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U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15 (d) of the
Securities and Exchange Act of 1934
For the fiscal year ended December 31, 2002
Commission File Number 1-14128
EMERGING VISION, INC.
(Exact name of Registrant as specified in its Charter)
NEW YORK 11-3096941
(State of incorporation) (I.R.S. 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:
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. [ ]
Indicate by check mark whether the registrant is an accelerated filer as
defined in Rule 12b-2 of the Act.
Yes No X
--- ---
The aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold, as of June 30, 2002, was $1,084,878.
Number of shares outstanding as of March 24, 2003:
29,890,620 shares of Common Stock, par value $0.01 per share
Documents incorporated by reference: None
Part I
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 ceased further development and discontinued the operations thereof.
STORE OPERATIONS
The Company and its franchisees operate retail optical stores under the
trade names "Sterling 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.
Occasionally, 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 both the Sterling Optical and Site For Sore Eyes
brand names. 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, 2002, there were 182 Sterling Stores in operation,
consisting of 23 Company-owned stores (including 8 stores being managed by
franchisees), and 159 franchised stores. The Company currently seeks to focus on
expanding its franchised store operations. Sterling Stores are located in 23
states, the District of Columbia, Canada, and the U.S. Virgin Islands.
Page -2-
The following chart sets forth the breakdown of Sterling Stores in
operation as of December 31, 2002 and 2001:
December 31,
2002(*) 2001
-------- --------
I. COMPANY-OWNED STORES:
--------------------
Company-owned stores......................... 15 25
Company-owned stores managed by franchisees.. 8 9
---- ----
Total.................. 23 34
==== ====
(*)Existing store locations: California (2), Iowa (1), Minnesota (1),
Nebraska (1), New York (14), North Dakota (1), Pennsylvania (1), and Wisconsin
(2).
II. FRANCHISED STORES:
-----------------
Franchised stores.......................... 159 168
Franchised stores managed by the Company... - 1
---- ----
Total.................. 159 169
==== ====
(*)Existing store locations: California (28), Colorado (1), Connecticut
(1), Delaware (6), Florida (1), Illinois (2), Kentucky (2), Maryland (17),
Massachusetts (1), Minnesota (1), Montana (1), Nevada (1), New Jersey (8), New
York (42), North Dakota (5), Ontario, Canada (2), Pennsylvania (15), South
Dakota (1), Texas (1), Virginia (8), Washington, D.C. (2), West Virginia (1),
Wisconsin (10), 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 ophthalmic 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, as well
as assistance in obtaining managed care contracts. 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.
Page -3-
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.
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 an advertising fund (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. In the past, the Company 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 2002, ten
franchised stores were closed, and the assets of (as well as possession of) an
additional 4 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.
Page -4-
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.
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 continually
refining its interactive web site, which further markets the "Sterling Optical"
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,
contracts with payors (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.
Page -5-
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.
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 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 March 24, 2003, the Company employed approximately 160 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 an employment agreement with one of its key
executives.
Page -6-
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. Generally, Sterling Stores range in size from 1,000 to 2,000
square feet.
Page -7-
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 Note 12 to the Consolidated Financial
Statements included in Item 8 of this Report, and is incorporated by reference
herein.
Page -8-
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, 2002.
Page -9-
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 closing
sales prices for the Registrant's Common Stock for each quarterly period of the
last two years, is as follows:
2002 2001
------------------ ------------------
Quarter Ended: High Low High Low
-------------- ------- ------- ------- -------
March 31 $0.14 $0.07 $0.72 $0.22
June 30 $0.11 $0.05 $0.37 $0.19
September 30 $0.10 $0.04 $0.80 $0.13
December 31 $0.10 $0.03 $0.14 $0.06
The approximate number of shareholders of record of the Company's Common
Stock as of March 24, 2003, was 300.
There was one shareholder of record of the Company's Senior Convertible
Preferred Stock as of March 24, 2003.
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.
Page -10-
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, 2002 were audited by Miller Ellin & Company LLP,
independent public accountants.
(In thousands, except for per share data)
Year Ended December 31,
----------------------------------------------------------------------
Statement of Operations Data: 2002 2001 2000 1999 1998
------------- ------------- -------------- ------------- -------------
System-wide sales (1) $ 104,448 $ 124,589 $ 128,775 $ 140,321 $ 147,402
========== ========== ========== ========== ==========
Total revenues $ 17,425 $ 20,619 $ 23,058 $ 29,580 $ 32,582
========== ========== ========== ========== ==========
Loss from continuing operations $ (4,721) $ (5,088) $ (14,628) $ (2,691) $ (16,016)
========== ========== ========== ========== ==========
Income (loss) from discontinued operations $ 74 $ 1,312 $ (15,533) $ 430 $ (956)
========== ========== ========== ========== ==========
Loss on disposal of discontinued operations $ - $ - $ (8,831) $ - $ -
========== ========== ========== ========== ==========
Net loss $ (4,647) $ (3,776) $ (38,992) $ (2,261) $ (17,777)
========== ========== ========== ========== ==========
Per Share Information - basic and diluted
- -----------------------------------------
Loss from continuing operations $ (0.17) $ (0.19) $ (2.04) $ (0.41) $ (1.10)
========== ========== ========== ========== ==========
Income (loss) from discontinued operations $ 0.01 $ 0.05 $ (0.66) $ 0.03 $ (0.07)
========== ========== ========== ========== ==========
Loss on disposal of discontinued operations $ - $ - $ (0.37) $ - $ -
========== ========== ========== ========== ==========
Net loss per share $ (0.16) $ (0.14) $ (3.07) $ (0.38) $ (1.23)
========== ========== ========== ========== ==========
Weighted-average common shares outstanding 28,641 26,409 23,627 15,232 14,627
========== ========== ========== ========== ==========
Balance Sheet Data:
- -------------------
Working capital deficit $ (4,632) $ (1,011) $ (3,987) $ (4,795) $ (3,351)
Total assets 6,650 11,057 22,531 30,312 32,685
Total debt 1,494 1,299 754 7,347 9,751
Quarterly Data:
- ---------------
First Quarter Second Quarter Third Quarter Fourth Quarter
--------------- ---------------- --------------- ----------------
2002 2001 2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ---- ---- ----
Net revenues $ 4,802 $ 5,464 $ 3,936 $ 5,288 $ 4,807 $ 5,006 $ 3,880 $ 4,895
Net loss from continuing
operations $ (533) $ (41) $ (397) $ (57) $ (1,895) $ (1,942) $ (1,896) $ (3,048)
Income (loss) from discontinued
operations $ - $ 431 $ (120) $ 1,064 $ 287 $ (657) $ (93) $ 474
Net income (loss) $ (533) $ 390 $ (517) $ 1,007 $ (1,608) $ (2,599) $ (1,989) $ (2,574)
Page -11-
Sterling Store Data: (In thousands, except for number of stores)
Year Ended December 31,
---------------------------------------------------------------------
2002 2001 2000 1999 1998
------------- ------------- ------------- ------------- -------------
Company-owned stores bought, opened or reacquired 4 15 3 11 6
Company-owned stores sold or closed (14) (10) (13) (16) (21)
Company-owned stores at end of period 15 25 20 30 35
Company-owned stores being managed by Franchisees at end
of period 8 9 12 6 6
Franchised stores being managed by Company at end of period - 1 3 5 12
Franchised stores at end of period 159 169 201 218 251
Average sales per store (2):
Company-owned stores $ 337 $ 377 $ 396 $ 420 $ 478
Franchised stores $ 591 $ 564 $ 546 $ 495 $ 475
Average franchise royalties per franchised store (2) $ 47 $ 43 $ 42 $ 38 $ 35
(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.
Page -12-
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.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
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 $1,742,000, or 15.0%,
to $9,906,000 for the year ended December 31, 2002, as compared to $11,648,000
for the comparable period in 2001. The decrease in net sales was a direct result
of management's commitment to continue to close non-profitable Company-owned
stores. There were 15 stores being operated by the Company as of December 31,
2002, compared to 25 stores as of December 31, 2001. 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, 2002 and 2001), comparative net sales decreased by
$377,000, or 8.2%, to $4,204,000 for the year ended December 31, 2002, as
compared to $4,581,000 for the comparable period in 2001. Management believes
this decrease was primarily a result of the struggling U.S. economy, combined
with continuing national threats that significantly impacted the New York area,
in which most of our Company-owned stores operate.
Franchise royalties decreased by $1,044,000, or 13.3%, to $6,816,000 for
the year ended December 31, 2002, as compared to $7,860,000 for the comparable
period in 2001. This decrease was a result of the fact that there were fewer
franchised stores in operation during 2002 as compared to 2001. As of December
31, 2002, there were 159 franchised stores in operation, as compared to 169 as
of December 31, 2001. Additional factors driving the decrease were the
struggling U.S. economy, and certain other out of the ordinary threats and
incidents that took place in areas of the United States in which a large number
of our franchise stores operate, including New York, Maryland, Virginia,
Washington D.C., and California, which significantly affected retail traffic in
those areas.
Net gains on the conveyance of Company-store assets to franchisees, and
other franchise related fees (which includes initial franchise fees, renewal
fees and fees related to the transfer of store ownership from one franchisee to
another) decreased by $69,000, or 49.3%, to $71,000 for the year ended December
31, 2002, as compared to $140,000 for the comparable period in 2001. This
decrease was a direct result of a lower amount of initial franchise, transfer
and renewal fees for the year ended December 31, 2002, as compared to the
comparable period in 2001. The Company did not convey the assets of any of its
Company-owned stores to franchisees during 2002 or 2001.
Interest on franchise notes receivable decreased by $635,000, or 67.1%, to
$312,000 for the year ended December 31, 2002, as compared to $947,000 for the
comparable period in 2001. This decrease was principally due to several
franchise notes maturing during 2002, along with the fact that certain of the
Company's franchisees filed bankruptcy or experienced other significant personal
financial difficulties, leaving them unable to fulfill their commitment under
their respective promissory notes to the Company.
Other income increased by $262,000, to $320,000, for the year ended
December 31, 2002, as compared to $58,000 for the comparable period in 2001.
This increase was primarily a result of the sale of certain assets of the
Company to third parties, along with the settlement of certain existing
liabilities at lesser amounts than anticipated.
The Company's gross profit margin increased by 3.4%, to 77.0% for the year
ended December 31, 2002, as compared to 73.6% for the comparable period in 2001.
This increase was a result of improved inventory management and control,
improved purchasing at lower average product costs, and improved discounts
obtained in 2002 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.
Page -13-
Selling, general and administrative expenses decreased by $1,797,000, or
8.8%, to $18,564,000 for the year ended December 31, 2002, as compared to
$20,361,000 for the comparable period in 2001. This decrease was primarily due
to management's continuing plans to reduce administrative expenses, and to close
non-profitable Company-owned stores. Included were reductions in salaries and
related expenses of $2,216,000, facility and other overhead charges of $263,000,
and depreciation and amortization of $863,000. These items were offset by a
$1,691,000 increase in the provision for doubtful accounts related to certain
franchise receivables and notes that management deemed uncollectible due to,
among other reasons, certain of the Company's franchisees filing bankruptcy or
experiencing other significant personal financial difficulties, leaving them
unable to fulfill their financial obligations to the Company. A smaller portion
of this provision related to certain managed care receivables that were deemed
uncollectible.
Provision for store closings decreased by $44,000, to $920,000, for the
year ended December 31, 2002, as compared to $964,000 for the comparable period
in 2001. In 2002, management made the decision to close an additional 15 of its
Company-owned stores. In connection therewith, the Company recorded a provision
based on the estimated costs (including lease termination costs and other
expenses) that will be incurred in the closing of the stores.
Non-cash charges for the issuance of warrants and induced conversions of
warrants decreased by $165,000, or 100.0%, for the year ended December 31, 2002,
from the comparable period in 2001. This decrease was due to the fact that there
were no non-cash charges related to warrants or induced conversions during 2002.
The Company does, however, have 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 $167,000, or 100.0%, for the year ended December 31, 2002, from the
comparable period in 2001. The Company did not manage any stores on behalf of
franchisees during 2002, and has no intention of doing so in the future.
Interest expense increased by $130,000, or 168.8%, to $207,000 for the year
ended December 31, 2002, as compared to $77,000 for the comparable period in
2001. This increase was a direct result of interest paid, during 2002, in
connection with $2,000,000 in financing arrangements obtained by the Company in
January 2002.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2001 AND 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 three 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.
Page -14-
Other income decreased by $300,000, or 83.8%, to $58,000 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.
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 fact that the Company recorded increased charges of $10,260,000 for 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 for the year ended December 31, 2001. As discussed in 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 more closely 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 $355,000, or 82.2%, to $77,000 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.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 2002, cash flows provided by investing
activities were $1,058,000, principally due to the proceeds received on the
Company's franchise notes receivable, offset, in part, by limited capital
expenditures made by the Company during 2002.
Page -15-
For the year ended December 31, 2002, cash flows provided by financing
activities were $323,000, principally due to an aggregate of $2,141,000 of
proceeds from a secured note from an independent financial institution,
borrowings under the Company's credit facility with Horizons Investors Corp.
("Horizons"), a related party, and a loan from one of the Company's directors.
These proceeds were offset by payments made against the secured note, the credit
facility, the director loan, and short-term loans made at the end of 2001from
Horizons and Broadway Partners LLC ("Broadway"), also a related party.
As of December 31, 2002 (exclusive of net liabilities of discontinued
operations), the Company had negative working capital of $4,424,000 and cash on
hand of $664,000. During 2002, the Company used $1,817,000 of cash in its
operating activities. The Company incurred a net loss from continuing operations
of $4,721,000 for the year ended December 31, 2002. The primary components of
this loss were related to the provision for doubtful accounts of approximately
$1,829,000, along with a provision for store closings of $920,000. Additionally,
a majority of the cash used in operating activities was a result of $775,000 of
costs paid out related to the Company's store closure plan (Note 8), a net
decrease of $430,000 in accounts payable and accrued liabilities that existed as
of December 31, 2002, and $227,000 related to the prepayment of certain other
business expenses, offset, in part, by a net decrease of $328,000 in franchise
and other receivables, and a net decrease in inventories (due to the closure of
non-profitable Company-owned stores and improved inventory management) of
$290,000. Management anticipates that it will continue to make significant
payments against liabilities associated with the closure of non-profitable
Company-owned stores that are already reflected in the Consolidated Balance
Sheet as of December 31, 2002.
The Company plans to continue to improve its cash flows during 2003 by
improving store profitability through increased monitoring of store-by-store
operations, closing non-profitable Company-owned stores, continuing to implement
reductions of administrative overhead expenses where necessary and feasible,
actively supporting development programs for franchisees, and adding new
franchised stores to the system. Management believes that with the successful
execution of the aforementioned plans to improve cash flows, its existing cash,
the collection of outstanding receivables, and the successful completion of its
shareholder rights offering (Note 14), there will be sufficient liquidity
available for the Company to continue in operation through the first quarter of
2004. However, there can be no assurance that the Company will be able to
successfully execute the aforementioned plans, or that it will be successful in
completing its rights offering.
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
consolidated 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
Debt Extinguishments and Accounting for Leases
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." For most companies, SFAS No. 145 will require gains and
losses on extinguishments of debt to be classified as income or loss from
continuing operations, rather than as an extraordinary item as previously
required. Extraordinary treatment will be required for certain extinguishments
as provided in Accounting Principles Board ("APB") Opinion No. 30. SFAS No. 145
also amends SFAS No. 13 to require that certain modifications to capital leases
be treated as a sale-leaseback, and to modify the accounting for sub-leases when
the original lessee remains a secondary obligor. The Company is required to
adopt the provisions of SFAS No. 145 in the first quarter of 2003.
Page -16-
Costs to Exit an Activity
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which addresses financial
accounting and reporting for costs associated with exit or disposal activities,
and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. The requirements of SFAS No. 146
apply prospectively to activities that are initiated after December 31, 2002
and, as a result, the Company cannot reasonably estimate the impact of adopting
these new rules until and unless it undertakes relevant activities in future
periods.
Guarantee Disclosures
In November 2002, the FASB issued Interpretation ("FIN") No. 45
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," which clarifies the required
disclosures to be made by a guarantor in their interim and annual financial
statements about its obligations under certain guarantees that it has issued.
FIN No. 45 also requires a guarantor to recognize, at the inception of the
guarantee, a liability for the fair value of the obligation undertaken. The
Company is required to adopt the disclosure requirements of FIN No. 45 for
financial statements ending December 31, 2002. The Company is required to adopt
and accordingly has adopted prospectively the initial recognition and
measurement provisions of FIN No. 45 for guarantees issued or modified after
December 31, 2002 and, as a result, the Company cannot reasonably estimate the
impact of adopting these new rules until and unless it undertakes relevant
activities in future periods.
Stock Based Compensation
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of SFAS No. 123." This
Statement amends SFAS No. 123, "Accounting for Stock-Based Compensation", to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The adoption of SFAS No. 148 is
not expected to have a material impact on the Company's financial position or
results of operations.
Consolidation of Variable Interest Entities
In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities, which clarifies the application of Accounting Research
Bulletin No. 51, Consolidated Financial Statements, relating to consolidation of
certain entities. First, FIN No. 46 will require identification of the Company's
participation in variable interests entities ("VIEs"), which are defined as
entities with a level of invested equity that is not sufficient to fund future
activities to permit them to operate on a stand alone basis, or whose equity
holders lack certain characteristics of a controlling financial interest. For
entities identified as VIEs, FIN No. 46 sets forth a model to evaluate potential
consolidation based on an assessment of which party to the VIE, if any, bears a
majority of the exposure to its expected losses, or stands to gain from a
majority of its expected returns. FIN No. 46 also sets forth certain disclosures
regarding interests in VIEs that are deemed significant, even if consolidation
is not required. As the Company does not participate in VIEs, it does not
anticipate that the provisions of FIN No. 46 will have a material impact on its
financial position or results of operations.
Page -17-
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
- --------------------------------------------------------------------
The Company presently has outstanding certain equity instruments with
beneficial conversion terms. Accordingly, the Company, 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 and term loan. The Company
believes that the level of risk related 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 or term loan.
Page -18-
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
TABLE OF CONTENTS
PAGE
REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS 20-21
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 2002 and 2001 22
Consolidated Statements of Operations for the Years Ended
December 31, 2002, 2001 and 2000 23
Consolidated Statements of Shareholders' Equity (Deficit) for the
Years Ended December 31, 2002, 2001 and 2000 24
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002, 2001 and 2000 25
Notes to Consolidated Financial Statements 26
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.
Page -19-
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Emerging Vision, Inc.:
We have audited the accompanying consolidated balance sheet of Emerging
Vision, Inc. (a New York corporation) and subsidiaries (the "Company") as of
December 31, 2002, and the related consolidated statements of operations,
shareholders' equity (deficit) and cash flows for the year then ended. 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 audit. The consolidated financial statements of the Company as of, and for
the two years ended, December 31, 2001 were audited by other auditors who have
ceased operations and whose report, dated April 8, 2002, expressed an
unqualified opinion on those financial statements.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the 2002 financial statements referred to above present
fairly, in all material respects, the financial position of Emerging Vision,
Inc. and subsidiaries as of December 31, 2002, and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States.
As discussed in Note 3 to the financial statements, the Company changed its
method of accounting for goodwill in 2002, as required by the provisions of
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets."
/S/ Miller Ellin & Company LLP
New York, New York
March 28, 2003
Page -20-
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
THIS REPORT IS A COPY OF A PREVIOUSLY ISSUED ARTHUR ANDERSEN REPORT AND HAS
NOT BEEN REISSUED BY ARTHUR ANDERSEN. PURSUANT TO SEC RELEASE NO. 33-8070 AND
RULE 437A UNDER THE SECURITIES ACT OF 1933, AS AMENDED, EMERGING VISION, INC.
HAS NOT RECEIVED WRITTEN CONSENT AFTER REASONABLE EFFORT TO USE THIS REPORT.
BECAUSE ARTHUR ANDERSEN LLP HAS NOT CONSENTED TO THE INCLUSION OF THEIR REPORT
IN THIS REPORT, YOU WILL NOT BE ABLE TO RECOVER AGAINST ARTHUR ANDERSEN LLP
UNDER SECTION 11 OF THE SECURITIES ACT FOR ANY UNTRUE STATEMENTS OF A MATERIAL
FACT CONTAINED IN THE FINANCIAL STATEMENTS AUDITED BY ARTHUR ANDERSEN LLP OR ANY
OMISSIONS TO STATE A MATERIAL FACT REQUIRED TO BE STATED THEREIN.
Page -21-
EMERGING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
December 31,
2002 2001
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 664 $ 1,053
Franchise receivables, net of allowance of $1,063 and $3,095, respectively 1,133 1,837
Other receivables, net of allowance of $101 and $171, respectively 447 739
Current portion of franchise notes receivable, net of allowance
of $442 and $0, respectively 612 2,993
Inventories 456 783
Prepaid expenses and other current assets 321 94
----------- -----------
Total current assets 3,633 7,499
----------- -----------
Property and equipment, net 693 1,075
Franchise notes and other receivables, net of allowance of $1,486
and $3,326, respectively 781 862
Goodwill 1,266 1,266
Other assets 277 355
----------- -----------
Total assets $ 6,650 $ 11,057
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt, net (Note 11) $ 626 $ 186
Accounts payable and accrued liabilities (Note 9) 5,945 6,375
Accrual for store closings (Note 8) 1,109 964
Related party borrowings (Notes 11 and 13) 377 750
Net liabilities of discontinued operations 208 235
----------- -----------
Total current liabilities 8,265 8,510
----------- -----------
Long-term debt, net (Note 11) 260 363
----------- -----------
Related party borrowings (Notes 11 and 13) 231 -
----------- -----------
Franchise deposits and other liabilities 1,709 1,567
----------- -----------
Commitments and contingencies (Note 12)
Shareholders' equity (deficit):
Preferred stock, $0.01 par value per share; 5,000,000 shares authorized:
Senior Convertible Preferred Stock, $100,000 liquidation preference
per share; 1 and 3 shares issued and outstanding, respectively 74 287
Common stock, $0.01 par value per share; 150,000,000 shares authorized;
29,922,957 and 27,187,309 shares issued, respectively, and 29,740,620
and 27,004,972 shares outstanding, respectively 299 272
Treasury stock, at cost, 182,337 shares (204) (204)
Additional paid-in capital 120,345 119,926
Accumulated deficit (124,329) (119,664)
----------- -----------
Total shareholders' equity (deficit) (3,815) 617
----------- -----------
Total liabilities and shareholders' equity (deficit) $ 6,650 $ 11,057
=========== ===========
The accompanying notes are an integral part of these consolidated balance sheets.
Page -22-
EMERGING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
For the Year Ended December 31,
-----------------------------------------------
2002 2001 2000
--------------- --------------- ---------------
Revenues:
Net sales $ 9,906 $ 11,648 $ 12,115
Franchise royalties 6,816 7,860 9,077
Net gains from the conveyance of Company-store assets to franchisees, and
other franchise related fees 71 140 298
Interest on franchise notes receivable 312 947 1,210
Other income 320 58 358
----------- ----------- -----------
17,425 20,653 23,058
----------- ----------- -----------
Costs and expenses:
Cost of sales 2,282 3,077 3,870
Selling, general and administrative expenses 18,564 20,361 31,260
Loss from franchised stores operated under management agreements - 167 627
Provision for store closings (Note 8) 920 964 -
Charges related to long-lived assets 173 930 1,131
Non-cash charges for issuance of common stock, warrants and induced
conversions of warrants - 165 366
Interest expense 207 77 432
----------- ----------- -----------
22,146 25,741 37,686
----------- ----------- -----------
Loss from continuing operations before provision for income taxes (4,721) (5,088) (14,628)
Provision for income taxes - - -
----------- ----------- -----------
Loss from continuing operations (4,721) (5,088) (14,628)
----------- ----------- -----------
Discontinued operations (Note 2):
Income (loss) from discontinued operations 74 1,312 (15,533)
Loss on disposal of discontinued operations - - (8,831)
----------- ----------- -----------
Income (loss) from discontinued operations 74 1,312 (24,364)
----------- ----------- -----------
Net loss $ (4,647) $ (3,776) $ (38,992)
=========== =========== ===========
Per share information - basic and diluted (Note 4):
Loss from continuing operations $ (0.17) $ (0.19) $ (2.04)
Income (loss) from discontinued operations 0.01 0.05 (0.66)
Loss on disposal of discontinued operations - - (0.37)
----------- ----------- -----------
Net loss per share $ (0.16) $ (0.14) $ (3.07)
=========== =========== ===========
Weighted-average number of common shares outstanding - basic and diluted 28,641 26,409 23,627
=========== =========== ===========
The accompanying notes are an integral part of these consolidated statements.
Page -23-
EMERGING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(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, 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
Issuance of warrrants in connection with financing
arrangements (Note 11).................................. - - - - - -
Exercise of stock warrants (Note 15)....................... - - - - 2,500,000 25
Issuance of common shares upon conversion of Senior
Covertible Preferred Stock (Note 14).................... - - (2) (213) 235,648 2
Net loss................................................... - - - - - -
----------- ------- ------ ------ ---------- --------
BALANCE - DECEMBER 31, 2002................................ - $ - 1 $ 74 29,922,957 $ 299
=========== ======= ====== ====== ========== ========
The accompanying notes are an integral part of these consolidated statements.
EMERGING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) - (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(In Thousands, Except Share Data)
Treasury Stock, Additional Total
at cost Paid-In Accumulated Shareholders'
Shares Amount Capital Deficit Equity (Deficit)
------ ----- -------- --------- --------
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
Issuance of warrrants in connection with financing
arrangements (Note 11).................................. - - 190 - 190
Exercise of stock warrants (Note 15)....................... - - - - 25
Issuance of common shares upon conversion of Senior
Covertible Preferred Stock (Note 14).................... - - 229 (18) -
Net loss................................................... - - - (4,674) (4,674)
------- ----- -------- --------- --------
BALANCE - DECEMBER 31, 2002................................ 182,337 $(204) $120,345 $(124,329) $(3,815)
======= ===== ======== ========= ========
The accompanying notes are an integral part of these consolidated statements.
Page -24-
EMERGING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
For the Year Ended December 31,
----------------------------------------------
2002 2001 2000
-------------- ---------------- --------------
Cash flows from operating activities:
Net loss from continuing operations $ (4,721) $ (5,088) $ (14,628)
Adjustments to reconcile net loss from continuing operations
to net cash used in operating activities:
Depreciation and amortization 489 1,351 1,440
Provision for doubtful accounts 1,829 138 6,967
Provision for store closings 920 964 -
Provision for inventories - 100 -
Net gains from the conveyance of Company-owned store assets to
franchisees - - (298)
Amortization of excess of fair value of assets acquired over cost - (317) (348)
Non-cash compensation charges related to options and warrants 87 165 94
Charges related to long-lived assets 173 930 1,131
Changes in operating assets and liabilities:
Franchise and other receivables 328 1,007 (35)
Inventories 290 150 880
Prepaid expenses and other current assets (227) 381 95
Other assets 78 15 330
Accounts payable and accrued liabilities (430) (5,365) 2,788
Franchise deposits and other liabilities 142 (134) (32)
Accrual for store closings (775) - (299)
----------- ----------- -----------
Net cash used in operating activities (1,817) (5,703) (1,915)
----------- ----------- -----------
Cash flows from investing activities:
Franchise notes receivable issued (71) - (582)
Proceeds from franchise and other notes receivable 1,409 1,961 2,030
Purchases of property and equipment (280) (345) (1,579)
----------- ----------- -----------
Net cash provided by (used in) investing activities 1,058 1,616 (131)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from the exercise of stock options and warrants 25 - 7,692
Proceeds from borrowings 2,141 750 -
Payments on borrowings (1,843) (205) (6,594)
Net proceeds from the issuance of Series B Convertible Preferred Stock - - 10,618
Acquisition of treasury shares - (1) (203)
----------- ----------- -----------
Net cash provided by financing activities 323 544 11,513
----------- ----------- -----------
Net cash (used in) provided by continuing operations (436) (3,543) 9,467
----------- ----------- -----------
Net cash provided by (used in) discontinued operations 47 (619) (4,360)
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (389) (4,162) 5,107
Cash and cash equivalents - beginning of year 1,053 5,215 108
----------- ----------- -----------
Cash and cash equivalents - end of year $ 664 $ 1,053 $ 5,215
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 118 $ 49 $ 324
=========== =========== ===========
Taxes $ 75 $ 69 $ 28
=========== =========== ===========
Non-cash investing and financing activities:
Franchise store assets reacquired $ - $ 501 $ 416
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
The accompanying notes are an integral part of these consolidated statements.
Page -25-
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 management's beliefs, 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, 2002, there were 182 Sterling Stores in operation,
consisting of 23 Company-owned stores (including 8 stores being managed by
franchisees), and 159 franchised stores. As discussed in Note 8, the Company
anticipates closing 11 of its non-profitable Company-owned stores during 2003.
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, 2002 (exclusive of net liabilities of discontinued
operations), the Company had negative working capital of $4,424,000 and cash on
hand of $664,000. During 2002, the Company used $1,817,000 of cash in its
operating activities. The Company incurred a net loss from continuing operations
of $4,721,000 for the year ended December 31, 2002. The primary components of
this loss were related to the provision for doubtful accounts of approximately
$1,829,000, along with a provision for store closings of $920,000. Additionally,
a majority of the cash used in operating activities was a result of $775,000 of
costs paid out related to the Company's store closure plan (Note 8), a net
decrease of $430,000 in accounts payable and accrued liabilities that existed as
of December 31, 2002, and $227,000 related to the prepayment of certain other
business expenses, offset, in part, by a net decrease of $328,000 in franchise
and other receivables, and a net decrease in inventories (due to the closure of
non-profitable Company-owned stores and improved inventory management) of
$290,000. Management anticipates that it will continue to make significant
payments against liabilities associated with the closure of non-profitable
Company-owned stores that are already reflected in the Consolidated Balance
Sheet as of December 31, 2002.
The Company plans to continue to improve its cash flows during 2003 by
improving store profitability through increased monitoring of store-by-store
operations, closing non-profitable Company-owned stores, continuing to implement
reductions of administrative overhead expenses where necessary and feasible,
actively supporting development programs for franchisees, and adding new
franchised stores to the system. Management believes that with the successful
execution of the aforementioned plans to improve cash flows, its existing cash,
the collection of outstanding receivables, and the successful completion of its
shareholder rights offering (Note 14), there will be sufficient liquidity
available for the Company to continue in operation through the first quarter of
2004. However, there can be no assurance that the Company will be able to
successfully execute the aforementioned plans, or that it will be successful in
completing its rights offering.
Page -26-
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, 2002, there were approximately $159,000 of expenses associated with the
Company's disposal of these divisions accrued as part of accounts payable and
accrued liabilities on the accompanying Consolidated Balance Sheet. The majority
of this amount (of which $195,000 was provided for during 2002) relates to
certain potential ongoing liabilities that the Company agreed to guarantee in
connection with the Company's sale of the Ambulatory Center (Note 12).
In August 2002, the Company received approximately $342,000 in connection
with the Pillar Point Partners Antitrust and Patent Litigation, a class action
lawsuit to which Insight Laser was a plaintiff. This amount was reflected as
income from discontinued operations on the accompanying Consolidated Statement
of Operations for the year ended December 31, 2002, and offset the
aforementioned costs associated with the Ambulatory Center guarantee.
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.
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 and 2000, the Company managed 1 and 3
Sterling Stores, respectively, for franchisees, under management agreements
entered into with each such franchisee. These management agreements generally
provided for the operation of the Sterling Store in question, by the Company,
with all operating decisions primarily being made by the Company. The Company
owned the inventory at these locations and was responsible for the collection of
all revenues and the payment of all associated expenses. For the years ended
December 31, 2001 and 2000, these stores generated revenues of $216,000 and
$1,382,000, respectively, and net losses of $167,000 and $627,000, respectively.
The Company did not manage any stores on behalf of franchisees during 2002, and
has no intention of doing so in the future.
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,
subject to meeting all of the requirements of SAB 101 described below.
Page -27-
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, and
other franchise related fees - Represents the net gains from the sale of
Company-owned store assets to franchisees; and certain fees collected by the
Company under the terms of franchise agreements (including, but not limited to,
initial franchise fees, transfer fees and renewal fees).
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 recognizes revenues in accordance with SEC Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101").
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. To the extent that collectibility of royalties and/or interest on
franchise notes is not reasonably assured, the Company recognizes such revenue
when the cash is received.
The Company also follows the provisions of Emerging Issues Task Force
("EITF") Issue 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 (that are offered to its
customers) as a direct reduction of sales.
Cash and Cash Equivalents
- -------------------------
Cash represents cash on hand at Company-owned stores and cash on deposit
with financial institutions. All highly liquid investments with an original
maturity (from date of purchase) of three months or less are considered to be
cash equivalents. The Company's cash equivalents are invested in various
investment-grade, money market accounts.
Fair Value of Financial Instruments
- -----------------------------------
As of December 31, 2002, the carrying values of the Company's financial
instruments, such as cash and cash equivalents, accounts and notes receivable
and long-term debt, approximated their fair values, based on their short-term
maturities and the nature of these instruments.
Inventories
- -----------
Inventories are stated at the lower of cost or market value, and consist
primarily of contact lenses, ophthalmic lenses, eyeglass frames and sunglasses.
Property and Equipment
- ----------------------
Property and equipment are recorded at cost, less accumulated depreciation
and amortization. Depreciation is recorded on a straight-line basis over the
estimated useful lives of the respective classes of assets.
Goodwill
- --------
Through December 31, 2001, goodwill was being amortized, on a straight-line
basis, over its estimated useful life of 20 years, and accumulated amortization
on goodwill was approximately $1,275,000 as of December 31, 2001.
In 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other
Intangible Assets." This Statement provided that goodwill and intangible assets
with indefinite lives should no longer be amortized, but should be reviewed, at
least annually, for impairment. In accordance with the adoption of SFAS No. 142,
beginning January 1, 2002, the Company ceased amortizing its existing net
goodwill of $1,266,000, resulting in the exclusion of approximately $268,000 of
amortization expense for the year ended December 31, 2002. Management performed
a review of its existing goodwill and determined that it is not impaired as of
December 31, 2002.
Page -28-
Impairment of Long-Lived Assets
- -------------------------------
The Company follows the provisions of SFAS No. 121, "Accounting for the
Impairment of Long Lived Assets and for Long-Lived Assets to be Disposed Of".
This Statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable, but amends the prior accounting and reporting standards for
segments of a business to be disposed of. The Company periodically evaluates its
long-lived assets (on a store-by-store basis) based on, among other factors, the
estimated, undiscounted future cash flows expected to be generated from such
assets in order to determine if an impairment exists. For the years ended
December 31, 2002 and 2001, the Company recorded impairment charges of $0 and
$574,000, respectively, for stores it will continue to operate, and wrote off
$173,000 and $356,000, respectively, of long-lived assets related to stores that
management has made the decision to close (Note 8). For the year ended December
31, 2000, the Company recorded impairment charges of $1,131,000 related to
certain corporate long-lived assets that it no longer had use for, along with
the capitalized web development costs associated with the development of the
website for its 1-800 Anylens business (Note 13). All of the aforementioned
amounts are reflected in the Consolidated Statements of Operations for the years
ended December 31, 2002, 2001 and 2000, respectively, and a new basis, if any,
for the impaired assets was established.
Advertising Costs
- -----------------
The Company expenses advertising costs as incurred. Advertising costs for
Company-owned stores aggregated approximately $364,000, $536,000 and $500,000
for the years ended December 31, 2002, 2001 and 2000, respectively.
Comprehensive Income
- --------------------
The Company follows the provisions of SFAS No. 130, "Reporting
Comprehensive Income," which establishes rules for the reporting of
comprehensive income and its components. For the years ended December 31, 2002,
2001 and 2000, the Company's operations did not give rise to items includible in
comprehensive loss that were not already included in net loss. Therefore, the
Company's comprehensive loss is the same as its net loss for all periods
presented.
Income Taxes
- ------------
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". Under the asset and liability method specified by
SFAS No. 109, the deferred income tax amounts included in the Consolidated
Balance Sheets are determined based on the differences between the financial
statement and tax basis of assets and liabilities, as measured by the enacted
tax rates, that will be in effect when these differences reverse. Differences
between assets and liabilities for financial statement and tax return purposes
are principally related to inventories and the depreciable lives of assets.
Stock-Based Compensation
- ------------------------
The Company follows the provisions of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees" and FASB
Interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation (an Interpretation of APB Opinion No. 25)" in connection with
stock-based compensation granted to employees and directors of the Company. The
Company provides the required pro forma disclosures, as if the fair value method
of SFAS No. 123, "Accounting for Stock Based Compensation," was adopted (Note
15). Stock-based compensation granted to non-employees is accounted for using
the provisions of SFAS No. 123.