form10-q.htm
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 June 30,
2007
|
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
(State
or
other jurisdiction of incorporation or organization)
11-3096941
(I.R.S.
Employer Identification No.)
100
Quentin Roosevelt Boulevard
Garden
City, NY 11530
(Address
and zip code of principal executive offices)
Telephone
Number: (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:
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer__
|
Accelerated
filer__
|
Non-accelerated
filer X
|
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act):
As
of
August 14, 2007, there were 70,323,698 outstanding shares of the Issuer’s Common
Stock, par value $0.01 per share.
EMERGING
VISION, INC.
FORM
10-Q
FOR
THE QUARTERLY PERIOD ENDED JUNE 30,
2007
TABLE
OF CONTENTS
EMERGING
VISION, INC. AND SUBSIDIARIES
(In
Thousands, Except Share Data)
|
|
ASSETS
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(unaudited)
|
|
|
(audited)
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
856
|
|
|
$ |
1,289
|
|
Restricted
cash
|
|
|
250
|
|
|
|
250
|
|
Franchise
receivables, net of allowance of $145 and $110,
respectively
|
|
|
2,195
|
|
|
|
1,620
|
|
Optical
purchasing group receivables, net of allowance of $40
|
|
|
2,850
|
|
|
|
1,914
|
|
Other
receivables, net of allowance of $2
|
|
|
544
|
|
|
|
312
|
|
Current
portion of franchise notes receivable, net of allowance of $48
and $44,
respectively
|
|
|
265
|
|
|
|
79
|
|
Inventories,
net
|
|
|
464
|
|
|
|
431
|
|
Prepaid
expenses and other current assets
|
|
|
566
|
|
|
|
398
|
|
Deferred
tax assets, current portion
|
|
|
843
|
|
|
|
600
|
|
Total
current assets
|
|
|
8,833
|
|
|
|
6,893
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
1,212
|
|
|
|
923
|
|
Franchise
notes receivable, net of allowance of $2 and $5,
respectively
|
|
|
106
|
|
|
|
214
|
|
Deferred
tax asset, net of current portion
|
|
|
979
|
|
|
|
800
|
|
Goodwill,
net
|
|
|
2,544
|
|
|
|
2,745
|
|
Intangible
assets, net
|
|
|
757
|
|
|
|
808
|
|
Other
assets
|
|
|
284
|
|
|
|
214
|
|
Total
assets
|
|
$ |
14,715
|
|
|
$ |
12,597
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
$ |
5,194
|
|
|
$ |
4,632
|
|
Optical
purchasing group payables
|
|
|
2,531
|
|
|
|
1,760
|
|
Short-term
debt
|
|
|
482
|
|
|
|
396
|
|
Related
party obligations
|
|
|
758
|
|
|
|
778
|
|
Total
current liabilities
|
|
|
8,965
|
|
|
|
7,566
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
1,128
|
|
|
|
1,185
|
|
Related
party borrowings, net of current portion
|
|
|
-
|
|
|
|
8
|
|
Franchise
deposits and other liabilities
|
|
|
399
|
|
|
|
487
|
|
|
|
|
|
|
|
|
|
|
Commitments
and 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; 0.74 shares issued and
outstanding
|
|
|
74
|
|
|
|
74
|
|
Common
stock, $0.01 par value per share; 150,000,000 shares authorized;
70,506,035 share issued and 70,323,698 shares outstanding
|
|
|
705
|
|
|
|
705
|
|
Treasury
stock, at cost, 182,337 shares
|
|
|
(204 |
) |
|
|
(204 |
) |
Additional
paid-in capital
|
|
|
127,135
|
|
|
|
127,062
|
|
Accumulated
deficit
|
|
|
(123,487 |
) |
|
|
(124,286 |
) |
Total
shareholders' equity
|
|
|
4,223
|
|
|
|
3,351
|
|
Total
liabilities and shareholders' equity
|
|
$ |
14,715
|
|
|
$ |
12,597
|
|
The
accompanying notes are an integral part of these consolidated condensed
financial statements.
EMERGING
VISION, INC. AND SUBSIDIARIES
(In
Thousands, Except Per Share Data)
|
|
|
|
For
the Three Months Ended June 30,
|
|
|
For
the Six Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
2,126
|
|
|
$ |
1,698
|
|
|
$ |
4,332
|
|
|
$ |
3,596
|
|
Optical
purchasing group sales
|
|
|
4,597
|
|
|
|
-
|
|
|
|
8,922
|
|
|
|
-
|
|
Franchise
royalties
|
|
|
1,765
|
|
|
|
1,729
|
|
|
|
3,506
|
|
|
|
3,482
|
|
Other
franchise related fees
|
|
|
75
|
|
|
|
48
|
|
|
|
128
|
|
|
|
133
|
|
Total
revenue
|
|
|
8,563
|
|
|
|
3,475
|
|
|
|
16,888
|
|
|
|
7,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
4,664
|
|
|
|
208
|
|
|
|
8,985
|
|
|
|
456
|
|
Selling,
general and administrative expenses
|
|
|
3,818
|
|
|
|
3,320
|
|
|
|
7,453
|
|
|
|
6,310
|
|
Total
costs and expenses
|
|
|
8,482
|
|
|
|
3,528
|
|
|
|
16,438
|
|
|
|
6,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
81
|
|
|
|
(53 |
) |
|
|
450
|
|
|
|
445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on franchise notes receivable
|
|
|
12
|
|
|
|
11
|
|
|
|
23
|
|
|
|
22
|
|
Gain
on sale of company-owned store to franchisee
|
|
|
5
|
|
|
|
-
|
|
|
|
5
|
|
|
|
218
|
|
Other
income
|
|
|
12
|
|
|
|
16
|
|
|
|
47
|
|
|
|
27
|
|
Interest
expense
|
|
|
(44 |
) |
|
|
(10 |
) |
|
|
(109 |
) |
|
|
(20 |
) |
Total
other income
|
|
|
(15
|
) |
|
|
17
|
|
|
|
(34
|
) |
|
|
247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations before (benefit from) provision
for
income taxes
|
|
|
66
|
|
|
|
(36 |
) |
|
|
416
|
|
|
|
692
|
|
(Benefit
from) provision for income taxes
|
|
|
(302 |
) |
|
|
218
|
|
|
|
(383 |
) |
|
|
(1,042 |
) |
Income
(loss) from continuing operations
|
|
|
368
|
|
|
|
(254 |
) |
|
|
799
|
|
|
|
1,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
from discontinued operations
|
|
|
-
|
|
|
|
(202 |
) |
|
|
-
|
|
|
|
(243 |
) |
Income
tax benefit
|
|
|
-
|
|
|
|
(81 |
) |
|
|
-
|
|
|
|
(98 |
) |
(Loss)
from discontinued operations
|
|
|
-
|
|
|
|
(121 |
) |
|
|
-
|
|
|
|
(145 |
) |
Net
income (loss)
|
|
$ |
368
|
|
|
$ |
(375 |
) |
|
$ |
799
|
|
|
$ |
1,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
share information – basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$ |
0.01
|
|
|
$ |
(0.00 |
) |
|
$ |
0.01
|
|
|
$ |
0.02
|
|
(Loss)
from discontinued operations
|
|
|
-
|
|
|
|
(0.00 |
) |
|
|
-
|
|
|
|
(0.00 |
) |
Net
income (loss)
|
|
$ |
0.01
|
|
|
$ |
(0.00 |
) |
|
$ |
0.01
|
|
|
$ |
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
share information – diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$ |
0.00
|
|
|
$ |
(0.00 |
) |
|
$ |
0.01
|
|
|
$ |
0.02
|
|
(Loss)
from discontinued operations
|
|
|
-
|
|
|
|
(0.00 |
) |
|
|
-
|
|
|
|
(0.00 |
) |
Net
income (loss)
|
|
$ |
0.00
|
|
|
$ |
(0.00 |
) |
|
$ |
0.01
|
|
|
$ |
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
number of shares of common stock outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
70,324
|
|
|
|
70,324
|
|
|
|
70,324
|
|
|
|
70,324
|
|
Diluted
|
|
|
127,006
|
|
|
|
108,969
|
|
|
|
123,635
|
|
|
|
108,007
|
|
The
accompanying notes are an integral part of these consolidated condensed
financial statements.
.
EMERGING
VISION, INC. AND SUBSIDIARIES
(Dollars
in Thousands)
|
|
|
|
For
the Six Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$ |
799
|
|
|
$ |
1,734
|
|
Adjustments
to reconcile income from continuing operations to net cash provided
by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
220
|
|
|
|
132
|
|
Provision
for doubtful accounts
|
|
|
(1 |
) |
|
|
55
|
|
Deferred
tax assets
|
|
|
(422 |
) |
|
|
(1,176 |
) |
Non-cash
compensation charges related to options and warrants
|
|
|
73
|
|
|
|
454
|
|
Gain
on the sale of company-owned store to franchisee
|
|
|
(5 |
) |
|
|
(218 |
) |
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Franchise
and other receivables
|
|
|
(827 |
) |
|
|
137
|
|
Optical
purchasing group receivables
|
|
|
(936 |
) |
|
|
-
|
|
Inventories
|
|
|
(33 |
) |
|
|
(17 |
) |
Prepaid
expenses and other current assets
|
|
|
(168 |
) |
|
|
(17 |
) |
Intangible
and other assets
|
|
|
182
|
|
|
|
33
|
|
Accounts
payable and accrued liabilities
|
|
|
562
|
|
|
|
(87 |
) |
Optical
purchasing group payables
|
|
|
771
|
|
|
|
-
|
|
Franchise
deposits and other liabilities
|
|
|
(88 |
) |
|
|
(121 |
) |
Net
cash provided by operating activities
|
|
|
127
|
|
|
|
909
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Franchise
notes receivable issued
|
|
|
(131 |
) |
|
|
(172 |
) |
Proceeds
from franchise and other notes receivable
|
|
|
74
|
|
|
|
97
|
|
Proceeds
from the sale of company-owned store to franchisee
|
|
|
-
|
|
|
|
200
|
|
Purchases
of property and equipment
|
|
|
(504 |
) |
|
|
(230 |
) |
Net
cash used in investing activities
|
|
|
(561 |
) |
|
|
(105 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Borrowings
under credit facility
|
|
|
350
|
|
|
|
-
|
|
Payments
on long-term debt
|
|
|
(349 |
) |
|
|
(21 |
) |
Net
cash provided by (used in) financing activities
|
|
|
1
|
|
|
|
(21 |
) |
Net
cash (used in) provided by continuing operations
|
|
|
(433 |
) |
|
|
783
|
|
Net
cash provided by discontinued operations
|
|
|
-
|
|
|
|
66
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(433 |
) |
|
|
849
|
|
Cash
and cash equivalents – beginning of period
|
|
|
1,289
|
|
|
|
816
|
|
Cash
and cash equivalents – end of period
|
|
$ |
856
|
|
|
$ |
1,665
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
25
|
|
|
$ |
5
|
|
Taxes
|
|
$ |
29
|
|
|
$ |
25
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated condensed
financial statements.
EMERGING
VISION, INC. AND SUBSIDIARIES
(UNAUDITED)
NOTE
1 – BASIS OF PRESENTATION:
The
accompanying Consolidated Condensed 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,
2006. There have been no changes in significant accounting policies
since December 31, 2006.
NOTE
2 – SIGNIFICANT ACCOUNTING POLICIES:
Stock-Based
Compensation
The
Company accounts for stock-based compensation in accordance with the provisions
of Financial Accounting Standards Board’s (“FASB”) Statement of Financial
Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based
Compensation,” which provides guidance for the recognition of compensation
expense as it related to the issuance of stock options and
warrants. The Company also adopted the provisions of SFAS No. 148,
“Accounting for Stock-Based Compensation – Transition and Disclosure – an
amendment of SFAS No. 123.” SFAS No. 148 amended SFAS No. 123 to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation provided
by SFAS No. 123. As permitted by SFAS No. 148, the Company has
adopted the fair value method recommended by SFAS No. 123 to effect a change
in
accounting for stock-based employee compensation. In addition, the
Company adopted the provisions of SFAS No. 123R, “Share-Based Payment,” which
revised SFAS No. 123 to require all share-based payments to employees, including
grants of employee stock options, to be recognized based on their fair
values.
Stock-based
compensation expense of approximately $69,000 and $413,000 is reflected in
selling, general and administrative expenses on the accompanying Consolidated
Condensed Statements of Operations for the three months ended June 30, 2007
and
2006, respectively, and $73,000 and $454,000 for the six months ended June
30,
2007 and 2006, respectively. The Company determined the fair value of
options and warrants issued using the Black-Scholes option pricing model with
the following assumptions: 1 to 2 year expected lives; 10-year
expiration period; risk-free interest rate ranging from 3.00% to 4.98%; stock
price volatility ranging from 48.00% to 98.22%; with no dividends over the
expected life.
During
the second quarter of 2007, the Company issued 600,000 warrants to two separate
investor relation consultants, 300,000 at $0.21 and 300,000 at $0.30. The
warrants vest in twelve (12) equal monthly installments of 50,000. As of
June 30, 2007, 125,000 warrants had vested. During the three and six
months ended June 30, 2007, the Company incurred a non-cash charge to earnings
of approximately $3,000, which is reflected in selling, general and
administrative expenses on the accompanying Consolidated Condensed Statements
of
Operations representing the fair value of the warrants.
On
May
16, 2007, the Company’s Compensation Committee granted an aggregate of 125,000
stock options to certain of the Company’s employees and 75,000 stock options to
certain independent contractors, all at an exercise price of $0.21, which was
the closing price on the date of grant. The stock options vest
according to the following schedule: (1) 66,666 vested immediately;
(2) 66,667 vest on May 21, 2008; and (3) 66,667 vest on May 21,
2009. During the three and six months ended June 30, 2007, the
Company incurred a non-cash charge to earnings of approximately $3,000, which
is
reflected in selling, general and administrative expenses on the accompanying
Consolidated Condensed Statements of Operations representing the fair value
of
the options. All of these options expire 10 years from the date of
grant.
On
June
11, 2007, the Company’s Compensation Committee granted an aggregate of 375,000
stock options to certain of the Company’s independent, non-employee directors,
all at an exercise price of $0.47, which was the closing price on the date
of
grant. The stock options vested immediately. During the
three and six months ended June 30, 2007, the Company incurred a non-cash charge
to earnings of approximately $46,000, reflected in selling, general and
administrative expenses on the accompanying Consolidated Condensed Statements
of
Operations representing the fair value of the options. All of these
options expire 10 years from the date of grant.
Revenue
Recognition
The
Company recognizes revenues in accordance with SEC Staff Accounting Bulletin
(“SAB”) No. 104, “Revenue Recognition.” Accordingly, revenues are
recorded when persuasive evidence of an arrangement exists, delivery has
occurred or services have been rendered, the Company’s prices to buyers are
fixed or determinable, and collectibility is reasonably assured.
The
Company derives its revenues from the following four principal
sources:
Net
sales– Represents sales from eye care products and related
services;
Optical
purchasing group sales– Represents product pricing extended
to Combine Buying Group, Inc. (“Combine”) members associated with the sale
of vendor’s eye care products to such Combine members;
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 certain franchise fees collected by the
Company under the terms of franchise agreements (including, but not limited
to,
initial franchise fees, transfer fees and renewal fees).
Continuing
franchise royalties are based upon a percentage of the gross revenues generated
by each franchised location. To the extent that collectibility of
royalties is not reasonably assured, the Company recognizes such revenue when
the cash is received. Initial franchise fees, which are
non-refundable, are recognized when the related franchise agreement is
signed. Membership fees generated by VisionCare of California, Inc.
(“VCC”), a wholly owned subsidiary of the Company, are for optometric services
provided to individual patients (members). A portion of
membership fee revenues is deferred when billed and recognized ratably over
the
one-year term of the membership agreement.
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.
Income
Taxes
Effective
January 1, 2007, the Company adopted the provisions of FASB’s Interpretation
(“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation
of FASB No. 109.” FIN 48 prescribes a recognition threshold and
measurement attribute for how a company should recognize, measure, present,
and
disclose in its financial statements uncertain tax positions that the company
has taken or expects to take on a tax return. FIN 48 requires that
the financial statements reflect expected future tax consequences of such
positions presuming the taxing authorities’ full knowledge of the position and
all relevant facts, but without considering time values. The Company
recognizes accrued interest and penalties related to unrecognized tax benefits
as income tax expense. No such amounts were accrued for at January 1,
2007. Additionally, no amounts were accrued for as of June 30,
2007. Management is currently unaware of any issues under review that
could result in significant payments, accruals or material deviations from
its
position.
Discontinued
Operations
In
February 2006, the Company discontinued all of its retail operations then being
conducted in the state of Arizona and have applied the provision of FASB SFAS
No. 144, “Accounting for the Impairment or Disposal of Long-Lived
Assets.” As a result, the Company determined that substantially all
of the net assets of the Company-owned stores located in Arizona as of December
31, 2005 were impaired. During the three and six months ended June
30, 2006, the Company incurred losses, net of taxes, related to the discontinued
operations of approximately $121,000 and $145,000,
respectively. There were no such losses incurred during the three and
six months ended June 30, 2007. As of June 30, 2007, there were no
assets remaining associated with the Company’s discontinued
operations.
Reclassification
Certain
reclassifications have been made to prior year’s consolidated condensed
financial statements to conform to the current year presentation.
NOTE
3 – PER SHARE INFORMATION:
In
accordance with SFAS No. 128, “Earnings Per Share”, basic earnings per share of
common stock (“Basic EPS”) is computed by dividing the net income by the
weighted-average number of shares of common stock
outstanding. Diluted earnings per share of common stock (“Diluted
EPS”) is computed by dividing the net income by the weighted-average number of
shares of common stock and dilutive common stock 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
Condensed Statements of Operations. Common stock equivalents totaling
2,030,464 and 2,280,464 were excluded from the computation of Diluted EPS for
the three and six months ended June 30, 2007, respectively, and 17,496,019
for
the three and six months ended June 30 2006, as their effect on the computation
of Diluted EPS would have been anti-dilutive.
The
following table sets forth the computation of basic and diluted per share
information:
|
|
For
the Three Months Ended June 30,
|
|
|
For
the Six Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$ |
368
|
|
|
$ |
(254 |
) |
|
$ |
799
|
|
|
$ |
1,734
|
|
(Loss)
from discontinued operations
|
|
|
-
|
|
|
|
(121 |
) |
|
|
-
|
|
|
|
(145 |
) |
Net
income (loss)
|
|
$ |
368
|
|
|
$ |
(375 |
) |
|
$ |
799
|
|
|
$ |
1,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
of shares of common stock outstanding
|
|
|
70,324
|
|
|
|
70,324
|
|
|
|
70,324
|
|
|
|
70,324
|
|
Dilutive
effect of stock options, warrants and restricted stock
|
|
|
56,682
|
|
|
|
38,645
|
|
|
|
53,311
|
|
|
|
37,683
|
|
Weighted-average
shares of common stock outstanding, assuming dilution
|
|
|
127,006
|
|
|
|
108,969
|
|
|
|
123,635
|
|
|
|
108,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
share information – basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$ |
0.01
|
|
|
$ |
(0.00 |
) |
|
$ |
0.01
|
|
|
$ |
0.02
|
|
(Loss)
from discontinued operations
|
|
|
-
|
|
|
|
(0.00 |
) |
|
|
-
|
|
|
|
(0.00 |
) |
Net
income (loss)
|
|
$ |
0.01
|
|
|
$ |
(0.00 |
) |
|
$ |
0.01
|
|
|
$ |
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
share information – diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$ |
0.00
|
|
|
$ |
(0.00 |
) |
|
$ |
0.01
|
|
|
$ |
0.02
|
|
(Loss)
from discontinued operations
|
|
|
-
|
|
|
|
(0.00 |
) |
|
|
-
|
|
|
|
(0.00 |
) |
Net
income (loss)
|
|
$ |
0.00
|
|
|
$ |
(0.00 |
) |
|
$ |
0.01
|
|
|
$ |
0.02
|
|
NOTE
4 – CREDIT FACILITY:
On
August
8, 2007, the Company entered into a Revolving Line of Credit Note and Credit
Agreement (the “Credit Agreement”) with Manufacturers and Traders Trust
Corporation (“M&T”), establishing a revolving credit facility (the “Credit
Facility”), for aggregate borrowings of up to $6,000,000, to be used for general
working capital needs and certain permitted acquisitions. This Credit
Facility replaces the Company’s previous revolving line of credit facility with
M&T, established in August, 2005. The initial term of the Credit
Facility expires in August 2009. All sums drawn by the Company under
the Credit Facility are repayable, interest only, on a monthly basis,
commencing on the first day of each month during the term of the Credit
Facility, calculated at the variable rate of two hundred seventy five (275)
basis points in excess of LIBOR, and all principal actually drawn by the Company
payable on August 1, 2009. The Credit Facility includes various
financial covenants including minimum net worth, maximum funded debt and debt
service ratio requirements.
As of June 30, 2007, the Company had borrowed $350,000
under
the Credit Facility and was in compliance with all of the financial
covenants.
On
August
10, 2007, the Company borrowed an additional $400,000 for general working
capital requirements and $3,609,423, which was drawn to fund the purchase price
payable in connection with the acquisition, by OG Acquisition, Inc., the
Company’s wholly-owned subsidiary, of (i) all of the equity ownership interests
in 1725758 Ontario Inc., d/b/a The Optical Group (“OG”), and (ii) substantially
all of the tangible and intangible assets of Corowl Optical Credit Services,
Inc. (“COC”). As of August 13, 2007, there remained $1,640,577
available under the Credit Facility for future borrowings.
NOTE
5 – SEGMENT REPORTING
The
Company follows the provisions of FASB Statement 131, “Disclosures about
Segments of a Business Enterprise and Related Information.” During
September 2006, the Company acquired substantially all of the assets of Combine
Optical Management Corp. (“COMC”), which created two operating segments: Retail
Optical Stores and Optical Group Purchasing Business.
The
Retail Optical Store segment consists of Company-owned and franchise retail
optical stores that offer eye care products and services such as prescription
and non-prescription eyeglasses, eyeglass frames, ophthalmic lenses, contact
lenses, sunglasses and a broad range of ancillary
items. Additionally, the segment also consists of optometric services
provided by VCC to patients (members) of certain of those franchise retail
optical stores.
The
Optical Group Purchasing Business segment represents product
pricing extended to Combine members associated with the sale of
vendor’s eye care products to such Combine members.
Certain
business segment information for continuing operations is as
follows:
|
|
For
the Three Months Ended June 30,
|
|
|
For
the Six Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Business
Segment Net Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
Optical Stores
|
|
$ |
3,966
|
|
|
$ |
3,475
|
|
|
$ |
7,966
|
|
|
$ |
7,211
|
|
Optical
Group Purchasing Business
|
|
|
4,597
|
|
|
|
-
|
|
|
|
8,922
|
|
|
|
-
|
|
Net
revenues
|
|
$ |
8,563
|
|
|
$ |
3,475
|
|
|
$ |
16,888
|
|
|
$ |
7,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
Segment Net Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
Optical Stores
|
|
$ |
303
|
|
|
$ |
(375 |
) |
|
$ |
613
|
|
|
$ |
1,589
|
|
Optical
Group Purchasing Business
|
|
|
65
|
|
|
|
-
|
|
|
|
186
|
|
|
|
-
|
|
Net
income (loss)
|
|
$ |
368
|
|
|
$ |
(375 |
) |
|
$ |
799
|
|
|
$ |
1,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
Segment Net Income (Loss) per Share – Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
Optical Stores
|
|
$ |
0.01
|
|
|
$ |
(0.00 |
) |
|
$ |
0.01
|
|
|
$ |
0.02
|
|
Optical
Group Purchasing Business
|
|
|
0.00
|
|
|
|
-
|
|
|
|
0.00
|
|
|
|
-
|
|
Net
income (loss) per share – Basic
|
|
$ |
0.01
|
|
|
$ |
(0.00 |
) |
|
$ |
0.01
|
|
|
$ |
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
Segment Net Income (Loss) per Share – Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
Optical Stores
|
|
$ |
0.00
|
|
|
$ |
(0.00 |
) |
|
$ |
0.01
|
|
|
$ |
0.02
|
|
Optical
Group Purchasing Business
|
|
|
0.00
|
|
|
|
-
|
|
|
|
0.00
|
|
|
|
-
|
|
Net
income (loss) per share – Diluted
|
|
$ |
0.00
|
|
|
$ |
(0.00 |
) |
|
$ |
0.01
|
|
|
$ |
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
Number of Shares of Common stock
Outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
70,324
|
|
|
|
70,324
|
|
|
|
70,324
|
|
|
|
70,324
|
|
Diluted
|
|
|
127,006
|
|
|
|
108,969
|
|
|
|
123,635
|
|
|
|
108,007
|
|
There
was
no activity for the Optical Group Purchasing Business segment during the three
and six months ended June 30, 2006, as the business segment was established
in
connection with the acquisition of COMC in September 2006.
Net
income included a (benefit from) provision for income taxes of ($302,000) and
$218,000 for the three months ended June 30, 2007 and 2006, respectively, and
included an income tax benefit of ($383,000) and ($1,042,000) for the six months
ended June 30, 2007, respectively.
Additional
business segment information is summarized as follows for the six months ended
June 30, 2007 (in thousands):
|
|
Retail
Optical Stores
|
|
|
Optical
Group Purchasing Business
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
9,068
|
|
|
$ |
5,647
|
|
|
$ |
14,715
|
|
Depreciation
and Amortization
|
|
|
143
|
|
|
|
77
|
|
|
|
220
|
|
Capital
Expenditures
|
|
|
433
|
|
|
|
71
|
|
|
|
504
|
|
Interest
Expense
|
|
|
22
|
|
|
|
87
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table shows certain unaudited pro forma results of the Company,
assuming the Company had acquired COMC at the beginning of the three and six
months ended June 30, 2007 (excluding discontinued operations):
|
|
For
the Three Months Ended June 30,
|
|
|
For
the Six Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Business
Segment Net Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
Optical Stores
|
|
$ |
3,966
|
|
|
$ |
3,475
|
|
|
$ |
7,966
|
|
|
$ |
7,211
|
|
Optical
Group Purchasing Business
|
|
|
4,597
|
|
|
|
4,441
|
|
|
|
8,922
|
|
|
|
8,063
|
|
Net
revenues
|
|
$ |
8,563
|
|
|
$ |
7,916
|
|
|
$ |
16,888
|
|
|
$ |
15,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
Segment Net Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
Optical Stores
|
|
$ |
303
|
|
|
$ |
(375 |
) |
|
$ |
613
|
|
|
$ |
1,589
|
|
Optical
Group Purchasing Business
|
|
|
65
|
|
|
|
137
|
|
|
|
186
|
|
|
|
273
|
|
Net
income (loss)
|
|
$ |
368
|
|
|
$ |
(238 |
) |
|
$ |
799
|
|
|
$ |
1,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
Segment Net Income (Loss) per Share – Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
Optical Stores
|
|
$ |
0.01
|
|
|
$ |
(0.00 |
) |
|
$ |
0.01
|
|
|
$ |
0.02
|
|
Optical
Group Purchasing Business
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
0.00
|
|
Net
income (loss) per share – Basic
|
|
$ |
0.01
|
|
|
$ |
(0.00 |
) |
|
$ |
0.01
|
|
|
$ |
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
Segment Net Income (Loss) per Share – Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
Optical Stores
|
|
$ |
0.00
|
|
|
$ |
(0.00 |
) |
|
$ |
0.01
|
|
|
$ |
0.02
|
|
Optical
Group Purchasing Business
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
0.00
|
|
Net
income (loss) per share – Diluted
|
|
$ |
0.00
|
|
|
$ |
(0.00 |
) |
|
$ |
0.01
|
|
|
$ |
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
Number of Shares of Common stock Outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
70,324
|
|
|
|
70,324
|
|
|
|
70,324
|
|
|
|
70,324
|
|
Diluted
|
|
|
127,006
|
|
|
|
108,969
|
|
|
|
123,635
|
|
|
|
108,007
|
|
NOTE
6 – COMMITMENTS AND CONTINGENCIES:
Litigation
In
1999,
Berenter Greenhouse and Webster, an 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. The Company has not recorded an accrual
for a loss in this action, as the Company does not believe it is probable that
the Company will be held liable in respect of plaintiff’s claims.
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. The Company has not
recorded an accrual for a loss and does not believe it is probable that the
Company shall be held liable in respect of defendant’s
counterclaims.
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. The Company answered the complaint in such action, and has
heard nothing since. The Company believes that it has a meritorious
defense to such action. The Company has not recorded an accrual for a
loss in this action, as the Company does not believe it is probable that the
Company will be held liable in respect of plaintiff’s claims.
On
May
20, 2003, Irondequoit Mall, LLC commenced an action against the Company and
Sterling Vision of Irondequoit, Inc. (“SVI”) 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
Company and SVI believe that they have a meritorious defense to such
action. As of the date hereof, these proceedings were in the
discovery stage. Although the Company has recorded an accrual for
probable losses in the event that the Company shall be held liable in respect
of
plaintiff’s claims, the Company does not believe that any such loss is
reasonably possible, or, if there is a loss, the Company does not believe that
it is reasonably possible that such loss would exceed the amount
recorded.
In
May
2006, the Company commenced an action against I and A Optical, Inc., Mark Shuff
and Felicia Shuff, in the Supreme Court of the State of New York, County of
Nassau, seeking, among other things, monetary damages as a result of the
defendants' alleged breach of the terms of the Sterling Optical Center Franchise
Agreement (and related documents) with the Company to which they are
parties. The defendants then asserted counterclaims against the
Company, seeking, among other things, money damages arising under the Franchise
Agreement with the Company as a result of the Company's alleged violation of
such Franchise Agreement. The Company believes that it has a
meritorious defense to such action. As of the date hereof, these
proceedings were in the discovery stage. The Company has not recorded
an accrual for a loss and does not believe it is probable that the Company
shall
be held liable in respect of defendant’s counterclaims.
In
August
2006, Amy Platt, a former employee of the Company, commenced an action against
the Company, in the United States District Court, Eastern District of New York,
alleging, among other things, that the Company violated Title VII of the Civil
Rights Act of 1964, as amended, 42 U.S.C. 2000e, et seq, the Pregnancy
Discrimination Act of 1978, and the New York Executive Law, Human Rights Law,
Section 290 et seq. In July 2007, this action was settled,
and was discontinued, with prejudice.
In
January 2007, PR Prince Georges Plaza, LLC commenced an action against the
Company, in the Circuit Court of the State of Maryland, Prince George’s County,
alleging, among other things, that the Company had breached its obligations
under its guaranty of the lease for the former Sterling Optical store located
at
The Mall at Prince Georges, 3500 East West Highway, Hyattsville, Prince George’s
County, Maryland. The Company believes that it has a meritorious
defense to this action. As of the date hereof, these proceedings were
in the discovery stage. Although the Company has recorded an accrual
for probable losses in the event that the Company shall be held liable in
respect of plaintiff’s claims, the Company does not believe that any such loss
is reasonably possible, or, if there is a loss, the Company does not believe
that it is reasonably possible that such loss would exceed the amount
recorded.
In
January 2007, Laurelrising as Owner, LLC commenced an action against the
Company, in the Circuit Court of the State of Maryland, Prince Georges County,
alleging, among other things, that the Company had breached its obligations
under its lease for the former Sterling Optical store located at Laurel Centre
Mall, Laurel, Maryland. The Company believes that it has a
meritorious defense to this action. The defendant’s time to answer
the complaint has not expired as of the date hereof. Although the
Company has recorded an accrual for probable losses in the event that the
Company shall be held liable in respect of plaintiff’s claims, the Company does
not believe that any such loss is reasonably possible, or, if there is a loss,
the Company does not believe that it is reasonably possible that such loss
would
exceed the amount recorded.
In
July
2007, Horizons Investors Corp. (“Horizons”) commenced an action against the
Company, in the Supreme Court of the State of New York, Nassau County, alleging,
among other things, a default in the performance of the Company’s obligations
under a promissory note issued to Horizons by the Company as a result of the
Company’s alleged failure to pay the correct interest rate on the then
outstanding principal amount of such note. The Company believes that
it has a meritorious defense to this action. As of the date hereof,
the Company’s time to reply to Horizon’s action has not yet expired. The
Company has not recorded an accrual for a loss and does not believe it is
probable that the Company shall be held liable in respect of plaintiff's
claims
Although
the Company, where indicated herein, believes that it has a meritorious defense
to the claims asserted against it (and its affiliates), given the uncertain
outcomes generally associated with litigation, there can be no assurance that
the Company’s (and its affiliates’) defense of such claims will be
successful.
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.
Guarantees
As
of
June 30, 2007, 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
$3,066,000. 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.
Letter
of Credit
Combine
holds a letter of credit with a financial institution in favor of one of its
key
vendors to ensure payment of any outstanding invoices not paid by
Combine. The letter of credit has a one-year term that expires in
December 2007. As of June 30, 2007, the letter of credit totaled
$250,000, and was secured by a certificate of deposit (totaling $250,000) at
the
same financial institution, which was included in Prepaid Expenses and Other
Current Assets on the accompanying Consolidated Condensed Balance
Sheets.
Employment
Agreements
The
Company has an Employment Agreement (“Agreement No. 1”) with its Chief Executive
Officer, which extends through November 2009. Agreement No. 1
provides for an annual salary of $275,000, certain other benefits, and the
potential for an annual bonus to be determined by the Company’s Board of
Directors based on the Company’s previous calendar’s year
performance.
Additionally,
in connection with the acquisition of COMC, the Company entered into a five-year
Employment Agreement (“Agreement No. 2”) with the existing President of
COMC. Agreement No. 2 provides for an annual salary of $210,000,
certain other benefits, and an annual bonus based upon certain financial targets
for Combine. During the year ended December 31, 2006, a bonus of
approximately $21,000 was achieved, which was paid in April
2007. During the six months ended June 30, 2007, a bonus of
approximately $35,000 was accrued for and reflected in accounts payable and
accrued expenses on the accompanying Consolidated Condensed Balance Sheet as
of
June 30, 2007.
NOTE
7 – INCOME TAXES:
The
(benefit from) provision for income taxes from continuing operations consists
of
the following (in thousands):
|
|
For
the Three Months Ended June 30,
|
|
|
For
the Six Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$ |
5
|
|
|
$ |
13
|
|
|
$ |
58
|
|
|
$ |
36
|
|
Deferred
|
|
|
(307 |
) |
|
|
205
|
|
|
|
(441 |
) |
|
|
(1,078 |
) |
Total
income tax (benefit) provision
|
|
$ |
(302 |
) |
|
$ |
218
|
|
|
$ |
(383 |
) |
|
$ |
(1,042 |
) |
The
deferred tax benefit on the accompanying Consolidated Condensed Statements
of
Operations for the three and six months ended June 30, 2007 is a result of
the
reduction in the valuation allowance of $425,000 and $712,000 less deferred
tax
expense of $118,000 and $278,000, respectively. For the three and six
months ended June 30, 2006, the deferred tax benefit is a result of the
reduction in the valuation allowance of $0 and $1,600,000 less deferred tax
expense of $205,000 and $522,000, respectively. Management, based on
current operations and future projections, estimates that deferred tax benefits,
arising principally from net operating loss carry forwards, will be realized
through June 30, 2009. The Company has a remaining valuation
allowance of approximately $13,530,000 as of June 30, 2007. As of
June 30, 2007, the Company had federal net operating loss carry forwards of
approximately $44,000,000.
NOTE
8 – SUBSEQUENT EVENTS:
Credit
Facility
On
August
8, 2007, the Company entered into a Credit Agreement with M&T, establishing
a revolving Credit Facility, for aggregate borrowings of up to $6,000,000,
to be
used for general working capital needs and certain permitted
acquisitions. This Credit Facility replaces the Company’s previous
revolving line of credit facility with M&T, established in August,
2005. The initial term of the Credit Facility expires in August
2009. All sums drawn by the Company under the Credit Facility are
repayable, interest only, on a monthly basis, commencing on the first day of
each month during the term of the Credit Facility, calculated at the variable
rate of two hundred seventy five (275) basis points in excess of LIBOR, and
all
principal actually drawn by the Company payable on August 1,
2009. The Credit Facility includes various financial covenants
including minimum net worth, maximum funded debt and debt service ratio
requirements.
On
August
10, 2007, the Company withdrew funds from its Credit Facility with M&T,
including $400,000 for general working capital requirements and $3,609,423
to
fund the purchase price payable in connection with the acquisition of TOG
and
COC.
Acquisition
of The Optical Group
On
August
10, 2007, effective July 1, 2007, the Company, through its wholly-owned
subsidiary OG, acquired all of the outstanding equity interests of TOG and
substantially all of the assets of COC for an aggregate purchase price of cash
consideration of $3,800,000 CAD (approximately $3,600,000 USD). TOG
is based in Ontario, Canada and operates an optical group purchasing business
in
Canada. COC is based in Ontario, Canada and operates a credit
reference business within the optical industry in Canada. TOG has
approximately 525 active members in its optical group purchasing
business.
The
acquisition will be accounted for as a business purchase and will be recorded
at
the estimated fair value (based on an independent expert’s valuation) of the
assets acquired, as follows:
Working
capital
|
|
$ |
1,000
|
|
Property
and equipment
|
|
|
41,000
|
|
Intangible
assets
|
|
|
1,979,000
|
|
Excess
cost over net tangible assets acquired
|
|
|
1,579,000
|
|
Net
assets acquired
|
|
$ |
3,600,000
|
|
|
|
|
|
|
Property
and equipment will be depreciated on a straight-line basis over the estimated
useful lives of the respective classes of assets. The intangible
assets consist of a covenant not-to-compete agreement with a five year useful
life, customer-related intangibles with a ten year useful life, and a trade
name
with an indefinite life.
This
Report contains certain forward-looking statements and information relating
to
the Company that is based on the beliefs of the Company’s management, as well as
assumptions made by, and information currently available to, the Company’s
management. When used in this Report, the words “anticipate”,
“believe”, “estimate”, “expect”, “there can be no assurance”, “may”, “could”,
“would”, “might”, “intends” and similar expressions and their negatives, 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 as identified in the Company’s Annual Report on Form 10-K for the
year ended December 31, 2006 and those described from time to time in previous
and future reports filed with the Securities and Exchange
Commission. 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 and as set forth in the Form 10-Q. The
Company does not intend to update these forward-looking statements for new
information, or otherwise, for the occurrence of future events.
Results
of Operations
For
the Three and Six Months Ended June 30, 2007, as Compared to the Comparable
Period in 2006
Total
revenues for the Company increased approximately $5,088,000, or 146.4%, to
$8,563,000 for the three months ended June 30, 2007, as compared to $3,475,000
for the three months ended June 30, 2006, and increased approximately
$9,677,000, or 134.2%, to $16,888,000 for the six months ended June 30, 2007,
as
compared to $7,211,000 for the six months ended June 30, 2006. These
increases were mainly a result of the acquisition ($4,597,000 and $8,922,000
for
the three and six months ended June 30, 2007, respectively), on September 29,
2006, having an effective date of August 1, 2006, of substantially all of the
assets of Combine Optical Management Corporation (“COMC”) through the Company’s
wholly-owned subsidiary, COM Acquisition, Inc. (“Combine”) and also due to the
increased number of Company-owned stores in operation as of June 30,
2007.
Total
costs, and selling, general and administrative expenses for the Company
increased approximately $4,954,000, or 140.4%, to $8,482,000 for the three
months ended June 30, 2007, as compared to $3,528,000 for the three months
ended
June 30, 2006, and increased approximately $9,672,000, or 143.0%, to $16,438,000
for the six months ended June 30, 2007, as compared to $6,766,000 for the six
months ended June 30, 2006. These increases were mainly a result of
the acquisition of substantially all of the assets of COMC ($4,473,000 and
$8,655,000 for the three and six months ended June 30, 2007, respectively)
and
also due to the increased number of Company-owned stores in operation as of
June
30, 2007.
Retail
Optical Store Segment
Net
sales
for Company-owned stores increased approximately $428,000, or 25.2%, to
$2,126,000 for the three months ended June 30, 2007, as compared to $1,698,000
for the three months ended June 30, 2006, and increased approximately $736,000,
or 20.5%, to $4,332,000 for the six months ended June 30, 2007, as compared
to
$3,596,000 for the six months ended June 30, 2006. These increases
were mainly attributable to more Company-owned store locations open during
the
comparable periods. As of June 30, 2007, there were 11 Company-owned
stores, as compared to 7 Company-owned stores as of June 30,
2006. On a same store basis (for stores that operated as a
Company-owned store during the entirety of both of the three and six months
ended June 30, 2007 and 2006), comparative net sales increased approximately
$115,000, or 15.9%, to $835,000 for the three months ended June 30, 2007, as
compared to $720,000 for the three months ended June 30, 2006, and increased
approximately $56,000, or 3.4%, to $1,697,000 for the six months ended June
30,
2007, as compared to $1,641,000 for the six months ended June 30,
2006. Management believes that these increases were a direct result
of changes to key personnel during the first quarter of 2007 (including many
of
the Company-store managers), which helped improve store
operations. Additionally, the Company added new training procedures
and operational systems, all of which lead to increased Company-store
sales.
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 approximately
$30,000, or 3.5%, to $878,000 for the three months ended June 30, 2007, as
compared to $848,000 for the three months ended June 30, 2006, and increased
approximately $50,000, or 2.9%, to $1,727,000 for the six months ended June
30,
2007, as compared to $1,677,000 for the six months ended June 30,
2006. These increases were primarily due to an increase in membership
fees generated by VCC during the first and second quarters of 2007.
Franchise
royalties increased approximately $36,000, or 2.1%, to $1,765,000 for the three
months ended June 30, 2007, as compared to $1,729,000 for the three months
ended
June 30, 2006, and increased approximately $24,000, or 0.7%, to $3,506,000
for
the six months ended June 30, 2007, as compared to $3,482,000 for the six months
ended June 30, 2006. Management believes these increases
were a result of increased levels of field support to franchisees, the success
of the Company’s audits of franchised locations, which generated additional
royalties, and an increase in franchise sales for the stores that were in
operation during both of the comparable periods, offset by a lower average
number of stores in operation during the same comparable periods. As
of June 30, 2007 and 2006, there were 147 franchised stores in
operation.
Including
revenues and the related of cost of revenues solely generated by the
Company-owned stores, the Company’s gross profit margin decreased by 4.7%, to
67.1%, for the three months ended June 30, 2007, as compared to 71.8% for the
three months ended June 30, 2006, and 2.2%, to 70.3%, for the six months ended
June 30, 2007, as compared to 72.5% for the six months ended June 30,
2006. 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, amongst
other things.
Selling,
general and administrative expenses increased approximately $325,000, or 9.8%,
to $3,645,000 for the three months ended June 30, 2007, as compared to
$3,220,000 for the three months ended June 30, 2006, and $791,000, or 12.5%,
to
$7,101,000 for the six months ended June 30, 2007, as compared to $6,310,000
for
the six months ended June 30, 2006. These increases were partially a
result of increases to advertising expenses of $34,000 and $114,000 due to
the
promotion of a new marketing campaign around the new product mix in our
Company-owned stores, payroll and related expenses of $569,000 and $914,000
due
to three additional Company-owned stores in operation and their related payroll
expense, to the addition of certain key employees hired to enhance Company
store operations and expand the franchise chain during the third and fourth
quarters of 2006, and additional charges, including rent and overhead expenses,
related to those three additional Company-owned stores during the three and
six
months ended June 30, 2007, respectively. These expenses were offset,
in part, by a decrease in equity compensation charges of $344,000 and $380,000
and bad debt recoveries of $100,000 during the three and six months ended June
30, 2007, respectively.
Gain
on
sale of Company-owned stores to franchisees related to the sale, in
2006, of an existing Company-owned store in upstate New York for a purchase
price of $225,000, which included the net fixed assets of such store (such
assets having a net book value of $7,000). There were no such sales
of Company-owned stores during the three and six months ended June 30,
2007.
Other
income increased approximately $52,000, or 325.0%, to $68,000 for the three
months ended June 30, 2007, as compared to $16,000 for the three months ended
June 30, 2006, and increased $88,000, or 325.9%, to $115,000 for the six months
ended June 30, 2007, as compared to $27,000 for the six months ended June 30,
2006. These increases were mainly a result of the Company accruing
for a business interruption insurance claim submitted as a result of fire damage
shutting down one of the Company-owned stores for 4 months.
Optical
Purchasing Group Business Segment
On
September 29, 2006, having an effective date of August 1, 2006, the Company,
through its wholly-owned subsidiary Combine, acquired substantially all of
the
assets of COMC. Combine activity for the six months ended June 30,
2007 has been included in the Company’s results of operations as of and for the
three and six months ended June 30, 2007.
Net
revenues for Combine were $4,597,000 and $8,922,000 for the three and six months
ended June 30, 2007, respectively, which represented 53.7% and 52.8%,
respectively, of the total revenue of the Company.
Costs
of
sales for Combine were $4,301,000 and $8,303,000 for the three and six months
ended June 30, 2007, respectively, which represented 92.2% and 92.4%,
respectively, of the total costs of sales of the Company.
Selling,
general and administrative expenses for Combine were $172,000 and $352,000
for
the three and six months ended June 30, 2007, respectively, which represented
4.5% and 4.7%, respectively, of the total selling, general and administrative
expenses of the Company. These expenses included payroll and related
benefits of $79,000 and $145,000, depreciation and amortization of $39,000
and
$77,000, and bank and credit card fees of $22,000 and $44,000 for the three
and
six months ended June 30, 2007, respectively.
Interest
expense for Combine was $31,000 and $87,000 for the three and six months ended
June 30, 2007. Interest expense related to the debt financing with
COMC in connection with the acquisition of substantially all of the assets
of
COMC.
There
are
no comparatives provided for Combine as the acquisition of COMC was consummated
during the 3rd
quarter of 2006.
Liquidity
and Capital Resources
As
of
June 30, 2007, the Company had a working capital deficit of $132,000 and cash
on
hand of $856,000. During the six months ended June 30, 2007, cash
flows provided by its operating activities were $127,000. This was
principally due to net income of $799,000 and an increase in optical purchasing
group payables of $771,000, offset, in part, by non-cash items of $208,000,
an
increase in franchise and other receivables of $827,000 and the increase in
optical purchasing group receivables of $936,000. The Company
believes it will continue to improve its operating cash flows through franchisee
audits, the addition of new franchise and company store locations, its current
and future acquisitions, the growth of the Company's optical purchasing group
business segment, and new marketing strategies and increased gross margins,
among other things, for its Company-owned stores.
For
the
six months ended June 30, 2007, cash flows used in investing activities were
$561,000 due, in part, to capital expenditures (which included the remodeling
of
one of the Company-owned stores and the Corporate offices) and the issuance
of franchise promissory notes , offset by proceeds received on certain franchise
promissory notes.
For
the
six months ended June 30, 2007, cash flows provided by financing activities
were $1,000 due to the Company borrowing $350,000 in April 2007 under the
Company’s Credit Facility with M&T Bank, offset by the repayment of the
Company’s related party borrowings, the promissory note payments made to COMC,
and the repayment of an existing promissory note as described below in
section (a) of Contractual Obligations.
Credit
Facility
On
August
8, 2007, the Company entered into a Revolving Line of Credit Note and Credit
Agreement (the “Credit Agreement”) with Manufacturers and Traders Trust
Corporation (“M&T”), establishing a revolving credit facility (the “Credit
Facility”), for aggregate borrowings of up to $6,000,000, to be used for general
working capital needs and certain permitted acquisitions. This Credit
Facility replaces the Company’s previous revolving line of credit facility with
M&T, established in August, 2005. The initial term of the Credit
Facility expires in August 2009. All sums drawn by the Company under
the Credit Facility are repayable, interest only, on a monthly basis, commencing
on the first day of each month during the term of the Credit Facility,
calculated at the variable rate of two hundred seventy five (275) basis points
in excess of LIBOR, and all principal actually drawn by the Company payable
on
August 1, 2009. The Credit Facility includes various financial
covenants including minimum net worth, maximum funded debt and debt service
ratio requirements.
As
of
June 30, 2007, the Company had borrowed $350,000 under the Credit Facility
and
was in compliance with all of the financial covenants.
On
August
10, 2007, the Company borrowed an additional $400,000 for general working
capital requirements and $3,609,423, which was drawn to fund the purchase price
payable in connection with the acquisition, by OG Acquisition, Inc., the
Company’s wholly-owned subsidiary, of (i) all of the equity ownership interests
in 1725758 Ontario Inc., d/b/a The Optical Group (“OG”), and (ii) substantially
all of the tangible and intangible assets of Corowl Optical Credit Services,
Inc. (“COC”). As of August 13, 2007, there remained $1,640,577
available under the Credit Facility for future borrowings.
Contractual
Obligations
Payments
due under contractual obligations as of June 30, 2007 were as follows (in
thousands):
|
|
Total
|
|
|
Less
than 1 year
|
|
|
1-3
years
|
|
|
3-5
years
|
|
|
More
than 5 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt obligations (a) (b) (c)
|
|
$ |
2,368
|
|
|
$ |
1,240
|
|
|
$ |
764
|
|
|
$ |
364
|
|
|
$ |
-
|
|
Interest
on long-term debt obligations (a) (b) (c)
|
|
|
318
|
|
|
|
122
|
|
|
|
134
|
|
|
|
62
|
|
|
|
-
|
|
Operating
leases
|
|
|
12,940
|
|
|
|
3,649
|
|
|
|
3,677
|
|
|
|
2,102
|
|
|
|
3,512
|
|
|
|
$ |
15,626
|
|
|
$ |
5,011
|
|
|
$ |
4,575
|
|
|
$ |
2,528
|
|
|
$ |
3,512
|
|
(a)
|
Effective
April 14, 2003, in connection with certain Rescission Transactions
consummated by the Company on December 31, 2003, the Company signed
numerous promissory notes with certain of its shareholders, two of
whom
are also directors of the Company. The notes, which aggregated
$520,000, accrued interest at a rate of 6% per annum. All sums
(principal and interest) under the notes were due and payable in
April
2007. On April 24, 2007, the Company repaid one of such notes
together with principal and interest totaling
$338,000. Each of the other shareholders agreed to extend
the terms of such notes for an additional 12 months at an interest
rate of
9%, due in April 2008.
|
(b)
|
In
connection with the acquisition of substantially all of the assets
of
COMC, the Company entered into two promissory notes with
COMC. The first note provides for four annual installments
commencing October 1, 2007, totaling $1,273,000 (without
interest). The second note provides for sixty monthly
installments commencing October 1, 2006, totaling $500,000 at 7%
interest
per annum.
|
(c)
|
On
April 12, 2007, the Company borrowed $350,000 under the Credit Facility,
which borrowings are payable (interest only) monthly and bear interest
at
a rate of LIBOR plus 2.75%. The principal and any accrued
interest are due and payable at the end August
2007.
|
Off-Balance
Sheet Arrangements
An
off-balance sheet arrangement is any contractual arrangement involving an
unconsolidated entity under which a company has (a) made guarantees,
(b) a retained or a contingent interest in transferred assets, (c) any
obligation under certain derivative instruments or (d) any obligation under
a material variable interest in an unconsolidated entity that provides
financing, liquidity, market risk, or credit risk support to the company, or
engages in leasing, hedging, or research and development services within the
company.
The
Company does not have any off-balance sheet financing or unconsolidated variable
interest entities, with the exception of certain guarantees on
leases. We refer the reader to the Notes to the Consolidated
Condensed Financial Statements included in Item 1 of this Quarterly Report
for
information regarding the Company’s lease guarantees.
Management’s
Discussion of Critical Accounting Policies and Estimates
High-quality
financial statements require rigorous application of high-quality accounting
policies. Management believes that its policies related to revenue
recognition, deferred tax assets, legal contingencies and allowances on
franchise, notes and other receivables are critical to an understanding of
the
Company’s Consolidated Condensed Financial Statements because their application
places the most significant demands on management’s judgment, with financial
reporting results relying on estimation about the effect of matters that are
inherently uncertain.
Management’s
estimate of the allowances on receivables is based on historical sales,
historical loss levels, and an analysis of the collectibility of individual
accounts. To the extent that actual bad debts differed from management's
estimates by 10 percent, consolidated net income would be an estimated $24,000
higher/lower for the six months ended June 30, 2007, depending upon
whether the actual write-offs are greater or less than
estimated.
Management’s
estimate of the valuation allowance on deferred tax assets is based on whether
it is more likely than not that the Company’s net operating loss carry-forwards
will be utilized. Factors that could impact estimated utilization of the
Company's net operating loss carry-forwards are the success of its stores and
franchisees, the Company's operating efficiencies and the effects of Section
382
of the Internal Revenue Code of 1986, as amended, based on certain changes
in
ownership that have occurred, or could occur in the future. To the extent
that management lowered its valuation allowance on deferred tax assets by 10
percent, consolidated net income would be an estimated $1,4000,000 higher/lower
for the six months ended June 30, 2007.
The
Company recognizes revenues in accordance with SEC Staff Accounting Bulletin
(“SAB”) No. 104, “Revenue Recognition.” 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 is not reasonably assured, the
Company recognizes such revenues when the cash is received. To the
extent that royalties that were recognized on a cash basis were recognized
on an
accrual basis, consolidated net income would be an estimated $171,000
higher/lower for the six months ended June 30, 2007.
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.
The
Company is exposed to interest rate risk under its Credit Facility with M&T
Bank. In April 2007, the Company borrowed $350,000 under its Credit
Facility and in August 2007, the Company borrowed an additional
$4,009,422. Any increase in the LIBOR rate would lead to higher
interest expense.
(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 Company’s
Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) 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 CEO
and CFO, as appropriate to allow timely decisions regarding required
disclosure. The Company’s management has not yet completed, and is
not yet required to have completed, the assessment about the effectiveness
of
internal controls over financial reporting required by Section 404 of the
Sarbanes-Oxley Act.
(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.
In
August
2006, Amy Platt, a former employee of the Company, commenced an action against
the Company, in the United States District Court, Eastern District of New York,
alleging, among other things, that the Company violated Title VII of the Civil
Rights Act of 1964, as amended, 42 U.S.C. 2000e, et seq, the Pregnancy
Discrimination Act of 1978, and the New York Executive Law, Human Rights Law,
Section 290 et seq. In July 2007, this action was
settled, and was discontinued, with prejudice.
In
July
2007, Horizons Investors Corp. (“Horizons”) commenced an action against the
Company, in the Supreme Court of the State of New York, Nassau County, alleging,
among other things, a default in the performance of the Company’s obligations
under a promissory note issued to Horizons by the Company as a result of the
Company’s alleged failure to pay the correct interest rate on the then
outstanding principal amount of such note. The Company believes that
it has a meritorious defense to this action. As of the date hereof,
the Company’s time to reply to Horizon’s action has not yet expired. The
Company has not recorded an accrual for a loss and does not believe it is
probable that the Company shall be held liable in respect of plaintiff's
claims.
There
have been no material changes to the disclosure related to risk factors made
in
our Annual Report on Form 10-K for the year ended December 31,
2006.
Pursuant
to a Letter of Engagement, dated May 7, 2007 (the“LOE”), between the
Company and R.D. Stout, Inc. (“RD”), RD agreed to provide to the Company
assistance with investor relations, broker relations and the planning and
execution of assorted activities relating to these tasks. The LOE
expires on May 6, 2008, but may be terminated by the Company at any time upon
the giving of written notice. In consideration for these services,
the Company (a) agreed to issue to RD on a monthly basis a number of shares
of restricted common stock of the Company (the “RD Shares”) equal to (i)
$8,333.33, divided by (ii) the closing price per share of the Company’s common
stock on the applicable issuance date, as reported on the Over-the-Counter
Bulletin Board, and (b) issued to RD a warrant (the “RD Warrant”) to purchase up
to an aggregate of 300,000 shares of the common stock of the Company at an
exercise price of $0.21 per share, which vested to the extent of
25,000 shares upon issuance, and the remaining balance of which vests in equal
monthly tranches of 25,000 shares each over the term of the LOE; however, the
Company may terminate the RD Warrant in the event RD’s retention by the Company
is terminated, in which event, the RD Warrant is deemed to be void to the extent
of any unvested shares as of the termination. The term of the RD Warrant, to
the
extent of any vested shares, is 3 years from the date of issuance.
The RD Warrant provides for dilution in certain events. The RD Shares
and RD Warrant were issued pursuant to the exemption from registration under
the
Securities Act of 1933, as amended (the “Act”), provided by Section 4
(2) of the Act.
Pursuant
to a Letter Agreement, dated April 11, 2007 (the “LA”), between the Company and
DuBois Consulting Group, Inc. (“DuBois”), DuBois agreed to provide to the
Company assistance with investor relations, broker relations, and the planning
and execution of assorted activities relating to these tasks. The LE
expires on April 10, 2008, but may be terminated by the Company at any time
upon
the giving of written notice. In consideration for these services,
the Company agreed to pay Dubois certain cash consideration provided for
in the
LA and issued to DuBois a warrant (the “DuBois Warrant”) to purchase up to an
aggregate of 300,000 shares of common stock of the Company at an
exercise price of $0.30 per share, which vests in equal monthly tranches
of
25,000 shares each over the term of the LA; however, the Company may
terminate the Dubois Warrant in the event Dubois’ retention by the Company is
terminated, in which event, the Dubois Warrant is deemed to be void to the
extent of any unvested shares as of the termination. The term of the
Dubois Warrant, to the extent of any vested shares, is 3 years from
the date of issuance. The Dubois Warrant provides for dilution in
certain events. The DuBois Shares and DuBois Warrant were issued
pursuant to the exemption from registration under the Act provided by Section
4
(2) of the Act.
Item
3. Defaults upon Senior
Securities
None.
None.
None.
2.4
|
Letter
of Intent, dated as of May 23, 2007, by and among OG Acquisition,
Inc.,
757979 Ontario Inc. (d/b/a The Optical Group), Corowl Optical Credit
Services, Inc. and Grant Osborne (Incorporated by reference to Exhibit
2.4
to the Company’s Current Report on Form 8-K dated May 31,
2007)
|
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
(Principal
Executive Officer)
BY:
/s/ Brian
P.
Alessi
Brian
P. Alessi
Chief
Financial Officer
(Principal
Financial and Accounting
Officer)
Dated:
August 14, 2007