot assure you that these procedures, or other alternative
technologies that may be developed in the future, will not cause a substantial
decline in the number of prescription eyewear wearers and thus have a material
adverse effect on our business, financial condition and results of operations.
We are dependent to a large degree on the services of our senior management
team.
We are dependent to a large degree on the services of our senior
management team, particularly Mark H. Levin, our President and Chief Executive
officer, Mark R. Suroff, our Chief Operating Officer, Executive Vice President,
Secretary and Treasurer, and William Armeniakis, our Vice President of
Operations. In July 1998, Messrs. Levin and Suroff each entered into three year
employment agreements with us which were amended in July 2000. The loss of any
of our key executives could have a material adverse effect on us. Our ability to
manage our anticipated growth will depend on our ability to identify, hire and
retain highly skilled management and technical personnel. Competition for such
personnel is intense. As a result, we cannot assure you that we will be
successful in attracting and retaining such personnel, and the failure to
attract and retain such personnel could have a material adverse effect on our
business, financial condition and results of operations.
Our executive officers and directors have the ability to effectively control
substantially all actions taken by our stockholders.
As of June 30, 2000, Messrs. Levin, Suroff, Armenakis and Mouyiaris and
Ms. Novick (each directors of the Company) own, in the aggregate, 3,891,000
shares of our common stock and control approximately 31.32% of the aggregate
voting power of all outstanding shares. Acting together, these stockholders can
effectively control substantially all actions taken by our stockholders,
including the election of directors. 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
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to pay for shares of Common Stock. Further, Mr. Mouyiaris has the contractual
right to appoint two members of EyeCity's board of directors, and at least one
of these members must approve 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;
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 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 of 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 Common Stock or (y) the
consummation by EyeCity of an underwritten public offering of its securities for
gross proceeds of at least $7,500,000.
We conduct our operations through a single distribution facility.
All of our inventory is stored and shipped from our distribution center in
Duluth, Minnesota. We depend in large part on the orderly operation of this
receiving and distribution process, which depends, in turn, on adherence to
shipping schedules and effective management of the distribution center. We
cannot assure you that we have anticipated all of the changing demands that our
expanding operations will impose on our receiving and distribution system or
that events beyond our 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 our business, results of operations and financial
condition.
Increases in the cost of shipping, postage or credit card processing could
adversely affect our business.
We ship our products to customers by FedEx and other overnight delivery
and surface services. We generally invoice the costs of delivery and parcel
shipments directly to customers as separate shipping and handling charges. In
addition, we receive a majority of our payments from customers using credit
cards. Any increases in shipping, postal or credit card processing rates could
have an adverse effect on our operating results as we may not be able to
effectively pass such increases on to
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our customers. Similarly, strikes or other service interruptions by these
shippers could adversely affect our ability to market or deliver our products on
a timely basis.
Our business could be adversely affected if we are required to collect state
sales tax on the sale of products.
At present, we do not collect sales or other similar taxes in connection
with the sale of our 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 companies such as ours conducting
direct marketing activities. A successful assertion by one or more states that
we should have collected or should be collecting sales taxes on the sale of our
products could result in additional costs and administrative expenses to us and
corresponding price increases to our customers, which could adversely affect our
business, financial condition and results of operations.
Legislation limiting the ability of the states to impose taxes on
Internet-based transactions recently has been enacted by the United States
Congress. However, this legislation, known as the Internet Tax Freedom Act,
imposes only a three-year moratorium, which commenced October 1, 1998 and ends
on October 21, 2001, on state and local taxes on (1) e-commerce where such taxes
are discriminatory and (2) Internet access unless such taxes were generally
imposed and actually enforced prior to October 1, 1998. It is possible that the
tax moratorium could fail to be renewed prior to October 21, 2001. Failure to
renew this legislation would allow various states to impose taxes on
Internet-based commerce. The imposition of such taxes could adversely affect our
ability to become profitable.
We face an inherent risk of exposure to product liability claims in the event
that the use of the products we sell results in personal injury.
We face an inherent risk of exposure to product liability claims in the
event that the use of the products we sell results in personal injury. Although
we have not experienced any losses due to product liability claims, we cannot
assure you that we will not experience such losses in the future. We maintain
insurance against product liability claims, but we cannot be certain that such
coverage will be adequate to cover any liabilities that we may incur, or that
such insurance will continue to be available on terms acceptable to us. A
successful claim brought against us in excess of available insurance coverage,
or any claim that results in significant adverse publicity against us, could
have a material adverse effect on our business, financial condition and results
of operations.
Our results of operations may be subject to seasonal fluctuations
We believe that our results of operations are somewhat seasonal in nature,
with a disproportionate amount of purchases by consumers in the second and
fourth quarters. Our limited operating history, however, makes it difficult to
fully assess the impact of these seasonal factors or whether or not our business
is susceptible to cyclical fluctuations in the U.S. economy. In addition, we
believe that our rapid growth may have overshadowed whatever seasonal or
cyclical factors might have influenced our business to date. There can be no
assurance that seasonal or cyclical variations in our operations will not become
more pronounced over time or that they will not materially adversely affect our
results of operations in the future.
We intend 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. Our operating results for
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any particular quarter may not be indicative of future operating results. You
should not rely on quarter-to-quarter comparisons of our results of operations
as an indication of our future performance.
Our results of operations may be subject to consumer fashion trends.
Our future revenues will depend upon continued demand for the types of
goods that are sold on our websites. The popularity of certain styles of items
or, in the case of products oriented toward a certain activity (e.g., golf,
hunting, etc.), the continued popularity of such activities, may vary over time
and could reduce the overall volume of transactions on our websites, resulting
in reduced revenues. Moreover, consumer "fads" and other changes in consumer
trends may cause significant fluctuations in our operating results from one
quarter to the next. Any decline in demand for the goods offered through our
websites as a result of changes in consumer trends could have a material adverse
effect on our business, results of operations and financial condition.
Investment Considerations Relating To The Internet
Our success is dependent, in part, on continued growth in use of the Internet.
The Internet is new and rapidly evolving. A decrease in the growth of
Internet usage would adversely affect our business, results of operations and
financial condition. The following factors may inhibit growth in Internet usage,
limit visits to our Internet addresses or limit orders placed through our
website:
inadequate Internet infrastructure;
security and privacy concerns;
inconsistent quality of service; and
unavailability of low cost, high-speed service.
Our success is dependent, in part, upon the ability of the Internet
infrastructure to support increased use. The performance and reliability of the
Internet may decline as the number of users increases or the bandwidth
requirements of users increase, or if "viruses" and other attacks on the
integrity of the Internet infrastructure continue to cause widespread
interruptions in service. The Internet has experienced a variety of outages due
to damage to portions of its infrastructure. If outages or delays occur
frequently in the future, Internet usage, including usage of our website, could
grow slowly or decline. Even if the necessary infrastructure or technologies are
developed, we may have to spend considerable amounts to adapt our solutions
accordingly.
Our success is dependent on continued growth of Internet commerce.
Our ability to generate a profit in the future depends substantially upon
the widespread acceptance and use of the Internet as an effective medium of
commerce. Rapid growth in commercial online businesses is a recent phenomenon.
We cannot assure you that a sufficiently broad base of consumers will visit, or
continue to visit, our websites. Demand for recently introduced services and
products over the Internet is subject to a high level of uncertainty. The
development of the Internet as a viable means of marketing products directly to
consumers is subject to a number of factors, including continued growth in the
number of users of such services, concerns about transaction security, continued
development of the necessary technological infrastructure, and the development
of complementary services and products. Failure of the Internet and online
businesses to become a viable
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means of marketing products would adversely affect our business, results of
operations and financial condition.
We do not have any property rights in the Internet addresses that we use.
We have obtained the rights to various Internet addresses, including, but
not limited to, www.eyecity.com, www.peepers.com, www.binoculars.com,
www.eyeglassplace.com, www.opticalsite.com, www.sunglasssite.com,
www.foggles.com, www.icity.com and www.ergovision.com. If third parties obtain
rights to use similar addresses, these third parties may confuse our customers
and cause our customers to inadvertently place orders with these third parties,
which could result in lost sales for us and could damage our brand. As with
telephone numbers, we do not have and cannot acquire any property rights in
Internet addresses. As a result, we cannot assure you that we will be able to
retain the use of our addresses. The loss of our ability to use our Internet
addresses could have a material adverse effect on our business, financial
condition and results of operations.
Online security breaches could harm our business.
The secure transmission of confidential information over the Internet is
essential to maintain consumer confidence in our websites. Substantial or
ongoing security breaches of our system or other Internet-based systems could
significantly harm our business. Any penetration of our network security or
other misappropriation of our customers' personal information could subject us
to liability. We may be liable for claims based on unauthorized purchases with
credit card information, impersonation or other similar fraud claims. Claims
could also be based on other misuses of personal information, such as for
unauthorized marketing purposes. These claims could result in litigation and
financial liability. Security breaches also could damage our reputation and
expose us to a risk of loss or litigation and possible liability. We rely on
licensed encryption and authentication technology to effect secure transmission
of confidential information, including credit card numbers. It is possible that
advances in computer capabilities, new discoveries or other developments could
result in a compromise or breach of the technology used by us to protect
customer transaction data.
We may incur substantial expense to protect against and remedy security
breaches and their consequences. A party that is able to circumvent our security
systems could steal proprietary information or cause interruptions in our
operations. Our insurance policies' limits may not be adequate to reimburse us
for losses caused by security breaches. We cannot guarantee that our security
measures will prevent security breaches.
Government regulation and legal uncertainties relating to the Internet and
online commerce could negatively impact our business operations.
Online commerce is new and rapidly changing, and federal and state
regulation relating to the Internet and online commerce is evolving. Currently,
there are few laws or regulations directly applicable to the Internet or online
commerce on the Internet, and the laws governing the Internet that exist remain
largely unsettled. Due to the increasing popularity of the Internet, it is
possible that additional laws and regulations may be enacted with respect to the
Internet, covering issues such as user privacy, pricing, taxation, content,
copyrights, distribution, antitrust and quality of products and services. The
adoption or modification of laws or regulations applicable to the Internet could
adversely affect our business operations.
In addition, several telecommunications carriers have requested the
Federal Communications Commission to regulate telecommunications over the
Internet. Due to the increasing use of the
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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
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 our business operations.
Changing technology could adversely affect the operation of our website.
The Internet, online commerce and online advertising markets are
characterized by rapidly changing technologies, evolving industry standards,
frequent new product and service introductions and changing customer
preferences. Our future success will depend on our ability, to adapt to rapidly
changing technologies and address our customers changing preferences, however,
we may experience difficulties that delay or prevent our being able to do so.
Investment Considerations Related To Ownership Of EyeCity's Common Stock
The price of our Common Stock has been volatile and could continue to fluctuate
in the future.
The market price for shares of our Common Stock has been volatile and
could fluctuate substantially based on a number of factors, including
quarter-to-quarter variations in our results of operations, news announcements,
changes in general market conditions for optical products, regulatory actions,
adverse publicity regarding us or the industry in general, changes in financial
estimates by securities analysts and other factors. In addition, broad market
fluctuations and general economic and political conditions may adversely affect
the market price of the Common Stock, regardless of our actual performance.
Privately held shares of our Common Stock will be available for sale in the
public markets in the future and may dilute the value of publicly traded shares.
Sales of substantial amounts of our 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 our Common Stock. These sales also
might make it more difficult for us to sell equity or equity-related securities
in the future at a time and price that we think appropriate. As of June 30,
2000, there were 11,718,714 shares of Common Stock outstanding, of which
9,337,899 were restricted securities under the Securities Act of 1933, as
amended (the "Securities Act"). As of June 30, 2000, 6,118,106 restricted
securities were eligible for sale in the public market. The remaining restricted
securities will be eligible for sale from time to time thereafter upon
expiration of applicable holding periods under Rule 144 under the Securities
Act. Further, holders of 2,043,334 of these restricted shares have so-called
"piggy-back" registration rights which require these shares of Common Stock to
be registered for sale in our future registrations, subject to certain
restrictions. In addition, as of June 30, 2000, there were outstanding options
to purchase 2,556,500 shares of our Common Stock. Substantially, all of the
shares issuable upon exercise of such options will be restricted securities
under the Securities Act and not eligible for sale in the public markets until
the underlying securities are registered on a Form S-8.
You should be aware that we do not anticipate paying cash dividends on our
Common Stock.
We intend to retain all future earnings for use in our business and,
therefore, do not anticipate paying any cash dividends on the Common Stock in
the foreseeable future.
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Certain provisions in our charter documents could delay or prevent a change in
control.
Certain provisions of our certificate of incorporation and our Bylaws may
inhibit changes in control of us not approved by our board of directors. These
provisions include the authority of the board of directors to issue without
stockholder approval preferred stock with such terms as the board of directors
may determine. We are also afforded the protections of Section 203 of the
Delaware General Corporation Law, which could have similar effects.
Certain provisions of our charter documents provide for limited personal
liability of members of our board of directors.
Our certificate of incorporation and Bylaws contain provisions which
reduce the potential liability of members of our board of directors for certain
monetary damages and provide for indemnity of directors and other persons. We
are unaware of any pending or threatened litigation against us or our directors
that would result in any liability for which any of our directors would seek
indemnification or similar protection.
Exercise of Warrants.
The price which the Company may receive for the Common Stock issued upon
exercise of any outstanding warrants may be less than the market price of the
Common Stock at the time such warrants are exercised. For the life of such
warrants, the holders thereof are given, at little or no cost, the opportunity
to profit from a rise in the market price of the Common Stock, if any, without
assuming the risk of ownership. So long as such warrants remain unexercised, the
terms under which the Company could obtain additional equity financing may be
adversely affected. Moreover, the holders of such warrants may be expected to
exercise them at a time when the Company would, in all likelihood, be able to
obtain any needed capital by a new offering of securities on terms more
favorable than those provided by such warrants. To the extent of any exercise of
the warrants, the interests of the Company's shareholders will be diluted
proportionately.
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Part II - OTHER INFORMATION
Item 1. - Legal proceedings
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 in an action now pending entitled American Eyewear, Inc. v. Peeper's
Sunglasses and Accessories, Inc. and EyeCity.com, Inc. which was commenced in
July 1999 in the United States District Court for the Northern District of
Texas. EyeCity was dismissed from the case and Peepers Inc. has interposed
counterclaims to limit or cancel American Eyewear's rights in the mark "Peepers"
and to preserve its rights in the "Peepers" trademark and peepers.com domain
name. However, the parties are discussing settlement. It is premature to assess
the likely outcome of the proceeding.
A wholly owned subsidiary of EyeCity, Peeper's was named as a defendant in
an action entitled Oakley, Inc. v. Peeper's Sunglasses & Accessories Inc. and
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.
This action, which is principally a contract claim against the third parties,
Son Dad Boards Ltd. and Larry Leege, also alleges that Peeper's interfered with
the plaintiff's contractual relationship with these third parties when it
purchased sunglasses from them and then re-sold the merchandise. Peeper's
believes the claim against it has no merit and has moved to dismiss the action
against it. However, it is premature to assess the likely outcome of the
proceeding.
On or about June 20, 2000, Thomas Seltzer ("Seltzer"), commenced an action
in the United States District Court for the Southern District of New York
entitled Thomas Seltzer v. Eyecity.com, Inc., Mark H. Levin and Mark Suroff,
Civ. Action No. 00-4597 (NRB) (the "Action") asserting several causes of action,
including breach of contract, fraud, negligent misrepresentation, breach of the
implied covenant of good faith and fair dealing, and unjust enrichment. Seltzer
seeks unspecified monetary damages and declaratory relief. Seltzer was the
founder and president of a company known as Impact Eyewear, LLC ("Impact"),
which EyeCity acquired in September 1999. After EyeCity acquired Impact, Seltzer
entered into an employment agreement with EyeCity and was terminated by EyeCity
on February 7, 2000. Seltzer further alleges that EyeCity breached his
employment agreement when it terminated him. EyeCity answered the complaint and
asserted counterclaims on August 7, 2000. A scheduling conference is scheduled
before the Court on September 15th. It is premature to assess the likely outcome
of the proceeding.
Item 2. - Sales of Unregistered Securities
During the six months ended June 30, 2000 EyeCity privately sold an
aggregate of 2,375,000 shares of its common stock to 63 investors in unrelated
transactions of which 1,745,000 shares were sold for $1 per share, 50,000 shares
were sold for $0.75 per share and 580,000 shares were sold for $0.50 per share
generating gross proceeds of $2,072,500. In connection with the sale of
$1,415,000 of these shares, EyeCity paid to James J. Armenakis a commission
equal to $212,250, issued 170,500 shares of EyeCity common stock and issued
warrants to purchase 58,000 shares of EyeCity common stock at an exercise price
of $1.00 per share. EyeCity relied on exemptions from registration under Section
4(2) of the Securities Act of 1933 (the "Securities Act"). Each of these
investors represented that he or she was an accredited investor as defined by
the rules promulgated under the Securities Act.
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Item 4. - Submission of Matters to a Vote of Security Holders
At the Company's 2000 Annual Meeting of Stockholders held on June 16, 2000
the following matters were voted on:
(a) The following four directors were elected to serve until the next
annual meeting of stockholders and until their respective successors
are elected and qualified by the following vote:
Name For Abstain
---- --- -------
Mark H. Levin 6,982,749 98,000
Mark R. Suroff 6,982,749 98,000
Nikos P. Mouyiaris 6,982,749 98,000
Barbara Novick 6,982,749 98,000
(b) EyeCity's 2000 Stock Option Plan was adopted by the following vote:
For Against Abstain
--- ------- -------
5,531,871 120,035 1,300
(c) An amendment to EyeCity's Certificate of Incorporation to increase
the number of shares of common stock which EyeCity is authorized to
issue from 20,000,000 to 100,000,000 shares was adopted by the
following vote:
For Against Abstain
--- ------- -------
7,031,877 50,405 2,502
(d) The selection of Ernst & Young LLP to serve as EyeCity's independent
auditors for the year ending December 31, 2000 was ratified by the
following vote:
For Against Abstain
--- ------- -------
6,946,399 5,800 285
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Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Placement Agent Agreement dated August 1, 2000 between EyeCity
and Connecticut Capital Markets, LLC
10.2 Form of Debenture relating to the Unit Offering
10.3 Form of Warrant relating to the Unit Offering
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed for the quarter covered by this
Report.
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
EYECITY.COM, INC.
August 10, 2000 By: /s/ Mark H. Levin
------------------------------------
Mark H. Levin, President,
Chief Executive Officer (principal
executive officer) and Director
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