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 September 30, 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 November 8, 2004, there were 70,323,698 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)
September 30, December 31,
2004 2003
(Unaudited)
------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,019 $ 1,383
Franchise receivables, net of allowance of $419 and $844, respectively 1,649 1,281
Other receivables, net of allowance of $68 and $118, respectively 88 291
Current portion of franchise notes receivable, net of allowance of $45 and $241,
respectively 370 449
Inventories, net 384 392
Prepaid expenses and other current assets 399 389
---------- ----------
Total current assets 3,909 4,185
---------- ----------
Property and equipment, net 459 481
Franchise notes and other receivables, net of allowance of $18 and $541, respectively 383 470
Goodwill 1,266 1,266
Other assets 208 237
---------- ----------
Total assets $ 6,225 $ 6,639
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 31 $ 207
Accounts payable and accrued liabilities 4,313 5,389
Payables associated with proxy contest and related litigation 229 -
Accrual for store closings 42 144
Related party borrowings 38 35
---------- ----------
Total current liabilities 4,653 5,775
---------- ----------
Long-term debt 112 143
---------- ----------
Related party borrowings 517 546
---------- ----------
Franchise deposits and other liabilities 682 937
---------- ----------
Contingencies
Shareholders' equity:
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; 70,506,035
and 67,682,087 shares issued, respectively, and 70,323,698 and 67,499,750 shares
outstanding, respectively 705 677
Treasury stock, at cost, 182,337 shares (204) (204)
Additional paid-in capital 126,070 125,987
Accumulated deficit (126,384) (127,296)
---------- ----------
Total shareholders' equity (deficit) 261 (762)
---------- ----------
Total liabilities and shareholders' equity $ 6,225 $ 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 For the Nine Months
Ended September 30, Ended September 30,
2004 2003 2004 2003
------------------------- -------------------------
Revenues:
Net sales $ 1,898 $ 1,881 $ 5,715 $ 5,698
Franchise royalties 1,639 1,631 5,040 4,828
Other franchise related fees 50 51 149 257
Interest on franchise notes receivable 18 33 61 126
Other income 22 15 49 51
--------- --------- --------- ---------
Total revenues 3,627 3,611 11,014 10,960
--------- --------- --------- ---------
Costs and expenses:
Cost of sales 245 188 737 656
Selling, general and administrative expenses 2,973 2,868 8,732 8,500
Costs for proxy contest and related litigation 159 - 580 -
Interest expense 21 12 53 169
--------- --------- --------- ---------
Total costs and expenses 3,398 3,068 10,102 9,325
--------- --------- --------- ---------
Income from continuing operations before provision for
income taxes 229 543 912 1,635
Provision for income taxes - - - -
--------- --------- --------- ---------
Income from continuing operations 229 543 912 1,635
--------- --------- --------- ---------
Income (loss) from discontinued operations - 56 - (164)
--------- --------- --------- ---------
Net income $ 229 $ 599 $ 912 $ 1,471
========= ========= ========= =========
Per share information - basic and diluted:
Income from continuing operations $ 0.00 $ 0.01 $ 0.01 $ 0.02
Income (loss) from discontinued operations 0.00 0.00 0.00 0.00
--------- --------- --------- ---------
Net income $ 0.00 $ 0.01 $ 0.01 $ 0.02
========= ========= ========= =========
Weighted-average number of common shares outstanding -
Basic 70,324 79,914 69,191 60,937
========= ========= ========= =========
Diluted 113,826 100,593 111,193 70,354
========= ========= ========= =========
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 Nine Months Ended
September 30,
----------------- ---------------
2004 2003
----------------- ---------------
Cash flows from operating activities:
Income from continuing operations $ 912 $ 1,635
Adjustments to reconcile income from continuing operations
to net cash used in operating activities:
Depreciation and amortization 165 223
Stock-based compensation 5 1
Provision for doubtful accounts 149 37
Gain on settlement of debt (27) -
Amortization of debt discount - 103
Changes in operating assets and liabilities:
Franchise and other receivables (43) (216)
Inventories 8 87
Prepaid expenses and other current assets (10) (150)
Other assets 29 35
Accounts payable and accrued liabilities (1,076) (1,065)
Payables associated with proxy contest and related litigation 229 -
Franchise deposits and other liabilities (255) (506)
Accrual for store closings (102) (772)
--------- ----------
Net cash used in operating activities (16) (588)
--------- ----------
Cash flows from investing activities:
Franchise notes receivable issued (377) (21)
Proceeds from franchise and other notes receivable 272 490
Purchases of property and equipment (143) (49)
--------- ----------
Net cash (used in) provided by investing activities (248) 420
--------- ----------
Cash flows from financing activities:
Proceeds from borrowings - 249
Payments on borrowings (206) (1,408)
Proceeds from issuance of common stock upon exercise of options and warrants 106 18
Net proceeds from Rights Offering - 1,859
--------- ----------
Net cash (used in) provided by financing activities (100) 718
--------- ----------
Net cash (used in) provided by continuing operations (364) 550
--------- ----------
Net cash used in discontinued operations - (22)
--------- ----------
Net (decrease) increase in cash and cash equivalents (364) 528
Cash and cash equivalents - beginning of period 1,383 664
--------- ----------
Cash and cash equivalents - end of period $ 1,019 $ 1,192
========= ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 29 $ 65
========= ==========
Taxes $ 73 $ 72
========= ==========
The accompanying notes are an integral part of these consolidated
statements.
4
EMERGING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 3O, 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..................... - - 2,823,948 28
Issuance of stock warrants................................. - - - -
Net income................................................. - - - -
------- ------- ----------- --------
BALANCE - SEPTEMBER 30, 2004 (Unaudited)................... 1 $ 74 70,506,035 $ 705
======= ======= =========== ========
EMERGING VISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY - (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
(In Thousands, Except Share Data)
Treasury Stock, Additional Total
at cost Paid-In Accumulated Shareholders'
Shares Amount Capital Deficit Equity
------- ----- -------- --------- ----------------
BALANCE - DECEMBER 31, 2003 (Audited)...................... 182,337 $(204) 125,987 (127,296) (762)
Exercise of stock options and warrants..................... - - 78 - 106
Issuance of stock warrants................................. - - 5 - 5
Net income................................................. - - - 912 912
------- ----- -------- --------- --------
BALANCE - SEPTEMBER 30, 2004 (Unaudited)................... 182,337 $(204) $126,070 $(126,384) $ 261
======= ===== ======== ========= ========
The accompanying notes are an integral part of this consolidated statement.
5
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 U.S. accounting principles generally accepted for interim financial
statement presentation and in accordance with the instructions to Quarterly
Reports on 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 its
fiscal 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
provisions 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 of operations.
Stock-based compensation cost of approximately $5,000 is reflected in net
income for the three and nine months ended September 30, 2004. Stock-based
compensation cost of approximately $1,000 is reflected in net income for the
three and nine months ended September 30, 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 period
presented:
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands) (In thousands)
---------------- --------------- --------------- ----------------
2004 2003 2004 2003
---- ---- ---- ----
Net income - as reported $ 229 $ 599 $ 912 $ 1,471
Add: Stock-based compensation expense included
in reported net income 5 - 5 1
Deduct: Stock-based compensation expense
determined under fair value method (6) (9) (47) (865)
------- ------- ------- --------
Pro forma net income $ 228 $ 590 $ 870 $ 607
======= ======= ======= ========
Net income per share:
Basic and diluted - as reported $ 0.00 $ 0.01 $ 0.01 $ 0.02
======= ======= ======= ========
Basic and diluted - pro forma $ 0.00 $ 0.01 $ 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 superceded 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 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 conform 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 7,944,153 were excluded from the calculation of Diluted EPS for the
three and nine months ended September 30, 2004, as the exercise prices of the
stock options and other convertible securities were greater than the average
share price for the three and nine months ended September 30, 2004, and,
therefore, their inclusion would have been anti-dilutive. Common stock
equivalents totaling 9,062,323 were excluded from the calculation for the three
and nine months ended September 30, 2003, respectively.
7
The following table sets forth the computation of basic and diluted per
share information:
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
(In thousands) (In thousands)
---------------- ---------------- --------------- ----------------
2004 2003 2004 2003
---- ---- ---- ----
Numerator:
Income from continuing operations $ 229 $ 543 $ 912 $ 1,635
Income (loss) from discontinued operations - 56 - (164)
-------- -------- -------- ---------
Net income $ 229 $ 599 $ 912 $ 1,471
======== ======== ======== =========
Denominator:
Weighted average common shares outstanding 70,324 79,914 69,191 60,937
Dilutive effect of:
Stock options and warrants 43,502 286 42,002 95
Warrants issued in connection with Rights
Offering - 20,393 - 9,322
-------- -------- -------- ---------
Weighted average common shares
outstanding, assuming dilution 113,826 100,593 111,193 70,354
======== ======== ======== =========
Basic and Diluted Per Share Information:
Income from continuing operations $ 0.00 $ 0.01 $ 0.01 $ 0.02
Income (loss) from discontinued operations 0.00 0.00 0.00 0.00
-------- -------- -------- ---------
Net income $ 0.00 $ 0.01 $ 0.01 $ 0.02
======== ======== ======== =========
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
September 30, 2004, $42,000 remained accrued for store closings on the
accompanying Consolidated Balance Sheet. No additional provision was provided
during the nine months ended September 30, 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 late
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
8
Company pursuant to the agreement previously entered into between the parties.
As of the date hereof, these proceedings were still in the discovery stage.
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 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. In August 2004, the Court granted the Company's motion for
summary judgment on its counterclaims and for dismissal of the plaintiff's
claims. The Company currently is seeking to enforce the judgment.
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.
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 in the approximate amount
of $229,000, and damages against the Company under its guaranty of such lease,
in the approximate amount of $110,000. The Landlord was granted a default
judgment against such subsidiary, which default judgment was uncontested by such
subsidiary. The Company has answered the Landlord's complaint in this action and
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, was seeking, among other things, damages under
the Company's lease for the store in the approximate amount of $59,000. In
November 2004, the Company settled this action with the Landlord, the terms of
which provide that the Company pay, to the Landlord, the aggregate sum of
9
$40,000, payable in three consecutive installments, in consideration for
Landlord's dismissal of the action, with prejudice, and the exchange of mutual
general releases.
In April 2004, Jean Sundstrom, a franchisee of the Company, commenced an
action, in the Wisconsin Circuit Court, Winebago County, which action was later
removed, on a motion by the Company, to the United States District Court,
Eastern District of Wisconsin, 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 believed that it had a
meritorious defense to plaintiffs' claims in such action. On November 2, 2004,
the Court granted the Company's motion to dismiss the action. 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. In October 2004, the Court granted the Company's
motion to enter a default judgment against plaintiff (as defendant in such New
York action) on all of the Company's claims raised in such action.
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 acions as part of accounts payable and
accrued liabilities and the accrual for store closings as of September 30, 2004.
Guarantees
As of September 30, 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
$4,292,000. 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 and operate as a Company-owned store as well as
implementing other remedies against a franchisee.
NOTE 6 - THE PROXY CONTEST AND RELATED LITIGATION
In May 2004, Benito R. Fernandez, a former director of the Company, and
Horizons Investors Corporation ("Horizons"), a company controlled by Mr.
Fernandez, commenced an action in New York Supreme Court against the Company and
four of his then fellow directors, which action was removed by the Company to
the United States District Court for the Eastern District of New York. In their
action, the plaintiffs alleged violations of state law arising the Company's
purported failure to provide plaintiffs with a complete and current list of the
Company's shareholders, and alleged breaches of fiduciary duty by directors of
the Company in connection with the setting of the record date and Annual
Meeting.
On June 2, 2004, Mr. Fernandez, through Horizons, filed a preliminary proxy
statement with the SEC in opposition to the Company's director nominees,
soliciting proxies in support of a slate of six insurgent director nominees
hand-picked by Fernandez. On June 16, 2004, Fernandez amended his preliminary
proxy statement to, among other things, exclude one of his original nominees
from his slate and ultimately filed a definitive proxy statement with the SEC on
June 25, 2004.
10
The Company's 2004 Annual Meeting of Shareholders (the "Annual Meeting")
was held on July 14, 2004 and, on July 26, 2004, the independent inspectors of
election, IVS Associates, Inc., certified the voting results. The Company's
nominees received 36,013,976 (approximately 56.6%) of the votes cast for the
contested election of directors. There were 63,582,913 (approximately 90.3%)
votes cast at the Annual Meeting out of a possible 70,422,217 voting shares. The
insurgent nominees of Horizons, the owner of 23,726,531 (approximately 33.7%)
shares of the Company, received only 3,796,925 (approximately 6.0% of the total
votes cast) additional votes, for a total of 27,523,456 (approximately 43.3%) of
the votes cast.
Accordingly, the Company's director nominees Seymour G. Siegel, Alan Cohen
and Harvey Ross have been elected to serve as Class I directors of the Company,
for a term of one year expiring in 2005, and Joel L. Gold, Robert Cohen and
Christopher G. Payan have been elected as Class II directors of the Company, for
a term of two years expiring in 2006.
On July 28, 2004, the aforementioned action was dismissed by Horizons,
without prejudice, on consent.
During the three and nine months ended September 30, 2004, the Company
incurred approximately $159,000 and $580,000, respectively, of costs associated
with the proxy contest and related litigation, of which, as of September 30,
2004, approximately $229,000 remained due and is included in payables associated
with proxy contest and related litigation on the accompanying Consolidated
Balance Sheet.
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 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", "there can be no assurance", "may", "could",
"would", "might", "intends" 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 view of the Company at the date they are
made with respect to future events, are not guarantees of future performance and
are subject to various 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 federal, state and local regulations that affect the
health care industry; insured health plan reimbursement policies and practices
with respect to our products and services; our ability to continue to enter
favorable arrangements with health care providers; increased competition from
other eyewear providers; the general consumer acceptance of refractive laser
surgery; product demand and market acceptance risks; the effect of general
economic conditions; the impact of competitive products, services and pricing;
product development, commercialization and technological difficulties; our
ability, or lack thereof, to secure additional equity or debt 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 with the forward-looking statements
referred to above. The Company does not intend to update these forward-looking
statements for the occurrence of events or developments not within the Company's
control.
Results of Operations
For the Three and Nine Months Ended September 30, 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, increased by approximately
$17,000, or 0.9%, to $1,898,000 for the three months ended September 30, 2004,
as compared to $1,881,000 for the comparable period in 2003, and increased by
approximately $17,000, or 0.3%, to $5,715,000 for the nine months ended
September 30, 2004, as compared to $5,698,000 for the comparable period in 2003.
These increases were primarily due to an increase in membership fees generated
by VCC during the three and nine months ended September 30, 2004, offset, in
part, by a decrease in Company-owned store sales primarily due to a lower
average number of stores in operation during the same comparable period.
As of September 30, 2004, there were 165 stores in operation, consisting of
11 Company-owned stores (including 2 Company-owned stores being managed by
franchisees) and 154 franchised stores, as compared to 172 stores in operation
as of September 30, 2003, consisting of 13 Company-owned stores (including 6
Company-owned stores being managed by franchisees) and 159 franchised stores. On
a same store basis (for those stores that the Company continues to operate as
Company-owned stores), comparative net sales decreased by $55,000, or 6.1%, to
$854,000 for the three months ended September 30, 2004, as compared to $909,000
for the comparable period in 2003, and decreased by $205,000, or 7.1%, to
$2,664,000 for the nine months ended September 30, 2004, as compared to
$2,869,000 for the comparable period in 2003. Management believes that the
year-to-date decline was a direct result of generally weak sales levels
experienced in the upstate New York market, where the majority of the
Company-owned stores are located, combined with the effects of employee turnover
in certain of the stores.
Franchise royalties increased by $8,000, or 0.5%, to $1,639,000 for the
three months ended September 30, 2004, as compared to $1,631,000 for the
comparable period in 2003, and increased by $212,000, or 4.4%, to $5,040,000 for
the nine months ended September 30, 2004, as compared to $4,828,000 for the
comparable period in 2003. Management believes that these increases were a
result of a slight increase in franchise sales for the stores that were open
during both of the comparable periods, combined with increased levels of field
support to franchisees.
12
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 $1,000, or 2.0%, to $50,000 for the three
months ended September 30, 2004, as compared to $51,000 for the comparable
period in 2003, and decreased by $108,000, or 42.0%, to $149,000 for the nine
months ended September 30, 2004, as compared to $257,000 for the comparable
period in 2003. The decrease for the nine months ended September 30, 2004 was
directly attributable to the Company entering into thirteen new franchise
agreements during the nine months ended September 30, 2003, as opposed to five
new franchise agreements during the comparable period in 2004.
Interest on franchise notes receivable decreased by $15,000, or 45.5%, to
$18,000 for the three months ended September 30, 2004, as compared to $33,000
for the comparable period in 2003, and decreased $65,000, or 51.6%, to $61,000
for the nine months ended September 30, 2004, as compared to $126,000 for the
comparable period in 2003. These decreases were primarily due to numerous
franchise notes maturing during the past 12 months with only three and seven new
notes, respectively, being generated during the three and nine month periods
ended September 30, 2004.
Excluding revenues generated by VCC, the Company's gross profit margin
decreased by 7.1%, to 70.3%, for the three months ended September 30, 2004, as
compared to 77.4% for the comparable period in 2003, and decreased by 5.9%, to
71.0% for the nine months ended September 30, 2004, as compared to 76.9% for the
comparable period in 2003. These decreases were mainly a result of the fact that
in 2003, the Company settled liabilities with certain of its vendors at lower
amounts than originally anticipated, which had a positive effect on its gross
profit margin during the three and nine months ended September 30, 2003. No such
settlements occurred in 2004. 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 increased by $105,000, or
3.7%, to $2,973,000 for the three months ended September 30, 2004, as compared
to $2,868,000 for the comparable period in 2003, and increased by $232,000, or
2.7%, to $8,732,000 for the nine months ended September 30, 2004, as compared to
$8,500,000 for the comparable period in 2003. This was primarily a result of
increases in salaries and related expenses of $96,000 and $252,000 for the three
and nine months ended September 30, 2004, respectively.
Interest expense increased by $9,000, to $21,000, for the three months
ended September 30, 2004, as compared to $12,000 for the comparable period in
2003, and decreased by $116,000, to $53,000, for the nine months ended September
30, 2004, as compared to $169,000 for the comparable period in 2003. The
decrease was primarily due to the amortization of the discount associated with
certain financing during the three and nine months ended September 30, 2003.
Liquidity and Capital Resources
As of September 30, 2004, the Company had negative working capital of
$744,000 and had cash on hand of $1,019,000. During the nine months ended
September 30, 2004, the Company used $16,000 of cash in its operating
activities. This usage was a primarily a result of a decrease in accounts
payable and accrued liabilities of $1,076,000, offset, in part, by income from
continuing operations of $912,000.
For the nine months ended September 30, 2004, cash flows used in investing
activities were $248,000, principally due to capital expenditures and the
issuance of seven franchise promissory notes, offset by proceeds received on the
Company's franchise notes receivable.
For the nine months ended September 30, 2004, cash flows used in financing
activities were $100,000, principally due to the repayment of the Company's debt
and related party borrowings, offset by proceeds received from the exercise of
stock options and warrants.
The Company plans to increase its cash flows during the remainder of 2004
and into 2005 and improve store profitability through increased monitoring of
store-by-store operations, continuing to reduce administrative overhead expenses
where necessary and feasible, actively supporting development programs for
franchisees, and adding new franchised stores to the system. Management believes
13
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
for the ensuing twelve-month period. 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 its Chief Executive Officer,
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 quarter ending
December 31, 2004 is approximately $78,000 and for the period January 1, 2005
through February 2005 is approximately $33,000.
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
------------------- ----------------- ----------------------
October 1, 2004 - September 30, 2005 $ 4,967 $ 4,514 $ 453
October 1, 2005 - September 30, 2006 3,151 2,833 318
October 1, 2006 - September 30, 2007 2,149 1,931 218
October 1, 2007 - September 30, 2008 1,618 1,455 163
October 1, 2008 - September 30, 2009 2,673 2,399 274
Thereafter 767 688 79
------------ ------------ ------------
$ 15,325 $ 13,820 $ 1,505
============ ============ ============
14
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 Chief Executive Officer and 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 Chief
Executive Officer and Chief Financial Officer, 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.
15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
In November 2004, Rubloff Hastings, LLC's action against the Company was
settled for the aggregate sum of $40,000, in consideration for Landlord's
dismissal of the action, with prejudice, and the exchange of mutual general
releases.
In November 2004, the United States District Court, Eastern District of
Wisconsin granted the Company's motion to dismiss the action commenced by Jean
Sundstrom, a franchisee of the Company, where such franchisee alleged, among
other things, that the Company breached certain of its obligations under her
franchise agreement. In October 2004, the Supreme Court, Nassau County, New York
granted the Company's motion to enter a default judgment against such franchisee
(as defendant in such New York action) on breach of her obligations under
certain promissory notes.
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.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
A. Exhibits
31.1 Certification of Chief Executive Officer pursuant to Securities Exchange
Act Rules 13a-14 and 15d-14
31.2 Certification of Chief Financial Officer pursuant to Securities Exchange
Act Rules 13a-14 and 15d-14
32.1 Certification of Chief Executive Officer 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
Not applicable.
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
Chief Executive Officer
BY: /s/ Brian P. Alessi
-----------------------------------
Brian P. Alessi
Chief Financial Officer and Treasurer
Dated: November 12, 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 officer 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 officer 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: November 12, 2004
/s/ Christopher G. Payan
----------------------------
Christopher G. Payan
Chief Executive Officer
Exhibit 31.2
I, Brian P. Alessi, 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 officer 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 officer 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: November 12, 2004
/s/ Brian P. Alessi
--------------------------------
Brian P. Alessi
Chief Financial Officer
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER 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
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 September 30, 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: November 12, 2004
/s/ Christopher G. Payan
------------------------------
Christopher G. Payan
Chief Executive Officer
/s/ Brian P. Alessi
------------------------------
Brian P. Alessi
Chief Financial 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.