Back to GetFilings.com
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, 2003
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, 2003, was $2,262,794.
Number of shares outstanding as of March 22, 2004:
67,786,152 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 after 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.
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, Inc. ("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 revenues from the sale of eye
care products and services at Company-owned stores, membership fees paid to VCC,
and ongoing royalty fees based upon a percentage of the gross revenues of its
franchised stores.
As of December 31, 2003, there were 172 Sterling Stores in operation,
consisting of 14 Company-owned stores (five of which were being managed by
franchisees) and 158 franchised stores. The Company currently is focused on
expanding its franchised store operations. Sterling Stores are located in 20
states, the District of Columbia, Canada and the U.S. Virgin Islands.
The following chart sets forth the breakdown of Sterling Stores in
operation as of December 31, 2003 and 2002:
December 31,
2003(*) 2002
-----------------------
I. COMPANY-OWNED STORES:
Company-owned stores............................... 9 15
Company-owned stores managed by franchisees........ 5 8
--- ---
Total........................................... 14 23
=== ===
(*)Existing store locations: California (1), Maryland (1), Nebraska (1),
New York (9), North Dakota (1), and Wisconsin (1).
2
II. FRANCHISED STORES:
Franchised stores................................. 158 159
(*)Existing store locations: California (39), Delaware (5), Florida (1),
Illinois (1), Kentucky (1), Maryland (14), Massachusetts (1), Minnesota (1),
Montana (1), Nevada (1), New Jersey (7), New York (40), North Dakota (5),
Ontario, Canada (2), Pennsylvania (14), 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, 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
ophthalmic eyeglass frames. The Company frequently test-markets various brands
of sunglasses, ophthalmic lenses, contact lenses and designer frames. Small
quantities of these items are usually purchased for selected stores that test
customer response and interest. If a product test is successful, the Company
attempts to negotiate a system-wide preferred vendor discount for the product in
an effort to maximize system-wide sales and profits.
FRANCHISE SYSTEM
An integral part of the Company's franchise system includes providing 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 design 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 and
national seminars, offers assistance in marketing and advertising programs and
promotions, offers online communication, franchisee group discussion as well as
updated training modules and product information through its interactive
Franchisee Intranet, and consults with its franchisees as to their management
and operational strategies and business plans.
Preferred Vendor Network. With the collective buying power of Company-owned
and franchised Sterling Stores, the Company has established a network of
preferred vendors (the "Preferred Vendors") whose products may be purchased
directly by franchisees at group discount prices, thereby providing such
franchisees with the opportunity for higher gross margins. Additionally, the
Company negotiates and executes cooperative advertising programs with its
Preferred Vendors for the benefit of all Company-owned and franchised stores.
Franchise Agreements. Each franchisee enters into a franchise agreement
(the "Franchise Agreement") with the Company, the material terms of which 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.
3
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. Termination. Franchise Agreements may be terminated if a 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 2003, nine
franchised stores were closed, and the assets of (as well as possession of) an
additional two franchised 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.
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 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. Both Company-owned and 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 as well as opt-in email 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. The Company, under the trade name "Insight Managed Vision Care,"
contracts with payors (i.e. 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,
4
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 independent opticians, optometrists and
ophthalmologists who provide professional services and may, in connection
therewith, dispense prescription eyewear. As retailers of prescription eyewear
generally service local markets, competition varies substantially from one
location or geographic area to another. Since 1994, certain major competitors of
the Company have been offering promotional incentives to their customers and, in
response thereto, the Company generally offers the same or similar incentives to
its customers.
The Company believes that the principal competitive factors in the retail
optical business are convenience of location, on-site availability of
professional eye examinations, rapid service, quality and consistency of product
and service, price, product warranties, a broad selection of merchandise and the
participation in third-party, managed care provider programs. The Company
believes that it competes favorably in each of these areas.
GOVERNMENT REGULATION
The Company and its operations are subject to extensive federal, state and
local laws, rules and regulations affecting the health care industry and the
delivery of health care, including laws and regulations prohibiting the practice
of medicine and optometry by persons not licensed to practice medicine or
optometry, prohibiting the unlawful rebate or unlawful division of fees, and
limiting the manner in which prospective patients may be solicited. The
regulatory requirements that the Company must satisfy to conduct its business
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.
The Company must comply with the Health Insurance Portability and
Accountability Act of 1996 ("HIPAA"), which governs our participation in managed
care programs. We also must comply with the privacy regulations under HIPAA,
which went into effect in April 2003. In addition, all states have passed laws
that govern or affect our arrangements with the optometrists who practice in our
vision centers. Some states, such as California, have particularly extensive and
burdensome requirements that affect the way we do business. In California,
optometrists who practice adjacent to our retail locations are providers to and
subtenants of a subsidiary, which is licensed as a single-service HMO.
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, with which the Company believes it
is in material compliance.
5
EMPLOYEES
As of March 22, 2004, the Company employed approximately 132 individuals,
of which approximately 75% were employed on a full-time basis. Except for those
individuals employed at Company-owned Sterling Stores located in the New York
metropolitan area, 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. The Company has an employment agreement with one of its key
executives.
Item 2. Properties
The Company's headquarters, consisting of approximately 7,000 square feet,
are located in an office building situated at 100 Quentin Roosevelt Boulevard,
Garden City, New York 11530, under a sublease that expires in November 2006.
This facility houses the Company's principal executive and administrative
offices.
The Company leases the space occupied by all of its Company-owned Sterling
Stores and certain of its franchised Sterling Stores. The remaining leases for
its franchised Sterling Stores are held in the names of the respective
franchisees, of which, the Company holds a collateral assignment on certain of
those leases.
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.
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 11 to the Consolidated Financial
Statements included in Item 8 of this Report, and is incorporated by reference
herein.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote by the Company's shareholders
during the fourth quarter ended December 31, 2003.
6
PART II
-------
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Registrant's Common Stock was listed on the OTC Bulletin Board under
the trading symbol "ISEE.OB" as of August 23, 2001, and was previously listed on
the Nasdaq National Market System. Over-the-counter market quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions. The range of the high and low closing
sales prices for the Registrant's Common Stock for each quarterly period of the
last two years, is as follows:
2003 2002
------------------- -----------------
Quarter Ended: High Low High Low
- -------------- ------- ------- ------- -------
March 31 $0.13 $0.04 $0.14 $0.07
June 30 $0.09 $0.04 $0.11 $0.05
September 30 $0.17 $0.06 $0.10 $0.04
December 31 $0.25 $0.09 $0.10 $0.03
The approximate number of shareholders of record of the Company's Common
Stock as of March 22, 2004 was 308.
There was one shareholder of record of the Company's Senior Convertible
Preferred Stock as of March 22, 2004.
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 growth.
RECENT SALES OF UNREGISTERED SECURITIES
On December 31, 2003, the Company issued warrants, to certain Subject
Shareholders, to purchase an aggregate of 59,210,028 shares of its Common Stock,
at exercise prices ranging from $0.0465 per share to $0.0489 per share, as a
settlement with such Subject Shareholders for certain damages they suffered in
connection with their participation in certain Rescission Transactions (see Note
14 to the Consolidated Financial Statements in Item 8 of this Report for further
information). The issuance of all of the aforementioned securities was exempt
from registration requirements pursuant to an exemption under Section 4(2) of
the Securities Act of 1933, as amended.
Item 6. Selected Financial Data
USE OF NON-GAAP FINANCIAL MEASURE
In this document, at times we refer to EBITDA. EBITDA is calculated as net
earnings before interest, taxes, depreciation and amortization, and
extraordinary items, and excludes non-cash charges related to equity securities.
We refer to EBITDA because it is a widely accepted financial indicator of a
company's ability to service or incur indebtedness.
EBITDA does not represent cash flow from operations as defined by generally
accepted accounting principles, is not necessarily indicative of cash available
to fund all cash flow needs, should not be considered an alternative to net
income or to cash flow from operations (as determined in accordance with GAAP)
and should not be considered an indication of our operating performance or as a
measure of liquidity. EBITDA is not necessarily comparable to similarly titled
measures for other companies.
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
7
consolidated financial statements have been audited by Arthur Andersen LLP,
independent public accountants, with respect to the years ended December 31,
2001, 2000 and 1999. The consolidated financial statements for the years ended
December 31, 2003 and 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: 2003 2002 2001 2000 1999
------------- ------------- -------------- ------------- -------------
System-wide sales (1) $ 93,165 $ 104,448 $ 124,589 $ 128,775 $ 140,321
=========== =========== =========== =========== ===========
Total revenues $ 13,980 $ 17,425 $ 20,653 $ 23,058 $ 29,580
=========== =========== =========== =========== ===========
Loss from continuing operations $ (2,948) $ (4,721) $ (5,088) $ (14,628) $ (2,691)
=========== =========== =========== =========== ===========
(Loss) income from discontinued operations $ (19) $ 74 $ 1,312 $ (15,533) $ 430
=========== =========== =========== =========== ===========
Loss on disposal of discontinued operations $ - $ - $ - $ (8,831) $ -
=========== =========== =========== =========== ===========
Net loss $ (2,967) $ (4,647) $ (3,776) $ (38,992) $ (2,261)
=========== =========== =========== =========== ===========
Per Share Information - basic and diluted
Loss from continuing operations $ (0.05) $ (0.17) $ (0.19) $ (2.04) $ (0.41)
=========== =========== =========== =========== ===========
(Loss) income from discontinued operations $ - $ 0.01 $ 0.05 $ (0.66) $ 0.03
=========== =========== =========== =========== ===========
Loss on disposal of discontinued operations $ - $ - $ - $ (0.37) $ -
=========== =========== =========== =========== ===========
-
Net loss per share $ (0.05) $ (0.16) $ (0.14) $ (3.07) $ (0.38)
=========== =========== =========== =========== ===========
Weighted-average common shares outstanding 56,507 28,641 26,409 23,627 15,232
=========== =========== =========== =========== ===========
Balance Sheet Data:
Working capital deficit $ (1,590) $ (4,632) $ (1,011) $ (3,987) $ (4,795)
Total assets 6,639 6,650 11,057 22,531 30,312
Total debt 931 1,494 1,299 754 7,347
Other Data:
EBITDA (2) 2,220 (3,971) (3,400) (12,592) 2,163
Quarterly Data:
First Quarter Second Quarter Third Quarter Fourth Quarter
2003 2002 2003 2002 2003 2002 2003 2002
------------------- ------------------- ------------------- ---------------------
Net revenues $ 3,752 $ 4,802 $ 3,389 $ 3,936 $ 3,486 $ 4,807 $ 3,353 $ 3,880
Net income (loss) from continuing
operations $ 581 $ (533) $ 511 $ (397) $ 543 $ (1,895) $ (4,583) $ (1,896)
(Loss) income from discontinued
operations $ (222) $ - $ 2 $ (120) $ 56 $ 287 $ 145 $ (93)
Net income (loss) $ 359 $ (533) $ 513 $ (517) $ 599 $ (1,608) $ (4,438) $ (1,989)
- ----------------------------------------------------------------------------------------------------------------------------------
EBITDA (2) $ 718 $ (368) $ 722 $ (218) $ 588 $ (1,323) $ 192 $ (2,062)
8
Sterling Store Data: (In thousands, except for number of stores)
Year Ended December 31,
---------------------------------------------------------------------
2003 2002 2001 2000 1999
------------- ------------- ------------- ------------- -------------
Company-owned stores bought, opened or reacquired 3 4 15 3 11
Company-owned stores sold or closed (9) (14) (10) (13) (16)
Company-owned stores at end of period 9 15 25 20 30
Company-owned stores being managed by Franchisees at end
of period 5 8 9 12 6
Franchised stores being managed by Company at end of period - - 1 3 5
Franchised stores at end of period 158 159 169 201 218
Average sales per store (3):
Company-owned stores $ 351 $ 337 $ 377 $ 396 $ 420
Franchised stores $ 545 $ 591 $ 564 $ 546 $ 495
Average franchise royalties per franchised store (3) $ 40 $ 47 $ 43 $ 42 $ 38
(1) System-wide sales represent combined retail sales generated by
Company-owned and franchised stores, as well as revenues generated by VCC.
(2) EBITDA is calculated as net earnings before interest, taxes,
depreciation and amortization, and extraordinary items, and excludes non-cash
charges related to equity securities (see "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Use of Non-GAAP Financial
Measures"). The following is a reconciliation of net income to EBITDA (amounts
in thousand):
Reconciliation of Non-GAAP Financial Measure
This table includes the reconciliation of net loss from continuing
operations to EBITDA for the year ended December 31, 2003.
-------------
2003
-------------
Net loss from continuing operations $ (2,948)
Add back:
Interest expense 197
Income taxes 57
Non-cash equity charges 4,636
Depreciation and amortization 278
------------
EBITDA $ 2,220
============
(3) Average sales per store and average franchise royalties per franchised
store are computed based upon the weighted-average number of Company-owned and
franchised stores in operation, respectively, for each of the specified periods.
For periods of less than a year, the averages have been annualized.
9
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This Report contains certain forward-looking statements and information
relating to the Company that are/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,
among other items: potential conflicts of interest that could occur with certain
of our directors; the retention of certain members of our management team; our
inability to control the management of our franchised stores; the effects of new
state, local and federal regulations that affect the health care industry; our
ability to continue to enter favorable arrangements with health care providers;
increased competition from other eyewear providers; the acceptance of refractive
laser surgery; 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; our
ability, or lack thereof, to secure additional financing in the future, if
necessary, due to the potential lack of liquidity of our common stock; the
potential limitation on the use of our net operating loss carry-forwards in
accordance with Section 382 of the Internal Revenue Code of 1986, as amended,
based on certain changes in ownership that have occurred or could in the future
occur; the possibility that we will be unable to successfully execute our
business plan; and the outcome of pending and future litigation. 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, 2003 AND 2002
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 $2,859,000, or 28.9%,
to $7,047,000 for the year ended December 31, 2003, as compared to $9,906,000
for the comparable period in 2002. The decrease in net sales was a direct result
of management's commitment to continue to close non-profitable Company-owned
stores. There were 9 stores being operated by the Company as of December 31,
2003 compared to 15 stores as of December 31, 2002. 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, 2003 and 2002), comparative net sales decreased by
$179,000, or 5.4%, to $3,135,000 for the year ended December 31, 2003, as
compared to $3,314,000 for the comparable period in 2002. Management believes
this decrease was primarily a result of the struggling U.S. economy.
Franchise royalties decreased by $391,000, or 5.7%, to $6,425,000 for the
year ended December 31, 2003, as compared to $6,816,000 for the comparable
period in 2002. Management believes this decrease was primarily a result of the
struggling U.S. economy, particularly the weak retail sales experienced during
the months of the War in Iraq, combined with increased competition in capturing
customers on certain managed care programs.
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) increased by $216,000, or 304.2%, to $287,000 for the
year ended December 31, 2003, as compared to $71,000 for the comparable period
in 2002. This increase was a direct result of the Company entering into 14 new
franchise agreements for the year ended December 31, 2003.
Interest on franchise notes receivable decreased by $161,000, or 51.6%, to
$151,000 for the year ended December 31, 2003, as compared to $312,000 for the
comparable period in 2002. This decrease was primarily due to numerous franchise
notes maturing during the past 12 months and only two new notes being generated
during 2003.
Other income decreased by $250,000, to $70,000, for the year ended December
31, 2003, as compared to $320,000 for the comparable period in 2002. This
decrease was primarily a result of one-time sales of certain assets of the
Company to third parties during 2002 that did not occur during 2003.
Excluding revenues generated by VCC, the Company's gross profit margin
decreased by 0.6%, to 76.4% for the year ended December 31, 2003, as compared to
77.0% for the comparable period in 2002. The gross profit margin remained
consistent with prior year. The Company continued to effectively manage and
control its inventory, continued purchasing at lower average product costs, and
continued receiving strong discounts from certain of the Company's key vendors.
In the future, the Company's gross profit margin may fluctuate depending upon
the extent and timing of changes in the product mix in Company-owned stores,
competitive pricing, and promotional incentives.
10
Selling, general and administrative expenses decreased by $7,231,000, or
39.0%, to $11,333,000 for the year ended December 31, 2003, as compared to
$18,564,000 for the comparable period in 2002. 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 $1,734,000, facility and other overhead charges of
$3,117,000 and professional fees of $684,000. Additionally, the provision for
doubtful accounts decreased by $1,651,000 as certain large notes receivable were
deemed uncollectible in 2002. The Company did not experience a similar situation
in 2003.
Provision for store closings decreased by $920,000, or 100.0%, to $0 for
the year ended December 31, 2003, as compared to $920,000 for the comparable
period in 2002. In 2002, management made the decision to close 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 would be incurred in the closing of the stores. The Company did
not incur any additional costs related to these store closures during 2003, nor
did management make the decision to close any additional stores.
Charges related to long-lived assets decreased by $163,000, or 94.2%, to
$10,000 for the year ended December 31, 2003, as compared to $173,000 for the
comparable period in 2002. In connection with management's decision to close
non-profitable Company-owned stores, the Company impaired assets related to
those stores during 2002. No such assets were deemed impaired during 2003.
Interest expense decreased by $10,000, or 4.8%, to $197,000, for the year
ended December 31, 2003, as compared to $207,000 for the comparable period in
2002. The decrease was a result of the Company paying off the majority of its
debt obligations in April 2003 with the proceeds received from its shareholder
rights offering, offset by the amortization of the remaining debt discount
resulting from the aforementioned debt payment in April 2003.
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 believed
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 operated.
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 operated, 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 for 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.
11
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.
Selling, general and administrative expenses decreased by $2,129,000, or
10.3%, to $18,564,000 for the year ended December 31, 2002, as compared to
$20,693,000 for the comparable period in 2001. This decrease was primarily due
to management's 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 would be incurred in the closing of the stores.
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.
USE OF NON-GAAP FINANCIAL MEASURE
In this document, at times we refer to EBITDA. EBITDA is calculated as net
earnings before interest, taxes, depreciation and amortization, and
extraordinary items, and excludes non-cash charges related to equity securities.
We refer to EBITDA because it is a widely accepted financial indicator of a
company's ability to service or incur indebtedness.
EBITDA does not represent cash flow from operations as defined by generally
accepted accounting principles, is not necessarily indicative of cash available
to fund all cash flow needs, should not be considered an alternative to net
income or to cash flow from operations (as determined in accordance with GAAP)
and should not be considered an indication of our operating performance or as a
measure of liquidity. EBITDA is not necessarily comparable to similarly titled
measures for other companies.
Reconciliation of Non-GAAP Financial Measure
This table includes the reconciliation of net loss from continuing
operations to EBITDA for the year ended December 31, 2003.
-------------
2003
-------------
Net loss from continuing operations $ (2,948)
Add back:
Interest expense 197
Income taxes 57
Non-cash equity charges 4,636
Depreciation and amortization 278
------------
EBITDA $ 2,220
============
12
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 2003, cash flows provided by investing
activities were $469,000, 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 2003.
For the year ended December 31, 2003, cash flows provided by financing
activities were $718,000, principally due to the completion of the shareholder
rights offering, offset by the repayment of the Company's debt and related party
borrowings.
In April 2003, the Company completed its shareholder rights offering,
resulting in net proceeds of $1,859,000, of which, as a result of certain
Rescission Transactions entered into as of December 31, 2003, $520,000 is
repayable to certain of the Company's shareholders pursuant to numerous
promissory notes that bear interest at a rate of 6% per annum and are due and
payable in April 2007. With a portion of the proceeds, the Company paid off
$417,000, $407,000 and $100,000, respectively, representing the remaining
principal amounts due under a secured term note, a credit facility and a
director loan.
As of December 31, 2003, the Company had negative working capital of
$1,590,000 (compared to $4,632,000 as of December 31, 2002) and cash on hand of
$1,383,000. During 2003, the Company used $449,000 of cash in its operating
activities. This usage was a result of $965,000 of costs paid out related to the
Company's store closure plan, a net decrease of $556,000 and $980,000,
respectively, in accounts payable and accrued liabilities, and other long-term
liabilities that existed as of December 31, 2002, a net increase in franchise
and other receivables of $234,000, offset by EBITDA of $2,220,000 for the year
ended December 31, 2003.
The Company plans to continue to improve its cash flows during 2004 by
improving store profitability through increased monitoring of store-by-store
operations, 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 and the collection of outstanding
receivables, there will be sufficient liquidity available for the Company to
continue in operation through the first quarter of 2005. However, there can be
no assurance that the Company will be able to successfully execute the
aforementioned plans.
MANAGEMENT'S DISCUSSION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
High-quality financial statements require rigorous application of
high-quality accounting policies. Management believes that its policies related
to revenue recognition, legal contingencies and allowances on franchise, notes
and other receivables 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.
Management's estimate of the allowances on receivables is based on
historical sales, historical loss levels, and an analysis of the collectibility
of individual accounts. To the extent that actual bad debts differed from
management's estimates by 10 percent, consolidated net loss would be an
estimated $174,000 higher/lower, based upon 2003 results, depending upon whether
the actual write-offs are greater or lesser than estimated.
Management's estimate of the valuation allowance on deferred tax assets is
based on whether it is more likely than not that the Company's net operating
loss carry-forwards will be utilized. Factors that could impact estimated
utilization of the Company's net operating loss carry-forwards are the success
of its stores and franchisees, as well as the Company's operating efficiencies,
which would allow it to generate taxable income in the future. To the extent
that management lowered its valuation allowance on deferred tax assets by 10
percent, consolidated net loss would be an estimated $2,160,000 lower, based on
2003 results.
The Company recognizes revenues in accordance with SAB 103. 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 and 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 revenues when the cash is
received. To the extent that revenues that were recognized on a cash basis were
recognized on an accrual basis, consolidated net loss would be an estimated
$374,000 lower, based upon 2003 results.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Debt Extinguishments and Accounting for Leases
Effective January 1, 2003, the Company adopted Financial Accounting
Standards Board ("FASB") 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." SFAS No. 145 requires 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 is required for certain extinguishments as
provided in Accounting Principles Board 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 subleases when the
original lessee remains a secondary obligor. The Company has adopted this
Statement and has determined that it does not have, nor is it expected to have,
a material impact on its financial position or results of operations.
Costs to Exit an Activity
Effective January 1, 2003, the Company adopted 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. This Statement did not
have a material impact the Company's financial position or results of operations
in 2003 as there were no additional stores that management made the decisions to
close/exit.
13
Financial Instruments
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
150 establishes standards for how an issuer classifies and measures financial
instruments with characteristics of both liabilities and equity. It requires
that an issuer classify a financial instrument within its scope as a liability.
SFAS 150 was effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The adoption of this Statement did not
have, nor is it expected to have, a material impact on the Company's financial
position or results of operations.
Consolidation of Variable Interest Entities
In December 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities." Application of this
Interpretation is required in a company's financial statements for interests in
variable interest entities ("VIEs") that are considered special-purpose entities
for the year ended December 31, 2003. The Company has certain sublease
arrangements with its franchisees; however, the Company does not have an equity
interest in the franchisees' corporations. Additionally, the franchisees have
full control over the decision-making in their franchise. The Company
continually monitors the creditworthiness of its franchisees in order to
evaluate their ability to continue profitable operations. As a result, the
Company has determined that the provisions of this Interpretation did not have a
material impact on its financial position or results of operations.
Retirement Plans and Benefits
In December 2003, the FASB issued FASB Staff Position 106-1, "Accounting
and Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003," which introduces a prescription drug
benefit under Medicare, as well as a federal subsidy to sponsors of retiree
health care benefit plans that provide a benefit that is at least actuarially
equivalent to Medicare. As the Company does not have a post-retirement drug
plan, the Company has determined the Staff Position does not have a material
impact on its financial position or results of operations.
In December 2003, the FASB revised FASB Statement No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." This Statement
requires additional disclosures about the assets, obligations, cash flows, and
net periodic benefit cost of defined benefit pension plans and other defined
benefit postretirement plans. The Statement requires that this information be
provided separately for pension plans and for other postretirement benefit
plans. The Company has adopted this Statement and has determined that it does
not have a material impact on its financial position or results of operations.
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 believes that the level of risk related to its cash equivalents
is not material to the Company's financial condition or results of operations.
14
Item 8. Financial Statements and Supplementary Data
TABLE OF CONTENTS
PAGE
-------
REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS 16 - 17
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 2003 and 2002 18
Consolidated Statements of Operations for the Years Ended
December 31, 2003, 2002 and 2001 19
Consolidated Statements of Shareholders' Equity (Deficit) for the
Years Ended December 31, 2003, 2002 and 2001 20
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2003, 2002 and 2001 21
Notes to Consolidated Financial Statements 22
Information required by schedules called for under Regulation S-X is either
not applicable or is included in the consolidated financial statements or notes
thereto.
15
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 (the "Company") as of
December 31, 2003 and 2002, and the related consolidated statements of
operations, shareholders' equity (deficit) and cash flows for the years 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 audits. The consolidated financial statements of the
Company for the year ended December 31, 2001 was 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 audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audits 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 2003 and 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, 2003 and 2002, and the results
of their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States.
/s/ MILLER, ELLIN & COMPANY LLP
New York, New York
March 22, 2004
16
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Emerging Vision, Inc.:
We have audited the accompanying consolidated balance sheets of Emerging
Vision, Inc. (a New York corporation) and subsidiaries as of December 31, 2001
and 2000, and the related consolidated statements of operations, shareholders'
equity and cash flows for the three years ended December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Emerging Vision, Inc. and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for the three years ended December 31, 2001 in
conformity with accounting principles generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
Melville, New York
April 8, 2002
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.
17
EMERGING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
December 31,
2003 2002
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,383 $ 664
Franchise receivables, net of allowance of $844 and $1,063, respectively 1,281 1,133
Other receivables, net of allowance of $118 and $101, respectively 291 447
Current portion of franchise notes receivable, net of allowance
of $241 and $442, respectively 449 612
Inventories, net 392 456
Prepaid expenses and other current assets 389 321
------------ ------------
Total current assets 4,185 3,633
------------ ------------
Property and equipment, net 481 693
Franchise notes and other receivables, net of allowance of
$541 and $1,486, respectively 470 781
Goodwill 1,266 1,266
Other assets 237 277
------------ ------------
Total assets $ 6,639 $ 6,650
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Current portion of long-term debt $ 207 $ 626
Accounts payable and accrued liabilities 5,389 6,153
Accrual for store closings 144 1,109
Related party borrowings 35 377
------------ ------------
Total current liabilities 5,775 8,265
------------ ------------
Long-term debt 143 260
------------ ------------
Related party borrowings 546 231
------------ ------------
Franchise deposits and other liabilities 937 1,709
------------ ------------
Commitments and contingencies (Note 11)
Shareholders' 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 share issued and outstanding 74 74
Common stock, $0.01 par value per share; 150,000,000 shares authorized;
67,682,087 and 29,922,957 shares issued, respectively, and 67,499,750
and 29,740,620 shares outstanding, respectively 677 299
Treasury stock, at cost, 182,337 shares (204) (204)
Additional paid-in capital 125,987 120,345
Accumulated deficit (127,296) (124,329)
------------ ------------
Total shareholders' deficit (762) (3,815)
------------ ------------
Total liabilities and shareholders' deficit $ 6,639 $ 6,650
============ ============
The accompanying notes are an integral part of these consolidated balance
sheets.
18
EMERGING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
For the Year Ended December 31,
----------------------------------------------
2003 2002 2001
--------------- --------------- --------------
Revenues:
Net sales $ 7,047 $ 9,906 $ 11,648
Franchise royalties 6,425 6,816 7,860
Other franchise related fees 287 71 140
Interest on franchise notes receivable 151 312 947
Other income 70 320 58
------------ ------------ ------------
13,980 17,425 20,653
------------ ------------ ------------
Costs and expenses:
Cost of sales 844 2,282 3,077
Selling, general and administrative expenses 11,333 18,564 20,693
Provision for store closings - 920 964
Charges related to long-lived assets 10 173 930
Non-cash charge for issuance of warrants as a result of Rescission Transactions 4,544 - -
Interest expense 197 207 77
------------ ------------ ------------
16,928 22,146 25,741
------------ ------------ ------------
Loss from continuing operations before provision for income taxes (2,948) (4,721) (5,088)
Provision for income taxes - - -
------------ ------------ ------------
Loss from continuing operations (2,948) (4,721) (5,088)
------------ ------------ ------------
(Loss) income from discontinued operations (19) 74 1,312
------------ ------------ ------------
Net loss $ (2,967) $ (4,647) $ (3,776)
============ ============ ============
Per share information - basic and diluted (Note 3):
Loss from continuing operations $ (0.05) $ (0.17) $ (0.19)
(Loss) income from discontinued operations - 0.01 0.05
------------ ------------ ------------
Net loss per share $ (0.05) $ (0.16) $ (0.14)
============ ============ ============
Weighted-average number of common shares outstanding - basic and diluted 56,507 28,641 26,409
============ ============ ============
The accompanying notes are an integral part of these consolidated
statements.
19
EMERGING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(In Thousands, Except Share Data)
Senior Convertible
Preferred Stock Common Stock
Shares Amount Shares Amount
------ ------ ----------- --------
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............................. - - - -
Net loss................................................... - - - -
------- ------- ----------- --------
BALANCE - DECEMBER 31, 2001................................ 3 287 27,187,309 272
Issuance of warrrants in connection with financing
arrangements............................................ - - - -
Exercise of stock warrants................................. - - 2,500,000 25
Issuance of common shares upon conversion of Senior
Covertible Preferred Stock.............................. (2) (213) 235,648 2
Net loss................................................... - - - -
------- ------- ----------- --------
BALANCE - DECEMBER 31, 2002................................ 1 74 29,922,957 299
Exercise of stock options and warrants..................... - - 759,130 8
Issuance of commons shares in connection with Rights
Offering (Note 14)...................................... - - 50,000,000 500
Issuance of warrants in connection with Rights Offering
(Note 14)............................................... - - - -
Issuance of stock options to officers and directors (Note 2) - - - -
Rescission of common shares and warrants issued in Rights
Offering (Note 14)...................................... - - (13,000,000) (130)
Issuance of warrants as a result of Rescission Transactions
(Note 14)............................................... - - - -
Vesting of warrants issued to Balfour & Goldin (Note 14)... - - - -
Net loss................................................... - - - -
------- ------- ----------- --------
BALANCE - DECEMBER 31, 2003................................ 1 $ 74 67,682,087 $ 677
======= ======= =========== ========
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, 2003, 2002 AND 2001
(In Thousands, Except Share Data)
Treasury Stock, Additional Total
at cost Paid-In Accumulated Shareholders'
Shares Amount Capital Deficit Equity (Deficit)
------- ----- -------- --------- ----------------
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............................. 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............................................ - - 190 - 190
Exercise of stock warrants................................. - - - - 25
Issuance of common shares upon conversion of Senior
Covertible Preferred Stock.............................. - - 229 (18) -
Net loss................................................... - - - (4,647) (4,647)
------- ----- -------- --------- --------
BALANCE - DECEMBER 31, 2002................................ 182,337 (204) 120,345 (124,329) (3,815)
Exercise of stock options and warrants..................... - - 37 - 45
Issuance of commons shares in connection with Rights
Offering (Note 14)...................................... - - 838 - 1,338
Issuance of warrants in connection with Rights Offering
(Note 14)............................................... - - 521 - 521
Issuance of stock options to officers and directors (Note 2) - - 13 - 13
Rescission of common shares and warrants issued in Rights
Offering (Note 14)...................................... - - (390) - (520)
Issuance of warrants as a result of Rescission Transactions
(Note 14)............................................... - - 4,544 - 4,544
Vesting of warrants issued to Balfour & Goldin (Note 14)... - - 79 - 79
Net loss................................................... - - - (2,967) (2,967)
------- ----- -------- --------- --------
BALANCE - DECEMBER 31, 2003................................ 182,337 $(204) $125,987 $(127,296) $ (762)
======= ===== ======== ========= ========
The accompanying notes are an integral part of these consolidated
statements.
20
EMERGING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
For the Year Ended December 31,
-------------- ---------------- --------------
2003 2002 2001
-------------- ---------------- --------------
Cash flows from operating activities:
Net loss from continuing operations $ (2,948) $ (4,721) $ (5,088)
Adjustments to reconcile net loss from continuing operations
to net cash used in operating activities:
Depreciation and amortization 278 489 1,351
Provision for doubtful accounts 179 1,829 138
Provision for store closings - 920 964
Provision for inventories - - 100
Amortization of excess of fair value of assets acquired over cost - - (317)
Non-cash compensation charges related to options and warrants 4,739 87 165
Charges related to long-lived assets 10 173 930
Changes in operating assets and liabilities:
Franchise and other receivables (234) 328 1,007
Inventories 64 290 150
Prepaid expenses and other current assets (68) (227) 381
Other assets 32 78 15
Accounts payable and accrued liabilities (556) (430) (5,365)
Franchise deposits and other liabilities (980) 142 (134)
Accrual for store closings (965) (775) -
------------ ------------ ------------
Net cash used in operating activities (449) (1,817) (5,703)
------------ ------------ ------------
Cash flows from investing activities:
Franchise notes receivable issued (21) (71) -
Proceeds from franchise and other notes receivable 558 1,409 1,961
Purchases of property and equipment (68) (280) (345)
------------ ------------ ------------
Net cash provided by investing activities 469 1,058 1,616
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from the issuance of common stock upon the
exercise of stock options and warrants 45 25 -
Proceeds from borrowings 769 2,141 750
Payments on borrowings (1,435) (1,843) (205)
Net proceeds from Rights Offering 1,339 - -
Acquisition of treasury shares - - (1)
------------ ------------ ------------
Net cash provided by financing activities 718 323 544
------------ ------------ ------------
Net cash provided by (used in) continuing operations 738 (436) (3,543)
------------ ------------ ------------
Net cash (used in) provided by discontinued operations (19) 47 (619)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 719 (389) (4,162)
Cash and cash equivalents - beginning of year 664 1,053 5,215
------------ ------------ ------------
Cash and cash equivalents - end of year $ 1,383 $ 664 $ 1,053
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 71 $ 118 $ 49
============ ============ ============
Taxes $ 72 $ 75 $ 69
============ ============ ============
Non-cash investing and financing activities:
Signing of promissory notes in exchange from rescission of units (Note 14) $ 520 $ - $ -
Franchise store assets reacquired - - 501
Issuance of common shares for consulting services - - 165
Issuance of common shares to settle vendor payable related to discontinued - - 324
operations
The accompanying notes are an integral part of these consolidated
statements.
21
EMERGING VISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BUSINESS:
Business
Emerging Vision, Inc. (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 after 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.
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. 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 designed to take advantage of
business-to-business opportunities in the optical industry.
As of December 31, 2003, there were 172 Sterling Stores in operation,
consisting of 14 Company-owned stores (five of which were being managed by
franchisees) and 158 franchised stores.
Basis of Presentation
The Consolidated Financial Statements reflect the operations of the
Company's retail optical store operation 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."
NOTE 2 - 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 current and potential litigation.
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.
Revenue Recognition
The Company 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 SEC Staff Accounting Bulletin No. 103 ("SAB
103"), "Update of Codification of Staff Accounting Bulletins." SAB 103
supercedes SAB 101, "Revenue Recognition in Financial Statements," and replaced
it, as well as other previously issued bulletins, with a codified format for the
updated information.
22
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.
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 their acquisition of the
assets of a Sterling Store, or a qualified refinancing of their obligations to
the Company.
The Company recognizes revenues in accordance with SAB 103. 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 revenues 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 a 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
In determining the fair value of its financial instruments, the Company
uses a variety of methods and assumptions that are based on market conditions
and risks existing as of each balance sheet date. For the majority of financial
instruments, including receivables, goodwill, long-term debt and equity-based
compensation, standard market conventions and techniques, such as discounted
cash flow analysis, option pricing models, replacement cost and termination
cost, are used to determine fair value. All methods of assessing fair value
result in a general approximation of value, and such value may never actually be
realized.
Inventories, net
Inventories, net, 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, net
Property and equipment, net, 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, as of December 31, 2003,
accumulated amortization of the goodwill was approximately $1,297,000.
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 each of the years ended December 31, 2003 and 2002.
Management performed a review of its existing goodwill and determined that it is
not impaired as of December 31, 2003.
23
Impairment of Long-Lived Assets
The Company follows the provisions of SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." 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, 2003, 2002 and 2001, the
Company recorded impairment charges of $0, $0 and $574,000, respectively, for
stores it will continue to operate, and wrote off $0, $173,000 and $356,000,
respectively, of long-lived assets related to stores that management has made
the decision to close (Note 7). All of the aforementioned amounts are reflected
in the Consolidated Statements of Operations for the years ended December 31,
2003, 2002 and 2001, 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 $177,000, $364,000 and $536,000
for the years ended December 31, 2003, 2002 and 2001, 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, 2003,
2002 and 2001, 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 accrued expenses, the allowances for receivable,
equity-based awards and net operating loss carry-forwards.
Guarantee Disclosures
The Company follows the provision of FASB 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
provisions of this Interpretation did not have a material impact on the
Company's financial position or results of operations, as the Company's
guarantees were to subsidiary companies.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with the
provision of 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 Company has adopted the provisions of SFAS No. 148
prospectively from January 1, 2003. Prior to 2003, the Company accounted for
stock-based employee compensation under the recognition and measurement
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and related Interpretations.
Stock-based compensation cost of approximately $13,000 is reflected in the
accompanying Statement of Operations for the year ended December 31, 2003, as a
result of the grant, on May 30, 2003, of an aggregate of 700,000 stock options
24
to the Company's directors and Co-Chief Operating Officers. The following table
illustrates the effect on net loss and net loss per share as if the fair value
method had been applied to all outstanding and unvested awards in each year
presented:
2003 2002 2001
---- ---- ----
Net loss, as reported $ (2,967) $ (4,647) $ (3,776)
Add: Stock-based compensation expense included in reported net
loss 13 - -
Deduct: Stock-based compensation expense determined under the
fair value method (917) (3,653) (5,140)
----------------- ----------------- -----------------
Pro forma $ (3,871) $ (8,300) $ (8,916)
========== ========== ==========
Net loss per share - basic and diluted, as reported: $ (0.05) $ (0.17) $ (0.14)
Pro forma $ (0.07) $ (0.29) $ (0.34)
The Company recognized no expense related to its issuance of stock options
and warrants to certain non-employee consultants to the Company in 2003, 2002 or
2001.
Concentration of Credit Risk
The Company operates retail optical stores in North America, predominantly
in the United States, and its receivables are primarily from franchisees that
also operate retail optical stores in the United States.
Segment Information
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," establishes annual and interim reporting standards for an
enterprise's operating segments, and related disclosures about its products,
services, geographic areas and major customers. For the years ended December 31,
2003, 2002 and 2001, the Company's continuing operations were classified into
one principal industry segment - retail optical (Note 1). Accordingly, the
disclosures required by SFAS No. 131 have not been provided.
Reclassifications
Certain reclassifications have been made to prior years' consolidated
financial statements to conform to the current year presentation.
New Accounting Pronouncements
Effective January 1, 2003, the Company adopted SFAS No. 145, "Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." SFAS No. 145 requires 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 is required for certain extinguishments as provided in
APB 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 subleases when the original lessee remains a secondary
obligor. The Company has adopted this Statement and has determined that it does
not have, nor is it expected to have, a material impact on its financial
position or results of operations.
Effective January 1, 2003, the Company adopted 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 EITF 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. This Statement did not have a
material impact the Company's financial position or results of operations in
2003 as there were no additional stores that management made the decisions to
close/exit.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
150 establishes standards for how an issuer classifies and measures financial
instruments with characteristics of both liabilities and equity. It requires
that an issuer classify a financial instrument within its scope as a liability.
SFAS 150 was effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The adoption of this Statement did not
have, nor is it expected to have, a material impact on the Company's financial
position or results of operations.
25
In December 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities." Application of this Interpretation is required in a
company's financial statements for interests in variable interest entities
("VIEs") that are considered special-purpose entities for the year ended
December 31, 2003. The Company has certain sublease arrangements with its
franchisees; however, the Company does not have an equity interest in the
franchisees' corporations. Additionally, the franchisees have full control over
the decision-making in their franchise. The Company continually monitors the
creditworthiness of its franchisees in order to evaluate their ability to
continue profitable operations. As a result, the Company has determined that the
provisions of this Interpretation did not have a material impact on its
financial position or results of operations.
In December 2003, the FASB issued FASB Staff Position 106-1, "Accounting
and Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003," which introduces a prescription drug
benefit under Medicare, as well as a federal subsidy to sponsors of retiree
health care benefit plans that provide a benefit that is at least actuarially
equivalent to Medicare. As the Company does not have a post-retirement drug
plan, the Company has determined the Staff Position does not have a material
impact on its financial position or results of operations.
In December 2003, the FASB revised FASB Statement No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." This Statement
requires additional disclosures about the assets, obligations, cash flows, and
net periodic benefit cost of defined benefit pension plans and other defined
benefit postretirement plans. The Statement requires that this information be
provided separately for pension plans and for other postretirement benefit
plans. The Company has adopted this Statement and has determined that it does
not have a material impact on its financial position or results of operations.
NOTE 3 - PER SHARE INFORMATION:
In accordance with SFAS No. 128, "Earnings Per Share", basic net loss per
common share ("Basic EPS") is computed by dividing the net loss attributable to
common shareholders by the weighted-average number of common shares outstanding.
Diluted net loss per common share ("Diluted EPS") is computed by dividing the