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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
- ----- Act of 1934, for the fiscal year ended December 31, 2001.
or
Transition Report pursuant to Section 13 or 15(d) of the Securities
- ----- Exchange Act of 1934 for the transition period from _______ to _______.
Commission File Number: 1-14128
EMERGING VISION, INC.
(Exact name of Registrant as specified in its Charter)
New York 11-3096941
(State of Incorporation) (IRS Employer Identification Number)
100 Quentin Roosevelt Boulevard
Garden City, NY 11530
Telephone Number: (516) 390-2100
(Address and Telephone Number of
Principal Executive Offices)
------------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
TITLE
Common Stock, par value $0.01 per share
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the Registrant's Common Stock, par value
$0.01 per share (the "Common Stock") held by non-affiliates of the Registrant as
of April 8, 2002, (based upon the closing price of $0.08 per share as quoted on
the OTC Bulletin Board) was approximately $1,711,100. For purposes of this
computation, the shares of Common Stock held by directors, executive officers
and principal shareholders owning more than 5% of the Registrant's outstanding
Common Stock and for which a Schedule 13G was filed, were deemed to be stock
held by affiliates. As of April 8, 2002, there were approximately 21,388,750
outstanding shares of Common Stock held by non-affiliates.
As of April 8, 2002, there were outstanding 27,004,972 shares of the
Registrant's Common Stock and 2.51 shares of the Registrant's Senior Convertible
Preferred Stock, par value $0.01 per share (convertible into an aggregate of
334,667 shares of the Registrant's Common Stock).
Item 1. Business
--------
General
Emerging Vision, Inc. (the "Registrant" and, together with its
subsidiaries, hereinafter the "Company" or "Emerging") is one of the largest
chains of retail optical stores and one of the largest franchise optical chains
in the United States, based upon management's beliefs, domestic sales and the
number of locations of Company-owned and franchised stores (collectively
referred to herein as "Sterling Stores"). The Registrant was incorporated under
the laws of the State of New York in January 1992 and, in July 1992, purchased
substantially all of the assets of Sterling Optical Corp., a New York
corporation then a debtor-in-possession under Chapter 11 of the U.S. Bankruptcy
Code.
In March 2001, the Board of Directors decided that the Company should focus
its efforts and resources on growing its retail optical business and, as a
result, approved a plan to discontinue all other operations then being conducted
by the Company. In connection with this decision, the Company completed its plan
of disposal of substantially all of the net assets of Insight Laser Centers,
Inc. ("Insight Laser") - which operated three laser vision correction centers in
the New York metropolitan area; Insight Laser Centers N.Y.I, Inc. (the
"Ambulatory Center") - owner of the assets of an ambulatory surgery center
located in Garden City, New York; and the yet-to-be-developed Internet Division
- - which was to provide a web-based portal being designed to take advantage of
business-to-business opportunities in the optical industry, for which the
Company simply ceased further development and discontinued the operations of.
In early 2001, the Company closed two of its three Insight Laser locations
and, in an effort to pursue a sale of the remaining net assets, and continued to
operate the one remaining location from its center located in Trump Tower in New
York City. The Company was unable to secure a favorable deal to sell the
remaining net assets, and in November 2001, the Trump Tower location was closed
as well, thereby completely ceasing operations of Insight Laser.
On May 31, 2001, the Company sold the net assets of the Ambulatory Center
to the owner of the license required to operate the center. The Company remains
a guarantor of certain liabilities and future obligations associated with the
Ambulatory Center.
Store Operations
The Company and its franchisees operate retail optical stores principally
under the trade names "Sterling Optical," "IPCO Optical," "Site For Sore Eyes,"
"Duling Optical," and "Singer Specs," although most stores (other than the
Company's Site for Sore Eyes stores located in Northern California) operate
under the name "Sterling Optical." The Company also operates VisionCare of
California ("VCC"), a specialized health care maintenance organization licensed
by the State of California Department of Managed Health Care, which employs
licensed optometrists who render services in offices located immediately
adjacent to, or within, most Sterling Stores located in California.
Most Sterling Stores offer eye care products and services such as
prescription and non-prescription eyeglasses, eyeglass frames, ophthalmic
lenses, contact lenses, sunglasses and a broad range of ancillary items. To the
extent permitted by individual state regulations, an optometrist is employed by,
or affiliated with, most Sterling Stores to provide professional eye
examinations to the public. The Company fills prescriptions from these employed
or affiliated optometrists, as well as from unaffiliated optometrists and
ophthalmologists. Most Sterling Stores have an inventory of ophthalmic and
contact lenses, as well as on-site lab equipment for cutting and edging
ophthalmic lenses to fit into eyeglass frames, which, in many cases, allows
Sterling Stores to offer same-day service.
The Company sells the assets of certain of its Company-owned stores to
qualified franchisees, and, in certain instances, realizes a profit on the
conveyance of the assets of such stores. Through these sales, along with the
opening of new stores by qualified franchisees, the Company seeks to create a
stream of royalty payments based upon a percentage of the gross revenues of the
franchised locations, and grow the Sterling Optical brand name. The Company
currently derives its retail optical store revenues principally from the sale of
eye care products and services at Company-owned stores, and ongoing royalty fees
based upon a percentage of the gross revenues of its franchised stores.
As of December 31, 2001, there were 203 Sterling Stores in operation,
consisting of 34 Company-owned stores (including 9 stores being managed by
franchisees), and 169 franchised stores (including 1 store being managed by the
Company on behalf of the franchisee thereof). The Company continually seeks to
expand both its Company-owned and franchised store operations. Sterling Stores
are located in 24 states, the District of Columbia, Canada, and the U.S. Virgin
Islands.
2
The following chart sets forth the breakdown of Sterling Stores in operation as
of December 31, 2001 and 2000:
December 31,
2001(*) 2000
-------- --------
I. COMPANY-OWNED STORES:
--------------------
Company-owned stores......................... 25 20
Company-owned stores managed by franchisees.. 9 12
---- ----
Total.................. 34 32
==== ====
(*)Existing store locations: California (3), Illinois (3), Iowa (1),
Kentucky (1), Minnesota (4), Missouri (2), Nebraska (1), New York (15), North
Dakota (1), Pennsylvania (1), Virginia (1) and Wisconsin (1).
II. FRANCHISED STORES:
-----------------
Franchised stores.......................... 168 198
Franchised stores managed by the Company... 1 3
---- ----
Total.................. 169 201
==== ====
(*)Existing store locations: California (27), Colorado (1), Connecticut
(1), Delaware (5), Florida (2), Illinois (2), Kentucky (2), Maryland (20),
Massachusetts (1), Minnesota (1), Montana (1), Nevada (1), New Jersey (8), New
York (45), North Dakota (5), Ontario, Canada (3), Pennsylvania (15), South
Dakota (1), Texas (2), Virginia (8), Washington, D.C. (2), West Virginia (1),
Wisconsin (13), and the U.S. Virgin Islands (2).
Sterling Stores generally range in size from approximately 1,000 square
feet to 2,000 square feet, are similar in appearance and are operated under
certain uniform standards and operating procedures. Many Sterling Stores are
located in enclosed regional shopping malls and smaller strip centers; however,
some Sterling Stores are located on the ground floor of office buildings or
other commercial structures, with a limited number of Sterling Stores being
housed in freestanding buildings with adjacent parking facilities. Sterling
Stores are generally clustered within geographic market areas to maximize the
benefit of advertising strategies and minimize the cost of supervising
operations.
In response to the eyewear market becoming increasingly fashion-oriented
during the past decade, most Sterling Stores carry a large selection of designer
eyeglass frames. The Company continually test-markets various brands of
sunglasses, ophthalmic lenses, contact lenses and designer frames. Small
quantities of these items are usually purchased for selected stores that test
customer response and interest. If a product test is successful, the Company
attempts to negotiate a system-wide preferred vendor discount for the product in
an effort to maximize system-wide sales and profits.
Franchise System
An integral part of the Company's franchise system includes providing what
the Company believes to be a high level of marketing, financial, training and
administrative support to its franchisees. The Company provides "grand opening"
assistance for each new franchised location by consulting with its franchisees
with respect to store design, fixture and equipment requirements and sources,
inventory selection and sources, and marketing and promotional programs.
Specifically, the Company's grand opening assistance helps to establish business
plans and budgets, provides preliminary store designs and plan approval prior to
construction of a franchised store, and provides training, an operations manual
and a comprehensive business review to aid the franchisee in attempting to
maximize its sales and profitability. Further, on an ongoing basis, the Company
provides training through regional seminars, offers assistance in marketing and
advertising programs and promotions, and consults with its franchisees as to
their management and operational strategies and business plans.
Preferred Vendor Network. With the collective buying power of Company-owned
and franchised Sterling Stores, the Company has established a network of
preferred vendors (the "Preferred Vendors") whose products may be purchased
directly by franchisees at group discount prices, thereby providing such
franchisees with the opportunity for higher gross margins. Additionally, the
Company negotiates and executes cooperative advertising programs with its
Preferred Vendors for the benefit of all Company-owned and franchised stores.
3
Franchise Agreements. Each franchisee enters into a franchise agreement
(the "Franchise Agreement") with the Company, the material terms of which
generally are as follows:
(a) Term. Generally, the term of each Franchise Agreement is ten years and,
subject to certain conditions, is renewable at the option of the franchisee.
(b) Initial Fees. Generally, franchisees (except for any franchisees
converting their existing retail optical store to a Sterling Store (a "Converted
Store"), and those entering into agreements for more than one location) must pay
the Company a non-recurring, initial franchise fee of $20,000. The Company
charges each franchisee of a Converted Store a non-recurring, initial franchise
fee of $10,000 per location. For each franchisee entering into agreements for
more than one location, the Company charges a non-recurring, initial franchise
fee of $15,000 for the second location, and $10,000 for each location in excess
of two.
(c) Ongoing Royalties. Franchisees are obligated to pay the Company ongoing
royalties in an amount equal to a percentage (generally 8%) of the gross
revenues generated by their Sterling Store. Franchisees of Converted Stores,
however, pay ongoing royalties, on their store's historical average base sales,
at reduced rates increasing (in most cases) from 2% to 6% for the first three
years of the term of the Franchise Agreement. In addition, most of the Franchise
Agreements acquired by the Company from Singer Specs, Inc. (the "Singer
Franchise Agreements") provide for ongoing royalties calculated at 7% of gross
revenues. Franchise Agreements entered into prior to January 1994 provide for
the payment of ongoing royalties on a monthly basis, while those entered into
after January 1994 provide for their payment on a weekly basis, in each case,
based upon the gross revenues for the preceding period. Gross revenues generally
include all revenues generated from the operation of the Sterling Store in
question, excluding refunds to customers, sales taxes, a limited amount of bad
debts and, to the extent required by state law, fees charged by independent
optometrists.
(d) Advertising Fund Contributions. Most franchisees must make ongoing
contributions to one of two advertising funds (the "Advertising Fund") equal to
a percentage of their store's gross revenues. Except for the Singer Franchise
Agreements, which generally provide for contributions equal to 7% of gross
revenues, for Franchise Agreements entered into prior to August 1993, the rate
of contribution is generally 4% of the store's gross revenues, while Franchise
Agreements entered into after August 1993 generally provide for contributions
equal to 6% of the store's gross revenues. Generally, 50% of these funds are
expended at the direction of each individual franchisee (for the particular
Sterling Store in question), with the balance being expended on joint
advertising campaigns for all franchisees located within specific geographic
areas.
(e) Financing. The Company generally has financed a majority of the
acquisition price of the assets (other than inventory) of Company-owned stores
sold to franchisees, to be repaid over a period of seven years, together with
interest at the rate of 12% per annum. The Company generally does not finance
the initial, non-recurring franchise fee or rent security deposits, which are
generally required under a franchisee's sublease. The purchase price is
generally based upon the historical and projected cash flow of the Sterling
Store in question. However, the Company has, on occasion, financed (and may in
the future finance) up to 100% of the acquisition price of a franchised store.
Substantially all such financing is personally guaranteed by the franchisee (or,
if a corporation, by the principals owning in excess of an aggregate of 51%
thereof) and is generally secured by all of the assets of the Sterling Store in
question, including subsequently acquired assets and the proceeds thereof. From
time to time, certain franchisees obtain financing from third parties. In such
cases, the Company generally subordinates its security interest in the assets of
the franchised location to the security interests granted to the provider of
such financing.
(f) Termination. Franchise Agreements may be terminated if the franchisee
has defaulted on its payment of monies due to the Company, or in its performance
of the other terms and conditions of the Franchise Agreement. During 2001, 25
franchised stores were closed, and the assets of (as well as possession of) an
additional 13 franchise stores were reacquired by the Company. Substantially all
of the assets located in such stores were voluntarily surrendered and
transferred back to the Company in connection with the termination of the
related Franchise Agreements. In such instances, it is generally the Company's
intention to re-convey the assets of such a store to a new franchisee, requiring
the new franchisee to enter into the Company's then current form of Franchise
Agreement. Subsequent to December 31, 2001, the Company repossessed 2 franchised
locations and currently operates them as Company-owned stores.
Marketing and Advertising
The Company's marketing strategy emphasizes professional eye examinations,
competitive pricing (primarily through product promotions), convenient
locations, excellent customer service, customer-oriented store design and
product displays, knowledgeable sales associates, and a broad range of quality
products, including privately-labeled contact lenses and lens cleaning solutions
presently being offered by the Company and certain of its franchisees.
Examinations by licensed optometrists are generally available on the premises
of, or directly adjacent to, substantially all Sterling Stores.
4
The Company continually prepares and revises its in-store,
point-of-purchase displays, which provide various promotional messages to
customers upon their arrival at Sterling Stores. Both Company-owned and most
franchised Sterling Stores participate in advertising and in-store promotions,
which include visual merchandising techniques to draw attention to the products
displayed in the Sterling Store in question. The Company is also in the process
of refining its interactive web site, which further markets the "Sterling" and
"Site for Sore Eyes" brands in an effort to increase traffic to its stores and,
in many instances, also uses direct mail advertising to reach prospective, as
well as existing, consumers.
The Company annually budgets approximately 4% to 6% of system-wide sales
for advertising and promotional expenditures. Generally, franchisees are
obligated to contribute a percentage of their Sterling Store's gross revenues to
the Company's segregated advertising fund accounts, which the Company maintains
for advertising, promotional and public relations programs. In most cases, the
Company permits each franchisee to direct the expenditure of approximately 50%
of such contributions, with the balance being expended to advertise and promote
all Sterling Stores located within the geographic area of the Sterling Store in
question, and/or on national promotions and campaigns.
Insight Managed Vision Care
Managed care is a substantial and growing segment of the retail optical
business. Under the trade name "Insight Managed Vision Care," the Company
promotes the use of its Sterling Stores through the ongoing development of its
managed care network. The Company, through Insight Managed Vision Care, markets
to payers (e.g. health maintenance organizations, preferred provider
organizations, insurance companies, Taft-Hartley unions, and mid-sized to large
companies) that offer eye care benefits to their covered participants. When
Sterling Stores provide services or products to a covered participant, it is
generally at a discount from the everyday advertised retail price. Typically,
participants will be eligible for greater eye care benefits at Sterling Stores
than those offered at eye care providers that are not participating in a managed
care program. The Company believes that the additional customer traffic
generated by covered participants, along with purchases by covered participants
above and beyond their eye care benefits, more than offsets the reduced gross
margins being realized on these sales. The Company believes that convenience of
store locations and hours of operation are key factors in attracting managed
care business. As the Company increases its presence within markets it has
already entered as well as expands into new markets, it believes it will be more
attractive to managed care payors due to the additional Sterling Stores being
operated by the Company and its franchisees.
Competition
The optical business is highly competitive and includes chains of retail
optical stores, superstores, individual retail outlets, the operators of web
sites and a large number of individual opticians, optometrists and
ophthalmologists who provide professional services and may, in connection
therewith, dispense prescription eyewear. As retailers of prescription eyewear
generally service local markets, competition varies substantially from one
location or geographic area to another. Since 1994, certain major competitors of
the Company have been offering promotional incentives to their customers and, in
response thereto, the Company generally offers the same or similar incentives to
its customers.
The Company believes that the principal competitive factors in the retail
optical business are convenience of location, on-site availability of
professional eye examinations, rapid service, quality and consistency of product
and service, price, product warranties, a broad selection of merchandise and the
participation in third-party, managed care provider programs. The Company
believes that it competes favorably in each of these areas.
Government Regulation
The Company and its operations are subject to extensive federal, state and
local laws, rules and regulations affecting the health care industry and the
delivery of health care, including laws and regulations prohibiting the practice
of medicine and optometry by persons not licensed to practice medicine or
optometry, prohibiting the unlawful rebate or unlawful division of fees and
limiting the manner in which prospective patients may be solicited. The
regulatory requirements that the Company must satisfy to conduct its business
will vary from state to state. In particular, some states have enacted laws
governing the ability of ophthalmologists and optometrists to enter into
contracts to provide professional services with business corporations or lay
persons, and some states prohibit the Company from computing its continuing
royalty fees based upon a percentage of the gross revenues of the fees collected
by affiliated optometrists. Various federal and state regulations limit the
financial and non-financial terms of agreements with these health care
providers; and the revenues potentially generated by the Company differ among
its various health care provider affiliations.
The Company is also subject to certain regulations adopted under the
Federal Occupational Safety and Health Act with respect to its in-store
laboratory operations. The Company believes that it is in material compliance
with all such applicable laws and regulations.
5
As a franchisor, the Company is subject to various registration and
disclosure requirements imposed by the Federal Trade Commission and by many
states in which the Company conducts franchising operations. The Company
believes that it is in material compliance with all such applicable laws and
regulations.
Environmental Regulation
The Company's business activities are not significantly affected by
environmental regulations, and no material expenditures are anticipated in order
for the Company to comply with any such environmental regulations. However, the
Company is subject to certain regulations promulgated under the Federal
Environmental Protection Act ("EPA") with respect to the grinding, tinting,
edging and disposal of ophthalmic lenses and solutions, which the Company
believes it is in material compliance with.
Employees
As of April 8, 2002, the Company employed approximately 238 individuals, of
which approximately 77% were employed on a full-time basis. Except for those
individuals employed at Company-owned Sterling Stores located in the New York
metropolitan area, and except for those individuals employed by the Registrant's
wholly-owned subsidiary, Insight IPA of New York, Inc. (which solicits managed
care provider agreements in the State of New York), of which there were none, no
employees are covered by any collective bargaining agreement. The Company
considers its labor relations with its associates to be in good standing and has
not experienced any interruption of its operations due to disagreements.
Additionally, the Company has employment agreements with two of its key
executives.
Item 2. Properties
The Company's headquarters, consisting of approximately 7,000 square feet,
are located in an office building situated at 100 Quentin Roosevelt Boulevard,
Garden City, New York 11530, under a sublease that expires in November 2006.
This facility houses the Company's principal executive and administrative
offices.
The Company leases the space occupied by all of its Company-owned Sterling
Stores and the majority of its franchised Sterling Stores. The remaining leases
for its franchised Sterling Stores, are held in the names of the respective
franchisees thereof.
Sterling Stores are generally located in commercial areas, including major
shopping malls, strip centers, freestanding buildings and other areas conducive
to retail trade. Sterling Stores range in size from 1,000 to 2,000 square feet.
Item 3. Legal Proceedings
Information with respect to the Company's legal proceedings required by
Item 103 of Regulation S-K is set forth in Notes 2 and 12 to the Consolidated
Financial Statements included in Item 8 of this Report, and is incorporated by
reference herein
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote by the Company's shareholders
during the fourth quarter ended December 31, 2001.
6
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Registrant's Common Stock was listed on the OTC Bulletin Board under
the trading symbol "ISEE.OB" as of August 23, 2001, and was previously listed on
the Nasdaq National Market System. Over-the-counter market quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions. The range of the high and low sales
prices for the Registrant's Common Stock for each quarterly period of the last
two years, is as follows:
2001 2000
------------------ ------------------
Quarter Ended: High Low High Low
-------------- ------- ------- ------- -------
March 31 $0.72 $0.22 $15.13 $5.44
June 30 $0.37 $0.19 $8.19 $1.88
September 30 $0.80 $0.13 $2.63 $0.94
December 31 $0.14 $0.06 $1.50 $0.19
The approximate number of shareholders of record of the Company's Common
Stock as of April 8, 2002, was 328.
The number of shareholders of record of the Company's Senior Convertible
Preferred Stock as of April 8, 2002, was 2.
Historically, the Company has not paid dividends on its Common Stock, and
has no intention to pay dividends on its Common Stock in the foreseeable future.
It is the present policy of the Registrant's Board of Directors to retain
earnings, if any, to finance the Company's operations and expansion.
7
Item 6. Selected Financial Data
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following Selected Financial Data has been derived from the audited
consolidated financial statements of the Company and should be read in
conjunction with those statements, which are included in this Report. The
consolidated financial statements have been examined and reported on by Arthur
Andersen LLP, independent public accountants, with respect to the years ended
December 31, 2001, 2000, 1999 and 1998. The consolidated financial statements
for the year ended December 31, 1997 were audited by Deloitte & Touche LLP,
independent public accountants.
(In thousands except for per share data and number of stores)
Year Ended December 31,
------------------------------------------------------------------
Statement of Operations Data: 2001 2000 1999 1998 1997
------------------------------------------------------------------
System-wide sales (1) $ 124,589 $ 128,775 $ 140,321 $ 147,402 $ 145,534
========== ========== ========== ========== ==========
Total revenues $ 20,619 $ 23,058 $ 29,580 $ 32,582 $ 35,193
========== ========== ========== ========== ==========
Loss from continuing operations $ (5,088) $ (14,628) $ (2,691) $ (16,016) $ (12,670)
========== ========== ========== ========== ==========
Income (loss) from discontinued operations $ 1,312 $ (15,533) $ 430 $ (956) $ (1,492)
========== ========== ========== ========== ==========
Loss on disposal of discontinued operations $ - $ (8,831) $ - $ - $ -
========== ========== ========== ========== ==========
Net loss $ (3,776) $ (38,992) $ (2,261) $ (17,777) $ (14,162)
========== ========== ========== ========== ==========
Per Share Information - basic and diluted
- -----------------------------------------
Loss from continuing operations $ (0.19) $ (2.04) $ (0.41) $ (1.10) $ (0.91)
========== ========== ========== =========== ==========
Income (loss) from discontinued operations $ 0.05 $ (0.66) $ 0.03 $ (0.07) $ (0.11)
========== ========== ========== ========== ==========
Loss on disposal of discontinued operations $ - $ (0.37) $ - $ - $ -
========== ========== ========== ========== ==========
Net loss per share $ (0.14) $ (3.07) $ (0.38) $ (1.23) $ (1.02)
========== ========== ========== ========== ==========
Weighted-average common shares outstanding 26,409 23,627 15,232 14,627 13,883
========== ========== ========== ========== ==========
Balance Sheet Data:
Working capital (deficit) $ (1,758) $ (3,987) $ (4,795) $ (3,351) $ 3,472
Total assets 11,057 22,531 30,312 32,685 43,265
Total debt 1,299 754 7,347 9,751 11,120
Sterling Store Data: (In thousands except for number of stores)
Year Ended December 31,
---------------------------------------------------------------------
2001 2000 1999 1998 1997
---------------------------------------------------------------------
Company-owned stores bought, opened or reacquired 15 3 11 6 7
Company-owned stores sold or closed (10) (13) (16) (21) (19)
Company-owned stores at end of period 25 20 30 35 50
Company-owned stores being managed by Franchisees at end
of period 9 12 6 6 0
Franchised stores being managed by Company at end of period 1 3 5 12 6
Franchised stores at end of period 169 201 218 251 263
8
Average sales per store: (2)
Company-owned stores $ 518 $ 396 $ 420 $ 478 $ 424
Franchised stores $ 564 $ 546 $ 495 $ 475 $ 478
Average franchise royalties per franchised store (2) $ 43 $ 42 $ 38 $ 35 $ 37
(1) System-wide sales represent combined retail sales generated by
Company-owned and franchised stores, as well as revenues generated by VCC.
(2) Average sales per store and average franchise royalties per franchised
store are computed based upon the weighted-average number of Company-owned and
franchised stores in operation, respectively, for each of the specified periods.
For periods of less than a year, the averages have been annualized.
9
Item 7. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
This Report contains certain forward-looking statements and information
relating to the Company that is based on the beliefs of the Company's
management, as well as assumptions made by, and information currently available
to, the Company's management. When used in this Report, the words "anticipate",
"believe", "estimate", "expect", and similar expressions, as they relate to the
Company or the Company's management, are intended to identify forward-looking
statements. Such statements reflect the current view of the Company with respect
to future events, are not guarantees of future performance and are subject to
certain risks and uncertainties. These risks and uncertainties may include:
product demand and market acceptance risks; the effect of economic conditions;
the impact of competitive products, services and pricing; product development,
commercialization and technological difficulties; the outcome of current and
future litigation; and other risks described elsewhere herein. Should one or
more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
described herein as anticipated, believed, estimated, or expected. The Company
does not intend to update these forward-looking statements.
Results of Operations
For the Year Ended December 31, 2001 compared to December 31, 2000
Net sales for Company-owned stores, including revenues generated by VCC, a
specialized health care maintenance organization licensed by the State of
California Department of Managed Health Care, decreased by $467,000, or 3.9%, to
$11,648,000 for the year ended December 31, 2001, as compared to $12,115,000 for
the comparable period in 2000. On a same store basis (for stores that operated
as a Company-owned store during the entirety of both of the years ended December
31, 2001 and 2000), comparative net sales decreased by $1,043,000, or 14.5%, to
$6,129,000 for the year ended December 31, 2001, as compared to $7,172,000 for
the comparable period in 2000. While, on average, there were more Company-owned
stores in operation during 2001 as compared to 2000, the Company experienced a
decline in sales during the last quarter of 2001. Management believes that this
decline was a direct result of the general economic downturn experienced as a
result of the tragic events of September 11, 2001, especially in light of the
fact that the nearly 50% of Company-owned stores operate in the State of New
York.
Franchise royalties decreased by $1,217,000, or 13.3%, to $7,860,000 for
the year ended December 31, 2001, as compared to $9,077,000 for the comparable
period in 2000. This decrease was a result of the fact that there were fewer
franchised stores in operation during 2001 as compared to 2000. As of December
31, 2001, there were 169 franchised stores in operation, as compared to 201 as
of December 31, 2000.
Net gains and fees on the conveyance of Company-owned store assets to
franchisees (which includes renewal fees and the fees related to the transfer of
store ownership from one franchisee to another) decreased by $158,000, or 53.0%,
to $140,000 for the year ended December 31, 2001, as compared to $298,000 for
the comparable period in 2000. This decrease was due to the fact that the
Company did not convey to franchisees (and thus did not realize a gain on) any
assets of Company-owned stores during the year ended December 31, 2001. In 2000,
however, the Company conveyed the assets of 3 Company-owned stores to
franchisees. The $140,000 reflected for the year ended December 31, 2001 relates
solely to transfer and renewal fees.
Interest on franchise notes receivable decreased by $263,000, or 21.7%, to
$947,000 for the year ended December 31, 2001, as compared to $1,210,000 for the
comparable period in 2000. This decrease was principally due to the fact that
several franchise notes matured during 2001.
Other income decreased by $334,000, or 93.3%, to $24,000 for the year ended
December 31, 2001, as compared to $358,000 for the comparable period in 2000.
This decrease was primarily a result of a decrease in the amount of interest
income earned by the Company, due to lower average cash balances on hand in its
banks during 2001, as compared to 2000.
The Company's gross profit margin increased by 5.5%, to 73.6% for the year
ended December 31, 2001, as compared to 68.1% for the comparable period in 2000.
This increase was a result of improved inventory management and control,
improved purchasing at lower average product costs, and better discounts
obtained in 2001 from certain of the Company's vendors. In the future, the
Company's gross profit margin may fluctuate depending upon the extent and timing
of changes in the product mix in Company-owned stores, competitive pricing, and
promotional incentives.
10
Selling, general and administrative expenses decreased by $11,870,000, or
36.6%, to $20,361,000 for the year ended December 31, 2001, as compared to
$31,260,000 for the comparable period in 2000. This decrease was primarily due
to the the fact that the Company recorded increased charges of $10,260,000
during the year ended December 31, 2000, related to the Company's provision for
doubtful accounts associated with accounts and notes receivable due from
franchisees, along with certain receivables from franchisees for advertising
expenditures that the Company incurred on their behalf, while the Company
incurred no such charges during the year ended December 31, 2001. As discussed
in the prior year, the increased charges in 2000 were a direct result of a
change in management philosophy, policy, direction, and related courses of
action resulting from a change in the Company's senior management personnel
subsequent to December 31, 2000, to take back franchise stores and/or reevaluate
notes receivable due from various problem franchisees. During 2001, the Company
did not incur similar charges, as management carefully monitored and managed its
franchise receivables and notes. Additionally, due to corporate downsizing and
improved scheduling in its Company-owned stores, the Company reduced salary and
related expenses by approximately $1,500,000. Finally, there was a decrease in
depreciation and amortization of approximately $350,000 due to the full
depreciation in the prior year of certain of the Company's property and
equipment.
Provision for store closings was $964,000 for the year ended December 31,
2001. No such provision was provided for the year ended December 31, 2000. In
2001, management made the decision to close 11 of its Company-owned stores. In
connection therewith, the Company recorded a provision based on the expected net
proceeds, if any, to be generated from the disposition of the store's assets, as
compared to the carrying value (after consideration of impairment, if any) of
such store's assets and the estimated costs (including lease termination costs
and other expenses) that will be incurred in the closing of the stores.
Non-cash charges for issuance of warrants and induced conversion of
warrants decreased by $201,000, or 54.9%, to $165,000 for the year ended
December 31, 2001, from $366,000 for the comparable period in 2000. This
decrease was principally due to the fact that there were no induced conversions
of warrants during 2001. The 2001 charges relate solely to the issuance of
common shares in consideration for consulting services. Furthermore, the Company
has outstanding contingent warrants that become exercisable upon the
achievement, by the Company, of certain predetermined EBITDA targets. Due to
these contingencies, the future valuation of the contingent warrants, if and
when they become exercisable, will result in charges to the Company's results of
operations in future periods. The significance of these charges, if any, will be
dependent upon the fair market value of the Company's common stock at the time
that the respective EBITDA targets are achieved.
Loss from the operation of franchised stores managed by the Company
decreased by $460,000, or 73.4%, to approximately $167,000 for the year ended
December 31, 2001, as compared to approximately $627,000 for the comparable
period in 2000. As of December 31, 2001, there was only one store that the
Company was managing on behalf of a franchisee, as opposed to the three stores
the Company was managing on behalf of franchisees as of December 31, 2000.
Interest expense decreased by $389,000, or 90.0%, to $43,000 for the year
ended December 31, 2001, as compared to $432,000 for the comparable period in
2000. This decrease resulted from a decrease in long-term debt during the year
ended December 31, 2001, as compared to the comparable period in 2000.
For the Year Ended December 31, 2000 compared to December 31, 1999
Net sales for Company-owned stores, including revenues generated by VCC, a
specialized health care maintenance organization licensed by the State of
California Department of Managed Health Care, decreased by approximately
$5,486,000, or 31.2%, to $12,115,000 for the year ended December 31, 2000, as
compared to $17,601,000 for the comparable period in 1999. This decrease was
principally due to a lower number of stores in operation for the year ended
December 31, 2000, as compared to the comparable period in 1999, as described
below. As of December 31, 2000, there were 233 Sterling Stores in operation,
consisting of 32 Company-owned stores (including 12 Company-owned stores being
managed by franchisees) and 201 franchised stores (including 3 franchised stores
being managed by the Company on behalf of franchisees), as compared to 254
Sterling Stores in operation for the comparable period in 1999, consisting of 36
Company-owned stores (including 6 Company-owned stores being managed by
franchisees) and 218 franchised stores (including 5 stores being managed by the
Company on behalf of franchisees). On a same store basis (for stores that
operated as a Company-owned store during the entirety of both of the years ended
December 31, 2000 and 1999), comparative net sales decreased by $257,000, or
3.8%, to $6,524,000 for the year ended December 31, 2000, as compared to
$6,781,000 for the comparable period in 1999.
Franchise royalties decreased by $278,000, or 3.0%, to $9,077,000 for the
year ended December 31, 2000, as compared to $9,355,000 for the comparable
period in 1999. This decrease was a result of fewer franchised stores in
operation throughout fiscal year 2000, as compared to fiscal year 1999.
11
Net gains and fees on the conveyance of Company-owned store assets to
franchisees, including renewal fees and the fees related to the transfer of
ownership from one franchisee to another, decreased by $369,000, or 55.3%, to
$298,000 for the year ended December 31, 2000, as compared to $667,000 for the
comparable period in 1999. This decrease was principally due to the conveyance
of the assets of 3 Company-owned stores to franchisees during the year ended
December 31, 2000, as compared to the conveyance of the assets of 13
Company-owned stores to franchisees during the comparable period in 1999.
Management believed that this decrease was principally due to the Company's
original decision to sell the assets of its Sterling Optical division (which was
subsequently reversed), which was believed to negatively impact the
marketability of Sterling Stores to independent franchisees.
Interest on franchise notes receivable decreased by $255,000, or 17.4%, to
$1,210,000 for the year ended December 31, 2000, as compared to $1,465,000 for
the comparable period in 1999. This decrease was principally due to reductions
of the principal balance of several franchisees notes and fewer notes being
generated during fiscal 2000.
Other income (primarily initial franchise fees) decreased by $134,000, or
27.2%, to $358,000 for the year ended December 31, 2000, as compared to $492,000
for the comparable period in 1999, due to fewer stores being franchised during
fiscal year 2000.
The Company's gross profit margin decreased by 4.3%, to 68.1% for the year
ended December 31, 2000, as compared to 72.4% for the comparable period in 1999,
due to the mix of products being sold in Company-owned stores during each
respective period.
Selling, general and administrative expenses increased by $8,782,000, or
37.2%, to $32,391,000 for the year ended December 31, 2000, as compared to
$23,609,000 for the comparable period in 1999. This increase was primarily
related to an increase of approximately $5,960,000 in the provision for doubtful
accounts associated with accounts and notes receivable due from franchisees.
This increase was a direct result of a change in management philosophy, policy,
direction, and related courses of action resulting from a change in the
Company's senior management personnel subsequent to year-end, to take back
franchise stores and/or reevaluate notes receivable due from various problem
franchisees, the number of which increased in 2000 as compared to prior years.
In this regard, the Company took back 7 franchised store locations immediately
subsequent to December 31, 2000. The increase in selling, general and
administrative expenses also includes approximately $4,300,000 of losses related
to receivables from franchisees for advertising expenditures that the Company
incurred on their behalf in the current period and in prior years, all of which
was determined in fiscal year 2000 to be unrealizable, or not collectible, by
the Company's new senior management. Another factor leading to the increase in
selling, general and administrative expense was the impairment charges of
approximately $1,131,000 primarily related to certain fixed assets at the
corporate headquarters that the Company deemed to no longer have future use, and
the write-off of the capitalized web development costs associated with the 1-800
Anylens business that was sold in the November 2000. Offsetting these increases
was a decrease of approximately $2,200,000 in Company-owned store related
operating costs due to the reduction in the number of Company-owned stores in
operation for the year ended December 31, 2000, as compared to the comparable
period in 1999.
Warrant issuance and induced conversion costs decreased by $2,005,000, or
84.67%, to $366,000 for the year ended December 31, 2000, from $2,371,000 for
the comparable period in 1999. This decrease was principally due to the
incurrence, during fiscal year 1999, of $2,000,000 of expenses related to the
Company's issuance of 2,500,000 warrants, all of which vested immediately.
Loss from the operation of franchised stores managed by the Company
increased by approximately $22,000, or 3.6%, to $627,000 for the year ended
December 31, 2000, as compared to $605,000 for the comparable period in 1999.
Interest expense decreased by $398,000, or 48.0%, to $432,000 for the year
ended December 31, 2000, as compared to $830,000 for the comparable period in
1999. This decrease resulted from a decrease in long-term debt during the year
ended December 31, 2000, as compared to the comparable period in 1999.
Loss from discontinued operations represents the net loss from the
operations of the Company's Internet Division, Insight Laser and Ambulatory
Center of $19,573,000, $1,083,000 and $3,708,000, respectively. The loss
attributable to the Internet Division included a net operating loss of
$15,409,000 (which primarily included charges for web-site development costs of
approximately $11,800,000, approximately $800,000 related to professional fees,
and approximately $1,300,000 related to salaries and wages), a non-cash
impairment charge of $711,000 on the expected disposal of certain assets,
$1,660,000 for estimated future liabilities and costs resulting from the
decision to dispose, and $1,700,000 related to the estimated operating losses of
the Internet Division through the end of April 2001 (the anticipated disposal
date). The loss attributable to Insight Laser included net operating losses of
$169,000, a non-cash impairment charge of $803,000 on the expected disposal of
certain assets and $111,000 for estimated future losses and
12
liabilities through the anticipated disposal date. The loss for the Ambulatory
Center included net operating income of $31,000, offset by a non-cash
impairment charge of $2,594,000 on the expected disposal of certain assets, and
$1,145,000 for estimated future losses and liabilities through the anticipated
disposal date.
Liquidity and Capital Resources
For the year ended December 31, 2001, cash flows used in operating
activities were $5,703,000, as compared to cash flows used in operating
activities of $1,915,000 for the year ended December 31, 2000. Approximately
$3,977,000 of the cash flows used in 2001 related to one-time liabilities that
arose as a result of the Company's plan of disposal of its discontinued
operations, and payment of those liabilities is reflected in the outflow of
$5,365,000 related to accounts payable and accrued liabilities. Other factors
leading to the increased cash used in operating activities were the $5,088,000
loss from continuing operations, offset by a decrease in franchise and other
receivables of $1,007,000, an increase in the accrual for store closings of
$964,000, charges of $930,000 related to long-lived assets, and depreciation and
amortization of $1,351,000.
For the year ended December 31, 2001, cash flows provided by investing
activities were $1,616,000, principally due to the proceeds received on its
franchise notes receivable, offset in part by limited capital expenditures made
by the Company during 2001.
For the year ended December 31, 2001, cash flows provided by financing
activities were $544,000, principally due to $750,000 of proceeds received in
connection with short-term loans provided to the Company by two related parties,
Horizon Investors Corp. ("Horizon") and Broadway Partners LLC ("Broadway").
As of December 31, 2001, the Company had negative working capital of
$1,758,000, and cash on hand of $1,053,000. As discussed above, the Company
utilized approximately $3,977,000 of cash in connection with one-time
liabilities associated with its plan of disposal of its discontinued operations.
On January 23, 2002, the Company secured two separate financing
arrangements, as follows:
Secured Term Note
The Company entered into a secured term note for $1,000,000 with an
independent financial institution. This note is repayable in 24 equal monthly
installments of $41,666, and bears interest as defined (4.95% at the inception
of the note). The note is fully collateralized/guaranteed by a $1,000,000
certificate of deposit posted by Horizon, a related party, at the same financial
institution.
Credit Facility
The Company entered into an agreement with Horizon to borrow up to a
maximum of $1,000,000. This credit facility bears interest at the prime rate
plus 1% (5.5% as of the date of the loan agreement), provided for an initial
advance of $300,000, requires minimum incremental advances of $150,000, matures
on January 22, 2004, requires ratable monthly principal and interest payments of
each borrowing, amortizable through the maturity date of the facility, is fully
collateralized by the Company's qualifying franchise notes (as referenced by a
pledge agreement), and requires the payment of a facility fee of 2% per annum,
payable monthly, on the unused portion of the credit facility.
Simultaneous with obtaining the above financing, the Company repaid
outstanding related party borrowings due to Horizon and Broadway totaling
$750,000, plus interest. In consideration for providing access to the credit
facility and guaranteeing the term note, the Company granted Horizon an
aggregate of 2,500,000 warrants (1,750,000 of which were immediately
exercisable, with the balance vesting in quarterly increments of 250,000,
beginning April 22, 2002, so long as any amounts remain unpaid under the secured
term note and/or credit facility). Each warrant has a five-year term and
provides for an exercise price of $0.01. The fair value of the warrants issued
was approximately $234,000. As of April 8, 2002, remaining availability under
the credit facility was approximately $700,000.
The Company believes that, in the furtherance of its business strategies,
the Company's immediate future capital requirements will include the renovating
and/or remodeling of certain Company-owned stores, terminating the leases of and
closing certain non-profitable Company-owned stores, the upgrading of management
information systems for Company-owned and franchised stores, and improved
support services for its franchise system.
The Company plans to attempt to improve its cash flows during 2002 by
improving store profitability through increased monitoring of store-by-store
operations, closing non-profitable Company-owned stores, implementing reductions
of administrative overhead expenses, where necessary and feasible, actively
supporting development programs for franchisees, and seeking additional
financing, if necessary and available. Management believes that with the
successful execution of its business plan (including the aforementioned
activities), its existing cash on hand, the collection of outstanding
receivables, and the availability under its existing credit facility, sufficient
liquidity will be available for the Company to continue in operation at least
through the end of the first quarter of 2003. However, there can be no assurance
that the Company will be able achieve the aforementioned plans, or that any
additional financing, if needed, will be available.
13
Management's Discussion of Critical Accounting Policies
High-quality financial statements require rigorous application of
high-quality accounting policies. Management believes that its policies related
to revenue recognition, legal contingencies, allowances on franchise, notes and
other receivables, and accruals for store closings and costs of disposal of
discontinued operations are critical to an understanding of the Company's
financial statements because their application places the most significant
demands on management's judgment, with financial reporting results relying on
estimation about the effect of matters that are inherently uncertain.
Recently Issued Accounting Pronouncements
Goodwill
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" and No. 142, "Goodwill and other Intangible Assets". SFAS No. 141
requires all business combinations initiated after June 30, 2001 to be accounted
for using the purchase method. Under SFAS No. 142, goodwill and intangible
assets with indefinite lives are no longer amortized but are reviewed annually
(or more frequently, if impairment indicators arise) for impairment. Separable
intangible assets that are not deemed to have indefinite lives will continue to
be amortized over their useful lives (but with no maximum life).
The Company has adopted SFAS No. 142 effective January 1, 2002 and,
accordingly, goodwill will no longer be amortized. In accordance with the SFAS
No. 142, goodwill will be evaluated periodically for impairment. The Company is
currently evaluating the effect of adoption, if any.
Asset Retirement Obligations
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement addresses the financial and reporting
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. It applies to legal obligations associated
with the retirement of long-lived assets that result from acquisition,
construction, development and/or the normal operation of a long-lived asset,
except for certain obligations of lessees. This statement is effective for
fiscal years beginning after June 15, 2001. The Company is currently evaluating
the effect of adoption of SFAS No. 143 on its financial position and results of
operations, but does not expect its impact to be material.
Long-Lived Assets
In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets". This statement supersedes SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" and Accounting Principles Board Opinion No. 30 "Reporting
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions". The Statement retains the fundamental provisions of SFAS No. 121
for recognition and measurement of impairment, but amends the accounting and
reporting standards for segments of a business to be disposed of. The provisions
of this statement are required to be adopted no later than fiscal years
beginning after December 31, 2001, with early adoption encouraged. The Company
is currently evaluating the impact of the adoption of SFAS No. 144.
14
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Registrant presently has outstanding certain equity instruments with
beneficial conversion terms. Accordingly, the Registrant, in the future, could
incur non-cash charges to equity (as a result of the exercise of such beneficial
conversion terms), which would have a negative impact on future per share
calculations.
The Company is exposed to market risks from potential changes in interest
rates as they relate to the Company's investments in highly liquid marketable
securities and borrowings under its credit facility. The Company believes that
the amount of risk as it relates to its investments and any such borrowings is
not material to the Company's financial condition or results of operations. The
Company does not expect to use interest rate swaps or other instruments to hedge
its borrowings under its credit facility.
15
Item 8. Financial Statements and Supplementary Data
TABLE OF CONTENTS
PAGE
------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 17
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 2001 and 2000 18
Consolidated Statements of Operations for the Years Ended
December 31, 2001, 2000 and 1999 19
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 2001, 2000 and 1999 20
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001, 2000 and 1999 21
Notes to Consolidated Financial Statements 22
Information required by schedules called for under Regulation S-X is either
not applicable or is included in the consolidated financial statements or notes
thereto.
16
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Emerging Vision, Inc.:
We have audited the accompanying consolidated balance sheets of Emerging
Vision, Inc. (a New York corporation) and subsidiaries as of December 31, 2001
and 2000, and the related consolidated statements of operations, shareholders'
equity and cash flows for the three years ended December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Emerging Vision, Inc. and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for the three years ended December 31, 2001 in
conformity with accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Melville, New York
April 8, 2002
17
EMERGING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
December 31,
-----------------------------
2001 2000
-----------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,053 $ 5,215
Franchise receivables, net of allowance of $3,095 and $3,521, respectively 1,837 1,493
Other receivables, net of allowance of $171 and $323, respectively 739 1,997
Current portion of franchise notes receivable 2,993 2,622
Inventories, net 783 1,033
Prepaid expenses and other current assets 94 475
--------- ---------
Total current assets 7,499 12,835
--------- ---------
Property and equipment, net 1,075 2,995
Franchise notes and other receivables, net of allowance of $3,326 and $3,019, respectively 862 3,926
Goodwill, net 1,266 1,534
Other assets 355 401
Net assets of discontinued operations - 840
--------- ---------
Total assets $ 11,057 $ 22,531
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations $ 186 $ 221
Accounts payable and accrued liabilities 7,122 13,595
Accrual for store closings 964 -
Related party borrowings (Note 13) 750 -
Net liabilities of discontinued operations 235 3,006
--------- ---------
Total current liabilities 9,257 16,822
--------- ---------
Capital lease obligations 363 533
--------- ---------
Excess of fair value of assets acquired over cost - 317
--------- ---------
Franchise deposits and other liabilities 820 954
--------- ---------
Commitments and contingencies (Note 12)
Shareholders' equity
Preferred stock, $.01 par value per share; 5,000,000 shares authorized:
Senior Convertible Preferred Stock, $100,000 liquidation preference per
share; 3 shares issued and outstanding 287 287
Common stock, $.01 par value per share; 50,000,000 shares authorized; 27,187,309 and
25,559,231 shares issued, respectively, and 27,004,972 and 25,382,230 shares outstanding,
respectively 272 256
Treasury stock, at cost, 182,337 and 177,001 shares, respectively (204) (203)
Additional paid-in capital 119,926 119,453
Accumulated deficit (119,664) (115,888)
--------- ---------
617 3,905
--------- ---------
$ 11,057 $ 22,531
========= =========
The accompanying notes are an integral part of these consolidated balance
sheets.
18
EMERGING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
For the Year Ended December 31,
-----------------------------------------
2001 2000 1999
-----------------------------------------
Revenues:
Net sales $ 11,648 $ 12,115 $ 17,601
Franchise royalties 7,860 9,077 9,355
Net gains and fees from the conveyance of Company-owned store
assets to franchisees 140 298 667
Interest on franchise notes receivable 947 1,210 1,465
Other income 24 358 492
--------- --------- ---------
20,619 23,058 29,580
--------- --------- ---------
Costs and expenses:
Cost of sales 3,077 3,870 4,856
Selling, general and administrative expenses 20,361 31,260 23,609
Loss from franchised stores operated under management agreements 167 627 605
Provision for store closings (Note 8) 964 - -
Charges related to long-lived assets 930 1,131 -
Non-cash charges for issuance of common stock, warrants and induced
conversions of warrants 165 366 2,371
Interest expense 43 432 830
--------- --------- ---------
25,707 37,686 32,271
--------- --------- ---------
Loss from continuing operations before provision for income taxes (5,088) (14,628) (2,691)
Provision for income taxes - - -
--------- --------- ---------
Loss from continuing operations (5,088) (14,628) (2,691)
--------- --------- ---------
Discontinued operations: (Note 2)
Income (loss) from discontinued operations 1,312 (15,533) 430
Loss on disposal of discontinued operations - (8,831) -
--------- --------- ---------
Income (loss) from discontinued operations 1,312 (24,364) 430
--------- --------- ---------
Net loss $ (3,776) $ (38,992) $ (2,261)
========= ========= =========
Per share information - basic and diluted: (Note 4)
Loss from continuing operations $ (0.19) $ (2.04) $ (0.41)
Income (loss) from discontinued operations 0.05 (0.66) 0.03
Loss on disposal of discontinued operations - (0.37) -
--------- --------- ---------
Net loss per share $ (0.14) $ (3.07) $ (0.38)
========= ========= =========
Weighted-average number of common shares outstanding - basic and diluted 26,409 23,627 15,232
========= ========= =========
The accompanying notes are an integral part of these consolidated
statements.
19
EMERGING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(In Thousands, Except Share Data)
Series B Convertible Senior Convertible
Preferred Stock Preferred Stock Common Stock
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ---------- --------
BALANCE - DECEMBER 31, 1998................................ - $ - 35 $4,025 14,920,351 $ 149
----------- ------- ------ ------ ---------- --------
Issuance of common shares upon induced conversion
of Senior Convertible Preferred Stock................. - - (14) (1,608) 1,172,500 12
Issuance of common shares to vendors and franchisees....... - - - - 61,273 1
Acquisition of RBG Consulting, Ltd......................... - - - - - -
Issuance of common shares upon exercise of warrants........ - - - - 500,000 5
Charge for payments related to stock price guarantees...... - - - - - -
Dividends on Senior Convertible Preferred Stock............ - - - - 22,506 -
Issuance of warrants for consulting services............... - - - - - -
Charge related to reductions in exercise price of warrants. - - - - - -
Net loss................................................... - - - - - -
----------- ------- ------ ------ ---------- --------
BALANCE - DECEMBER 31, 1999................................ - - 21 2,417 16,676,630 167
Issuance of common shares upon induced conversion
of Senior Convertible Preferred Stock................. - - (18) (2,130) 2,468,334 25
Exercise of stock options and warrants..................... - - - - 2,048,460 20
Issuance of common shares for consulting services.......... - - - - 1,010,000 10
Issuance of Series B Convertible Preferred Stock........... 1,677,570 - - - - -
Issuance of warrants in connection with
Series B Convertible Preferred Stock.................. - - - - - -
Accretion of dividends on Series B Convertible
Preferred Stock....................................... - 11,743 - - - -
Issuance of common shares upon conversion of Series B
Convertible Preferred Stock........................... (1,677,570) (11,743) - - 3,355,140 34
Issuance of common shares to franchisees................... - - - - 667 -
Issuance of warrants and options for consulting services... - - - - - -
Equity contribution related to extinguishment of
debt to related party................................. - - - - - -
Acquisition of treasury shares............................. - - - - - -
Net loss................................................... - - - - - -
----------- ------- ------ ------ ---------- --------
BALANCE - DECEMBER 31, 2000................................ - - 3 287 25,559,231 256
Issuance of common shares for consulting services (Note 14) - - - - 1,628,078 16
Acquisition of treasury shares (Note 14)................... - - - - - -
Net loss................................................... - - - - - -
----------- ------- ------ ------ ---------- --------
BALANCE - DECEMBER 31, 2001................................ - $ - 3 $ 287 27,187,309 $ 272
=========== ======= ====== ====== ========== ========
The accompanying notes are an integral part of these consolidated statements.
EMERGING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(In Thousands, Except Share Data)
Treasury Stock, Additional Total
at cost Paid-In Accumulated Shareholders'
Shares Amount Capital Deficit Equity
------ ----- -------- --------- --------
BALANCE - DECEMBER 31, 1998................................. - $ - $ 46,036 $ (37,663) $ 12,547
------- ----- -------- --------- --------
Issuance of common shares upon induced conversion
of Senior Convertible Preferred Stock.................. - - 5,035 (3,439) -
Issuance of common shares to vendors and franchisees........ - - 249 - 250
Acquisition of RBG Consulting, Ltd.......................... - - 640 - 640
Issuance of common shares upon exercise of warrants......... - - 995 - 1,000
Charge for payments related to stock price guarantees....... - - (386) - (386)
Dividends on Senior Convertible Preferred Stock............. - - 83 (83) -
Issuance of warrants for consulting services................ - - 2,000 - 2,000
Charge related to reductions in exercise price of warrants.. - - 371 - 371
Net loss.................................................... - - - (2,261) (2,261)
------- ----- -------- --------- --------
BALANCE - DECEMBER 31, 1999................................. - - 55,023 (43,446) 14,161
Issuance of common shares upon induced conversion
of Senior Convertible Preferred Stock.................. - - 23,812 (21,707) -
Exercise of stock options and warrants...................... - - 7,672 - 7,692
Issuance of common shares for consulting services........... - - 9,798 - 9,808
Issuance of Series B Convertible Preferred Stock............ - - 6,239 - 6,239
Issuance of warrants in connection
with Series B Convertible Preferred Stock............. - - 4,379 - 4,379
Accretion of dividends on Series B Convertible
Preferred Stock........................................ - - - (11,743) -
Issuance of common shares upon conversion of Series B
Convertible Preferred Stock............................ - - 11,709 - -
Issuance of common shares to franchisees.................... - - - - -
Issuance of warrants and options for consulting services.... - - 94 - 94
Equity contribution related to extinguishment of
debt to related party.................................. - - 727 - 727
Acquisition of treasury shares.............................. 177,001 (203) - - (203)
Net loss.................................................... - - - (38,992) (38,992)
------- ----- -------- --------- --------
BALANCE - DECEMBER 31, 2000 177,001 (203) 119,453 (115,888) 3,905
Issuance of common shares for consulting services (Note 14) - - 473 - 489
Acquisition of treasury shares (Note 14)................... 5,336 (1) - - (1)
Net loss................................................... - - - (3,776) (3,776)
------- ----- -------- --------- --------
BALANCE - DECEMBER 31, 2001................................ 182,337 $(204) $119,926 $(119,664) $ 617
======= ===== ======== ========= ========
The accompanying notes are an integral part of these consolidated
statements.
20
EMERGING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
For the Year Ended December 31,
----------------------------------------------
2001 2000 1999
----------------------------------------------
Cash flows from operating activities:
Net loss from continuing operations $ (5,088) $ (14,628) $ (2,691)
Adjustments to reconcile net loss from continuing operations
to net cash used in operating activities:
Depreciation and amortization 1,351 1,440 1,653
Provision for doubtful accounts 138 6,967 1,007
Provision for inventories 100 - -
Net gains from the conveyance of Company-owned store assets to
franchisees - (298) (667)
Accrued interest - - 83
Amortization of excess of fair value of assets acquired over cost (317) (348) (348)
Non-cash compensation charges related to options and warrants 165 94 2,371
Charges related to long-lived assets 930 1,131 -
Changes in operating assets and liabilities:
Franchise and other receivables 1,007 (35) (1,526)
Inventories 150 880 355
Prepaid expenses and other current assets 381 95 69
Other assets 15 330 (1,117)
Accounts payable and accrued liabilities (5,365) 2,788 (269)
Franchise deposits and other liabilities (134) (32) (106)
Accrual for store closings 964 (299) 180
--------- --------- ---------
Net cash used in operating activities (5,703) (1,915) (1,006)
--------- --------- ---------
Cash flows from investing activities:
Franchise notes receivable issued - (582) (2,816)
Proceeds from franchise and other notes receivable 1,961 2,030 3,859
Purchases of property and equipment (345) (1,579) (1,386)
Proceeds from conveyance of property and equipment - - 1,947
--------- --------- ---------
Net cash provided by (used in) investing activities 1,616 (131) 1,604
--------- --------- ---------
Cash flows from financing activities:
Payments related to stock price guarantees - - (386)
Proceeds from the exercise of stock options and warrants - 7,692 1,000
Proceeds from borrowings 750 - 981
Payments on borrowings (205) (6,594) (2,968)
Net proceeds from the issuance of Series B Convertible Preferred Stock - 10,618 -
Acquisition of treasury shares (1) (203) -
--------- --------- ---------
Net cash provided by (used in) financing activities 544 11,513 (1,373)
--------- --------- ---------
Net cash (used in) provided by continuing operations (3,543) 9,467 (775)
--------- --------- ---------
Net cash (used in) provided by discontinued operations (619) (4,360) 55
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents (4,162) 5,107 (720)
Cash and cash equivalents - beginning of year 5,215 108 828
--------- --------- ---------
Cash and cash equivalents - end of year $ 1,053 $ 5,215 $ 108
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 49 $ 324 $ 699
========= ========= =========
Taxes $ 69 $ 28 $ 62
========= ========= =========
Non-cash investing and financing activities:
Franchise store assets reacquired $ 501 $ 416 $ 815
Issuance of common shares for consulting services 165 - -
Issuance of common shares to settle vendor payable related to discontinued
operations 324 - -
Extinguishment of related party debt - 727 -
Preferred stock dividend paid in common shares - - 83
The accompanying notes are an integral part of these consolidated
statements.
21
EMERGING VISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BUSINESS:
Business
- --------
Emerging Vision, Inc. and subsidiaries (the "Company"), is one of the
largest chains of retail optical stores and one of the largest franchise optical
chains in the United States, based upon domestic sales and the number of
locations of Company-owned and franchised stores (collectively referred to
herein as "Sterling Stores"). The Company was incorporated under the laws of the
State of New York in January 1992 and, in July 1992, purchased substantially all
of the assets of Sterling Optical Corp., a New York corporation then a
debtor-in-possession under Chapter 11 of the U.S. Bankruptcy Code.
On March 28, 2001, the Board of Directors decided that the Company should
focus its efforts and resources on growing its retail optical business and, as a
result, approved a plan to discontinue all other operations then being conducted
by the Company (Note 2). In connection with this decision, during 2001, the
Company completed its plan of disposal of substantially all of the net assets of
Insight Laser Centers, Inc. ("Insight Laser") - which operated three laser
vision correction centers in the New York metropolitan area, Insight Laser
Centers N.Y.I, Inc. (the "Ambulatory Center") - the owner of the assets of an
ambulatory surgery center located in Garden City, New York, and its Internet
Division - which was to provide a web-based portal being designed to take
advantage of business-to-business opportunities in the optical industry.
As of December 31, 2001, there were 203 Sterling Stores in operation,
consisting of 34 Company-owned stores (including 9 stores being managed by
franchisees), and 169 franchised stores (including 1 franchised store being
managed by the Company on behalf of the franchisee - Note 3). As discussed in
Note 8, the Company anticipates closing 11 of its non-profitable Company-owned
stores during 2002.
Basis of Presentation
- ---------------------
The Consolidated Financial Statements reflect the operations of the
Company's retail optical store division as continuing operations. The results of
operations and cash flows of Insight Laser, the Ambulatory Center and the
Internet Division are reflected as discontinued operations in accordance with
Accounting Principles Board ("APB") Opinion No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions". The
remaining net liabilities of those segments of the Company's business have been
separately stated on the accompanying Consolidated Balance Sheets as net assets
or liabilities of discontinued operations, and are classified depending on their
expected realization and/or settlement date.
Management's Liquidity Plans
- ----------------------------
As of December 31, 2001, the Company had negative working capital of
$1,758,000, and cash on hand of $1,053,000. During 2001, the Company's operating
activities used approximately $5,703,000 of cash, of which approximately
$3,977,000 related to one-time liabilities that arose as a result of the
Company's plan of disposal (Note 2).
The Company plans to attempt to improve its cash flows during 2002 by
improving store profitability through increased monitoring of store-by-store
operations, closing non-profitable Company-owned stores, implementing reductions
of administrative overhead expenses, where necessary and feasible, actively
supporting development programs for franchisees, and by seeking additional
financing, if necessary and available. Management believes that with its plans
to attempt to improve cash flows as discussed above, its existing cash, the
collection of outstanding receivables, and the availability under its existing
credit facility (Note 19), there will be sufficient liquidity available to the
Company to continue in operation until at least the end of the first quarter of
2003. There can be no assurance, however, that the Company will be able achieve
the aforementioned plans, or that any financing will be available.
NOTE 2 - DISCONTINUED OPERATIONS:
As discussed in Note 1, in March 2001, the Company's Board of Directors
decided to discontinue the operations of the Internet, Insight Laser and
Ambulatory Center divisions. The Company successfully completed its plan of
disposal of the assets of these segments in 2001; accordingly, the remaining
results of operations and cash flows have been reflected as discontinued
operations in the accompanying consolidated financial statements. As of December
31, 2001 and 2000, respectively, net liabilities of $235,000 and $2,166,000
related to these discontinued operations were segregated on the accompanying
Consolidated Balance Sheets.
22
In connection with its original plan of disposal, the Company, as of
December 31, 2000, recorded an initial provision of approximately $8,116,000 for
costs associated with the plan. This provision included estimates of future
operating losses, known and anticipated expenses associated with the sale of the
net assets of these divisions, and an estimate of loss upon disposition. As of
December 31, 2000, approximately $4,719,000 of this provision was accrued as
part of accounts payable and accrued liabilities on the accompanying
Consolidated Balance Sheet.
Internet Division
During 2001, in connection with discontinuing the operations of the
Internet Division, the Company incurred an aggregate of approximately $805,000
in severance payments to all of the Internet Division's personnel located in its
Dallas, Texas office, and approximately $1,298,000 of operating costs. Included
in such severance payments were payments of $277,000 and $205,000, respectively,
to Mr. Gregory Cook, the Company's former President and Chief Executive Officer,
and Mr. James Ewer, the Company's former Senior Vice-President of Operations.
Additionally, on March 23, 2001, the Company issued to each of Mssrs. Cook and
Ewer, fully-vested stock options to purchase 250,000 shares of the Company's
Common Stock at an exercise price of $0.25, the fair market value on the date of
grant.
On April 24, 2001, the Company and Ms. Sara V. Traberman, the former Chief
Financial Officer of the Company, settled her claim for severance benefits
(which, in accordance with the terms of her Employment Agreement with the
Company, called for a cash settlement in the approximate amount of $1,300,000,
and the immediate vesting of the 400,000 stock options previously granted to her
under the Agreement, all as a result of the failure of the Company to sell its
non-Internet related assets by March 1, 2001) for a lump sum payment of
$750,000, plus the issuance of fully-vested stock options to purchase 125,000
shares of the Company's Common Stock at an exercise price of $0.29, the fair
market value on the date of grant.
On July 5, 2001, the Company and each of Rare Medium Group, Inc. and Rare
Medium, Inc. (collectively, "Rare") entered into a Settlement Agreement and
Mutual Release whereby the Company's dispute with Rare regarding their
respective obligations under the Company's various agreements with Rare
(pertaining to the development and implementation of the e-commerce business and
strategies of the Company's previously abandoned Internet Division) was settled,
and each of the parties was released from substantially all of its respective
obligations under the various agreements between the parties (including, but not
limited to, the $3.00 price protection guarantee afforded Rare with respect to
the 1,000,000 shares of the Company's Common Stock previously issued to Rare
under the agreements (the "Existing Shares"), all in exchange for the Company's
payment to Rare of $375,000, the Company's issuance to Rare of an additional
1,000,000 shares of its Common Stock (which the Company was required to attempt
to register for resale under the Securities Act of 1933, as amended (the
"Act")), and the Company's agreement not to impede Rare's ability to sell the
Existing Shares, all of which were previously registered under the Act. As this
settlement amount was accrued as of December 31, 2000, no charge to the
accompanying Consolidated Statement of Operations was required in 2001.
Additionally, the Company successfully settled certain claims related to
its Internet Division for less than the amounts originally accrued. As a result,
at various times during 2001, the Company reevaluated its total accrual related
to the discontinuance of the operations of its Internet Division and,
accordingly, reversed approximately $610,000 of such accrual into earnings.
Insight Laser
In early 2001, the Company closed two of its three Insight Laser locations
and, in an effort to pursue a sale of the remaining net assets, continued to
operate from its flagship center located in Trump Tower in New York City. The
Company was unsuccessful in its attempts to sell the business and net assets of
Insight Laser and, in September 2001, made a decision to cease all operations,
effective as of November 30, 2001, and attempt to settle all of Insight Laser's
liabilities in connection therewith (including lease termination costs and
employee-related severance costs), as well as to thereafter liquidate the assets
thereof. As a result of this decision not to sell such assets, the Company
accrued an additional $425,000 related to the discontinuance of the operations
of Insight Laser.
Ambulatory Center
On May 31, 2001, the Company and the owner/licensee of the Ambulatory
Center reached an agreement whereby the Company sold and transferred its assets
then located in the Ambulatory Center to a limited liability company owned, in
principal part, by the owner/licensee thereof. In consideration of the sale and
transfer, the purchaser assumed the Ambulatory Center's liabilities (subject to
certain limitations), released the Company from its obligations under the lease
for the premises of the Ambulatory Center (except in limited circumstances),
agreed to the termination of the Administrative Services and Consulting
Agreement
23
whereby the Company rendered services to the owner/licensee in connection
with the operation of the Ambulatory Center, and agreed to the termination of
the Purchase Agreement whereby an affiliate of the Company had agreed to
purchase the New York State License (Certificate of Need) for the Ambulatory
Center. As a result, the Company reversed into earnings, $887,000 of the
previously accrued $1,145,000 of liabilities related to the Ambulatory Center.
For the year ended December 31, 2001, the Company incurred approximately
$62,000, related to the aforementioned guarantee of certain liabilities of the
Ambulatory Center. Additionally, as of December 31, 2001, the Company has
accrued an additional $104,000 related to such estimated guaranty liabilities
for 2002.
The reversal of $1,497,000 of amounts previously accrued for the Internet
Division and Ambulatory Center, offset by the aforementioned additional accrual
of $425,000 for Insight Laser, is reflected in income from discontinued
operations on the accompanying Consolidated Statement of Operations for the year
ended December 31, 2001. As of December 31, 2001, approximately $141,000 related
to discontinued operations remains accrued as part of accounts payable and
accrued liabilities on the accompanying Consolidated Balance Sheet.
Summarized financial information for these discontinued operations is as
follows (in thousands):
As of and for the Years Ended December 31:
Internet Insight Ambulatory
Division Laser Center Total
-------- --------- ---------- ---------
2001
Net revenues $ - $ 1,004 $ 72 $ 1,076
======== ========= ========== =========
Net income (loss) * $ 563 $ (47) $ 796 $ 1,312
======== ========= ========== =========
Current assets $ - $ - $ - $ -
======== ========= ========== =========
Total assets $ - $ - $ - $ -
======== ========= ========== =========
Current liabilities $ 145 $ 90 $ - $ 235
======== ========= ========== =========
Net assets (liabilities) $ (145) $ (90) $ - $ (235)
======== ========= ========== =========
2000
Net revenues $ 108 $ 2,610 $ 753 $ 3,471
======== ========= ========== =========
Net loss $(19,573) $ (1,083) $ (3,708) $(24,364)
======== ========= ========== =========
Current assets $ 36 $ 13 $ 10 $ 59
======== ========= ========== =========
Total assets $ 36 $ 953 $ 10 $ 999
======== ========= ========== =========
Current liabilities $ 1,208 $ 1,857 $ - $ 3,065
======== ========= ========== =========
Net assets (liabilities) $ (1,172) $ (1,004) $ 10 $ (2,166)
======== ========= ========== =========
* Net income results from the reversal of accruals associated with the
Company's plan of disposal.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and the
disclosure of contingent assets and liabilities as of the dates of such
financial statements, and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from those estimates.
Significant estimates made by management include, but are not limited to,
allowances on franchise, notes and other receivables, and accruals for store
closings and costs of disposal of discontinued operations.
Principles of Consolidation
- ---------------------------
The Consolidated Financial Statements include the accounts of Emerging
Vision, Inc. and its operating subsidiaries, all of which are wholly owned. All
intercompany balances and transactions have been eliminated in consolidation.
24
Company-Managed Stores
- ----------------------
The Company accounts for the results of operations of certain franchised
Sterling Stores operated by the Company under management agreements in
accordance with Emerging Issues Task Force Issue 97-2 ("EITF 97-2"),
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." In accordance with EITF 97-2, the results of
operations of Company-managed stores are shown on a net basis, and are
classified as a loss from franchised stores operated under management agreements
in the accompanying Consolidated Statements of Operations.
For the years ended December 31, 2001, 2000 and 1999, the Company managed
1, 3 and 5 Sterling Stores, respectively, for franchisees, under management
agreements entered into with each such franchisee. These management agreements
generally provide for the operation of the Sterling Store in question, by the
Company, with all operating decisions primarily being made by the Company. The
Company owns the inventory at these locations and is responsible for the
collection of all revenues and the payment of all associated expenses. For the
years ended December 31, 2001, 2000 and 1999, these stores generated revenues of
$216,000, $1,382,000 and $1,524,000, respectively, and net losses of $167,000,
$627,000 and $605,000, respectively. Subsequent to December 31, 2001, due to the
significant operating losses being incurred, the Company terminated its single
outstanding management agreement with the franchisee of the Sterling Store in
question, recovered the assets of such store, and entered into a termination
agreement with the landlord thereof for the lease of the location. The cost of
this termination amounted to approximately $80,000.
Revenue Recognition
- -------------------
The Company generally charges franchisees a nonrefundable initial franchise
fee. Initial franchise fees are recognized at the time all material services
required to be provided by the Company have been substantially performed.
Continuing franchise royalty fees are based upon a percentage of the gross
revenues generated by each franchised location and are recorded as earned.
The Company recognizes revenues in accordance with SEC Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements." Accordingly,
revenues are recorded when persuasive evidence of an arrangement exists,
delivery has occurred or services have been rendered, the Company's price to the
buyer is fixed or determinable, and collectibility is reasonably assured.
The Company derives its revenues from the following four principal sources:
Net sales - Represents sales from eye care products and related services;
Franchise royalties - Represents continuing franchise fees based upon a
percentage of the gross revenues generated by each franchised location;
Net gains from the conveyance of Company-store assets to franchisees -
Represents the net gains from the sale of Company-owned store assets to
franchisees; and
Interest on franchise notes - Represents interest charged to franchisees
pursuant to promissory notes issued in connection with a franchisee's
acquisition of the assets of a Sterling Store or a qualified refinancing of a
franchisee's obligations to the Company.
The Company also follows the provisions of EITF 01-09, "Accounting for
Consideration Given by a Vendor to a Customer (Including Reseller of the
Vendor's Products)" and, accordingly, accounts for discounts, coupons and
promotions (tha