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 September 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 November 8, 2000, there were outstanding 12,479,064 shares of the
issuer's common stock, $.001 par value per share.
<PAGE>
EYECITY.COM, INC. AND SUBSIDIARIES
FORM 10-QSB
NINE MONTHS ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page
----
Item 1. Financial Statements:
Consolidated Balance Sheet ....................................... 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 6. Exhibits and Reports on Form 8-K ................................. 26
SIGNATURES ............................................................... 27
1
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EYECITY.COM, INC. AND SUBISDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited)
SEPTEMBER 30, 2000
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 448,652
Accounts receivable, net of allowance of $9,150 34,695
Inventories 335,566
Prepaid expenses and other current assets 106,333
------------
Total current assets 925,246
Property and equipment, net of accumulated
depreciation of $114,558 350,642
Intangibles, net of accumulated
amortization of $2,305,940 2,786,864
Website development costs, net of
accumulated amortization of $23,055 142,945
Deferred financing costs, net of
accumulated amortization of $8,559 299,570
Security deposits 13,322
------------
Total assets $ 4,518,589
============
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,041,726
Accrued payroll and related taxes 43,556
Deferred salaries to officers 185,384
Current portion of capital lease obligations 26,993
Current portion of notes payable 958,914
Current portion of subordinated convertible promissory notes 16,667
------------
Total current liabilities 2,273,240
Capital lease obligations, less current portion 51,394
Subordinated convertible promissory notes, less current portion 33,333
Convertible debenture 1,372,222
------------
Total liabilities 3,730,189
------------
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,
12,347,814 shares issued and outstanding 12,347
Additional paid-in capital 10,918,377
Accumulated deficit (10,135,955)
Unamortized compensation component of stock options (6,369)
------------
Total stockholders' equity 788,400
------------
Total liabilities and stockholders' equity $ 4,518,589
============
</TABLE>
See accompanying notes.
2
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EYECITY.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
----------------- ------------------
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues $ 2,058,358 $ 1,531,159 $ 682,018 $ 979,222
Cost of revenues 1,446,540 1,089,328 487,365 709,207
------------ ------------ ------------ ------------
Gross profit 611,818 441,831 194,653 270,015
------------ ------------ ------------ ------------
Operating expenses:
Marketing and sales 356,639 244,575 102,191 118,101
General and administrative 2,459,820 2,175,611 952,876 1,083,295
Depreciation and amortization 1,362,404 591,779 460,621 369,833
Technology and development 214,535 177,357 51,959 51,433
------------ ------------ ------------ ------------
Total operating expenses 4,393,398 3,189,322 1,567,647 1,622,662
------------ ------------ ------------ ------------
Operating loss (3,781,580) (2,747,491) (1,372,994) (1,352,647)
------------ ------------ ------------ ------------
Other income (expense):
Interest and investment income 5,481 6,742 2,637 774
Interest expense (286,055) (120,943) (150,457) (70,861)
------------ ------------ ------------ ------------
Net other expense (280,574) (114,201) (147,820) (70,087)
------------ ------------ ------------ ------------
Net loss $ (4,062,154) $ (2,861,692) $ (1,520,814) $ (1,422,734)
============ ============ ============ ============
Basic and diluted net loss
per common share $ (.37) $ (0.43) $ (.12) $ (0.17)
============ ============ ============ ============
Shares used in the calculation of
basic and diluted net loss per
common share 11,090,068 6,650,508 12,185,341 8,602,128
============ ============ ============ ============
</TABLE>
See accompanying notes.
3
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EYECITY.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
September 30,
-------------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities
Net loss $(4,062,154) $(2,861,692)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,362,404 591,779
Amortization of discount 97,639 95,207
Amortization of compensation component of stock options 44,429 321,362
Amortization of deferred financing costs 8,559 --
Issuance of stock for consulting and marketing services 70,000 193,000
Issuance of stock for consideration of extending note 15,000 --
Issuance of stock for salary and expenses 10,200 --
Loss on conversion of debt 96,000 --
Changes in operating assets and liabilities:
Accounts receivable (9,913) 14,557
Inventories 152,674 (398,729)
Prepaid expenses and other current assets (14,682) (3,224)
Accounts payable and accrued expenses (168,600) 546,457
Accrued payroll and related taxes (29,013) 9,301
Deferred salary to officers (141,154) 124,052
----------- -----------
Net cash used in operating activities (2,568,611) (1,367,930)
----------- -----------
Cash flows from investing activities
Capitalized website development costs (150,000) --
Purchases of property and equipment (47,902) (223,032)
Purchase of intangibles -- (14,000)
Cash paid for acquisitions, net of cash acquired -- (1,087,857)
Security deposits (5,063) --
----------- -----------
Net cash used in investing activities (202,965) (1,324,889)
----------- -----------
Cash flows from financing activities
Exercise of stock options -- 50,000
Repayment of convertible subordinated notes -- (25,000)
Repayment of notes payable (216,954) --
Proceeds from issuance of common stock, net of expenses 1,894,750 2,657,002
Proceeds from issuance of convertible debenture, net of expenses 1,385,583 --
Proceeds from line of credit/note payable -- 41,330
Repayment of capital lease obligations (18,306) --
----------- -----------
Net cash provided by financing activities 3,045,073 2,723,332
----------- -----------
Net increase in cash and cash equivalents 273,497 30,513
Cash and cash equivalents at beginning of year 175,155 224,748
----------- -----------
Cash and cash equivalents at end of period $ 448,652 $ 255,261
=========== ===========
Supplemental disclosures
Cash paid for interest $ 33,775 $ 26,270
=========== ===========
</TABLE>
See accompanying notes.
4
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EYECITY.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NINE MONTHS ENDED SEPTEMBER 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 nine and three month
periods ended September 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 year
ended December 31, 1999. The results of operations for the nine and three month
periods ended September 30, 2000 are not necessarily indicative of the results
to be expected for the full year.
2. Stockholders' Equity
During the nine months ended September 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 $.75 per share and 680,000 shares of its
common stock at a price of $.50 per share resulting in aggregate gross proceeds
of $2,122,500. The investors who purchased 680,000 shares of common stock at
$.50 per share also received three year warrants to purchase 680,000 shares of
common stock at an exercise price of $1.00 per share.
During the nine months ended September 30, 2000, EyeCity issued 217,283 shares
of its common stock with a value of $196,900 in exchange for legal, accounting,
consulting and marketing services.
During the nine months ended September 30, 2000, holders converted $275,000 of
subordinated convertible promissory notes into 400,000 shares of EyeCity common
stock. Of the notes which were converted, $150,000 in principal was converted in
connection with an incentive offered to the holder to convert these shares. In
connection with the incentive, the holder received an aggregate of 300,000
shares of common stock and three year warrants to purchase 150,000 shares of
common stock at an exercise price of $1.00 per share. The fair value of these
additional equity securities issued is $96,000 and has been recorded as interest
expense in the third quarter.
During the nine months ended September 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 nine months ended September 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 nine months ended September 30, 2000, EyeCity issued 209,000 shares
of its common stock with a value of $114,050 to an investment advisor in
connection with financing transactions.
During the nine months ended September 30, 2000, EyeCity issued 13,600 shares of
its common stock with a value of $10,200 for salary and expenses owed to an
employee.
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3. Convertible Debenture
In August 2000, EyeCity completed a private placement "bridge" offering
pursuant to which it has sold, to certain accredited investors, sixteen
and one - quarter units (each a "Unit") for gross proceeds of $1,625,000,
each Unit consisting of a $100,000 10% Secured Convertible Debenture due
2003 ("Debentures") and warrants ("Warrants") to purchase 400,000 shares
of EyeCity's common stock. The Debentures are secured by EyeCity's assets,
subject to certain exceptions, and are subordinate to certain other
obligations of EyeCity. The Debentures are convertible into common stock
at the rate of $.50 per share, and the Warrants are exercisable for common
stock at $1.00 per share, in each case, subject to standard anti-dilution
protection. EyeCity can require conversion of the Debentures under certain
circumstances, and the Debentures are redeemable at EyeCity's option. The
Warrants are, under certain circumstances, redeemable by EyeCity for $.05
per warrant. EyeCity intends to use the proceeds of the offering for
working capital purposes. The securities have not been registered under
the Securities Act of 1933 (although EyeCity has an obligation to effect
registration of the shares of common stock issuable upon conversion of the
Debentures and exercise of the Warrants) and may not be offered or sold in
the United States absent such registration or an applicable exemption.
4. Effect of Recently Issued Accounting Pronouncements
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 "Revenue Recognition" ("SAB 101"), which
provides guidance on the recognition, presentation and disclosure of
revenue in financial statements filed with the SEC. SAB 101 outlines the
basic criteria that must be met to recognize revenue and provides guidance
for disclosures related to revenue recognition policies. In recent
actions, the SEC has further delayed the required implementation date
which, for the Company, will be no later than the fourth quarter of fiscal
2001, retroactive to the beginning of the fiscal year. Although the
Company cannot fully assess the impact of SAB 101 at this time, the
Company's preliminary conclusion is that the implementation of SAB 101
will not have a material effect on the timing of when the Company
recognizes revenue.
6
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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
previously 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. Although this letter of intent has lapsed, the Company is
continuing to negotiate a definitive agreement with this buying group, subject
to obtaining necessary financing. 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 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
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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 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.
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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 nine and three month periods ended September 30, 2000
were approximately $2,058,000 and $682,000, respectively, as compared to
approximately $1,531,000 and $979,000 in the corresponding periods in the prior
year. The increase in revenues for the nine month period 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 nine and three month
periods ended September 30, 2000 were approximately $1,895,000 and $636,000,
respectively. The decrease in the three month period is primarily due to lost
sales from the inability to show our largest supplier on our websites.
Cost of revenues for the nine and three month periods ended September 30,
2000 were approximately $1,447,000 and $487,000, respectively, as compared to
approximately $1,089,000 and $709,000 in the corresponding periods in the prior
year. The increase in the nine month period is due primarily to costs associated
with increased sales volume and costs associated with product sales by Peeper's.
The decrease in the three month period is due primarily to lost sales from the
inability to show our largest supplier on our websites.
Gross profit amounted to approximately $612,000 (29.7% of net revenues)
and $195,000 (28.5% of net revenues) in the nine and three month periods ended
September 30, 2000, respectively, as compared to $442,000 (28.9% of net
revenues) and $270,000 (27.6% of net revenues) in the corresponding periods in
the prior year. The percentage increase in gross profits was primarily due to
increased sales of higher margin items.
General and administrative expenses approximated $2,460,000 and $953,000
for the nine and three month periods ended September 30, 2000, respectively, as
compared to approximately $2,176,000 and $1,083,000 for the corresponding
periods in 1999. The increase in general and administrative expenses for the
nine month period was primarily due to increases in salaries and related
expenses due to an increase in headcount.
Depreciation and amortization expenses were approximately $1,362,000 and
$461,000 for the nine and three month periods ended September 30, 2000,
respectively, as compared to approximately
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$592,000 and $370,000 in the corresponding periods in 1999. The increase is
principally attributable to amortization of goodwill and other intangible assets
resulting from various acquisitions including Peeper's and SunSource.
Technology and development expenses were approximately $215,000 and
$52,000 for the nine and three month periods ended September 30, 2000,
respectively, as compared to approximately $177,000 and $51,000 in the
corresponding periods in 1999. These expenses related to the development of the
eyecity.com SuperSite.
Interest expense was approximately $286,000 and $150,000 for the nine and
three month period ended September 30, 2000, respectively, as compared to
approximately $121,000 and $71,000 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 as well as the valuation of stock and
warrants for the conversion of debt. See "Liquidity and Capital Resources".
Liquidity and Capital Resources
As of September 30, 2000, EyeCity had negative working capital (total
current assets less total current liabilities) of approximately $1,348,000.
EyeCity believes that its currently available funds will be sufficient to meet
its anticipated working capital needs through the end of November 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 December 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 September 30, 2000, EyeCity had approximately $449,000 of cash and
cash equivalents. As of September 30, 2000, EyeCity's principal commitments
consisted of:
o accounts payable of approximately $1,085,282;
o interest bearing promissory notes issued to sellers in connection
with prior acquisitions by EyeCity in the aggregate amount of
$928,000 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 notes payable to vendors of approximately $30,000;
o $50,000 of 10% subordinated convertible promissory notes, due
October 1, 2003;
o $185,000 of deferred salary for officers. Included in this amount is
deferred salaries owed to Mark Levin of $86,500, Mark Suroff of
$86,500 and Daniel Thralow of $12,000.
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 signed a non-binding letter of intent to acquire a
professional optical buying group that has in excess of 2000 optometrists in its
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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 were 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 resulting in an additional charge of
$90,000 and 150,000 three-year warrants exercisable at $1.00 per share valued at
$6,000. The value of these additional equity securities issued of $96,000 has
been recorded as interest expense in the third quarter. 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.
For the nine months ended September 30, 2000, EyeCity used approximately
$2,569,000 in connection with its operating activities, principally to fund its
net loss of approximately $4,062,154, 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 nine months ended September 30, 2000, net cash used in investing
activities approximated $203,000. This is primarily attributable to cash paid
for the development of the website and the purchase of property and equipment.
For the nine months ended September 30, 2000, net cash provided by
financing activities approximated $3,045,000, primarily from the sale of common
stock and issuance of convertible debentures.
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Financing Activity
Historically, EyeCity has financed its cash requirements primarily through
private placements of its securities. As of September 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 $4,909,500 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 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.
In August 2000, the placement agent completed for EyeCity a private
placement "bridge" offering pursuant to which EyeCity has sold, to certain
accredited investors, sixteen and one - quarter units (each a "Unit") for gross
proceeds of $1,625,000, each Unit consisting of a $100,000 10% Secured
Convertible Debenture due 2003 ("Debentures") and warrants ("Warrants") to
purchase 400,000 shares of Eyecity's common stock. The Debentures are secured by
Eyecity's assets, subject to certain exceptions, and are subordinate to certain
other obligations of Eyecity. The Debentures are
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convertible into common stock at the rate of $.50 per share, and the Warrants
are exercisable for common stock at $1.00 per share, in each case, subject to
standard anti - dilution protection. Eyecity can require conversion of the
Debentures under certain circumstances, and the Debentures are redeemable at
Eyecity's option. The Warrants are, under certain circumstances, redeemable by
Eyecity for $.05 per warrant. Eyecity intends to use the proceeds of the
offering for working capital purposes. The securities have not been registered
under the Securities Act of 1933 (although Eyecity has an obligation to effect
registration of the shares of common stock issuable upon conversion of the
Debentures and exercise of the Warrants) and may not be offered or sold in the
United States absent such registration or an applicable exemption.
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.
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 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
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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 September 30, 2000, EyeCity had negative working capital of
approximately $1,348,000.
We believe that our currently available funds will be sufficient to meet
our anticipated working capital needs through the end of November 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 nine months ended September 30,
2000 ($1,410,324, $4,130,832 and $4,062,154, 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
$1,348,000 as of December 31, 1998, 1999 and September 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
$2,058,000 for the nine months ended September 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 13.9% of our
inventory in 1999 and the nine months ended September 30, 2000, respectively. In
the event that any of these suppliers, or other 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
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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 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
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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
laws that we believe place no restrictions on the dispensing of contact
lenses or prescription eyewear.
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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."
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
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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 September 30, 2000, Messrs. Levin, Suroff, Mouyiaris and Ms. Novick
(each directors of the Company) own, in the aggregate, 3,391,000 shares of our
common stock and control approximately 27.46% 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 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
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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 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.
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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 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
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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 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,
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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 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.
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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 September 30,
2000, there were 12,347,814 shares of Common Stock outstanding, of which
9,839,989 were restricted securities under the Securities Act of 1933, as
amended (the "Securities Act"). As of September 30, 2000, 6,227,598 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 September 30, 2000, there were outstanding
options to purchase 3,194,500 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.
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
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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. It is premature to assess the likely
outcome of the proceeding.
Item 2. - Sales of Unregistered Securities
During the nine months ended September 30, 2000 EyeCity privately sold an
aggregate of 2,475,000 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 680,000 shares were sold for $0.50 per share
generating gross proceeds of $2,122,500. The investors who purchased 680,000
shares of common stock at $.50 per share also received three year warrants to
purchase 680,000 shares of common stock at an exercise price of $1.00 per share.
In connection with the sale of $1,465,000 of these shares, EyeCity paid to James
J. Armenakis a commission equal to $232,000, issued 180,500 shares of EyeCity
common stock and issued warrants to purchase 68,000 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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In August 2000, EyeCity completed a private placement "bridge" offering
pursuant to which it has sold, to certain accredited investors, sixteen and one
- quarter units (each a "Unit") for gross proceeds of $1,625,000, each Unit
consisting of a $100,000 10% Secured Convertible Debenture due 2003
("Debentures") and warrants ("Warrants") to purchase 400,000 shares of EyeCity's
common stock. The Debentures are secured by EyeCity's assets, subject to certain
exceptions, and are subordinate to certain other obligations of EyeCity. The
Debentures are convertible into common stock at the rate of $.50 per share, and
the Warrants are exercisable for common stock at $1.00 per share, in each case,
subject to standard anti-dilution protection. EyeCity can require conversion of
the Debentures under certain circumstances, and the Debentures are redeemable at
EyeCity's option. The Warrants are, under certain circumstances, redeemable by
EyeCity for $.05 per warrant. EyeCity intends to use the proceeds of the
offering for working capital purposes. The securities have not been registered
under the Securities Act of 1933 (although EyeCity has an obligation to effect
registration of the shares of common stock issuable upon conversion of the
Debentures and exercise of the Warrants) and may not be offered or sold in the
United States absent such registration or an applicable exemption. In connection
with the sale of the Debentures EyeCity issued placement agent Warrants to
purchase 406,250 shares of EyeCity common stock at an exercise price of $.50 per
share. EyeCity relied on exemptions from registration under Section 4(2) of 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.
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated September 6,
2000 (date of earliest event reported) reporting under Item 5 -
Other Events. No financial statement was filed with the 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.
November 10, 2000 By: /s/ Mark H. Levin
----------------------------------
Mark H. Levin, President,
Chief Executive Officer (principal
executive officer) and Director
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