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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31, 2004
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period
from _____________ to _____________
Commission file number: 1-14128
EMERGING VISION, INC.
(Exact name of Registrant as specified in its Charter)
New York 11-3096941
- ---------------------------- -------------------------------------------
(State of Incorporation) (IRS Employer Identification No.)
100 Quentin Roosevelt Boulevard
Garden City, New York 11530
(Address of Principal Executive Offices, including Zip Code)
(516) 390-2100
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
----- -----
As of May 14, 2004 there were 69,386,260 outstanding shares of the
Registrant's Common Stock, par value $0.01 per share.
Item 1. Financial Statements
EMERGING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
March 31, December 31,
2004 2003
(Unaudited)
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,333 $ 1,383
Franchise receivables, net of allowance of $872 and $844, respectively 1,332 1,281
Other receivables, net of allowance of $103 and $118, respectively 253 291
Current portion of franchise notes receivable, net of allowance of $209 and $241,
respectively 350 449
Inventories, net 391 392
Prepaid expenses and other current assets 330 389
---------- ----------
Total current assets 3,989 4,185
---------- ----------
Property and equipment, net 491 481
Franchise notes and other receivables, net of allowance of $532 and $541, respectively 428 470
Goodwill 1,266 1,266
Other assets 217 237
---------- ----------
Total assets $ 6,369 $ 6,639
========== ==========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Current portion of long-term debt $ 178 $ 207
Accounts payable and accrued liabilities 4,627 5,389
Accrual for store closings 77 144
Related party borrowings 36 35
---------- ----------
Total current liabilities 4,918 5,775
---------- ----------
Long-term debt 137 143
---------- ----------
Related party borrowings 537 546
---------- ----------
Franchise deposits and other liabilities 898 937
---------- ----------
Contingencies (Note 5)
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;
67,991,364 and 67,682,087 shares issued, respectively, and 67,809,027
and 67,499,750 shares outstanding, respectively 680 677
Treasury stock, at cost, 182,337 shares (204) (204)
Additional paid-in capital 125,999 125,987
Accumulated deficit (126,648) (127,296)
---------- ----------
Total shareholders' deficit (99) (762)
---------- ----------
Total liabilities and shareholders' deficit $ 6,369 $ 6,639
========== ==========
The accompanying notes are an integral part of these consolidated balance
sheets.
2
EMERGING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In Thousands, Except Per Share Data)
For the Three Months Ended
March 31,
-------------------------------
2004 2003
--------------- ---------------
Revenues:
Net sales $ 1,987 $ 2,090
Franchise royalties 1,686 1,601
Other franchise related fees 54 181
Interest on franchise notes receivable 17 49
Other income 24 4
-------- --------
Total revenues 3,768 3,925
-------- --------
Costs and expenses:
Cost of sales 271 323
Selling, general and administrative expenses 2,833 2,960
Interest expense 16 61
-------- --------
Total costs and expenses 3,120 3,344
-------- --------
Income from continuing operations before provision for income taxes 648 581
Provision for income taxes - -
-------- --------
Income from continuing operations 648 581
-------- --------
Loss from discontinued operations - (222)
-------- --------
Net income $ 648 $ 359
======== ========
Per share information - basic and diluted (Note 3):
Income from continuing operations $ 0.01 $ 0.02
Loss from discontinued operations - (0.01)
-------- --------
Net income per share $ 0.01 $ 0.01
======== ========
Weighted-average number of common shares outstanding:
Basic 67,646 29,806
======== ========
Diluted 85,858 29,806
======== ========
The accompanying notes are an integral part of these consolidated
statements.
3
EMERGING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In Thousands)
For the Three Months Ended
March 31,
---------------------------------
----------------- ---------------
2004 2003
----------------- ---------------
Cash flows from operating activities:
Income from continuing operations $ 648 $ 581
Adjustments to reconcile income from continuing operations
to net cash used in operating activities:
Depreciation and amortization 53 75
Provision for doubtful accounts 33 13
Amortization of debt discount - 24
Changes in operating assets and liabilities:
Franchise and other receivables (29) (227)
Inventories 1 103
Prepaid expenses and other current assets 59 7
Other assets 12 31
Accounts payable and accrued liabilities (762) (215)
Franchise deposits and other liabilities (39) (235)
Accrual for store closings (67) (306)
---------- ---------
Net cash used in operating activities (91) (149)
---------- ---------
Cash flows from investing activities:
Franchise notes receivable issued (24) -
Proceeds from franchise and other notes receivable 148 95
Purchases of property and equipment (55) (20)
---------- ---------
Net cash provided by investing activities 69 75
---------- ---------
Cash flows from financing activities:
Proceeds from borrowings - 150
Payments on borrowings (43) (331)
Proceeds from issuance of common stock upon exercise of options
and warrants 15 12
---------- ---------
Net cash used in financing activities (28) (169)
---------- ---------
Net cash used in continuing operations (50) (243)
---------- ---------
Net cash used in discontinued operations - (3)
---------- ---------
Net decrease in cash and cash equivalents (50) (246)
Cash and cash equivalents - beginning of period 1,383 664
---------- ---------
Cash and cash equivalents - end of period $ 1,333 $ 418
========== =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 7 $ 37
========== =========
Taxes $ 42 $ 55
========== =========
The accompanying notes are an integral part of these consolidated
statements.
4
EMERGING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT
FOR THE THREE MONTHS ENDED MARCH 31, 2004
(In Thousands, Except Share Data)
Senior Convertible
Preferred Stock Common Stock
Shares Amount Shares Amount
------ ------ ----------- --------
BALANCE - DECEMBER 31, 2003 (Audited)...................... 1 $ 74 67,682,087 $ 677
Exercise of stock options and warrants..................... - - 309,277 3
Net income................................................. - - - -
------- ------- ----------- --------
BALANCE - MARCH 31, 2003 (Unaudited)....................... 1 $ 74 67,991,364 $ 680
======= ======= =========== ========
The accompanying notes are an integral part of this consolidated statement.
EMERGING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT - (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2004
(In Thousands, Except Share Data)
Treasury Stock, Additional Total
at cost Paid-In Accumulated Shareholders'
Shares Amount Capital Deficit Deficit
------- ----- -------- --------- ----------------
BALANCE - DECEMBER 31, 2003 (Audited)...................... 182,337 $(204) 125,987 (127,296) (762)
Exercise of stock options and warrants..................... - - 12 - 15
Net income................................................. - - - 648 648
------- ----- -------- --------- --------
BALANCE - MARCH 31, 2004 (Unaudited)....................... 182,337 $(204) $125,999 $(126,648) $ (99)
======= ===== ======== ========= ========
The accompanying notes are an integral part of this consolidated statement.
EMERGING VISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION:
The accompanying Consolidated Financial Statements of Emerging Vision, Inc.
and subsidiaries (collectively, the "Company") have been prepared in accordance
with accounting principles generally accepted for interim financial statement
presentation and in accordance with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted for complete
financial statement presentation. In the opinion of management, all adjustments
for a fair statement of the results of operations and financial position for the
interim periods presented have been included. All such adjustments are of a
normal recurring nature. This financial information should be read in
conjunction with the Consolidated Financial Statements and Notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2003. There have been no changes in significant accounting policies since
December 31, 2003.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES:
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.
No stock-based compensation cost is reflected in net income for the three
months ended March 31, 2004 and 2003. The following table illustrates the effect
on net income and net income per share as if the fair value method had been
applied to all outstanding and unvested awards in each year presented:
Three Months Ended
March 31,
(In thousands)
---------------------------------
---------------- ----------------
2004 2003
---- ----
Net income, as reported $ 648 $ 359
Deduct: Stock-based compensation expense determined under
fair value method (23) (794)
-------- ---------
Pro forma $ 625 $ (435)
======== =========
Net income per share - basic and diluted, as reported $ 0.01 $ 0.01
======== =========
Pro forma income (loss) - basic and diluted $ 0.01 $ (0.01)
======== =========
6
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 ("SAB") No.
103, "Update of Codification of Staff Accounting Bulletins," and SAB 104,
"Revenue Recognition." 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. SAB 104 revised
or rescinded portions of the interpretative guidance included in SAB 103.
The Company derives its revenues from the following three principal
sources:
Net sales - Represents sales from eye care products and related services;
Franchise royalties - Represents continuing franchise royalty fees based
upon a percentage of the gross revenues generated by each franchised location;
Other franchise related fees - Represents the net gains realized 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).
The Company recognizes revenues in accordance with SAB 103 and SAB 104.
Accordingly, revenues are recorded when persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the Company's
price to the buyer is fixed or determinable, and collectibility is reasonably
assured. To the extent that collectibility of royalties and/or interest on
franchise notes is not reasonably assured, the Company recognizes such revenue
when the cash is received.
The Company also follows the provisions of Emerging Issue 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.
Reclassifications
Certain reclassifications have been made to prior years' consolidated
financial statements to confirm to current year presentation.
NOTE 3 - PER SHARE INFORMATION:
In accordance with SFAS No. 128, "Earnings Per Share", basic net income per
common share ("Basic EPS") is computed by dividing net income attributable to
common shareholders by the weighted-average number of common shares outstanding.
Diluted net income per common share ("Diluted EPS") is computed by dividing the
net income by the weighted-average number of common shares and dilutive common
share equivalents and convertible securities then outstanding. SFAS No. 128
requires the presentation of both Basic EPS and Diluted EPS on the face of the
Company's Consolidated Statements of Operations. Common stock equivalents
totaling 7,715,139 and 9,062,323, respectively, were excluded from the
computation for the three months ended March 31, 2004 and 2003, as their impact
would have been anti-dilutive.
7
The following table sets forth the computation of basic and diluted per
share information:
For the Three Months Ended
March 31,
(In thousands)
---------------------------------
---------------- ----------------
2004 2003
---- ----
Numerator:
Income from continuing operations $ 648 $ 581
Loss from discontinued operations - (222)
--------- ---------
Net income $ 648 $ 359
========= =========
Denominator:
Weighted-average common shares outstanding 67,646 29,806
Dilutive effect of:
Stock options and warrants 18,212 -
--------- ---------
Weighted-average common shares outstanding, assuming dilution 85,858 29,806
========= =========
Basic and Diluted Per Share Information:
Income from continuing operations $ 0.01 $ 0.02
Loss from discontinued operations - (0.01)
--------- ---------
Net income $ 0.01 $ 0.01
========= =========
NOTE 4 - ACCRUAL FOR STORE CLOSINGS:
In accordance with SFAS No. 146, "Accounting for Costs Associated with Exit
or Disposal Activities," the Company records a liability for a cost associated
with an exit or disposal activity when the liability is incurred. As of March
31, 2004, $77,000 remained accrued for store closings on the accompanying
Consolidated Balance Sheet for the final store closure. The Company closed this
store during the first quarter of 2004. No additional provision was provided
during the three months ended March 31, 2004.
NOTE 5 - CONTINGENCIES:
Litigation
In 1999, Apryl Robinson commenced an action in Kentucky against, among
others, the Company, seeking an unspecified amount of damages and alleging
numerous claims, including fraud and misrepresentation. The claims that are the
subject of this action were subsequently tried in an action in New York that
resulted in a judgment in favor of the Company, and against Ms. Robinson and Dr.
Larry Joel, a co-defendant in such action. Subsequently, Ms. Robinson and Dr.
Joel filed for bankruptcy in Kentucky, and received a discharge from the
trustee. Presently, there is a motion pending in the U.S. Bankruptcy Court to
vacate Dr. Joel's discharge based upon, among other things, fraud on the
Bankruptcy Court. A trial on this motion is anticipated to commence in mid 2004.
In 1999, Berenter Greenhouse and Webster, the advertising agency previously
utilized by the Company, commenced an action, against the Company, in the New
York State Supreme Court, New York County, for amounts alleged to be due for
advertising and related fees. The amounts claimed by the plaintiff are in excess
of $200,000. In response to this action, the Company filed counterclaims of
approximately $500,000, based upon estimated overpayments allegedly made by the
Company pursuant to the agreement previously entered into between the parties.
As of the date hereof, these proceedings were still in the discovery stage.
8
In July 2001, the Company commenced an Arbitration Proceeding, in the
Ontario Superior Court of Justice, against Eye-Site, Inc. and Eye Site
(Ontario), Ltd., as the makers of two promissory notes (in the aggregate
original principal amount of $600,000) made by one or more of the makers in
favor of the Company, as well as against Mohammed Ali, as the guarantor of the
obligations of each maker under each note. The notes were issued, by the makers,
in connection with the makers' acquisition of a Master Franchise Agreement for
the Province of Ontario, Canada, as well as their purchase of the assets of, and
a Sterling Optical Center Franchise for, four of the Company's retail optical
stores then located in Ontario, Canada. In response, the defendants
counterclaimed for damages, in the amount of $1,500,000, based upon, among other
items, alleged misrepresentations made by representatives of the Company in
connection with these transactions. The Company believes that it has a
meritorious defense to each counterclaim. As of the date hereof, these
proceedings were in the discovery stage.
In February 2002, Kaye Scholer, LLP, the law firm previously retained by
the Company as its outside counsel, commenced an action in the New York State
Supreme Court seeking unpaid legal fees of approximately $122,000. As of the
date hereof, the Company has answered the complaint in such action. The Company
believes that it has a meritorious defense to such claim.
In May 2002, a class action was commenced in the California Superior Court,
Los Angeles County, against the Company and VisionCare of California, Inc.
("VCC"), a wholly owned subsidiary of the Company, by Consumer Cause, Inc.,
seeking a preliminary and permanent injunction enjoining the defendants from
their continued alleged violation of the California Business and Professions
Code (the "California Code"), and restitution based upon the defendants' alleged
illegal charging of dilation fees during the four year period immediately
preceding the date of the plaintiff's commencement of such action. In its
complaint, the plaintiff alleged that VCC's employment of licensed optometrists,
as well as its operation (under the name Sterling VisionCare) of optometric
offices in locations which are usually situated adjacent to the Company's retail
optical stores located in the State of California, violated certain provisions
of the California Code and was seeking to permanently enjoin VCC from continuing
to operate in such manner. In November 2002, the plaintiffs filed an amended
complaint removing VCC as a defendant in this action. In January 2003, on motion
of the Company, the Court dismissed this action, with prejudice, and without
liability to the Company. In April 2003, the plaintiff filed a Notice of Appeal
of the decision of the lower court dismissing this action. In August 2003, the
Company filed its reply brief, as supplemental on two occasions, opposing the
plaintiff's appeal. In April, the Court of Appeals affirmed, in all respects,
the lower court's dismissal of this action.
In October 2002, an action was commenced against the Company and its wholly
owned subsidiary, Sterling Vision of Eastland, Inc. (the "Tenant"), in the North
Carolina General Court of Justice, in which Charlotte Eastland Mall, LLC, as the
Landlord of the Tenant's former Sterling Optical Center located in Charlotte,
North Carolina, is seeking, among other things, damages against the Company, in
the approximate amount of $81,000, under its Limited Guaranty of the Tenant's
obligations under the Lease for such Center. The Company believes that it has a
meritorious defense to such action. As of the date hereof, these proceedings
were in the discovery stage. However, in April 2004, the Company filed a motion
for summary judgment in this action. A decision with respect to such motion is
currently pending.
In November 2002, ADD of North Dakota, ADD of Jamestown, Inc., each former
franchisees of the Company, and Aron Dinesen, their principal shareholder,
commenced an action against the Company, in the United States District Court,
District of North Dakota, Southeastern Division, alleging, among other things,
that the Company breached certain of its obligations under each of their
respective Franchise Agreements. In response thereto, the defendant asserted
counterclaims based upon the defendants alleged breach of each such franchise
agreement and of certain of the other agreements executed by the defendants in
connection therewith. The Company believes that it has a meritorious defense to
plaintiffs' claims in such action. As of the date hereof, these proceedings were
in the discovery stage. However, in April 2004, the Company filed a motion for
summary judgment, which motion is currently pending.
On May 20, 2003, Irondequoit Mall, LLC commenced an action against the
Company and Sterling Vision of Irondequoit, Inc. alleging, among other things,
that the Company had breached its obligations under its guaranty of the lease
for the former Sterling Optical store located in Rochester, New York. The
defendants believe that they have a meritorious defense to such action. As of
the date hereof, these proceedings were in the discovery stage.
9
In October 2003, Developers Diversified Realty Corporation ("DDRC")
commenced an action against the Company, in the District Court of the County of
Wapello, State of Iowa, in which DDRC, as the Landlord of the Company's former
Sterling Optical store located in Ottumwa, Iowa, is seeking, among other things,
damages against the Company, in the approximate amount of $200,000, under the
lease for such store. In May 2004, the Company reached a settlement, in
principal, of this action, which currently contemplates that the Company would
pay DDRD the aggregate sum of $120,000 in consideration for DDRD's dismissal of
the action, with prejudice, and the exchange of mutual general releases. There
can be no assurance, however, that such a settlement will actually be
consummated.
In October 2003, Luzerne Optical Laboratories, Ltd. ("Luzerne") commenced
an action against the Company in the Court of Common Pleas of the County of
Luzerne, State of Pennsylvania, which action was thereafter removed to the
Federal Court, Middle District of Pennsylvania. In this action, plaintiff seeks
to recover, from the Company, the approximate sum of $240,000 for certain
laboratory services allegedly provided to the Company. The Company believes that
is has a meritorious defense to such action. As of the date hereof, these
proceedings were in the discovery stage.
In December 2003, Westminster Mall Company commenced an action against the
Company and Sterling Vision of Westminster, Inc., the Company's wholly-owned
subsidiary, in the District Court of the County of Jefferson, State of Colorado,
in which the plaintiff, as the Landlord of the Company's former Sterling Optical
store located in Westminster, Colorado, is seeking, among other things, damages
against such subsidiary under the lease for such store, and against the Company
under its guaranty of such lease, in the approximate amount of $229,000. The
Company believes that it has a meritorious defense to such action. As of the
date hereof, these proceedings were in the discovery stage.
In April 2004, Rubloff Hastings, LLC commenced an action against the
Company, in the District Court of Adams County, Nebraska, in which the
plaintiff, as the Landlord of the Company's former Sterling Optical store
located in Hastings, Nebraska, is seeking, among other things, damages under the
Company's lease for the store in the approximate amount of $59,000. The Company
believes that it has a meritorious defense to such action. The Company's time to
answer the plaintiff's complaint has not yet expired.
In April 2004, Jean Sundstrom, a franchisee of the Company, commenced an
action, in the Wisconsin Circuit Court, Winebago County, against the Company
alleging, among other things, that the Company breached certain of its
obligations under her franchise agreement. The Company has counterclaims against
the plaintiff based upon the plaintiff's alleged breach of such franchise
agreement and of certain of the other agreements executed by the plaintiff. The
Company believes that it has a meritorious defense to plaintiffs' claims in such
action. The Company's time to answer plaintiff's complaint has not yet expired.
In addition, the Company commenced, in May 2004, a separate action against
plaintiff in the Supreme Court, Nassau County, New York, by expedited procedure,
alleging a breach, by plaintiff, of her obligations under certain promissory
notes given, by plaintiff, to the Company. The plaintiff's (as defendant in such
New York action) time to respond to the Company's action has not yet expired.
In addition to the foregoing in the ordinary course of business, the
Company is a defendant in certain lawsuits alleging various claims incurred,
certain of which claims are covered by various insurance policies, subject to
certain deductible amounts and maximum policy limits. In the opinion of
management, the resolution of these claims should not have a material adverse
effect, individually or in the aggregate, upon the Company's business or
financial condition. Other than as set forth above, management believes that
there are no other legal proceedings, pending or threatened, to which the
Company is, or may be, a party, or to which any of its properties are or may be
subject to, which, in the opinion of management, will have a material adverse
effect on the Company. Additionally, with respect to the landlord-tenant actions
described herein, the Company has already accounted for the estimated possible
costs (including possible judgments) associated with such actions as part of
accounts payable and accrued liabilities, and the accrual for store closings as
of March 31, 2004.
Additionally, with respect to the landlord-tenant actions described herein,
the Company has already accounted for the estimated possible costs (including
possible judgments) associated with such actions as part of accounts payable and
accrued liabilities, and the accrual for store closures as of March 31, 2004.
10
Guarantees
As of March 31, 2004, the Company was a guarantor of certain leases of
retail optical stores franchised and subleased to its franchisees. In the event
that all of such franchisees defaulted on their respective subleases, the
Company would be obligated for aggregate lease obligations of approximately
$4,112,000. The Company continually evaluates the credit-worthiness of its
franchisees in order to determine their ability to continue to perform under
their respective subleases. Additionally, in the event that a franchisee
defaults under its sublease, the Company has the right to take over operation of
the respective location.
11
Item 2. 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.
Results of Operations
For the Three Months Ended March 31, 2004, as Compared to the Comparable
Period in 2003
Net sales for Company-owned stores, including revenues generated by the
Company's wholly-owned subsidiary, VisionCare of California, Inc. ("VCC"), a
specialized health care maintenance organization licensed by the State of
California Department of Managed Health Care, decreased by approximately
$103,000, or 4.9%, to $1,987,000 for the three months ended March 31, 2004, as
compared to $2,090,000 for the comparable period in 2003. This decrease was
primarily due to a decrease in Company-owned store sales due to a lower average
number in operation during the same comparable periods, offset, in part, by an
increase in membership fees generated by VCC during the three months ended March
31, 2004, as compared to the same period in 2003.
As of March 31, 2004, there were 168 stores in operation, consisting of 11
Company-owned stores (including 3 Company-owned stores being managed by
franchisees) and 157 franchised stores, as compared to 178 stores in operation
as of March 31, 2003, consisting of 18 Company-owned stores (including 7
Company-owned stores being managed by franchisees) and 160 franchised stores. On
a same store basis (for those stores that the Company will continue to operate
as Company-owned stores), comparative net sales decreased by $65,000, or 6.4%,
to $961,000 for the three months ended March 31, 2004, as compared to $1,026,000
for the comparable period in 2003. The Company increased advertising promotions
in such stores, which led to a decrease in total sales while not affecting
profitability.
Franchise royalties increased by $85,000, or 5.3%, to $1,686,000 for the
three months ended March 31, 2004, as compared to $1,601,000 for the comparable
period in 2003. This increase was primarily a result of a slight increase in
franchise sales for the stores that were open during both of the comparable
periods.
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 $127,000, or 70.2%, to $54,000 for the three
months ended March 31, 2004, as compared to $181,000 for the comparable period
in 2003. This decrease was a direct result of the Company entering into seven
new franchise agreements for the three months ended March 31, 2003 compared to
two for the comparable period in 2004.
12
Interest on franchise notes receivable decreased by $32,000, or 65.3%, to
$17,000 for the three months ended March 31, 2004, as compared to $49,000 for
the comparable period in 2003. This decrease was primarily due to numerous
franchise notes maturing during the past 12 months with only one new note being
generated during the three-month period ended March 31, 2004.
Excluding revenues generated by the Company's wholly-owned subsidiary,
VisionCare of California, Inc., the Company's gross profit margin increased by
2.7%, to 74.2%, for the three months ended March 31, 2004, as compared to 71.5%
for the comparable period in 2003. This increase was mainly a result of improved
inventory management and control, improved purchasing at lower average product
costs, and improved discounts obtained from certain of the Company's vendors. In
the future, the Company's gross profit margin may fluctuate depending upon the
extent and timing of changes in the product mix in Company-owned stores,
competitive pricing, and promotional incentives.
Selling, general and administrative expenses decreased by $127,000, or
4.3%, to $2,833,000 for the three months ended March 31, 2004, as compared to
$2,960,000 for the comparable period in 2003. This decrease was primarily due to
management's continuing plan to reduce administrative expenses, where necessary
and feasible, and to close non-profitable Company-owned stores. Included were
decreases to salaries and related expenses of $163,000, offset, in part by
increases in professional fees of $40,000 and facility and overhead charges of
$19,000.
Interest expense decreased by $45,000, to $16,000, for the three months
ended March 31, 2004, as compared to $61,000 for the comparable period in 2003.
This decrease was primarily due to the amortization of the discount associated
with certain financing, during the entire three months ended March 31, 2003.
Liquidity and Capital Resources
As of March 31, 2004, the Company had negative working capital of $929,000
and cash on hand of $1,333,000. During the three months ended March 31, 2004,
the Company's used $91,000 of cash in its operating activities. This usage was a
result of a decrease in accounts payable and accrued liabilities of $762,000,
offset, in part, by income from continuing operations of $648,000.
For the three months ended March 31, 2004, cash flows provided by investing
activities were $69,000, as compared to $75,000 for the comparable period in
2003. This was principally due to proceeds received on the Company's franchise
notes receivable, offset, in part, by limited capital expenditures.
For the three months ended March 31, 2004, cash flows used in financing
activities were $28,000, principally due to the repayment of the Company's debt
and related party borrowings.
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 second quarter of 2005. However, there can be
no assurance that the Company will be able to successfully execute the
aforementioned plans.
Future Contractual Obligations
The Company has an employment agreement with one of its key employees,
which extends through February 2005. The employment agreement provides for
certain base compensation and other miscellaneous benefits. The employment
agreement also provides for an incentive bonus based upon the Company's
achievement of certain EBITDA targets, as defined. The aggregate future annual
base compensation relating to this employment agreement for the years ending
December 31, 2004 and 2005 is approximately $282,000 and $33,000, respectively.
13
The Company leases locations for both its Company-owned and franchised
stores, as well as its executive and administrative offices. The following table
shows the Company's minimum future rental payments for Company-owned stores,
executive and administrative offices, as well as for stores leased by the
Company and subleased to franchisees (in thousands):
-------------------- ----------------- ----------------------
Total Lease Sublease Net Company
Obligations Rentals Obligations
-------------------- ----------------- ----------------------
-------------------- ----------------- ----------------------
April 1, 2004 - March 31, 2005 $ 5,375 $ 4,821 $ 554
April 1, 2005 - March 31, 2006 3,409 2,879 530
April 1, 2006 - March 31, 2007 2,421 2,056 365
April 1, 2007 - March 31, 2008 1,794 1,619 175
April 1, 2008 - March 31, 2009 1,334 1,184 150
Thereafter 2,892 2,597 295
----------- ----------- -----------
$ 17,225 $ 15,156 $ 2,069
=========== =========== ===========
Item 3. 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.
Item 4. Controls and Procedures
- --------------------------------
a) Evaluation of Disclosure Controls and Procedures
Based on their evaluation of the Company's disclosure controls and
procedures as of the end of the period covered by this Quarterly Report on Form
10-Q, the Co-Chief Operating Officers (each of whom are Principal Executive
Officers, and one of whom is also the Company's Chief Financial Officer) have
concluded that the Company's disclosure controls and procedures are effective to
ensure that information required to be disclosed by the Company in reports that
it files or submits under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in Securities and Exchange
Commission rules and forms, and include controls and procedures designed to
ensure that information required to be disclosed by the Company in such reports
is accumulated and communicated to the Company's management, including the
Co-Chief Operating Officers, as appropriate to allow timely decisions regarding
required disclosure.
b) Changes in Internal Controls
There were no changes that occurred during the fiscal quarter covered by
this Quarterly Report on Form 10-Q that have materially affected, or are
reasonably likely to materially affect, the Company's internal controls over
financial reporting.
14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
In April 2004, the Company made its final payment under the settlement with
Preit-Rubin and the action was dismissed with prejudice.
In April, the Court of Appeals affirmed, in all respects, the lower court's
dismissal of Consumer Cause, Inc.'s action against the Company.
In April 2004, the Company made its final payment under the settlement with
Wells Fargo and the action was dismissed with prejudice.
In April 2004, General Electric Capital Corporation's ("GECC") action
against the Company was settled, the terms of which provide that the Company
will pay to GECC the aggregate sum of $85,000, in consideration for GECC's
dismissal of the action, with prejudice, and the exchange of mutual general
releases.
In May 2004, the Company reached a settlement, in principal, of Developers
Diversified Realty Corporation's ("DDRC") action, which currently contemplates
that the Company would pay DDRD the aggregate sum of $120,000 in consideration
for DDRD's dismissal of the action, with prejudice, and the exchange of mutual
general releases. There can be no assurance, however, that such a settlement
will actually be consummated.
In April 2004, Rubloff Hastings, LLC commenced an action against the
Company, in the District Court of Adams County, Nebraska, in which the
plaintiff, as the Landlord of the Company's former Sterling Optical store
located in Hastings, Nebraska, is seeking, among other things, damages under the
Company's lease for the store in the approximate amount of $59,000. The Company
believes that it has a meritorious defense to such action. The Company's time to
answer the plaintiff's complaint has not yet expired.
In April 2004, Jean Sundstrom, a franchisee of the Company, commenced an
action, in the Wisconsin Circuit Court, Winebago County, against the Company
alleging, among other things, that the Company breached certain of its
obligations under her franchise agreement. The Company has counterclaims against
the plaintiff based upon the plaintiff's alleged breach of such franchise
agreement and of certain of the other agreements executed by the plaintiff. The
Company believes that it has a meritorious defense to plaintiffs' claims in such
action. The Company's time to answer plaintiff's complaint has not yet expired.
In addition, the Company commenced, in May 2004, a separate action against
plaintiff in the Supreme Court, Nassau County, New York, by expedited procedure,
alleging a breach, by plaintiff, of her obligations under certain promissory
notes given, by plaintiff, to the Company. The plaintiff's (as defendant in such
New York action) time to respond to the Company's action has not yet expired.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
- -----------------------------------------------------------------------------
Not applicable.
Item 3. Defaults Upon Senior Securities
- ---------------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
Not applicable.
Item 5. Other Information
- -------------------------
Not applicable.
15
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
A. Exhibits
31.1 Certification of Co-Chief Operating Officer and Chief Financial Officer
pursuant to Securities Exchange Act Rules 13a-14 and 15d-14
31.2 Certification of Co-Chief Operating Officer pursuant to Securities
Exchange Act Rules 13a-14 and 15d-14
31.3 Certification of Co-Chief Operating Officer pursuant to Securities
Exchange Act Rules 13a-14 and 15d-14
32.1 Certification of Co-Chief Operating Officers and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
B. Reports on Form 8-K
On February 17, 2004, the Company filed a Report on Form 8-K regarding the
issuance of a press release, on February 16, 2004, regarding the rescission of
units and warrants in connection with the Company's Rights Offering.
On April 6, 2004, the Company filed a Report on Form 8-K regarding the
issuance of a press release, on April 6, 2004, correcting the press release
issued on February 16, 2004 and that it would not be restating its quarterly
financials.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this Report to be signed on its behalf
by the undersigned hereunto duly authorized.
EMERGING VISION, INC.
(Registrant)
BY: /s/ Christopher G. Payan
-----------------------------------
Christopher G. Payan
Senior Vice President,
Co-Chief Operating Officer and
Chief Financial Officer
(Co-Principal Executive Officer and
Principal Financial Officer)
BY: /s/ Brian P. Alessi
----------------------------------
Brian P. Alessi
Corporate Controller and Treasurer
(Principal Accounting Officer)
Dated: May 17, 2004
17
Exhibit 31.1
I, Christopher G. Payan, certify that:
1. I have reviewed this Form 10-Q of Emerging Vision, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statements of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the period presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls over
financial reporting.
Date: May 17, 2004
/s/ Christopher G. Payan
- ------------------------------------
Christopher G. Payan
Co-Chief Operating Officer and
Chief Financial Officer
(Co-Principal Executive Officer and
Principal Financial Officer)
Exhibit 31.2
I, Myles S. Lewis, certify that:
1. I have reviewed this Form 10-Q of Emerging Vision, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statements of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the period presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls over
financial reporting.
Date: May 17, 2004
/s/ Myles S. Lewis
- ----------------------------------
Myles S. Lewis
Co-Chief Operating Officer
(Co-Principal Executive Officer)
Exhibit 31.3
I, Samuel Z. Herskowitz, certify that:
1. I have reviewed this Form 10-Q of Emerging Vision, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statements of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the period presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls over
financial reporting.
Date: May 17, 2004
/s/ Samuel Z. Herskowitz
- ---------------------------------
Samuel Z. Herskowitz
Co-Chief Operating Officer
(Co-Principal Executive Officer)
Exhibit 32.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICERS AND PRINCIPAL FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned hereby certifies, pursuant to, and as required by, 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that the Quarterly Report of Emerging Vision, Inc. (the "Company")
on Form 10-Q for the period ended March 31, 2004 fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934,
as amended, and that information contained in such Quarterly Report on Form 10-Q
fairly presents, in all material respects, the financial condition and results
of operations of the Company.
Date: May 17, 2004
/s/ Christopher G. Payan
--------------------------------
Christopher G. Payan
Co-Chief Operating Officer and
Chief Financial Officer
(Co-Principal Executive Officer and
Principal Financial Officer)
/s/ Myles S. Lewis
--------------------------------
Myles S. Lewis
Co-Chief Operating Officer
(Co-Principal Executive Officer)
/s/ Samuel Z. Herskowitz
--------------------------------
Samuel Z. Herskowitz
Co-Chief Operating Officer
(Co-Principal Executive Officer)
The foregoing certification is being furnished solely pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350,
chapter 63 of title 18, United States Code) and is not being filed as part of
the Form 10-Q or as a separate disclosure document.