<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-12740
NEW WEST EYEWORKS, INC.
(Exact name of registrant as specified in its charter)
Delaware 34-1589514
(State of incorporation) (I.R.S. Employer Identification No.)
2104 West Southern Avenue, Tempe, Arizona 85282
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(Address of principal executive offices) (Zip Code)
(602) 438-1330
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, $0.01 par value: 3,763,036 (as of September 28, 1996)
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NEW WEST EYEWORKS, INC.
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INDEX Page
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PART I--FINANCIAL INFORMATION..................................................................................... 3
Item 1. Financial Statements..................................................................................... 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................................ 8
PART II--OTHER INFORMATION........................................................................................ 14
Item 1. Legal Proceedings........................................................................................ 14
Item 6. Exhibits................................................................................................. 14
</TABLE>
2
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NEW WEST EYEWORKS, INC.
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEW WEST EYEWORKS, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 28, DECEMBER 30,
1996 1995
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(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 126,000 $ 241,000
ACCOUNTS RECEIVABLE 1,324,000 999,000
INVENTORY 3,488,000 3,132,000
OTHER CURRENT ASSETS 189,000 78,000
------------ ------------
TOTAL CURRENT ASSETS 5,127,000 4,450,000
PROPERTY AND EQUIPMENT, NET 7,214,000 6,656,000
GOODWILL 528,000 596,000
OTHER ASSETS 51,000 32,000
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TOTAL ASSETS $ 12,920,000 $ 11,734,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
ACCOUNTS PAYABLE $ 5,250,000 $ 5,755,000
ACCRUED EXPENSES 2,358,000 3,096,000
DEFERRED WARRANTY REVENUES 310,000 348,000
NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS, CURRENT PORTION 2,133,000 235,000
------------ ------------
TOTAL CURRENT LIABILITIES 10,051,000 9,434,000
------------ ------------
LIABILITY FOR CLOSED STORE LEASES 25,000 57,000
NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS 235,000 321,000
------------ ------------
TOTAL LIABILITIES 10,311,000 9,812,000
------------ ------------
STOCKHOLDERS' EQUITY:
SERIES A 6% CUMULATIVE CONVERTIBLE PREFERRED STOCK, $1,000
PAR VALUE, 3,960 SHARES AUTHORIZED, ISSUED AND OUTSTANDING 3,960,000 3,960,000
SERIES B 6% CUMULATIVE CONVERTIBLE PREFERRED STOCK, $1,000
PAR VALUE, 1,500 SHARES AUTHORIZED, ISSUED AND OUTSTANDING 1,500,000 1,500,000
COMMON STOCK, $0.01 PAR VALUE, 5,000,000 SHARES AUTHORIZED,
3,763,036 SHARES ISSUED AND OUTSTANDING 38,000 38,000
PAID-IN CAPITAL 10,100,000 10,070,000
ACCUMULATED DEFICIT (12,989,000) (13,646,000)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 2,609,000 1,922,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 12,920,000 $ 11,734,000
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
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NEW WEST EYEWORKS, INC.
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NEW WEST EYEWORKS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
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<CAPTION>
THREE-MONTHS ENDED NINE-MONTHS ENDED
-------------------------------- ----------------------------------
(UNAUDITED) (UNAUDITED)
SEPTEMBER 28, SEPTEMBER 30, SEPTEMBER 28, SEPTEMBER 30,
1996 1995 1996 1995
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<S> <C> <C> <C> <C>
NET SALES $ 11,674,000 $ 10,088,000 $ 34,043,000 $ 31,030,000
COST OF SALES 5,618,000 5,254,000 16,847,000 15,493,000
------------ ------------ ------------ ------------
GROSS PROFIT 6,056,000 4,834,000 17,196,000 15,537,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 5,640,000 5,624,000 15,977,000 15,975,000
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) 416,000 (790,000) 1,219,000 (438,000)
INTEREST INCOME 6,000 12,000
INTEREST EXPENSE 63,000 9,000 145,000 25,000
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 353,000 (793,000) 1,074,000 (451,000)
INCOME TAX EXPENSE (BENEFIT) 46,000 (78,000) 172,000
------------ ------------ ------------ ------------
NET INCOME (LOSS) 307,000 (715,000) 902,000 (451,000)
PREFERRED STOCK DIVIDENDS (81,000) (81,000) (243,000) (245,000)
------------ ------------ ------------ ------------
NET INCOME (LOSS) APPLICABLE TO HOLDERS OF
COMMON STOCK $ 226,000 $ (796,000) $ 659,000 $ (696,000)
============ ============ ============ ============
NET INCOME (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARES $ 0.06 $ (0.21) $ 0.18 $ (0.18)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 3,763,000 3,763,000 3,763,000 3,763,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
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NEW WEST EYEWORKS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
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<CAPTION>
NINE-MONTHS ENDED
-------------------------------
(UNAUDITED)
SEPTEMBER 28, SEPTEMBER 30,
1996 1995
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<S> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
NET INCOME (LOSS) 902,000 $ (451,000)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO
NET CASH FROM (USED IN) OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 910,000 763,000
PROVISION FOR CLOSED STORES 40,000
CHANGES IN ASSETS AND LIABILITIES:
ACCOUNTS RECEIVABLE (325,000) (95,000)
INVENTORY (356,000) (686,000)
OTHER CURRENT ASSETS (111,000) (21,000)
ACCOUNTS PAYABLE (505,000) 1,290,000
ACCRUED EXPENSES (819,000) (295,000)
DEFERRED WARRANTY REVENUES (38,000) (179,000)
OTHER ASSETS AND LIABILITIES (30,000) (72,000)
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NET CASH FROM (USED IN) OPERATING ACTIVITIES (372,000) 294,000
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CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
PURCHASE OF PROPERTY AND EQUIPMENT (1,300,000) (1,380,000)
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NET CASH USED IN INVESTING ACTIVITIES (1,300,000) (1,380,000)
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CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
PROCEEDS FROM REVOLVING LINE OF CREDIT 1,915,000
PROCEEDS FROM CAPITAL LEASES 505,000
PROCEEDS FROM BRIDGE LOAN 700,000
PAYMENT OF BRIDGE LOAN (700,000)
PAYMENT OF DEBT (195,000) (128,000)
PAYMENT OF PREFERRED STOCK DIVIDENDS (163,000) (164,000)
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NET CASH FROM FINANCING ACTIVITIES 1,557,000 213,000
---------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS: (115,000) (873,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 241,000 1,000,000
---------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 126,000 $ 127,000
========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
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NEW WEST EYEWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL INFORMATION
1. The unaudited consolidated financial information presented herein has
been prepared in accordance with the instructions to Form 10-Q and
Regulation S-X and does not include all of the information and note
disclosures required by generally accepted accounting principles.
Therefore, this information should be read in conjunction with the
consolidated financial statements and notes thereto included in the
Form 10-K of New West Eyeworks, Inc. (the "Company") for the year ended
December 30, 1995. This information reflects all adjustments that are,
in the opinion of management, necessary for a fair statement of the
results for the interim periods reported. These adjustments are of a
normal and recurring nature.
2. The results of operations for the periods ended September 28, 1996 are
not necessarily indicative of the results to be expected for the full
year.
3. Income per common and common equivalent share is computed using the
weighted average number of common and common equivalent shares
outstanding during the period. Fully diluted earnings per share,
assuming the conversion of the Company's Series A and B 6% Cumulative
Convertible Preferred Stock as of the beginning of the period, have not
been presented, as the impact of such conversion is insignificant in
1995 and 1996.
4. In early 1996, to fund the Company's expansion and advertising needs,
the Company entered into two bridge loans with Mesirow Capital Partners
VI, a common and preferred stockholder, and Ronald E. Weinberg,
Chairman of the Board, totaling $700,000. The loans bore interest at an
annual rate of 15% and were secured by a deed of trust on the Company's
executive office building and optical laboratory facility in Tempe,
Arizona. The bridge loans were retired with the proceeds of a $2.0
million bank revolving line of credit in June, 1996. The loan matures
on May 31, 1997, and is secured by substantially all of the Company's
assets, including the Company's executive office building and optical
laboratory in Tempe, Arizona, but excluding furniture, fixtures, and
equipment. The loan bears interest on the principal balance outstanding
from time to time at a rate equal to the lending bank's prime rate plus
2.0% per annum, and is due and payable monthly. The loan is also
secured by guarantees from Mesirow Capital Partners V, a preferred
stockholder, Mesirow Capital Partners VI, and Mr. Weinberg. Barry J.
Feld, President and Chief Executive Officer, agreed to share in the
obligations of the guarantors.
In exchange for the guarantee of the Company's obligations under its
line of credit by such officers and shareholders, the Company issued
warrants to them to purchase, in the aggregate, 50,000 shares of the
Company's common stock at a price per share of $6.11, subject to
customary anti-dilution adjustments. The value of the warrants, which
was determined by independent valuation to be $0.57 per share, is
reflected on the September 28, 1996 balance sheet in other assets and
paid-in capital and will be amortized over the life of the loan.
6
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The Company was not in compliance with one of the financial covenants
contained in the line of credit agreement at June 29, 1996 and
September 28, 1996 and accordingly, received waivers and amendments
with respect to such covenant from the bank for periods up to and
including September 30, 1996. The credit agreement was amended
effective October 24, 1996, and the Company is now in compliance with
all covenants contained in the agreement. There can be no assurance
that the Company will not require additional waivers in the future or,
if required, that the lenders will grant them.
5. As a result of the settlement agreement entered into between the
Company and Saatchi & Saatchi North America, Inc., in February 1996,
the Company agreed to pay Saatchi & Saatchi $1.0 million, as full
consideration for production and media costs incurred as a result of
services provided in 1995 by Saatchi & Saatchi, and to indemnify the
Company against certain of these costs. The Company paid $250,000 in
February 1996, and the balance of $750,000 was paid in seven
installments of $107,000. Six installments were paid in the Company's
second and third quarters and the remaining installment, which is
reflected in accounts payable in the accompanying consolidated balance
sheet as of September 28, 1996, was paid on October 31, 1996.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Unless otherwise stated, references in this report to the third quarter
of 1996 and 1995 relate to the periods ended September 28, 1996 and September
30, 1995.
OVERVIEW
Since the hiring of new management in 1991, New West Eyeworks, Inc.
(the "Company") has redirected its business by implementing a new merchandising
strategy, improving its operating efficiency, expanding its managed optical care
program and successfully entering new markets. The Company has achieved 19
consecutive quarters of positive comparable store sales growth, including a 9.2%
increase in the first nine months of 1996 compared to the first nine months of
1995.
The Company opened nine stores and closed 20 unprofitable or
underperforming stores, mostly in host locations, in 1995. In the first nine
months of 1996, the Company opened six stores in malls in Iowa, one mall store
in Illinois, one mall store in New Mexico, one store in a strip center in
Arizona, and one store in a Fred Meyer, Inc. ("Fred Meyer") host store in
Oregon. The Iowa and Illinois stores represent the Company's first entry into
the Midwestern United States. The Company also closed two stores located in
strip centers in Oregon and one store located in a Fred Meyer host store in
Alaska, bringing the number of stores to 146 as of September 28, 1996. In
addition, the Company remodeled or relocated eight stores.
It is the Company's accounting policy to expense advertising costs to
support new stores and other store pre-opening expenses as they are incurred.
Consequently, the Company expects that its operating margins may be adversely
affected by increased operating costs associated with new store openings.
RESULTS OF OPERATIONS
THIRD QUARTER 1996 COMPARED TO THIRD QUARTER 1995
Net sales increased $1.6 million or 15.7% to $11.7 million during the
third quarter of 1996 from $10.1 million during the third quarter of 1995.
Revenues during the third quarter of 1995 included $162,000 in sales from
unprofitable or underperforming host stores which were closed during 1995. If
prior-year sales from these closed retail outlets were excluded from 1995
revenues, the Company would have posted a 17.6% third quarter improvement in net
sales ($11.7 million compared to $9.9 million). The net sales increase in the
third quarter of 1996 was primarily attributable to an increase of 14.2% in
comparable store sales. The comparable store sales increase was primarily due to
increases in eyeglass and contact lens units sold and sales generated under the
Alexis Vision Plan, the Company's managed optical care division. The comparable
store sales increase in the third quarter of 1996 at the Company's stores in
malls and strip shopping centers was partially offset by a lower rate of
comparable store sales growth in the Company's host stores.
8
<PAGE> 9
Gross profit increased $1.2 million to $6.1 million during the third
quarter of 1996, a 25.3% increase compared to gross profit of $4.8 million
during the third quarter of 1995. The gross profit margin increased to 51.9% in
the third quarter of 1996 from 47.9% in the third quarter of 1995. This increase
was primarily due to increased sales volume which covered more of the fixed cost
components of cost of goods sold and was partially offset by increased sales
under the Alexis Vision Plan. Consistent with the Company's practice, the Alexis
Vision Plan sales are generally at a discount from the Company's everyday value
prices.
Selling, general and administrative expenses remained steady at $5.6
million during the third quarter of 1996 and the third quarter of 1995. As a
percentage of sales, these expenses decreased to 48.3% during the third quarter
of 1996, from 55.7% during the third quarter of 1995 as a result of an increase
in the Company's sales while the selling, general, and administrative expenses
remained steady, and to a lesser extent, reduced advertising expenditures
resulting from the Company's changing to a different advertising agency in the
fourth quarter of 1995.
Interest expense increased by $54,000 to $63,000 in the third quarter
of 1996 from $9,000 in the third quarter of 1995 as a result of increased
interest on the line of credit executed in June, 1996 and increased capital
lease obligations.
Income tax expense increased by $124,000 to $46,000 in the third
quarter of 1996 compared to the income tax benefit of $78,000 in the third
quarter of 1995, as a result of the Company's pre-tax income in the third
quarter of 1996 compared to a pre-tax loss in the third quarter of 1995. The
income tax expense for the Company is lower than what the Company would have to
pay if it did not have significant net operating loss carryforwards.
As a result of the foregoing, net income increased by $1.0 million to
$307,000 in the third quarter of 1996 compared to a net loss of $715,000 in the
third quarter of 1995.
Dividends were accrued and subsequently paid on the Company's
convertible 6% cumulative preferred stock, Series A, par value $1,000 per share,
and the Company's convertible 6% cumulative preferred stock, Series B, par value
$1,000 per share, in the aggregate amount of $81,000 in the third quarter of
1996 and in the third quarter of 1995.
FIRST NINE MONTHS OF 1996 COMPARED TO FIRST NINE MONTHS 1995
Net sales increased $3.0 million or 9.7% to $34.0 million during the
first nine months of 1996 from $31.0 million during the first nine months of
1995. Revenues during the first nine months of 1995 included $989,000 in sales
from unprofitable or underperforming host stores which were closed during 1995.
If prior-year sales from these closed retail outlets were excluded from 1995
revenues, the Company would have posted a 13.3% year-to-date improvement in net
sales ($34.0 million compared to $30.0 million). The net sales increase in the
first nine months of 1996 was primarily attributable to an increase of 9.2% in
comparable store sales. The comparable store sales increase was primarily due to
increases in eyeglass and contact lens units sold and sales generated under the
Alexis Vision Plan, the Company's managed optical care division. The comparable
store sales increase in the first nine months of 1996 at the Company's stores in
malls and strip shopping centers was partially offset by a lower rate of
comparable store sales growth in the Company's host stores.
9
<PAGE> 10
Gross profit increased $1.7 million to $17.2 million during the first
nine months of 1996, a 10.7% increase compared to gross profit of $15.5 million
during the first nine months of 1995. The gross profit margin improved slightly
to 50.5% in the first nine months of 1996 from 50.1% in the first nine months of
1995. This increase was primarily due to increased sales volume which covered
more of the fixed cost components of cost of goods sold and was partially offset
by increased sales under the Alexis Vision Plan. Consistent with the Company's
practice, the Alexis Vision Plan sales are generally at a discount from the
Company's everyday value prices.
Selling, general and administrative expenses remained steady at $16.0
million during the first nine months of 1996 and the first nine months of 1995.
As a percentage of sales, these expenses decreased to 46.9% during the first
nine months of 1996, from 51.5% during the first nine months of 1995 as a result
of an increase in the Company's sales while the selling, general, and
administrative expenses remained steady, and to a lesser extent, reduced
advertising expenditures resulting from the Company's changing to a different
advertising agency in the fourth quarter of 1995.
Interest expense increased by $120,000 to $145,000 in the first nine
months of 1996 from $25,000 in the first nine months of 1995 as a result of
increased capital lease obligations, interest payments on the two bridge loans
from Mesirow Capital Partners VI and Mr. Weinberg, and interest on the line of
credit executed in June, 1996.
Income tax expense increased to $172,000 in the first nine months of
1996 compared to no income tax expense in the first nine months of 1995, as a
result of increased pre-tax income. The income tax expense for the Company is
lower than what the Company would have to pay if it did not have significant net
operating loss carryforwards.
As a result of the foregoing, net income increased by $1.4 million to
$902,000 in the first nine months of 1996 compared to a net loss of $451,000 in
the first nine months of 1995.
Dividends were accrued and paid on the Company's convertible 6%
cumulative preferred stock, Series A, par value $1,000 per share, and the
Company's convertible 6% cumulative preferred stock, Series B, par value $1,000
per share, in the aggregate amount of $243,000 in the first nine months of 1996
and $245,000 in the first nine months of 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires liquidity and working capital primarily for
operations and the opening of new stores, and, to a lesser extent, management
information systems and optical laboratory equipment to support store growth and
improve operating efficiencies. The Company's primary sources of funds are cash
flow from operations, lease financing of equipment, vendor trade credit,
shareholder loans, and bank loans.
In early 1996, to fund the Company's expansion and advertising needs,
the Company entered into two bridge loans with Mesirow Capital Partners VI and
Mr. Weinberg, totaling $700,000. The loans bore interest at an annual rate of
15% and were secured by a deed of trust on the Company's executive office
building and optical laboratory facility in Tempe, Arizona. The bridge loans
were retired with the proceeds of a $2.0 million bank revolving line of credit
in June, 1996. The loan matures on May 31, 1997, and is secured by substantially
all of the
10
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Company's assets, including the Company's executive office building and optical
laboratory in Tempe, Arizona, but excluding furniture, fixtures, and equipment.
The loan bears interest on the principal balance outstanding from time to time
at a rate equal to the lending bank's prime rate plus 2.0% per annum, and is due
and payable monthly. The interest rate may be reduced to the lending bank's
prime rate plus 1.0% per annum if certain financial covenants are met at year
end 1996 and at the end of February 1997. The loan is also secured by guarantees
from Mesirow Capital Partners V, Mesirow Capital Partners VI, and Mr.Weinberg.
Mr. Feld agreed to share in the obligations of the guarantors.
In exchange for the guarantee of the Company's obligations under its
line of credit by such officers and shareholders, the Company issued warrants to
them to purchase, in the aggregate, 50,000 shares of the Company's common stock
at a price per share of $6.11, subject to customary anti-dilution adjustments.
The value of the warrants, which was determined by independent valuation to be
$0.57 per share, is reflected on the September 28, 1996 balance sheet in other
assets and paid in capital and will be amortized over the life of the loan.
The Company was not in compliance with one financial covenant contained
in the line of credit agreement at June 29, 1996 and September 28, 1996, and
accordingly, has received waivers and amendments with respect to such covenant
from the bank for periods up to and including September 30, 1996. The credit
agreement was amended effective October 24, 1996, and the Company is now in
compliance with the covenant. There can be no assurance that the Company will
not require additional waivers in the future or, if required, that the lenders
will grant them.
Short-term trade credit represents a significant source of financing
for inventory. Trade credit arises from the willingness of the Company's vendors
to grant payment terms for inventory purchases. Inventory levels increased
$356,000 from December 30, 1995 to September 28, 1996, primarily as a result of
the opening of a net of seven new stores in the first nine months of 1996 and
expanded merchandise programs in certain other stores. Although the Company has
negotiated what it believes to be favorable payment terms from its primary
vendors, there is no assurance that the Company will obtain such terms in the
future.
The Company leases all of its retail space and the optical laboratory
and distribution facility near Portland, Oregon. The Company owns its executive
offices and optical laboratory and distribution facility in Tempe, Arizona,
subject to a deed of trust under the Company's revolving line of credit.
Net cash used in operating activities was $372,000 in the first nine
months of 1996 compared to net cash from operating activities of $294,000 in the
first nine months of 1995. The decrease was primarily attributable to a $505,000
decrease in accounts payable in the first nine months of 1996 compared to a $1.3
million increase in accounts payable during the same period in 1995, and an
$819,000 decrease in accrued expenses in the first nine months of 1996 compared
to a $295,000 decrease in accrued expenses during the same period in 1995.
Cash flows used in investing activities, primarily for store expansion,
renovation, and relocation were $1.3 million in the first nine months of 1996
and the first nine months of 1995.
11
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Cash flows from financing activities were $1.6 million in the third
quarter of 1996 compared to $213,000 in the third quarter of 1995. Cash flows
from financing activities in the third quarter of 1996 reflect the establishment
of the line of credit facility.
The Company believes that cash flow from operations, lease financing
and the line of credit facility will be sufficient to fund its working capital
needs and store expansion program for the next twelve months. The Company
anticipates renegotiating the line of credit facility prior to its expiration on
May 31, 1997 or obtaining other comparable financing. If the Company determines
that it needs additional capital for its store expansion program, the Company
may seek to raise additional debt or equity financing. There can be no assurance
that the Company will be able to renegotiate the line of credit on terms
acceptable to the Company, or that the Company will be able to raise additional
debt or equity financing.
NET OPERATING LOSS CARRYFORWARDS
As of December 30, 1995, the Company had net operating loss
carryforwards of $7.7 million and $6.9 million for regular tax and alternative
minimum tax purposes, respectively, which begin to expire in 2006. The Company's
initial public offering in 1993 caused the Company to experience an ownership
change as defined by Section 382(g) of the Internal Revenue Code. As a result,
there will be an annual limitation of approximately $1.0 million on the amount
of net operating loss carryforwards generated prior to the ownership change
which can be utilized to offset the Company's future taxable income.
Additionally, capital share transactions among existing shareholders during 1995
may further limit the Company's ability to utilize its operating loss
carryforwards. Future transactions involving the Company's stock (or rights to
acquire such stock) could also cause an ownership change resulting in additional
restrictions on the Company's ability to utilize its net operating loss
carryforwards after the date of such ownership change.
SEASONALITY AND QUARTERLY RESULTS
Historically, the Company's operations have been seasonal, with the
highest sales in a given year occurring first in February, March and April and
then in August, September and, to a lesser extent, in October. The Company has
historically incurred and anticipates that it may continue to incur lower net
sales and net losses during the Company's fourth quarter because of reduced
demand for eyewear during the holiday season.
The Company's results of operations may also fluctuate from quarter to
quarter as a result of the amount and timing of sales contributed by new stores
and the integration of new stores into the operations of the Company, as well as
other factors. The addition of a large number of new stores can therefore
significantly affect quarterly results of operations.
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FORWARD-LOOKING STATEMENTS
Statements that are not historical facts, including statements about
management's confidence in the Company's prospects and strategies and its
expectations about the Company's expansion into new markets, growth in existing
markets, and acceleration of the growth in comparable-store sales, are
forward-looking statements that involve risks and uncertainties. These risks and
uncertainties include, but are not limited to: (1) market acceptance risks,
including whether or not the Company will be able to successfully implement its
value-pricing strategy in new geographic markets, most of which markets include
competitors of the Company that have financial and other resources substantially
greater than that of the Company, and whether or not the Company will be able to
conduct a successful advertising campaign in new and existing markets against
better-financed competitors; (2) laboratory capacity and supply constraints,
including whether or not, as the Company expands into new geographic markets, it
will be able to successfully integrate its new markets into its existing eyewear
laboratory manufacturing and distribution system; (3) a slowdown in the growth
of managed care in the eyewear industry or in the Company's share of such
business, including whether or not federal or state health-care legislation will
have an adverse impact on managed care; (4) the ability of the Company to comply
with the financial covenants in its line of credit facility; (5) the ability of
the Company to restore sales and comparable-store sales increases in its
locations in Fred Meyer host stores to levels comparable to those prior to the
1994 strike against Fred Meyer; (6) leasing risks, including whether or not the
Company will be able to lease prime mall and strip- shopping center locations at
attractive rates for its expansion into new markets and to fill out its store
locations in the Company's existing markets; and (7) the impact of government
regulation on the Company's advertising, location and design of stores, and
products sold, on the opticians employed by the Company, and on the relationship
between independent optometrists and the Company, which regulations vary widely
throughout the states in which the Company operates and are subject to frequent
change. These risks and others that are detailed in this Form 10-Q must be
considered by an investor or potential investor in the Company.
13
<PAGE> 14
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is involved in legal matters which are
incidental to its operations. In the opinion of management, the ultimate
resolution of these matters is not anticipated to have a material adverse effect
on the Company's financial condition or results of operations.
ITEM 6. EXHIBITS
(a) EXHIBITS
27 Financial Data Schedule for Commercial and Industrial Companies
14
<PAGE> 15
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.
NEW WEST EYEWORKS, INC.
Date: November 8, 1996 By: /s/ Ronald E. Weinberg
-----------------------
Ronald E. Weinberg
Chairman of the Board and Treasurer
Date: November 8, 1996 By: /s/ Barry J. Feld
------------------
Barry J. Feld
President and Chief Executive Officer
and Chief Financial Officer
15
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