UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR
15(d)
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OF
THE SECURITIES EXCHANGE ACT OF 1934
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For
the fiscal year ended: December 31,
2007
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Commission
file number: 1-14128
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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)
Registrant’s
telephone number, including area code: (516) 390-2100
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.01 per
share
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act:
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act:
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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in the definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer
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Accelerated
filer
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Non-accelerated
filer
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Smaller
reporting company X
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act):
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold as of June 30, 2007, was $21,224,602.
Number of
shares outstanding as of March 31, 2008:
125,292,806 shares of Common Stock,
par value $0.01 per share
Documents
incorporated by reference: Part III of this Annual Report on Form
10-K incorporates by reference information from the registrant’s definitive
Proxy Statement for its Annual Meeting of Shareholders to be held during
2008.
Part
I
Item
1. Business
GENERAL
Emerging
Vision, Inc. (the “Registrant” and, together with its subsidiaries, hereinafter
the “Company” or “Emerging”) operates one of the largest chains of retail
optical stores and one of the largest franchise optical chains in the United
States, based upon management’s beliefs, domestic sales and the number of
locations of Company-owned and franchised stores (collectively referred to
hereinafter as “Sterling Stores”). Additionally, Emerging operates
one of the leading optical purchasing groups in the United States (hereinafter
referred to as “COM”) and one of the leading optical purchasing groups in Canada
(hereinafter referred to as “TOG”), based upon management’s beliefs, annual
sales and the number of member locations. The Registrant was
incorporated under the laws of the State of New York in January 1992 and, in
July 1992, purchased substantially all of the assets of Sterling Optical Corp.,
a New York corporation, then a debtor-in-possession under Chapter 11 of the U.S.
Bankruptcy Code.
RETAIL
STORE OPERATIONS
The
Company and its franchisees operate retail optical stores under the trade names
“Sterling Optical,” “Site For Sore Eyes,” “Kindy Optical” and “Singer Specs,”
although most stores (other than the Company’s Site for Sore Eyes stores located
in Northern California) operate under the name “Sterling
Optical.” The Company also operates VisionCare of California, Inc.
(“VCC”), a specialized health care maintenance organization licensed by the
State of California, Department of Managed Health Care, which employs licensed
optometrists who render services in offices located immediately adjacent to, or
within, most Sterling Stores located in California.
Most
Sterling Stores offer eye care products and services such as prescription and
non-prescription eyeglasses, eyeglass frames, ophthalmic lenses, contact lenses,
sunglasses and a broad range of ancillary items. To the extent permitted by
individual state regulations, an optometrist is employed by, or affiliated with,
most Sterling Stores to provide professional eye examinations to the public. The
Company fills prescriptions from these employed or affiliated optometrists, as
well as from unaffiliated optometrists and ophthalmologists. Most Sterling
Stores have an inventory of ophthalmic and contact lenses, as well as on-site
lab equipment for cutting and edging ophthalmic lenses to fit into eyeglass
frames, which, in many cases, allows Sterling Stores to offer same-day
service.
Occasionally,
the Company sells the assets of certain of its Company-owned stores to qualified
franchisees and, in certain instances, realizes a profit on the conveyance of
the assets of such stores. Through these sales, along with the
opening of new stores by qualified franchisees, the Company seeks to create a
stream of royalty payments based upon a percentage of the gross revenues of the
franchised locations, and grow both the Sterling Optical and Site For Sore Eyes
brand names. The Division currently derives its revenues from the sale of eye
care products and services at Company-owned stores, membership fees paid to VCC
and ongoing royalty fees based upon a percentage of the gross revenues of its
franchised stores.
Sterling
Stores generally range in size from approximately 1,000 square feet to 2,000
square feet, are similar in appearance and are operated under certain uniform
standards and operating procedures. Many Sterling Stores are located in enclosed
regional shopping malls and smaller strip centers, with a limited number of
Sterling Stores being housed in freestanding buildings with adjacent parking
facilities. Sterling Stores are generally clustered within geographic
market areas to maximize the benefit of advertising strategies and minimize the
cost of supervising operations.
All
Sterling Stores carry a large selection of ophthalmic eyeglass frames,
sunglasses, ophthalmic and contact lenses and accessories. The Company
frequently test-markets various brands of sunglasses, ophthalmic lenses, contact
lenses and designer frames. Small quantities of these items are usually
purchased for selected stores that test customer response and interest. If a
product test is successful, the Company attempts to negotiate a system-wide
preferred vendor discount for the product in an effort to maximize system-wide
sales and profits.
As of
December 31, 2007, there were 158 Sterling Stores in operation, consisting of 12
Company-owned stores and 146 franchised stores. Sterling Stores are
located in 14 states, the District of Columbia, Canada and the U.S. Virgin
Islands.
The
following chart sets forth the breakdown of Sterling Stores in operation as of
December 31, 2007 and 2006:
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December
31, |
I.
COMPANY-OWNED STORES:
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2007 |
* |
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2006
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Company-owned
stores
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11 |
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10 |
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Company-owned
stores managed by franchisees
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1 |
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- |
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Total
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12 |
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10 |
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(*)
Existing store locations: Maryland (1), New Jersey (1), New York (8),
Pennsylvania (1) and Virginia (1).
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December
31,
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2007 |
* |
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2006
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II.
FRANCHISED STORES:
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146 |
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144 |
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(*)
Existing store locations: California (43), Delaware (4), Florida (1),
Illinois (1), Kentucky (2), Maryland (15), Massachusetts (1), Nevada (1),
New Jersey (6), New York (39), North Dakota (3), Ontario, Canada (2),
Pennsylvania (9), Virginia (6), Washington D.C. (2), West Virginia (1),
Wisconsin (8), and the U.S. Virgin Islands (2)
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FRANCHISE
SYSTEM
An
integral part of the Company's franchise system includes providing a high level
of marketing, training and administrative support to its franchisees. The
Company provides “grand opening” assistance for each new franchised location by
consulting with its franchisees with respect to store design, fixture and
equipment requirements and sources, inventory selection and sources, and
marketing and promotional programs, as well as assistance in obtaining managed
care contracts. Specifically, the Company's grand opening assistance helps to
establish business plans and budgets, provides preliminary store design and plan
approval prior to construction of a franchised store, and provides training, an
operations manual and a comprehensive business review to aid the franchisee in
attempting to maximize its sales and profitability. Further, on an
ongoing basis, the Company provides training through regional and national
seminars, offers assistance in marketing and advertising programs and
promotions, offers online communication, franchisee group discussion as well as
updated training modules and product information through its interactive
Franchisee Intranet, and consults with its franchisees as to their management
and operational strategies and business plans.
Preferred Vendor Network.
With the collective buying power of Company-owned and franchised Sterling
Stores, the Company has established a network of preferred vendors (the
“Preferred Vendors”) whose products may be purchased directly by franchisees at
group discount prices, thereby providing such franchisees with the opportunity
for higher gross margins. Additionally, the Company negotiates and
executes cooperative advertising programs with its Preferred Vendors for the
benefit of all Company-owned and franchised stores.
Franchise Agreements. Each
franchisee enters into a franchise agreement (the “Franchise Agreement”) with
the Company, the material terms of which are as follows:
a.
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Term. Generally, the
term of each Franchise Agreement is ten years and, subject to certain
conditions, is renewable at the option of the
franchisee.
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b.
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Initial Fees.
Generally, franchisees (except for any franchisees converting their
existing retail optical store to a Sterling Store (a “Converted Store”),
and those entering into agreements for more than one location) must pay
the Company a non-recurring, initial franchise fee of
$20,000. For each franchisee entering into agreements for more
than one location, the Company charges a non-recurring, initial franchise
fee of $15,000 for the second location, and $10,000 for each location in
excess of two. The Company charges each franchisee of a
Converted Store a non-recurring, initial franchise fee of $10,000 per
location.
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c.
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Ongoing
Royalties. Franchisees are obligated to pay the Company
ongoing royalties in an amount equal to a percentage (generally 8%) of the
gross revenues generated by their Sterling Store. Franchisees of Converted
Stores, however, pay ongoing royalties, on their store's historical
average base sales, at reduced rates increasing (in most cases) from 2% to
6% for the first three years of the term of the Franchise
Agreement. The Franchise Agreement provides for the payment of
ongoing royalties on a weekly basis, based upon the gross revenues for the
preceding week. Gross revenues generally include all revenues generated
from the operation of the Sterling Store in question, excluding refunds to
customers, sales taxes, a limited amount of bad debts and, to the extent
required by state law, fees charged by independent
optometrists.
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d.
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Advertising Fund
Contributions. Most franchisees must make ongoing contributions, on
a weekly basis, to an advertising fund (the “Advertising Fund”) generally
equal to 6% of their store's gross revenues for the preceding week.
Generally, 50% of these funds are expended at the direction of each
individual franchisee (for the particular Sterling Store in question),
with the balance being expended on joint advertising campaigns for all
franchisees located within specific geographic
areas.
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e.
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Termination. Franchise
Agreements may be terminated if a franchisee has defaulted on its payment
of monies due to the Company, or in its performance of the other terms and
conditions of the Franchise Agreement. During 2007, the assets of (as well
as possession of) three franchised stores were reacquired by the
Company. Substantially all of the assets located in such stores
were voluntarily surrendered and transferred back to the Company in
connection with the termination of the related Franchise Agreements. In
certain instances, the Company will re-convey the assets of such a store
to a new franchisee, requiring the new franchisee to enter into the
Company’s then current form of Franchise Agreement. However,
the Company reviews each stores historical performance to consider if the
Company will continue to operate such store (as a Company-owned location)
without re-conveying the assets of such store to a new
franchisee.
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OPTICAL
PURCHASING GROUP BUSINESS
The
Optical Purchasing Group Business is divided into two units. The U.S. unit, COM,
which is based in the state of Florida, is one of the leading optical purchasing
groups in the United States. COM operates an optical purchasing group
business, which provides its members (“COM Members”) with vendor discounts on
optical products for resale. COM Members are typically independent
optical retailers. COM is in the process of integrating an
internet-based purchasing website to allow current COM Members and potential new
members to purchase eye care products via the internet. As of December 31, 2007,
COM had 856 active members in its optical purchasing group.
TOG,
which is based in Ontario, Canada, is one of the leading optical purchasing
groups in Canada. TOG operates an optical purchasing group business,
which provides its members (“TOG Members”) with vendor discounts on optical
products for resale. TOG Members are typically independent optical
retailers. TOG also operates a credit reference business within the
optical industry in Canada, which allows TOG to selectively service only the
most credit-worthy retailers. As of December 31, 2007 TOG had 522
active members in its optical purchasing group.
INSIGHT
MANAGED VISION CARE
Managed
care is a substantial and growing segment of the retail optical
business. The Company, under the trade name “Insight Managed Vision
Care,” contracts with payers (i.e. health maintenance organizations, preferred
provider organizations, insurance companies, Taft-Hartley unions, and mid-sized
to large companies) that offer eye care benefits to their covered
participants. When Sterling Stores provide services or products to a
covered participant, it is generally at a discount from the everyday advertised
retail price. Typically, participants will be eligible for greater
eye care benefits at Sterling Stores than those offered at eye care providers
that are not participating in a managed care program. The Company
believes that the additional customer traffic generated by covered participants,
along with purchases by covered participants above and beyond their eye care
benefits, more than offsets the reduced gross margins being realized on these
sales. The Company believes that convenience of store locations and
hours of operation are key factors in attracting managed care
business. As the Company increases its presence within markets it has
already entered, as well as expands into new markets, it believes it will be
more attractive to managed care payors due to the additional Sterling Stores
being operated by the Company and its franchisees.
MARKETING
AND ADVERTISING
The
Company's marketing strategy emphasizes professional eye examinations,
competitive pricing (primarily through product promotions), convenient
locations, excellent customer service, customer-oriented store design and
product displays, knowledgeable sales associates, and a broad range of quality
products, including privately-labeled contact lenses presently being offered by
the Company and certain of its franchisees. Examinations by licensed
optometrists are generally available on the premises of, or directly adjacent
to, substantially all Sterling Stores.
The
Company continually prepares and revises its in-store, point-of-purchase
displays, which provide various promotional messages to customers. Both
Company-owned and franchised Sterling Stores participate in advertising and
in-store promotions, which include visual merchandising techniques to draw
attention to the products displayed in the Sterling Store in question. The
Company is also continually refining its interactive web sites, which further
markets the “Sterling Optical” and “Site for Sore Eyes” brands in an effort to
increase traffic to its stores and, in many instances, also uses direct mail
advertising as well as opt-in email, search engine and other internet
advertising to reach prospective, as well as existing, consumers.
The
Company annually budgets approximately 4% to 6% of system-wide sales for
advertising and promotional expenditures. Generally, franchisees are obligated
to contribute a percentage of their Sterling Store’s gross revenues to the
Company's segregated advertising fund accounts, which the Company maintains for
advertising, promotional and public relations programs. In most cases, the
Company permits each franchisee to direct the expenditure of approximately 50%
of such contributions, with the balance being expended to advertise and promote
all Sterling Stores located within the geographic area of the Sterling Store in
question, and/or on national promotions and campaigns.
COMPETITION
The
optical business is highly competitive and includes chains of retail optical
stores, superstores, individual retail outlets, the operators of web sites and a
large number of independent opticians, optometrists and ophthalmologists who
provide professional services and may, in connection therewith, dispense
prescription eyewear. As retailers of prescription eyewear generally service
local markets, competition varies substantially from one location or geographic
area to another. Since 1994, certain major competitors of the Company have been
offering promotional incentives to their customers and, in response thereto, the
Company generally offers the same or similar incentives to its
customers. Many of these competitors have greater resources than the
Company, which opens them to more favorable discounts on an assortment of
goods/services than the Company can get based on their purchasing
power.
The
Company believes that the principal competitive factors in the retail optical
business are convenience of location, on-site availability of professional eye
examinations, rapid service, quality and consistency of product and service,
price, product warranties, a broad selection of merchandise, the participation
in third-party managed care provider programs and the general consumer
acceptance of refractive laser surgery.
There are
other optical purchasing group businesses both in the United States and Canada
that offer the same type of services and vendor discounts that the Company’s
optical purchasing group businesses offer. In addition, certain
groups offer a different arrangement of services and products than the Company’s
groups.
GOVERNMENT
REGULATION
The
Company and its operations are subject to extensive federal, state and local
laws, rules and regulations affecting the health care industry and the delivery
of health care, including laws and regulations prohibiting the practice of
medicine and optometry by persons not licensed to practice medicine or
optometry, prohibiting the unlawful rebate or unlawful division of fees, and
limiting the manner in which prospective patients may be solicited. The
regulatory requirements that the Company must satisfy to conduct its business
vary from state to state. In particular, some states have enacted laws governing
the ability of ophthalmologists and optometrists to enter into contracts to
provide professional services with business corporations or lay persons, and
some states prohibit the Company from computing its continuing royalty fees
based upon a percentage of the gross revenues of the fees collected by
affiliated optometrists. Various federal and state regulations limit the
financial and non-financial terms of agreements with these health care
providers; and the revenues potentially generated by the Company differ among
its various health care provider affiliations.
The
Company is also subject to certain regulations adopted under the Federal
Occupational Safety and Health Act with respect to its in-store laboratory
operations. The Company believes that it is in material compliance with all such
applicable laws and regulations.
As a
franchisor, the Company is subject to various registration and disclosure
requirements imposed by the Federal Trade Commission and by many states in which
the Company conducts franchising operations. The Company believes that it is in
material compliance with all such applicable laws and regulations.
The
Company must comply with the Health Insurance Portability and Accountability Act
of 1996 (“HIPAA”), which governs our participation in managed care programs. We
also must comply with the privacy regulations under HIPAA, which went into
effect in April 2003. In addition, all states have passed laws that
govern or affect our arrangements with the optometrists who practice in our
vision centers. Some states, such as California, have particularly extensive and
burdensome requirements that affect the way we do business. In California,
optometrists who practice adjacent to our retail locations are providers to, and
subtenants of, a subsidiary, which is licensed as a single-service
HMO.
ENVIRONMENTAL
REGULATION
The
Company's business activities are not significantly affected by environmental
regulations, and no material expenditures are anticipated in order for the
Company to comply with any such environmental regulations. However, the Company
is subject to certain regulations promulgated under the Federal Environmental
Protection Act with respect to the grinding, tinting, edging and disposal of
ophthalmic lenses and solutions, with which the Company believes it is in
material compliance.
EMPLOYEES
As of
March 7, 2008, the Company employed approximately 134 individuals, of which
approximately 68% were employed on a full-time basis. No employees
are covered by any collective bargaining agreement. At franchised store
locations, employees are hired and governed by the franchisee, not the Company.
The Company considers its labor relations with its associates to be in good
standing and has not experienced any interruption of its operations due to
disagreements.
Item
1A. Risk Factors
An
investment in the Company’s common stock involves a number of very
significant risks. Because of these risks, only persons able to
bear the risk and withstand the loss of their entire investment should
invest in the Company’s common stock. Prospective investors
should consider the following risk factors before making an investment
decision.
·
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The
Company’s common stock was delisted from the Nasdaq Global Market
(“NASDAQ”), which makes it more difficult for shareholders to sell shares
of the Company’s common stock.On August 24, 2001, NASDAQ terminated the
listing of the Company’s common stock as a result of the Company’s failure
to maintain a $1.00 per share minimum bid price for the Company’s common
stock. As a result, the Company’s common stock began trading on
the Over-The-Counter Bulletin Board (“OTCBB”) on August 24, 2001. The
OTCBB is generally considered a less efficient market than
NASDAQ. Shareholders are likely to find it more difficult to
trade the Company’s common stock on the
OTCBB.
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·
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The
application of the "penny stock rules" could reduce the liquidity
and, therefore, the market price of the Company’s common
stock. On March 28, 2008, the last reported sales price of the
Company’s common stock was $0.20. Because the trading
price of the Company’s common stock is less than $5.00 per share and no
longer trades on NASDAQ, the Company’s common stock comes within the
definition of a "penny stock." The “penny stock rules”
impose additional sales practice requirements on broker-dealers who
sell the Company’s securities to persons other than established
customers and accredited investors, generally those with assets
in excess of $1,000,000 or annual income exceeding $200,000, or
$300,000 together with their spouse. Before a
broker-dealer can sell a penny stock, the Securities and Exchange
Commission (the “SEC”) rules require the firm to first approve the
customer for the transaction in question and receive from the
customer a written agreement to such transaction. The
firm must furnish the customer a document describing the risks of
investing in penny stocks. The broker-dealer must also
advise the customer of the current market quotation, if any, for the
penny stock and the compensation the firm and its broker will receive
for the trade. Finally, the firm must send monthly
account statements showing the market value of each penny stock held
in the customer’s account. These additional burdens
imposed on broker-dealers may restrict the ability of broker-dealers
to sell the Company’s securities and may affect your ability
to resell the Company’s common
stock.
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·
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Dr.
Alan Cohen, the Company’s Chairman of its Board of Directors, and, one of
the Company’s significant shareholders, owns, operates, manages and/or is
otherwise involved with other companies in the retail optical industry,
which are in competition with the Company’s Sterling Stores and/or COM
Members, and may result in potential conflicts. Dr. Cohen
is also a principal shareholder and executive officer and director of Real
Optical, LLC. Real Optical operates and franchises retail
optical stores similar to Sterling Stores and COM Members in the States of
Connecticut, Florida, New Hampshire, Massachusetts, New Jersey and New
York and may, in the future, operate in other states as
well. In the future, Real Optical may open or franchise
additional stores that are located in the same areas as Sterling Stores
and/or COM Member locations. These competing businesses could
reduce the revenues generated at the Company’s competing Sterling Stores
and/or from COM Members.
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Dr. Cohen
is also one of the principal members and executive officers of General Vision
Services, LLC, or GVS, which operates retail optical stores located in the New
York metropolitan area. GVS stores are similar to, and compete with,
the Sterling Stores and/or COM Members being operated in the same
areas. Furthermore, GVS solicits and administers third party benefit
programs, similar to those being administered by the Company, through GVS's
network of company-owned and independent retail optical stores. It is
possible that additional GVS stores, or other retail optical stores, which
provide services under third party benefit plans administered by GVS, may, in
the future, be located near one or more of the Company’s Sterling Stores and/or
COM Member locations, and may compete directly with such
locations. Additionally, the Company and GVS jointly participate in certain
third party benefit plans and certain Sterling Stores and GVS stores participate
as providers under third party benefit plans obtained by the Company or GVS and,
in all likelihood, will continue to do so in the future.
A
possible consequence of Dr. Cohen’s’ interests in Cohen Fashion Optical, Real
Optical, GVS and their respective affiliates is that conflicts of interest may
arise, as described above, and when business opportunities in the Company’s line
of business are presented to them, whether in his capacity as member of the
Company’s Board or as a shareholder, officer and director in these other
entities. While there can be no assurance as to the manner in which
corporate opportunities presented to Dr. Cohen will be allocated, by him, among
the various competing business entities in which he is involved, as a supplement
to the common law fiduciary duties to which all directors owe the Company and
its shareholders, the Company has adopted a Corporate Code of Ethics (which can
be accessed on the Company’s website www.emergingvision.com) to which Dr. Cohen
must adhere, which, in part, establishes guidelines as to how potential
conflicts of interest are to be handled.
Dr.
Robert Cohen, who served on the Company’s Board of Directors until he resigned
on March 5, 2008, and who is still a shareholder of the Company, also owns,
operates, manages and/or is otherwise involved with the same companies that Dr.
Alan Cohen is involved in.
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The
Company significantly depends on the ability and experience of certain
members of its management, and their departure may prevent or delay the
successful execution of the Company’s business plan. The
Company relies on the skills of certain members of its
senior management team to guide its operations including, but
not limited to, Mr. Christopher G. Payan, the Company’s Chief
Executive Officer, the loss of whom could have an adverse effect on the
Company’s operations. The Company currently has an employment
agreement with Mr. Payan through November 2009; however, only one other
member of senior management has an employment
agreement. Accordingly, the loss of their services could
prevent or delay the successful execution of its business plan and
attainment of profitability.
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·
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The
Company does not control the management of all of the Sterling Stores that
operate under its name, nor does it control any of the COM or TOG Members,
and these stores may be managed by unsuccessful franchisees, COM Members
and/or TOG Members, which would reduce the Company’s revenues from these
stores. The Company relies, in substantial part, on
franchisees, COM Members and TOG Members for revenues. Since
the Company does not control the management of these locations, it is
possible that a franchisee/owner may not have the business acumen or
financial resources to successfully operate his or her franchised Sterling
Store, COM Member location and/or TOG Member location. The
Company, together with a substantial number of franchisees, has recently
experienced an increase in the sales generated from the operation of
Sterling Stores; however it cannot guarantee continued increases in the
future. If a substantial number of franchisees, COM Members
and/or TOG Members experience a future decline in their sales and/or are
ultimately not successful; revenues from franchisees, COM Members and/or
TOG Members would decrease. Some of the factors that could lead
to future decline in sales, include, among others: decreased
spending by consumers, due to a weaker economy; increased competition by
large discount eyewear chains, which increases the need for franchisees,
COM Members and/or TOG Members to provide more aggressive promotional
sales, thus decreasing their profit margins; and the limitations of vision
care benefits available under medical and third party benefit
plans.
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·
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Better
financed competitors that provide greater levels of advertising obtain
favorable discounts from suppliers and offer customers aggressive discount
pricing. The Company competes with many types of eyewear
providers, which may prevent it from increasing or maintaining market
share. The retail optical business is highly competitive and
includes chains of retail optical stores, superstores, individual retail
outlets and a large number of individual opticians, optometrists and
ophthalmologists that provide professional services and dispense
prescription eyewear. These competitors may take advantage of
prompt
payment discount plans, aggressive discounting and
price-cutting for customers, and increased advertising. As
retailers of prescription eyewear, the Company and its franchisees
generally service local markets and, therefore, competition varies
substantially from one location or geographic area to
another. If the Company is not successful in dealing with
competition, the Company will not be able to increase or maintain its
customer base or market share.
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·
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The
Company often offers incentives to its customers, which lower profit
margins. At times when major competitors offer significantly
lower prices for their products, the Company is required to do the same.
Certain of major competitors
offer promotional incentives to their
customers including free eye exams, "50% Off" on designer
frames and "Buy One, Get One Free" eyecare
promotions. In response to these promotions, the Company has
offered the same or similar incentives to its customers. This
practice has resulted in lower profit margins and these competitive
promotional incentives may further reduce revenues, gross margins and cash
flows. Although the Company believes that Sterling Stores
provide quality service and products at competitive prices, several of the
large retail optical chains have greater financial resources. Therefore,
the Company may not be able to continue to deliver cost efficient products
in the event of aggressive pricing by competitors, which would reduce the
Company’s profit margins, net income and cash
flow.
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·
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Laser
surgery could eliminate the need for certain eyeglasses and contact
lenses. As refractive laser surgery gains market acceptance,
the Company may lose revenue from traditional eyewear
customers. As traditional eyewear users undergo laser vision
correction procedures or other vision correction techniques, the
demand for certain contact lenses and eyeglasses will
decrease. Due to the fact that the marketing and sale
of eyeglasses and contact lenses is a significant part of the
Company’s business, a decrease in customer demand for these products could
have a material adverse effect on sales of prescription eyewear, as
well as those of the Company’s
franchisees.
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·
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The
Company is subject to a variety of federal, state and local laws, rules
and regulations that affect the health care industry, which may
affect its ability to generate revenues or subject the Company to
additional expenses. The regulatory requirements that the Company and
its franchisees must satisfy to conduct its businesses, varies from
state to state. For example, some states have enacted laws governing
the ability of ophthalmologists and optometrists to enter into
contracts with business corporations or lay persons, and some states
prohibit companies from computing their royalty fees based upon a
percentage of the gross revenues generated by optometrists from exam
fees. Various federal and state regulations also limit the financial
and non-financial terms of agreements with health care providers and,
therefore, potential revenues may differ depending upon the nature of
the Company’s various health care provider
affiliations.
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·
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The
Company and its franchisees are also subject to the requirements of the
Health Insurance Portability and Accountability Act of 1996 (“HIPAA”),
which governs participation in managed care programs. The
Company also must comply with the privacy regulations under
HIPAA. In addition, all states have passed laws that govern or
affect arrangements with the optometrists who practice in vision
centers. Additionally, the Company and its franchisees are also
subject to regulations regarding franchise business and in-store
laboratory operations, as well as the operation, in California, of
VCC, which is regulated by the State of California Department of
Managed Health Care. As a franchisor, the Company is subject
to various registrations and disclosure requirements imposed by the
Federal Trade Commission and by many of the states in which the
Company conducts franchising operations. The Federal
Occupational Safety and Health Act regulates the Company’s in-store
laboratory operations. Although the Company believes that it is
in material compliance with all applicable laws and/or regulations,
the Company may not be able to sustain compliance if these laws
and/or regulations change in the future and, in that event, the
Company may have to incur significant expenses to maintain
compliance.
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·
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If
the Company’s subsidiary, VCC, is no longer permitted to
employ optometrists, then the revenue generated from its California
Sterling Stores would, in all likelihood, decrease materially,
thereby decreasing net income and cash
flow.
|
A class
action was commenced against the Company and VCC alleging that the
operation of VCC, which employs licensed
optometrists, violates certain provisions of the California Business and
Professions Code. Although the Company and VCC prevailed
in this case, in such event that VCC would lose its right to employ licensed
optometrists in the future, then sales, net income and cash flow would, in all
likelihood, decrease.
·
|
The
Company may be exposed to significant risk from liability claims if it is
unable to obtain insurance, at acceptable costs, to protect the Company
against potential liability claims. The provision of
professional eyecare services entails an inherent risk
of professional malpractice and other similar claims. The
Company does not influence or control the practice of optometry by
the optometrists that it employs or affiliates with, nor does it have
responsibility for their compliance with certain regulatory and other
requirements directly applicable to these
individual professionals. As a result of the relationship
between the Company and its employed or affiliated optometrists, the
Company may become subject to professional malpractice actions or
claims under various theories relating to the professional services
provided by these individuals. The Company may not be able
to continue to obtain adequate liability insurance at reasonable
rates, in which event, its insurance may not be adequate to cover
claims asserted against the Company, thus, potentially decreasing the
Company’s future cash position and potentially jeopardizing the
Company’s ability to continue
operations.
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·
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The
Company’s operations and success are highly dependent upon health care
providers, and the Company may be unable to enter into favorable
arrangements with these providers. Certain states prohibit the
Company from employing optometrists to render professional
services. Accordingly, the success of the Company’s
operations as full-service eye care providers depends upon its
ability to enter into agreements with these health care providers to
render professional services at Sterling Stores, COM Member and/or TOG
Member locations. Due to the increased competition, among
large discounters of retail eyewear, to enter into agreements with
health care providers and the finite number of available health care
providers, the costs of compensating these health care providers
has increased materially. The Company, its franchisees,
COM Members and/or TOG Members may not be able to enter
into agreements with these health care providers on satisfactory
terms, or these agreements may not be profitable, which would reduce
the revenues the Company, its franchisees, COM Members and/or TOG Members
could generate from their
operations.
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·
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Certain
events could result in a dilution of your ownership of the Company’s
common stock. As of December 31, 2007, the Company had
22,472,311 shares that were reserved for issuance under outstanding
warrants, options and senior convertible preferred
stock. The exercise and conversion prices, as the case may
be, of common stock equivalents range from $0.04 to $8.25 per
share. If converted or exercised, these securities will
result in a dilution of your percentage ownership of the Company’s common
stock. In addition, if the Company acquires new companies through
the issuance of common or preferred stock, your percentage of
ownership will be further diluted.
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·
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The
Company’s potential limitation on the use of its net operating loss
carry-forwards in accordance with Section 382 of the Internal Revenue Code
of 1986, as amended, due to certain changes in ownership that have
occurred or could occur in the future. Furthermore, in order to limit the
potential that future transactions could have a similar effect on the
Company’s tax attributes, the Company amended its by-laws to provide the
Board of Directors with the ability to void certain transactions in
Company securities that may impair or limit the future utilization of its
tax attributes, including its net operating loss
carry-forwards. However, there can be no assurance that the
Company has been, or will in the future be, successful in preventing an
event which could materially impair or limit the Company’s utilization of
its net operating loss carry-forwards and other tax
attributes.
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·
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The
acquisition of Combine, which conducts business with approximately 850
retail optical stores (COM Members), could create an appearance of
conflict amongst the COM Members. COM Members operate retail
optical stores similar to Sterling Stores in the states of California,
Delaware, Florida, Illinois, Maryland, Massachusetts, Nevada, New Jersey,
New York, North Dakota, Pennsylvania, South Dakota, Virginia, West
Virginia, Wisconsin, and in the District of Columbia and the Virgin
Islands, and may, in the future, operate in other states as
well. As of the date hereof, many COM Member locations are in
the same shopping center or mall as, or in close proximity to, certain
Sterling Stores; and in the future, the Company may open Sterling Stores
that are located in the same areas as COM Members. These
competing businesses could reduce the revenues generated at, both, the
Company’s Sterling Stores and COM Member locations, or could cause
COM Members to leave COM because they view COM as the
competition.
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·
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COM
and TOG operations and success are highly dependent upon the purchases of
eye care products by independent optical retailers (COM/TOG
Members). If COM/TOG Member’s decide to purchase their eye care
products through a competing optical purchasing group business or purchase
direct from a vendor, then revenues generated from COM and/or TOG would
decrease. A decrease in the number of COM/TOG Members could reduce
COM and/or TOG profit margins, net income and cash
flow.
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·
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COM
and TOG utilize certain key vendors to provide its members with a broad
spectrum of product purchasing options. If one of these key
vendors ceases to do business with COM and/or TOG, or ceases to exist, COM
and/or TOG could see a decrease in the amount of product purchased by its
members, thus decreasing its revenues and net
income.
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·
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The
Company relies heavily on computer systems in managing financial
results. The Company is subject to damage and interruption from
power outages, computer and telecommunications failures, computer viruses,
security breaches, catastrophic events and usage by
employees. This includes any damage to the systems that allow
for electronic payments from the Company’s franchisees and credit card
payments from its Sterling Store customers. Any repairs
necessary to replace and/or fix these systems could result in a
significant expense to the Company. Additionally, certain of
the Company’s financial reporting processes are not part of an integrated
financial reporting system, which requires additional hours and
administrative costs to operate, manage and control these
systems. The Company is working to transition most of the
processes to an integrated financial reporting system. The
conversion of these systems and processes to become SOX compliant could
result in a significant expense to the Company and may pose greater risks
associated with maintaining internal controls as the systems are
integrated.
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·
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The
Company’s leasing space for a majority of its Sterling Stores could expose
it to possible liabilities and losses. The Company’s leases are
generally for 10 years. Many of the leases provide for annual
increases over the term of the lease in addition to the costs associated
with insurance, taxes, repairs, maintenance and utilities. If
an existing Sterling Store becomes non-profitable and the Company decides
to close the location, the Company may still be required to pay the base
rent, taxes and other rental charges for the balance of the
lease.
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·
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The
Company may be unable to service its debt obligations. In
connection with the purchases of COM and TOG, along with other debt
obligations, the Company has approximately $5,630,000 of outstanding debt
as of December 31, 2007. If the Company is unable to generate
sufficient cash flows from operations in the future, it may be unable to
make principal or interest payments on such borrowings when they become
due and may need to refinance all or a portion of the existing debt, or
obtain additional financing. The Company cannot guarantee that
such refinancing or financing would be available on favorable terms, or at
all.
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·
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The
Company is Plaintiff in a pending civil action (the “Action”) against For
Eyes Optical Company (“For Eyes” or “Defendant”) in which the Company
claims, among other things, , that (i) there is no likelihood of confusion
between the Company’s and Defendant’s mark, and that the Company has not
infringed, and is not infringing, Defendant’s mark; (ii) the Company is
not bound by that certain settlement agreement, executed in 1981 by a
prior owner of the Site For Sore Eyes trademark; and (iii) Defendant’s
mark is generic and must be cancelled. For Eyes, in its Answer,
asserted defenses to the Company’s claims, and asserted counterclaims
against the Company, including, among others, that (i) the Company has
infringed For Eyes’ mark; (ii) the Company wrongfully obtained a trademark
registration for its mark and that said registration should be cancelled;
and (iii) the acts of the Company constitute a breach of the
aforementioned settlement agreement. For Eyes seeks injunctive
relief, cancellation of the Company’s trademark registration, trebled
monetary damages, payment of any profits made by the Company in respect of
the use of such tradename, and costs and attorney fees. While
the Company believes that it will be successful in prosecuting its claims
against the Defendant, and in defending against the counterclaims made by
Defendant, there can be no assurance of such success. In the
event that the Company is not successful, it is possible that, under
certain circumstances, the Company may be limited in, or precluded from
continuing, its use of the Site for Sore Eyes
tradename.
|
If the
Company is successful in prosecuting its claims against Defendant in the Action,
it is possible that the Company would then have a right to use the Site for Sore
Eyes mark beyond the territory to which Defendant claims its use is
restricted. However, if the Company is unsuccessful in prosecuting such
claims, the Company could be required to recognize a charge to earnings, as the
Company is currently accounting for the costs of such litigation as an
Intangible Asset – Trademark. The Company currently has accumulated
approximately $300,000 of costs related to such litigation.
Item
2. Properties
The
Company's headquarters, consisting of approximately 7,000 square feet, are
located in an office building situated at 100 Quentin Roosevelt Boulevard,
Garden City, New York 11530, under a sublease that expires in November
2010. This facility houses the Company's principal executive
and administrative offices.
VCC’s
headquarters, consisting of approximately 1,050 square feet, are located in an
office building situated at 9625 Black Mountain Road, Suite 311, San Diego,
California 92126, under a lease that expires in March 2010.
COM ’s
headquarters, consisting of approximately 1,900 square feet, are located in an
office building situated at 6001 Broken Sound Parkway, Suite 508, Boca Raton,
Florida 33487, under a lease that expires in June 2009.
TOG’s
headquarters, consisting of approximately 1,520 square feet, are located in an
office building situated at 20 Elgin Street, Suite 200, Oshawa, Ontario L1G 1S8,
under a lease that is currently on a month-to-month term.
The
Company leases the space occupied by all of its Company-owned Sterling Stores
and certain of its franchised Sterling Stores. The remaining leases for its
franchised Sterling Stores are held in the names of the respective franchisees,
of which the Company holds a collateral assignment on certain of those
leases. The Company does not hold any of the leases, nor does
it hold any collateral assignments, on COM Member locations.
Sterling
Stores are generally located in commercial areas, including major shopping
malls, strip centers, freestanding buildings and other areas conducive to retail
trade. Generally, Sterling Stores range in size from 1,000 to 2,000
square feet.
Item
3. Legal Proceedings
Information
with respect to the Company’s legal proceedings required by Item 103 of
Regulation S-K is set forth in the Notes to the Consolidated Financial
Statements included in Item 8 of this Report, and is incorporated by reference
herein.
Item
4. Submission of Matters to a Vote of Security Holders
The
Company held its Annual Meeting of Shareholders on December 13,
2007. Having received approximately 54.72% of the votes cast, Seymour
G. Siegel, Alan Cohen and Harvey Ross were re-elected to serve as Class I
directors of the Company, for a term of two years expiring in
2009. Approximately 94.41% of the Company’s outstanding shares were
voted at the meeting.
PART
II
Item
5. Market for Registrant's Common Equity, Related Shareholder Matters
and Issuer Purchases of Equity Securities
The
Registrant's Common Stock is traded in the over-the-counter market and quoted on
the OTCBB under the trading symbol “ISEE”. Over-the-counter market
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions. The
range of the high and low closing bid prices for the Registrant's Common Stock
for each quarterly period of the last two years is as follows:
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Quarter Ended:
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March
31
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$ |
0.21 |
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$ |
0.15 |
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$ |
0.16 |
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$ |
0.10 |
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June
30
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$ |
0.47 |
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$ |
0.17 |
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$ |
0.16 |
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$ |
0.12 |
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September
30
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$ |
0.38 |
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$ |
0.22 |
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$ |
0.21 |
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$ |
0.13 |
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December
31
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$ |
0.33 |
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$ |
0.18 |
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$ |
0.21 |
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$ |
0.15 |
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The
approximate number of shareholders of record of the Company's Common Stock as of
March 31, 2008 was 272.
There was
one shareholder of record of the Company’s Senior Convertible Preferred Stock as
of March 31, 2008.
Historically,
the Company has not paid dividends on its Common Stock, and has no intention to
pay dividends on its Common Stock in the foreseeable future. It is the present
policy of the Registrant’s Board of Directors to retain earnings, if any, to
finance the Company's future operations and growth.
Although
the Company has not paid dividends, if the Company does in the future, those
dividend payments could affect the Company’s financial covenants related to
their credit facility. Such credit facility is described in Item 7 of
this Report.
Item 6. Selected Financial
Data
This
Annual Report does not include information described under Item 6 of Form 10-K
pursuant to the rules of the Securities and Exchange Commission that permit
“smaller reporting companies” to omit such information.
Item
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This
Report contains certain forward-looking statements and information relating to
the Company that is based on the beliefs of the Company’s management, as well as
assumptions made by, and information currently available to, the Company’s
management. When used in this Report, the words “anticipate”,
“believe”, “estimate”, “expect”, “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 Item 1A. Risk Factors. 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 new information, or otherwise, for the occurrence of future
events.
COMPARISON
OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006
Total
revenues for the Company increased approximately $27,909,000, or 128.5%, to
$49,621,000 for the year ended December 31, 2007, as compared to $21,712,000 for
the year ended December 31, 2006. This increase was mainly a result
of the acquisition, on September 29, 2006, having an effective date of August 1,
2006, of substantially all of the assets of Combine Optical Management
Corporation (“Combine”) through the Company’s wholly-owned subsidiary, COM
Acquisition, Inc. (“COM”), and of the acquisition, on August 10, 2007, having an
effective date of August 1, 2007, of all of the equity ownership interests in
1725758 Ontario Inc., d/b/a The Optical Group (“TOG”) through the Company’s
wholly-owned subsidiary, OG Acquisition, Inc. Additionally, the
average number of Company-owned stores in operation increased from 8.8 for
fiscal 2006 compared to 10.8 for fiscal 2007.
Total
costs, and selling, general and administrative expenses for the Company
increased approximately $29,007,000, or 136.0%, to $50,331,000 for the year
ended December 31, 2007, as compared to $21,324,000 for the year ended December
31, 2006. This increase was mainly a result of the acquisitions of
COM and TOG, and also due to the increased number of Company-owned stores in
operation during 2007.
Retail
Optical Store Segment
Net sales
for Company-owned stores increased approximately $1,488,000, or 38.1%, to
$5,393,000 for the year ended December 31, 2007, as compared to $3,905,000 for
the year ended December 31, 2006. This increase was mainly
attributable to the Company having more Company-owned stores open during the
same period (average of 10.8 stores in 2007 vs. 8.8 stores in
2006). On a same store basis (for stores that operated as a
Company-owned store during the entirety of both of the years ended December 31,
2007 and 2006), comparative net sales increased approximately $151,000, or 4.9%,
to $3,263,000 for the year ended December 31, 2007, as compared to $3,112,000
for the year ended December 31, 2006. Management believes that this
increase was 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, continued to implement a new point-of-sale system, and
spent $190,000 more on Company-store advertising, 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
$131,000, or 3.9%, to $3,513,000 for the year ended December 31, 2007, as
compared to $3,382,000 for the year ended December 31, 2006. This
increase was primarily due to an increase in membership fees generated by VCC
during the first and second quarters of 2007 in addition to an increase in the
membership fee charged, which went into effect July
2007. Additionally, VCC designed website in 2007 that allows
customers to book eye exams online, thus allowing for additional exam fee
revenue generated by franchise locations.
Franchise
royalties decreased approximately $416,000, or 5.9%, to $6,626,000 for the
year ended December 31, 2007, as compared to $7,042,000 for the comparable
period in 2006. Management believes this decrease was mainly due to a
decrease in royalties generated from franchise store audits of $439,000, which
audits were factored over an equivalent sample size of franchise locations for
each year audited. The decrease was offset by an increase in the
total number of stores open during the comparable periods and a 3.6% increase in
franchise sales for the stores that were in operation during both of the
comparable periods
Other
franchise related fees (which includes initial franchise fees, renewal fees and
fees related to the transfer of store ownership from one franchisee to another)
increased approximately $44,000, or 22.3%, to $241,000 for the year ended
December 31, 2007, as compared to $197,000 for the year ended December 31,
2006. This increase was primarily attributable to the Company
recognizing franchise fees on 21 new franchise agreement transactions during the
year ended December 31, 2007, as compared to 14 new franchise agreement
transactions during the year ended December 31, 2006.
Including
revenues solely generated by the Company-owned stores, the Company’s gross
profit margin decreased by 2.6%, to 69.0%, for the year ended December 31, 2007,
as compared to 71.6% for the year ended December 31, 2006. The
Company has identified the major contributing factors that led to the decrease
in the Company’s gross profit margin. Management is addressing these
issues through increased training at the Company-store level, amongst other
things, and anticipates these changes will result in improvements in the
Company’s gross profit margin in the future. The Company’s gross
margin may, however, fluctuate in the future depending upon the extent and
timing of changes in the product mix in the Company-owned stores, competitive
pricing, and promotional.
Selling,
general and administrative expenses increased approximately $2,534,000, or
19.1%, to $15,803,000 for the year ended December 31, 2007, as compared to
$13,269,000 for the year ended December 31, 2006. This increase was
partially a result of an increase to advertising expenses of $316,000 due to the
promotion of a new marketing campaign around the new product mix in our
Company-owned stores, payroll and related expenses of $1,584,000 due, in part,
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, a charge of $263,000 for closing 2 of the Company’s non-profitable,
Company-owned stores, and additional charges, including rent and overhead
expenses, related to an average of three more Company-owned stores in operation
during the year ended December 31, 2007. In addition to these items,
the Company incurred certain costs associated with the development of two new
business lines, costs associated with the implementation of Sarbanes-Oxley
compliance including hiring additional personnel, overhead and redirecting
resources of existing employees, and the cost to implement the recent
acquisitions of the Company. These expenses were offset, in part, by
a decrease in equity compensation charges of $420,000 and bad debt recoveries of
$140,000 during the year ended December 31, 2007.
Gain on
settlement of litigation relates to the settlement of an adversary proceeding
between the Company and BAL Global Finance, LLC, formerly known as Sanwa
Business Credit Corporation that had been pending in the United States
Bankruptcy Court for the Southern District of New York since
1995. The material terms of the settlement generated other income of
$1,270,000 less certain costs and expenses incurred in the litigation (including
attorney fees) of $258,000.
Optical
Purchasing Group Business Segment
On
September 29, 2006, having an effective date of August 1, 2006, the Company,
through its wholly-owned subsidiary COM, acquired substantially all of the
assets of Combine. COM activity, beginning August 1, 2006, has been
included in the Company’s results of operations as of December 31, 2007 and
2006, respectively.
On August
10, 2007, having an effective date of August 1, 2007, the Company, through its
wholly-owned subsidiary OG, acquired all of the equity ownership interest in
TOG. OG activity, beginning August 1, 2007, has been included in the
Company’s results of operations as of December 31, 2007.
Net
revenues for the optical purchasing group segment increased approximately
$26,662,000, or 371.0%, to $33,848,000 for the year ended December 31, 2007, as
compared to $7,186,000 for the year ended December 31, 2006, which represented
68.2% and 33.1%, respectively, of the total revenue of the Company.
Costs of
sales for the optical purchasing group segment increased approximately
$25,363,000, or 376.2%, to $32,105,000 for the year ended December 31, 2007, as
compared to $6,742,000 for the year ended December 31, 2006, which represented
95.6% and 86.6%, respectively, of the total costs of sales of the
Company.
Selling,
general and administrative expenses for the optical purchasing group segment
increased approximately $611,000, or 178.1%, to $954,000 for the year ended
December 31, 2007, as compared to $343,000 for the year ended December 31, 2006,
which represented 5.7% and 2.4%, respectively, of the total selling, general and
administrative expenses of the Company.
Interest
expense for the optical purchasing group segment increased $221,000, or
2,455.6%, to $230,000 for the year ended December 31, 2007 as compared to $9,000
for the year ended December 31, 2006, which represented 79.7% and 18.8%,
respectively, of the total interest expense of the Company. The
increase in interest expense was related to the debt financing with Combine in
connection with the acquisition of substantially all of the assets of Combine,
and to the borrowings under the Company’s Credit Facility with Manufacturers and
Traders Trust Corporation (“M&T”) to fund the acquisitions of TOG and
COC.
LIQUIDITY
AND CAPITAL RESOURCES
As of
December 31, 2007, the Company had positive working capital of $772,000 and cash
on hand of $2,846,000. During 2007, cash flows provided by its
operating activities were $1,289,000. This was principally due to
earnings before taxes, depreciation and amortization from continuing operations
of $698,000 in addition to equity compensation charges of $113,000, as well as
the gain on the Sanwa settlement totaling $1,012,000. 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, and new marketing strategies and increased gross
margins, among other things, for its Company-owned stores.
For the
year ended December 31, 2007, cash flows used in investing activities were
$4,453,000 mainly due to the acquisition of TOG and COC, as well as capital
expenditures (which included the remodeling of one of the Company-owned stores
and the Corporate offices, and the purchase of a customized exhibiting booth for
the Company’s trade shows) made by the Company.
For the
year ended December 31, 2007, cash flows provided by financing activities
were $4,798,000 mainly due to the Company borrowing $3,609,000 in August 2007
under the Company’s Credit Facility with M&T to fund the acquisitions of TOG
and COC. Additionally, the Company borrowed another $750,000
throughout the year for general working capital requirements and received
proceeds of approximately $1,345,000 as a result of the exercise of options and
warrants. These were offset by the repayment of the Company’s related
party borrowings, the promissory note payments made to COMC, and the payment on
all of the Company’s promissory notes in connection with certain Rescission
Transactions consummated by the Company on December 31, 2003.
CREDIT
FACILITY
On August
8, 2007, the Company entered into a Revolving Line of Credit Note and Credit
Agreement (the “Credit Agreement”) with 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 replaced 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 drawn by the Company is payable on August 1, 2009.
On August
10, 2007, the Company borrowed $3,609,423 to fund the purchase price payable in
connection with the acquisitions of TOG and COC, and borrowed $400,000 for
general working capital requirements. The Credit Facility includes
various financial covenants including minimum net worth, maximum funded debt and
debt service ratio requirements. As of December 31, 2007, the Company
had outstanding borrowings of $4,359,423 under the Credit Facility, which amount
was included in Long-term Debt on the accompanying Consolidated Condensed
Balance Sheet, was in compliance with the various financial covenants, and had
$1,640,577 available under the Credit Facility for future
borrowings.
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
Financial Statements included in Item 8 of this 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, legal contingencies and allowances on franchise, notes and other
receivables are critical to an understanding of the Company’s consolidated
financial statements because their application places the most significant
demands on management’s judgment, with financial reporting results relying on
estimation about the effect of matters that are inherently
uncertain.
Management’s
estimate of the allowances on receivables is based on historical sales,
historical loss levels, and an analysis of the collectibility of individual
accounts. To the extent that actual bad debts differed from management's
estimates by 10 percent, consolidated net income would be an estimated $30,000
and $22,000 higher/lower for the years ended December 31, 2007 and 2006,
respectively, 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 $1,563,000 and $1,720,000
higher/lower for the years ended December 31, 2007 and 2006,
respectively.
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 and/or interest on franchise notes
is not reasonably assured, the Company recognizes such revenues when the cash is
received. To the extent that revenues that were recognized on a cash
basis were recognized on an accrual basis, consolidated net income would be an
estimated $187,000 and $125,000 higher/lower for the years ended December 31,
2007 and 2006, respectively.
Management’s
performs an annual impairment analysis to determine the fair value of goodwill
and certain intangible assets. In determining the fair value of such
assets, management uses a variety of methods and assumptions including a
discounted cash flow analysis along with various qualitative
tests. To the extent that management needed to impair its goodwill or
certain intangible assets by 10 percent, consolidated net income would be an
estimated $578,000 and $296,000 lower for the years ended December 31, 2007 and
2006, respectively.
RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS
In July
2006, the FASB issued Interpretation (“FIN”) No. 48 “Accounting for Uncertainty in Income
Taxes – An Interpretation of SFAS 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 will require 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. FIN 48 is effective for annual periods beginning after December
15, 2006. The implementation of FIN 48 is not expected to have a material
impact on the Company’s consolidated financial statements and is disclosed in
the Company’s footnotes in Item 8 of this Report.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157
defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. The new FASB rule does
not supersede all applications of fair value in other pronouncements, but
creates a fair value hierarchy and prioritizes the inputs to valuation
techniques for use in most pronouncements. It requires companies to assess
the significance of an input to the fair value measurement in its entirety.
SFAS 157 also requires companies to disclose information to enable users
of financial statements to assess the inputs used to develop the fair value
measurements. SFAS 157 is effective for fiscal periods beginning
after November 15, 2007. The implementation of SFAS 157 did not have
a material impact on the Company’s consolidated financial
statements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities – Including an amendment of SFAS No. 115.” SFAS No. 159
amends SFAS No. 115, “Accounting for Certain Investment in
Debt and Equity Securities,” with respect to accounting for a transfer to
the trading category for all entities with available-for-sale and trading
securities electing the fair value option. This standard allows companies
to elect fair value accounting for many financial instruments and other items
that currently are not required to be accounted as such, allows different
applications for electing the option for a single item or groups of items, and
requires disclosures to facilitate comparisons of similar assets and liabilities
that are accounted for differently in relation to the fair value option.
SFAS 159 is effective for fiscal years beginning after November 15,
2007. The implementation of SFAS 159 did not have a material impact
on the Company’s consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 141R, “Business Combinations”
(“SFAS 141R”), which establishes principles and requirements for the reporting
entity in a combination, including recognition and measurement in the financial
statements of the identifiable assets acquired, the liabilities assumed, and any
non-controlling interest in the acquiree. This statement also establishes
disclosure requirements to enable financial statement users to evaluate the
nature and financial effects of the business combination. SFAS 141R applies
prospectively to business combinations for which the acquisition date is on or
after fiscal years beginning after December 15, 2008. The Company is currently
evaluating the effect that the adoption of SFAS 141R will have on its
consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements, an Amendment of ARB No. 51” (“SFAS
160”). SFAS 160 establishes accounting and reporting standards pertaining to
ownership interests in subsidiaries held by parties other than the parent; the
amount of net income attributable to the parent and to the non-controlling
interest; changes in a parent’s ownership interest; and the valuation of any
retained non-controlling equity investment when a subsidiary is deconsolidated.
SFAS 160 also establishes disclosure requirements that clearly identify and
distinguish between the interests of the parent and the interests of the
non-controlling owners. SFAS 160 is required to be adopted prospectively for the
first annual reporting period after December 15, 2008. The implementation of
SFAS 159 is not expected to have a material impact on the Company’s consolidated
financial statements as it currently does not have non-controlling
interests.
Item
7A. Quantitative and Qualitative Disclosures about Market
Risk
This
Annual Report does not include information described under Item 7 of Form 10-K
pursuant to the rules of the Securities and Exchange Commission that permit
“smaller reporting companies” to omit such information.
Item
8. Financial Statements and Supplementary Data
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PAGE
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|
CONSOLIDATED
FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Information
required by schedules called for under Regulation S-X is either not applicable
or is included in the consolidated financial statements or notes
thereto.
To the
Board of Directors and Shareholders of Emerging Vision, Inc. and
Subsidiaries:
We have
audited the accompanying consolidated balance sheets of Emerging Vision, Inc. (a
New York corporation) and subsidiaries (the “Company”) as of December 31, 2007
and 2006, and the related consolidated statements of income and comprehensive
income, shareholders' equity and cash flows for each of the years then
ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Emerging Vision, Inc. and
subsidiaries as of December 31, 2007 and 2006, and the results of their
operations and their cash flows for each of the years then ended in conformity
with accounting principles generally accepted in the United States.
/S/
MILLER, ELLIN & COMPANY LLP
New York,
New York
March 20,
2008
CONSOLIDATED
BALANCE SHEETS
(In
Thousands, Except Share Data)
|
|
ASSETS
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
2,846 |
|
|
$ |
1,289 |
|
Restricted
cash
|
|
|
- |
|
|
|
250 |
|
Franchise
receivables, net of allowance of $147 and $110,
respectively
|
|
|
1,842 |
|
|
|
1,620 |
|
Optical
purchasing group receivables, net of allowance of $60 and $40,
respectively
|
|
|
4,840 |
|
|
|
1,914 |
|
Other
receivables, net of allowance of $5 and $2, respectively
|
|
|
369 |
|
|
|
312 |
|
Current
portion of franchise notes receivable, net of allowance of $38 and $44,
respectively
|
|
|
191 |
|
|
|
79 |
|
Inventories,
net
|
|
|
466 |
|
|
|
431 |
|
Prepaid
expenses and other current assets
|
|
|
447 |
|
|
|
507 |
|
Deferred
tax asset, current portion
|
|
|
600 |
|
|
|
600 |
|
Total
current assets
|
|
|
11,601 |
|
|
|
7,002 |
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
1,496 |
|
|
|
923 |
|
Franchise
notes receivable, net of allowance of $0 and $5,
respectively
|
|
|
121 |
|
|
|
214 |
|
Deferred
tax asset, net of current portion
|
|
|
1,074 |
|
|
|
800 |
|
Goodwill
|
|
|
4,237 |
|
|
|
2,544 |
|
Intangible
assets, net
|
|
|
3,065 |
|
|
|
808 |
|
Other
assets
|
|
|
271 |
|
|
|
306 |
|
Total
assets
|
|
$ |
21,865 |
|
|
$ |
12,597 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
$ |
5,607 |
|
|
$ |
4,595 |
|
Optical
purchasing group payables
|
|
|
4,486 |
|
|
|
1,760 |
|
Accrual
for store closings
|
|
|
300 |
|
|
|
37 |
|
Short-term
debt
|
|
|
32 |
|
|
|
396 |
|
Related
party obligations, current portion
|
|
|
404 |
|
|
|
778 |
|
Total
current liabilities
|
|
|
10,829 |
|
|
|
7,566 |
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
4,424 |
|
|
|
20 |
|
Related
party obligations, net of current portion
|
|
|
770 |
|
|
|
1,173 |
|
Franchise
deposits and other liabilities
|
|
|
442 |
|
|
|
487 |
|
Total
liabilities
|
|
|
16,465 |
|
|
|
9,246 |
|
|
|
|
|
|
|
|
|
|
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;
125,475,143 shares issued and 125,292,806 shares
outstanding
|
|
|
1,254 |
|
|
|
705 |
|
Treasury
stock, at cost, 182,337 shares
|
|
|
(204 |
) |
|
|
(204 |
) |
Additional
paid-in capital
|
|
|
127,971 |
|
|
|
127,062 |
|
Accumulated
comprehensive income
|
|
|
165 |
|
|
|
- |
|
Accumulated
deficit
|
|
|
(123,860 |
) |
|
|
(124,286 |
) |
Total
shareholders' equity
|
|
|
5,400 |
|
|
|
3,351 |
|
Total
liabilities and shareholders' equity
|
|
$ |
21,865 |
|
|
$ |
12,597 |
|
The
accompanying notes are an integral part of these consolidated balance
sheets.
CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In
Thousands, Except Per Share Data)
|
|
|
|
For
the Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
Optical
purchasing group sales
|
|
$ |
33,848 |
|
|
$ |
7,186 |
|
Retail
sales
|
|
|
8,906 |
|
|
|
7,287 |
|
Franchise
royalties
|
|
|
6,626 |
|
|
|
7,042 |
|
Other
franchise related fees
|
|
|
241 |
|
|
|
197 |
|
Total
revenue
|
|
|
49,621 |
|
|
|
21,712 |
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
Cost
of optical purchasing group sales
|
|
|
32,105 |
|
|
|
6,742 |
|
Cost
of retail sales
|
|
|
1,469 |
|
|
|
970 |
|
Selling,
general and administrative expenses
|
|
|
16,494 |
|
|
|
13,613 |
|
Provision
for store closings
|
|
|
263 |
|
|
|
- |
|
Total
costs and expenses
|
|
|
50,331 |
|
|
|
21,325 |
|
|
|
|
|
|
|
|
|
|
Operating
(loss) income
|
|
|
(710 |
) |
|
|
387 |
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
Interest
on franchise notes receivable
|
|
|
35 |
|
|
|
45 |
|
Gain
on sale of company-owned stores to franchisees
|
|
|
13 |
|
|
|
268 |
|
Other
income
|
|
|
114 |
|
|
|
118 |
|
Gain
on settlement of litigation
|
|
|
1,012 |
|
|
|
- |
|
Interest
expense
|
|
|
(289 |
) |
|
|
(48 |
) |
Total
other income
|
|
|
885 |
|
|
|
383 |
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before income tax benefit
|
|
|
175 |
|
|
|
770 |
|
Income
tax benefit
|
|
|
251 |
|
|
|
1,249 |
|
Income
from continuing operations
|
|
|
426 |
|
|
|
2,019 |
|
|
|
|
|
|
|
|
|
|
(Loss)
from discontinued operations
|
|
|
- |
|
|
|
(264 |
) |
Income
tax benefit
|
|
|
- |
|
|
|
105 |
|
(Loss)
from discontinued operations
|
|
|
- |
|
|
|
(159 |
) |
Net
income
|
|
|
426 |
|
|
|
1,860 |
|
|
|
|
|
|
|
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
165 |
|
|
|
- |
|
Comprehensive
income
|
|
$ |
591 |
|
|
$ |
1,860 |
|
|
|
|
|
|
|
|
|
|
Net
income per share – basic
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$ |
0.01 |
|
|
$ |
0.03 |
|
(Loss)
from discontinued operations
|
|
|
- |
|
|
|
(0.00 |
) |
Net
income
|
|
$ |
0.01 |
|
|
$ |
0.03 |
|
|
|
|
|
|
|
|
|
|
Net
income per share – diluted
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$ |
0.01 |
|
|
$ |
0.02 |
|
(Loss)
from discontinued operations
|
|
|
- |
|
|
|
(0.00 |
) |
Net
income
|
|
$ |
0.01 |
|
|
$ |
0.02 |
|
|
|
|
|
|
|
|
|
|
Weighted-average number of
common shares outstanding –
|
|
|
|
|
|
|
|
|
Basic
|
|
|
84,489 |
|
|
|
70,324 |
|
Diluted
|
|
|
93,131 |
|
|
|
111,556 |
|
The
accompanying notes are an integral part of these consolidated
statements.
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(In
Thousands, Except Share Data)
|
|
|
|
Senior
Convertible Preferred
Stock
|
|
|
Common Stock
|
|
|
Treasury
Stock,
at cost
|
|
|
Additional
Paid-In
|
|
|
Accumulated
Comprehensive
|
|
|
Accumulated
|
|
|
Total
Shareholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Income
|
|
|
Deficit
|
|
|
Equity
|
|
Balance
– December 31, 2005
|
|
|
1 |
|
|
$ |
74 |
|
|
|
70,506,035 |
|
|
$ |
705 |
|
|
|
182,337 |
|
|
$ |
(204 |
) |
|
$ |
126,389 |
|
|
$ |
- |
|
|
$ |
(126,146 |
) |
|
$ |
818 |
|
Issuance
of stock options and warrants
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
534 |
|
|
|
- |
|
|
|
- |
|
|
|
534 |
|
Issuance
of stock options in connection with the acquisition of
Combine
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
139 |
|
|
|
- |
|
|
|
- |
|
|
|
139 |
|
Net
income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,860 |
|
|
|
1,860 |
|
Balance
– December 31, 2006
|
|
|
1 |
|
|
$ |
74 |
|
|
|
70,506,035 |
|
|
$ |
705 |
|
|
|
182,337 |
|
|
$ |
(204 |
) |
|
$ |
127,062 |
|
|
$ |
- |
|
|
$ |
(124,286 |
) |
|
$ |
3,351 |
|
Exercise
of stock options and warrants
|
|
|
- |
|
|
|
- |
|
|
|
54,848,264 |
|
|
|
548 |
|
|
|
- |
|
|
|
- |
|
|
|
797 |
|
|
|
- |
|
|
|
- |
|
|
|
1,345 |
|
Issuance
of restricted stock for services rendered in connection with investor
relations
|
|
|
- |
|
|
|
- |
|
|
|
120,844 |
|
|
|
1 |
|
|
|
- |
|
|
|
- |
|
|
|
112 |
|
|
|
- |
|
|
|
- |
|
|
|
113 |
|
Effects
of foreign currency translation adjustments
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
165 |
|
|
|
- |
|
|
|
165 |
|
Net
income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
426 |
|
|
|
426 |
|
Balance
– December 31, 2007
|
|
|
1 |
|
|
$ |
74 |
|
|
|
125,475,143 |
|
|
$ |
1,254 |
|
|
|
182,337 |
|
|
$ |
(204 |
) |
|
$ |
127,971 |
|
|
$ |
165 |
|
|
$ |
(123,860 |
) |
|
$ |
5,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated
statements.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Dollars
in Thousands)
|
|
|
|
For
the Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
Cash
flows from operating activities:
|
|
|
|
|
|
Income
from continuing operations
|
|
$ |
426 |
|
|
$ |
2,019 |
|
Adjustments
to reconcile income from continuing operations to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
523 |
|
|
|
327 |
|
Provision
for doubtful accounts
|
|
|
319 |
|
|
|
220 |
|
Deferred
tax assets
|
|
|
(274 |
) |
|
|
(1,295 |
) |
Provision
for store closings
|
|
|
263 |
|
|
|
- |
|
Non-cash
compensation charges related to options and warrants
|
|
|
113 |
|
|
|
534 |
|
Gain
on the sale of property and equipment
|
|
|
(13 |
) |
|
|
(268 |
) |
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Franchise
and other receivables
|
|
|
(455 |
) |
|
|
(151 |
) |
Optical
purchasing group receivables
|
|
|
688 |
|
|
|
(518 |
) |
Inventories
|
|
|
(35 |
) |
|
|
54 |
|
Prepaid
expenses and other current assets
|
|
|
60 |
|
|
|
(253 |
) |
Intangible
and other assets
|
|
|
(343 |
) |
|
|
(148 |
) |
Accounts
payable and accrued liabilities
|
|
|
1,012 |
|
|
|
546 |
|
Optical
purchasing group payables
|
|
|
(950 |
) |
|
|
414 |
|
Franchise
deposits and other liabilities
|
|
|
(45 |
) |
|
|
(180 |
) |
Net
cash provided by operating activities
|
|
|
1,289 |
|
|
|
1,301 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Franchise
notes receivable issued
|
|
|
(252 |
) |
|
|
(143 |
) |
Proceeds
from franchise and other notes receivable
|
|
|
293 |
|
|
|
277 |
|
Proceeds
from the sale of property and equipment
|
|
|
33 |
|
|
|
250 |
|
Purchases
of property and equipment
|
|
|
(918 |
) |
|
|
(388 |
) |
Acquisition
of Combine
|
|
|
- |
|
|
|
(700 |
) |
Acquisition
of 1725758 Ontario Inc.
|
|
|
(3,609 |
) |
|
|
- |
|
Net
cash used in investing activities
|
|
|
(4,453 |
) |
|
|
(704 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from the issuance of common stock upon
the
exercise of stock options and warrants
|
|
|
1,345 |
|
|
|
- |
|
Return
of restricted cash
|
|
|
250 |
|
|
|
- |
|
Proceeds
from equipment financing
|
|
|
79 |
|
|
|
- |
|
Net
borrowings under credit facility
|
|
|
4,299 |
|
|
|
- |
|
Payments
on long-term debt
|
|
|
(1,175 |
) |
|
|
(85 |
) |
Net
cash provided by (used in) financing activities
|
|
|
4,798 |
|
|
|
(85 |
) |
Net
cash provided by continuing operations
|
|
|
1,634 |
|
|
|
512 |
|
Net
cash used in discontinued operations
|
|
|
- |
|
|
|
(39 |
) |
Exchange
of foreign exchange rate changes on cash
|
|
|
(77 |
) |
|
|
- |
|
Net
increase in cash and cash equivalents
|
|
|
1,557 |
|
|
|
473 |
|
Cash
and cash equivalents – beginning of year
|
|
|
1,289 |
|
|
|
816 |
|
Cash
and cash equivalents – end of year
|
|
$ |
2,846 |
|
|
$ |
1,289 |
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
Interest
|
|
$ |
59 |
|
|
$ |
8 |
|
Taxes
|
|
$ |
36 |
|
|
$ |
34 |
|
|
|
|
|
|
|
|
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
Accounts
receivable, property and equipment, intangible assets and goodwill
acquired in connection with the purchase of Combine
|
|
$ |
- |
|
|
$ |
1,773 |
|
The
accompanying notes are an integral part of these consolidated
statements.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1 –
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
Business
Emerging
Vision, Inc. (the “Registrant” and, together with its subsidiaries, hereinafter
the “Company” or “Emerging”) operates one of the largest chains of retail
optical stores and one of the largest franchise optical chains in the United
States, based upon management’s beliefs, domestic sales and the number of
locations of Company-owned and franchised stores (collectively referred to
hereinafter as “Sterling Stores”). Emerging Vision also operates
optical purchasing groups in the United States (referred to as “COM”) and in
Canada (referred to as “TOG”). Management believes that COM and TOG
are leading optical purchasing groups based on their annual sales and
membership. The Registrant was incorporated under the
laws of the State of New York in January 1992 and, in July 1992, purchased
substantially all of the assets of Sterling Optical Corp., a New York
corporation, then a debtor-in-possession under Chapter 11 of the U.S. Bankruptcy
Code.
As of
December 31, 2007, there were 158 Sterling Stores in operation, consisting of 12
Company-owned stores and 146 franchised stores, 856 active members of COM, and
522 active members of TOG.
Basis of
Presentation
The
Consolidated Financial Statements reflect the operations of the Company’s retail
optical store operations, COM and TOG as continuing operations. The
results of the retail operations and cash flows conducted in the state of
Arizona are reflected as discontinued operations in accordance with the
provisions of Financial Accounting Standards Board (“FASB”) Statement of
Financial Accounting Standards (“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
year ended December 31, 2006, the Company incurred losses, net of taxes, related
to the discontinued operations of approximately $159,000.
Principles of
Consolidation
The
Consolidated Financial Statements include the accounts of Emerging Vision, Inc.
and its operating subsidiaries, all of which are wholly-owned. All intercompany
balances and transactions have been eliminated in consolidation.
Use of
Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and the disclosure of
contingent assets and liabilities as of the dates of such financial statements,
and the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates. Significant
estimates made by management include, but are not limited to, allowances on
franchise, notes and other receivables, costs of current and potential
litigation, and the allowance on deferred tax assets.
Cash and Cash
Equivalents
Cash
represents cash on hand at Company-owned stores and cash on deposit with
financial institutions. All highly liquid investments with an
original maturity (from date of purchase) of three months or less are considered
to be cash equivalents. The Company's cash equivalents are invested
in various investment-grade money market accounts, in a certificate of deposit
and in Canadian treasury accounts.
Fair Value of Financial
Instruments
In
determining the fair value of its financial instruments, the Company uses a
variety of methods and assumptions that are based on market conditions and risks
existing as of each balance sheet date. For the majority of financial
instruments, including receivables, long-term debt, and stock options and
warrants, standard market conventions and techniques, such as discounted cash
flow analysis, option pricing models, replacement cost and termination cost, are
used to determine fair value. All methods of assessing fair value
result in a general approximation of value, and such value may never actually be
realized.
Inventories,
net
Inventories,
net, are stated at the lower of cost or market, using the first-in, first-out
(FIFO) method, and consist primarily of contact lenses, ophthalmic lenses,
eyeglass frames and sunglasses.
Property and Equipment,
net
Property
and equipment, net, are recorded at cost, less accumulated depreciation and
amortization. Depreciation is recorded on a straight-line basis over the
estimated useful lives of the respective classes of assets. All
depreciation and amortization costs are reflected in selling, general and
administrative expenses in the accompanying Consolidated Statements of
Income.
Software
Certain
software development costs have been capitalized in accordance with the
provisions of Statement of Position 98-1, “Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use.” Such costs include
charges for consulting services and costs for personnel associated with
programming, coding and testing such software. Amortization of
capitalized software costs begins when the software is placed into service, is
recorded on a straight-line basis over the estimated useful life and is
reflected in selling, general and administrative expenses in the accompanying
Consolidated Statements of Income.
Goodwill and Intangible
Assets, net
In 2001,
the FASB issued SFAS No. 142, “Goodwill and Other Intangible
Assets.” This Statement provides that goodwill and certain intangible
assets with indefinite lives should not be amortized, but should be reviewed, at
least annually, for impairment. Intangible assets with definite useful lives are
amortized over their respective estimated useful lives to their estimated
residual value. In accordance with the adoption of SFAS No. 142,
management performed a review of its existing goodwill and certain intangible
assets, and determined that they are not impaired as of December 31,
2007. All other intangible assets are being amortized over their
useful lives.
Impairment of Long-Lived
Assets
The
Company follows the provisions of SFAS No. 144, “Accounting for the Impairment
or Disposal of Long-Lived Assets.” This Statement requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable, but amends the prior
accounting and reporting standards for segments of a business to be disposed
of. The Company periodically evaluates its long-lived assets (on a
store-by-store basis) based on, among other factors, the estimated, undiscounted
future cash flows expected to be generated from such assets in order to
determine if an impairment exists. During the years ended December
31, 2007 and 2006, there were no impairment charges.
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:
Retail sales – Represents
sales from eye care products and related services;
Optical purchasing group
sales – Represents product pricing extended to the Company’s
optical purchasing group members associated with the sale of vendor’s eye care
products to such 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,
transfer, renewal and conversion 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. These revenues are
included in Retail Sales in the Consolidated Statements of Income.
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.
Cost of
Sales
Cost of
retail sales include the sale of inventory items such as eyeglass frames,
contact lenses, ophthalmic lenses, sunglasses and accessories as well as the
respective shipping and freight costs for such items.
Cost of
optical purchasing group sales include COM and TOG cost of product (based on the
volume purchasing power from ordering for its members as a group) from its
vendors, the associated shipping and freight costs, less certain discounts for
the Company’s guaranteed prompt payment.
Selling, general and
administrative expenses
Selling,
general and administrative expenses primarily include payroll and related
benefits, franchise promotions and seminars, business travel, rent and related
charges, advertising, professional fees, depreciation and amortization, bank and
credit card fees, bad debt expense, and equity compensation
charges.
Advertising
Costs
The
Company expenses advertising costs as incurred. Advertising costs
aggregated approximately $875,000 and $546,000 for the years ended December 31,
2007 and 2006, respectively, and is reflected in selling, general and
administrative expenses on the accompanying Consolidated Statements of
Income. Advertising fees received from franchisees are not accounted
for in the Consolidated Statements of Income as the Company acts in an agent
capacity with respect to those funds. These funds are included in
accounts payable and accrued liabilities on the accompanying Consolidated
Balance Sheets until such time as the franchisee directs the spending of such
funds.
Comprehensive
Income
The
Company follows the provisions of SFAS No. 130, “Reporting Comprehensive
Income,” which establishes rules for the reporting of comprehensive income and
its components. Comprehensive income is defined as the change in
equity from transactions and other events and circumstances other than those
resulting from investments by owners and distributions to owners. The
Company’s comprehensive income is comprised of the cumulative translation
adjustment arising from the conversion of foreign currency.
Foreign Currency
Translation
The
financial position and results of operations of the Company’s wholly-owned
subsidiary, OG Acquisition, Inc. (“OG”) were measured using OG’s local currency
(Canadian Dollars) as the functional currency. Balance sheet accounts
are translated from the foreign currency into U.S. Dollars at the period-end
rate of exchange. Income and expenses are translated at the weighted
average rates of exchange for the period. The resulting $165,000
translation gain from the conversion of foreign currency to U.S. Dollars is
included as a component of comprehensive income for the year ended December 31,
2007 and is recorded directly to accumulated comprehensive income within the
Consolidated Balance Sheet as of December 31, 2007.
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. No such
amounts were accrued for at January 1, 2007. Additionally, no
adjustments related to uncertain tax positions were recognized during the year
ended December 31, 2007.
The
Company recognizes interest and penalties related to uncertain tax positions as
a reduction of the income tax benefit. No interest and penalties
related to uncertain tax positions were accrued as of December 31,
2007.
The
Company operates in multiple tax jurisdictions within the United States of
America and Canada. Although we do not believe that we are currently
under examination in any of our major tax jurisdictions, we remain subject to
examination in all of our tax jurisdictions until the applicable statutes of
limitation expire. As of December 31, 2007, a summary of the tax
years that remain subject to examination in our major tax jurisdictions
are: United States – Federal and State – 2004 and
forward. The Company does not expect to have a material change to
unrecognized tax positions within the next twelve months.
Operating
Leases
The
Company accounts for all operating leases on a straight-line basis over the term
of the lease. In accordance with the provisions of FASB SFAS No. 13,
“Accounting for
Leases,” any incentives or rent escalations are recorded as deferred rent
and amortized as rent expense over the respective lease term.
Guarantee
Disclosures
The
Company follows the provision of FASB Interpretation (“FIN”) No. 45,
“Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others,” which clarifies the required
disclosures to be made by a guarantor in their interim and annual consolidated
financial statements about its obligations under certain guarantees that it has
issued. FIN No. 45 also requires a guarantor to recognize, at the
inception of the guarantee, a liability for the fair value of the obligation
undertaken. The provisions of this Interpretation did not have a
material impact on the Company’s financial position or results of
operations.
Stock-Based
Compensation
The
Company accounts for stock-based compensation in accordance with the provisions
of 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. In addition, the Company
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.
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% to 98%,
with no dividends over the expected life.
The
Company recognized stock-based compensation expenses of approximately $68,000
and $534,000 related to the issuance of stock options to certain
employees. Such expenses are reflected in selling, general and
administrative expenses on the accompanying Consolidated Statement of Income for
the years ended December 31, 2007 and 2006, respectively.
The
Company recognized stock-based compensation expense of approximately
$45,000 related to its issuance of restricted stock and stock warrants to
certain non-employee investor relation consultants. Such expense is
reflected in selling, general and administrative expenses on the accompanying
Consolidated Statements of Income for the year ended December 31,
2007. No such expenses were incurred during the year ended December
31, 2006.
Concentration of Credit
Risk
Cash
The
Company maintains cash balances with various financial institutions, which, at
times, may exceed the Federal Deposit Insurance Corporation limit in the United
States and/or the Canadian Deposit Insurance Corporation limit in
Canada. The Company has not experienced any losses to date as a
result of this policy, and management believes there is little risk of
loss.
Receivables
The
Company operates retail optical stores and its two optical purchasing businesses
in North America, and its receivables are from franchisees that also operate
retail optical stores in the United States and from its optical purchasing
businesses’ members that operate retail optical stores in North
America. The Company estimates allowances for doubtful accounts based
on its franchisees’ or members’ financial condition and collection
history. Management believes the Company’s allowances are sufficient
to cover any losses related to its inability to collect its accounts and notes
receivables. Accounts are written-off when significantly past due and
deemed uncollectible by management. At times, the Company experiences
difficulties with the collection of amounts due from certain franchisees and
with certain franchisees’ reporting of revenues subject to
royalties. This is a common problem for franchisors, and the Company
has taken steps designed to improve the reporting by, and collection from, its
franchisees.
Vendors
COM and
TOG utilize certain key vendors to provide its members with a broad spectrum of
product purchasing options. If one of these key vendors ceases to do
business with COM or TOG, or ceases to exist, COM and/or TOG could see a
decrease in the amount of product purchased by its members, thus decreasing
sales and net income. Management believes there are a sufficient
number of competing vendors and enough of a product mix to mitigate any changes
to the Company’s key vendors.
As of
December 31, 2007 and 2006, optical purchasing group payables relating to its
three most significant vendors as a percentage were as follows:
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Vendor
A
|
|
|
32.5 |
% |
|
|
39.8 |
% |
Vendor
B
|
|
|
12.0 |
% |
|
|
10.7 |
% |
Vendor
C
|
|
|
5.0 |
% |
|
|
15.9 |
% |
|
|
|
49.5 |
% |
|
|
66.4 |
% |
Segment
Information
The
Company follows the provisions of SFAS No. 131, “Disclosures about Segments of
an Enterprise and Related Information,” which establishes annual and interim
reporting standards for an enterprise’s operating segments, and related
disclosures about its products, services, geographic areas and major
customers. As defined in SFAS No. 131, for the year ended December
31, 2005, the Company reviewed its business operations and determined that the
Company's operations were classified into one principal industry segment; retail
optical. During 2006, in connection with the Company acquiring
substantially all of the tangible assets of Combine Optical Management
Corporation, the Company established a second operating segment (the optical
purchasing group segment).
Reclassifications
Certain
reclassifications have been made to prior years’ consolidated financial
statements to conform to the current year presentation.
NOTE
2 – ACQUISITIONS:
Combine
Optical Management Corporation
On
September 29, 2006, effective August 1, 2006, the Company, through its
wholly-owned subsidiary COM Acquisition, Inc. (“COM”), acquired substantially
all of the tangible assets of Combine Optical Management Corp. (“Combine”) for
an aggregate purchase price of $2,410,000. Combine, which is based in
Florida, operates an optical purchasing group business which provides its
members vendor discounts on optical products. Also acquired in this
transaction was a development stage neutraceutical business that is focused on
the development and distribution of nutritional supplements targeted to
consumers with pre-dispositions to certain optical diseases and
conditions. COM had 856 active members in its optical purchasing
group business as of December 31, 2007.
The
purchase price consisted of the following: (i) $700,000 paid at
closing; (ii) a non-interest bearing promissory note (with an imputed annual
interest rate of 8.1%) in the amount of $1,273,000 with $498,000 paid in October
2007, $300,000 payable on October 1, 2008, $250,000 payable on October 1, 2009,
and $225,000 payable on October 1, 2010; and (iii) a promissory note in the
amount of $500,000 (with interest at 7% per annum) payable in sixty, equal
monthly installments of $9,900.60, which commenced on October 1,
2007. Additionally, the President of Combine received 3,515,625 stock
options to purchase shares of the Company’s common stock. The options
have an exercise price of $0.15, which was the closing price on the date of
grant. All of the options vested immediately and expire 10 years from
the date of grant. Commencing on September 29, 2010, and expiring
September 28, 2016, 2,187,500 options may be put back to the Company at a put
price per share of $0.32. The fair value of such options,
approximately $139,000, was calculated using the Black-Scholes method and was
included as part of the purchase price.
In
connection with this acquisition, the Company entered into a five-year
Employment Agreement (the “Agreement”) with the existing President of
Combine. The Agreement provides for an annual salary of $210,000,
certain other benefits, and an annual bonus based upon an established
formula.
The
acquisition was accounted for as a business purchase and recorded at the
estimated fair value (based on an independent expert’s valuation) of the assets
acquired and liabilities assumed, as follows:
Working
Capital
|
|
$ |
4,000 |
|
Other
long-term assets |
|
|
92,000 |
|
Prepaid
Expenses and Other Current Assets
|
|
|
109,000 |
|
Property
and Equipment
|
|
|
312,000 |
|
Intangible
Assets, net
|
|
|
833,000 |
|
Goodwill
|
|
|
1,278,000 |
|
Net
assets acquired
|
|
$ |
2,628,000 |
|
|
|
|
|
|
Property
and equipment is being depreciated on a straight-line basis over the estimated
useful lives of the respective classes of assets, which include a software
system developed by COM having a five year useful life. The
intangible assets consist of a covenant not-to-compete based on terms provided
in the Agreement, which has a five year useful life, customer-related
intangibles with an eleven year useful life, and a trade name with an indefinite
life. The Goodwill is amortized over fifteen years for tax purposes
only.
1725758
Ontario Inc. (d/b/a The Optical Group)
On August
10, 2007, effective August 1, 2007, the Company, through its wholly-owned
subsidiary OG Acquisition, Inc., acquired all of the outstanding equity
interests of 1725758 Ontario Inc., d/b/a The Optical Group ("TOG") and
substantially all of the assets of Corowl Optical Credit Services, Inc. ("COC")
for an aggregate purchase price of cash consideration of $3,800,000 CAD
(Canadian Dollars) (approximately $3,609,000 USD). The Company
withdrew funds from its Credit Facility with Manufacturers and Traders Trust
Corporation (“M&T”), including $3,609,423 to fund the purchase price payable
in connection with the acquisitions of TOG and COC, and $50,000 for general
working capital requirements. TOG is based in Ontario, Canada and
operates an optical purchasing group business in Canada. COC is based
in Ontario, Canada and operates a credit reference business within the optical
industry in Canada. TOG had approximately 522 active members in its
optical purchasing group business as of December 31, 2007.
The
acquisition was accounted for as a business purchase and recorded at the
estimated fair value (based on an independent expert’s valuation) of the assets
acquired and liabilities assumed on August 1, 2007, as follows:
Working
capital
|
|
$ |
1,000 |
|
Accounts
receivable
|
|
|
3,817,000 |
|
Property
and equipment
|
|
|
41,000 |
|
Intangible
assets
|
|
|
1,844,000 |
|
Goodwill
|
|
|
1,582,000 |
|
Accounts
payable
|
|
|
(3,676,000 |
) |
Net
assets acquired
|
|
$ |
3,609,000 |
|
|
|
|
|
|
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. The Goodwill is amortized over fifteen years
for tax purposes only.
The
following table shows certain unaudited pro forma results of the Company, giving
effect to the acquisitions of COM and TOG, assuming the acquisitions were
consummated at the beginning of each of the two years ended December 31,
2007:
|
|
(In
thousands)
|
|
|
|
2007
|
|
|
2006
|
|
Business
Segment Net Revenues:
|
|
|
|
|
|
|
Retail
Optical Stores
|
|
$ |
15,773 |
|
|
$ |
14,526 |
|
Optical
Purchasing Group Business
|
|
|
57,390 |
|
|
|
49,396 |
|
Net
revenues
|
|
$ |
73,163 |
|
|
$ |
63,922 |
|
|
|
|
|
|
|
|
|
|
Business
Segment Income from Continuing Operations:
|
|
|
|
|
|
|
|
|
Retail
Optical Stores
|
|
$ |
(63 |
) |
|
$ |
1,926 |
|
Optical
Purchasing Group Business
|
|
|
1,239 |
|
|
|
1,209 |
|
Income
from continuing operations
|
|
$ |
1,176 |
|
|
$ |
3,135 |
|
|
|
|
|
|
|
|
|
|
Business
Segment Loss from Discontinued Operations:
|
|
|
|
|
|
|
|
|
Retail
Optical Stores
|
|
$ |
- |
|
|
$ |
(159 |
) |
Optical
Purchasing Group Business
|
|
|
- |
|
|
|
- |
|
Loss
from discontinued operations
|
|
$ |
- |
|
|
$ |
(159 |
) |
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
Statements of Income. Common stock equivalents totaling 2,202,687 and
1,886,020 were excluded from the computation of Diluted EPS for the years ended
December 31, 2007 and 2006, respectively, 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:
|
|
(In
thousands)
|
|
|
|
2007
|
|
|
2006
|
|
Numerator:
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$ |
426 |
|
|
$ |
2,019 |
|
(Loss)
from discontinued operations
|
|
|
- |
|
|
|
(159 |
) |
Net
income
|
|
$ |
426 |
|
|
$ |
1,860 |
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
84,489 |
|
|
|
70,324 |
|
Dilutive
effect of stock options and warrants
|
|
|
8,642 |
|
|
|
41,232 |
|
Weighted
average common shares outstanding, assuming dilution
|
|
|
93,131 |
|
|
|
111,556 |
|
|
|
|
|
|
|
|
|
|
Per Share Information -
Basic:
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$ |
0.01 |
|
|
$ |
0.03 |
|
(Loss)
from discontinued operations
|
|
|
- |
|
|
|
(0.00 |
) |
Net
income
|
|
$ |
0.01 |
|
|
$ |
0.03 |
|
|
|
|
|
|
|
|
|
|
Per Share Information -
Diluted:
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$ |
0.01 |
|
|
$ |
0.02 |
|
(Loss)
from discontinued operations
|
|
|
- |
|
|
|
(0.00 |
) |
Net
income
|
|
$ |
0.01 |
|
|
$ |
0.02 |
|
NOTE 4 – FRANCHISE
NOTES RECEIVABLE:
Franchise
notes held by the Company consist primarily of purchase money notes related to
Company-financed conveyances of Company-owned store assets to franchisees, and
certain franchise notes receivable obtained by the Company in connection with
acquisitions in prior years. Substantially all notes are secured by
the underlying assets of the related franchised store, as well as the personal
guarantee of the principal owners of the franchise. As of December
31, 2007, these notes generally provided for interest ranging from 6% to
12%.
Scheduled
maturities of notes receivable as of December 31, 2007, are as follows (in
thousands):
2008
|
|
$ |
218 |
|
2009
|
|
|
56 |
|
2010
|
|
|
76 |
|
|
|
|
350 |
|
Less:
allowance for doubtful accounts
|
|
|
(38 |
) |
|
|
$ |
312 |
|
NOTE
5 – VALUATION AND QUALIFYING ACCOUNTS:
Franchise
receivables, optical purchasing group receivables, franchise notes receivable,
and other Company receivables, are shown on the Consolidated Balance Sheets net
of allowances for doubtful accounts. The following is a breakdown, by
major component, of the change in those allowances, along with the accruals for
store closings:
|
(In
thousands)
|
|
|
As
of December 31,
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
Balance,
beginning of year
|
|
$ |
110 |
|
|
$ |
195 |
|
Charged
to expense
|
|
|
94 |
|
|
|
2 |
|
Reductions,
including write-offs
|
|
|
(58 |
) |
|
|
(262 |
) |
Additions
and transfers
|
|
|
1 |
|
|
|
175 |
|
Balance,
end of year
|
|
$ |
147 |
|
|
$ |
110 |
|
|
|
|
|
|
|
|
|
|
Optical
Purchasing Group Receivables:
|
|
|
|
|
|
|
|
|
Balance,
beginning of year
|
|
$ |
40 |
|
|
$ |
- |
|
Charged
to expense
|
|
|
20 |
|
|
|
40 |
|
Reductions,
including write-offs
|
|
|
- |
|
|
|
- |
|
Additions
and transfers
|
|
|
- |
|
|
|
- |
|
Balance,
end of year
|
|
$ |
60 |
|
|
$ |
40 |
|
|
|
|
|
|
|
|
|
|
Franchise
Notes Receivables:
|
|
|
|
|
|
|
|
|
Balance,
beginning of year
|
|
$ |
49 |
|
|
$ |
191 |
|
Charged
to expense
|
|
|
1 |
|
|
|
59 |
|
Reductions,
including write-offs
|
|
|
(11 |
) |
|
|
(26 |
) |
Additions
and transfers
|
|
|
(1 |
) |
|
|
(175 |
) |
Balance,
end of year
|
|
$ |
38 |
|
|
$ |
49 |
|
|
|
|
|
|
|
|
|
|
Other
Company Receivables:
|
|
|
|
|
|
|
|
|
Balance,
beginning of year
|
|
$ |
2 |
|
|
$ |
2 |
|
Charged
to expense
|
|
|
21 |
|
|
|
32 |
|
Reductions,
including write-offs
|
|
|
(18 |
) |
|
|
(32 |
) |
Additions
and transfers
|
|
|
- |
|
|
|
- |
|
Balance,
end of year
|
|
$ |
5 |
|
|
$ |
2 |
|
|
|
|
|
|
|
|
|
|
Accrual
for Store Closings:
|
|
|
|
|
|
|
|
|
Balance,
beginning of year
|
|
$ |
37 |
|
|
$ |
37 |
|
Charged
to expense
|
|
|
236 |
|
|
|
- |
|
Reductions,
including write-offs
|
|
|
- |
|
|
|
- |
|
Additions
and transfers
|
|
|
27 |
|
|
|
- |
|
Balance,
end of year
|
|
$ |
300 |
|
|
$ |
37 |
|
|
|
|
|
|
|
|
|
|
NOTE
6 – PROPERTY AND EQUIPMENT, NET:
Property
and equipment, net, consists of the following:
|
|
(In
thousands)
As
of December 31,
|
|
Estimated
|
|
|
2007
|
|
|
2006
|
|
Useful
Lives
|
|
|
|
|
|
|
|
|
Furniture
and fixtures
|
|
$ |
382 |
|
|
$ |
277 |
|
5-7
years
|
Machinery
and equipment
|
|
|
2,084 |
|
|
|
1,707 |
|
3-5
years
|
Software
|
|
|
846 |
|
|
|
685 |
|
3-5
years
|
Leasehold
improvements
|
|
|
1,347 |
|
|
|
1,048 |
|
10
years*
|
|
|
|
4,659 |
|
|
|
3,717 |
|
|
Less:
accumulated depreciation
|
|
|
(3,163 |
) |
|
|
(2,794 |
) |
|
Property
and equipment, net
|
|
$ |
1,496 |
|
|
$ |
923 |
|
|
|
|
|
|
|
|
|
|
|
|
* Based upon the lesser of the
assets’ useful lives or the term of the lease of the related
property.
Depreciation
and amortization expense on property and equipment for the years ended December
31, 2007 and 2006 was $369,000 and $282,000, respectively, and is reflected in
selling, general and administrative expenses in the accompanying Consolidated
Statements of Income.
NOTE
7 – INTANGIBLE ASSETS, NET:
Intangible
assets, net, consist of the following:
|
|
(In
thousands)
As
of December 31,
|
|
Estimated
|
|
|
2007
|
|
|
2006
|
|
Useful
Lives
|
|
|
|
|
|
|
|
|
Customer
lists
|
|
$ |
1,107 |
|
|
$ |
333 |
|
10-11
years
|
Non-compete
agreement
|
|
|
465 |
|
|
|
290 |
|
5
years
|
Other
|
|
|
151 |
|
|
|
22 |
|
2
years
|
Trade
name
|
|
|
1,543 |
|
|
|
210 |
|
Indefinite
|
|
|
|
3,266 |
|
|
|
855 |
|
|
Less:
accumulated amortization
|
|
|
(201 |
) |
|
|
(47 |
) |
|
Intangible
assets, net
|
|
$ |
3,065 |
|
|
$ |
808 |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
expense on intangible assets for the years ended December 31, 2007 and 2006 was
$154,000 and $45,000, respectively, and is reflected in selling, general and
administrative expenses in the accompanying Consolidated Statements of
Income. Amortization expense of $293,000, $243,000, $193,000,
$169,000 and $121,000 will be reflected in future Consolidated Statements of
Income for the years ending December 31, 2008, 2009, 2010, 2011 and 2012,
respectively.
NOTE
8 – ACCRUAL FOR STORE CLOSINGS:
Effective
January 1, 2003, the Company adopted the provisions of SFAS No. 146, “Accounting
for Costs Associated with Exit or Disposal Activities,” which superceded EITF
Issue 94-3, “Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity.” In accordance therewith, the
Company records a liability for the cost associated with an exit or disposal
activity when the liability is incurred. For the year ended December
31, 2007, the Company recorded a provision for two store closings totaling
approximately $263,000, which was comprised of lease termination
costs. No provision for store closings was provided for during the
year ended December 31, 2006. As of December 31, 2007 and 2006,
$300,000 and $37,000, respectively, was reflected in accrual for store closings
on the accompanying Consolidated Balance Sheets.
NOTE
9 – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
Accounts
payable and accrued liabilities consist of the following (in
thousands):
|
|
December
31, |
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
2,961 |
|
|
$ |
1,945 |
|
Accrued
payroll and fringe benefits
|
|
|
536 |
|
|
|
477 |
|
Accrued
professional fees
|
|
|
128 |
|
|
|
120 |
|
Accrued
advertising
|
|
|
1,310 |
|
|
|
1,328 |
|
Accrued
rent under sublease
|
|
|
227 |
|
|
|
218 |
|
Accrued
interest
|
|
|
- |
|
|
|
117 |
|
Other
accrued expenses
|
|
|
445 |
|
|
|
390 |
|
|
|
$ |
5,607 |
|
|
$ |
4,595 |
|
NOTE 10 – LONG-TERM
DEBT (INCLUDING RELATED PARTY BORROWINGS):
As of
December 31, 2007, principal payments due on the Company's long-term debt and
related party borrowings are as follows (in thousands):
Year
|
|
Related
Party
Borrowings
(1)
(2)
|
|
|
Other
Debt
(3)
(4)
|
|
|
|
|
|
|
|
|
2008
|
|
$ |
404 |
|
|
$ |
32 |
|
2009
|
|
|
352 |
|
|
|
4,374 |
|
2010
|
|
|
335 |
|
|
|
16 |
|
2011
|
|
|
83 |
|
|
|
17 |
|
2012
|
|
|
- |
|
|
|
17 |
|
|
|
$ |
1,174 |
|
|
$ |
4,456 |
|
1)
|
On
December 31, 2002, the Company refinanced certain past due amounts owed to
Cohen’s Fashion Optical (“CF”), a retail optical chain owned by certain of
the principal shareholders and directors of the Company (Note
15). As a result, the Company signed a 5-year, $200,000
promissory note, bearing interest at a rate of 10% per
annum. Such note was in paid, in full, in February
2008.
|
2)
|
In
connection with the acquisition of all of the net tangible assets of
Combine, the Company entered into two promissory notes with
Combine. The first note provides for four annual installments,
which commenced October 1, 2007, totaling $1,273,000 (which is
non-interest bearing with an imputed annual interest rate of
8.1%). The second note, which commenced October 1, 2006,
provides for sixty monthly installments totaling $500,000 at 7% interest
per annum.
|
3)
|
The
Company had outstanding borrowings of $4,359,423 under its Credit Facility
with M&T Bank, which borrowings are payable (interest only) monthly
and bear interest at a rate of LIBOR plus 2.75%. As of December
31, 2007, the interest rate was 7.98%. The principal and any
accrued interest are due and payable in August
2009.
|
4)
|
In
connection with the remodeling of one of the Company-owned stores, the
Company obtained $78,000 of equipment financing from De Lage Landen
Financial Services, Inc. in November 2007, which borrowings provide for
sixty monthly installments and bear interest at a rate of
10.2%.
|
NOTE
11 – CREDIT FACILITY:
On August
8, 2007, the Company entered into a Revolving Line of Credit Note and Credit
Agreement (the “Credit Agreement”) with 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 replaced 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 drawn by the Company is payable on August 1, 2009.
On August
10, 2007, the Company borrowed $3,609,423 to fund the purchase price payable in
connection with the acquisitions of TOG and COC, and borrowed $400,000 for
general working capital requirements. The Credit Facility includes
various financial covenants including minimum net worth, maximum funded debt and
debt service ratio requirements. As of December 31, 2007, the Company
had outstanding borrowings of $4,359,423 under the Credit Facility, which amount
was included in Long-term Debt on the accompanying Consolidated Balance Sheet,
was in compliance with the various financial covenants, and had $1,640,577
available under the Credit Facility for future borrowings.
NOTE
12 – INCOME TAXES:
The
Company records the income tax effect of transactions in the same year that the
transactions occur to determine net income, regardless of when the transactions
are recognized for tax purposes. Deferred taxes are provided to
reflect the income tax effects of amounts included in the Company’s financial
statements in different periods than for tax purposes, principally valuation
allowances for accounts receivables, equity compensation charges, and
depreciation and amortization expenses for income tax purposes. The
income tax benefit from continuing operations for the years ended December 31,
2007 and 2006 was $251,000 and $1,249,000, respectively.
As of
December 31, 2007 and 2006, net deferred tax assets were approximately
$17,300,000 and $18,600,000, respectively, resulting primarily from the future
tax benefit of net operating loss carry-forwards. In accordance with
SFAS No. 109, the Company has provided a valuation allowance against its net
deferred tax assets of approximately $15,600,000 and $17,200,000 as of December
31, 2007 and 2006, respectively. The valuation allowance against the
net deferred tax assets decreased by approximately $1,600,000 and $3,400,000
during the years ended December 31, 2007 and 2006, respectively.
The tax
effect of temporary differences that give rise to the deferred tax asset as of
December 31, 2007 and 2006, are presented below (in thousands):
|
|
2007
|
|
|
2006
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Reserves
and allowances
|
|
$ |
1,150 |
|
|
$ |
904 |
|
Net
operating loss and credits carry forwards
|
|
|
16,003 |
|
|
|
17,999 |
|
Stock
compensation expense
|
|
|
258 |
|
|
|
- |
|
Valuation
allowance
|
|
|
(15,628 |
) |
|
|
(17,195 |
) |
Total
deferred tax assets
|
|
|
1,783 |
|
|
|
1,708 |
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, and intangibles
|
|
|
(109 |
) |
|
|
(193 |
) |
Deferred
revenue
|
|
|
- |
|
|
|
(24 |
) |
Accrued
and other expenses
|
|
|
- |
|
|
|
(91 |
) |
Total
deferred tax liabilities
|
|
|
(109 |
) |
|
|
(308 |
) |
Net
deferred tax asset
|
|
$ |
1,674 |
|
|
$ |
1,400 |
|
The
(provision for) benefit from income taxes for the years ended December 31, 2007
and 2006 is presented below as follows (in thousands):
|
|
2007
|
|
|
2006
|
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$ |
(3 |
) |
|
$ |
(13 |
) |
State
and local
|
|
|
(10 |
) |
|
|
(33 |
) |
Foreign
|
|
|
(10 |
) |
|
|
- |
|
Total
current
|
|
|
(23 |
) |
|
|
(46 |
) |
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
233 |
|
|
|
1,190 |
|
State
and local
|
|
|
47 |
|
|
|
210 |
|
Foreign
|
|
|
- |
|
|
|
- |
|
Total
deferred
|
|
|
274 |
|
|
|
1,400 |
|
Income
tax benefit
|
|
$ |
251 |
|
|
$ |
1,354 |
|
As of
December 31, 2007 and 2006, the Company had net operating loss carry forwards
for regular tax and alternative minimum taxable income purposes available to
reduce future taxable income, which may be limited 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 occur in the future. These
carry forwards expire as follows (in thousands):
|
|
Net
Operating Loss
|
|
|
AMT
Operating Loss
|
|
|
|
|
|
|
|
|
2011
|
|
$ |
1,838 |
|
|
$ |
1,162 |
|
2012
|
|
|
3,845 |
|
|
|
3,845 |
|
2018
|
|
|
10,810 |
|
|
|
10,810 |
|
2019
|
|
|
1,358 |
|
|
|
1,358 |
|
2020
|
|
|
20,269 |
|
|
|
20,269 |
|
2021
|
|
|
2,369 |
|
|
|
1,808 |
|
2022
|
|
|
4,375 |
|
|
|
4,310 |
|
2023
|
|
|
166 |
|
|
|
166 |
|
2024
|
|
|
25 |
|
|
|
25 |
|
2025
|
|
|
292 |
|
|
|
292 |
|
|
|
$ |
45,347 |
|
|
$ |
44,045 |
|
The
Company’s effective tax rate differs from the statutory Federal income tax rate
of 34%, primarily due to the effect of state and income taxes and the impact of
recording a valuation allowance to offset the potential future tax benefit
resulting from net operating loss carry-forwards for all years
presented. The following is a reconciliation of the U.S. Federal
statutory income tax rate to the Company’s effective income tax rate for the
years ended December 31, 2007 and 2006:
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Federal
statutory rate
|
|
|
34.0 |
% |
|
|
34.0 |
% |
State
and local income taxes, net of federal tax benefit
|
|
|
2.2 |
% |
|
|
3.5 |
% |
Permanent
differences
|
|
|
3.0 |
% |
|
|
1.5 |
% |
Net
operating loss carry forward adjustments
|
|
|
12.4 |
% |
|
|
0.0 |
% |
Change
to valuation allowance
|
|
|
(195.0 |
%) |
|
|
(201.2 |
%) |
Effective
tax rate
|
|
|
(143.4 |
%) |
|
|
(162.2 |
%) |
NOTE
13 – SEGMENT REPORTING
Business
Segments
The
Company follows the provisions of FASB Statement 131, “Disclosures about
Segments of a Business Enterprise and Related Information.” During
September 2006, the Company, through its wholly-owned subsidiary COM, acquired
substantially all of the assets of Combine, which created a new operating
segment; the Optical Purchasing Group Business. The results of the
operations of TOG are also included in this segment since the date of
acquisition. The Optical Purchasing Group Business segment along with
the existing operating segment, Retail Optical Stores, constitutes the Company’s
two reporting segments.
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 Purchasing Group Business segment represents product pricing extended to
COM and TOG members associated with the sale of vendor’s eye care products to
such members.
Certain
business segment information for continuing operations is as
follows:
|
|
(In
thousands)
|
|
|
|
2007
|
|
|
2006
|
|
Business
Segment Net Revenues:
|
|
|
|
|
|
|
Retail
Optical Stores
|
|
$ |
15,773 |
|
|
$ |
14,526 |
|
Optical
Purchasing Group Business
|
|
|
33,848 |
|
|
|
7,186 |
|
Net
revenues
|
|
$ |
49,621 |
|
|
$ |
21,712 |
|
Business
Segment Income from Continuing Operations:
|
|
|
|
|
|
|
|
|
Retail
Optical Stores
|
|
$ |
50 |
|
|
$ |
1,926 |
|
Optical
Purchasing Group Business
|
|
|
376 |
|
|
|
93 |
|
Income
from continuing operations
|
|
$ |
426 |
|
|
$ |
2,019 |
|
|
|
|
|
|
|
|
|
|
Business
Segment Loss from Discontinued Operations:
|
|
|
|
|
|
|
|
|
Retail
Optical Stores
|
|
$ |
- |
|
|
$ |
(159 |
) |
Optical
Purchasing Group Business
|
|
|
- |
|
|
|
- |
|
Loss
from discontinued operations
|
|
$ |
- |
|
|
$ |
(159 |
) |
|
|
|
|
|
|
|
|
|
The
Optical Purchasing Group Business segment includes COM’s business activity from
August 1, 2006, the effective date of the acquisition of Combine, and includes
TOG’s business activity from August 1, 2007, the effective date of the
acquisition of TOG.
Additional
business segment information is summarized as follows for the year ended
December 31, 2007 (in thousands):
|
|
Retail
Optical Stores
|
|
|
Optical
Purchasing Group Business
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
11,902 |
|
|
$ |
9,963 |
|
|
$ |
21,865 |
|
Depreciation
and Amortization
|
|
|
320 |
|
|
|
203 |
|
|
|
523 |
|
Capital
Expenditures
|
|
|
799 |
|
|
|
119 |
|
|
|
918 |
|
Goodwill
|
|
|
1,266 |
|
|
|
2,971 |
|
|
|
4,237 |
|
Intangible
Assets
|
|
|
369 |
|
|
|
2,696 |
|
|
|
3,065 |
|
Goodwill
Additions
|
|
|
- |
|
|
|
1,692 |
|
|
|
1,692 |
|
Intangible
Asset Additions
|
|
|
379 |
|
|
|
2,031 |
|
|
|
2,410 |
|
Interest
Expense
|
|
|
59 |
|
|
|
230 |
|
|
|
289 |
|
Additional
business segment information is summarized as follows for the year ended
December 31, 2006 (in thousands):
|
|
Retail
Optical Stores
|
|
|
Optical
Purchasing Group Business
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
8,934 |
|
|
$ |
3,663 |
|
|
$ |
12,597 |
|
Depreciation
and Amortization
|
|
|
264 |
|
|
|
63 |
|
|
|
327 |
|
Capital
Expenditures
|
|
|
388 |
|
|
|
312 |
|
|
|
700 |
|
Goodwill
|
|
|
1,266 |
|
|
|
1,479 |
|
|
|
2,745 |
|
Intangible
Assets
|
|
|
11 |
|
|
|
797 |
|
|
|
808 |
|
Goodwill
Additions
|
|
|
- |
|
|
|
1,479 |
|
|
|
1,479 |
|
Intangible
Asset Additions
|
|
|
22 |
|
|
|
833 |
|
|
|
855 |
|
Interest
Expense
|
|
|
39 |
|
|
|
9 |
|
|
|
48 |
|
Geographic
Information
The
Company also does business in two separate geographic areas; the United States
and Canada. Certain geographic information for continuing operations
is as follows:
|
|
(In
thousands)
|
|
|
|
2007
|
|
|
2006
|
|
Net
Revenues:
|
|
|
|
|
|
|
Canada
|
|
$ |
16,957 |
|
|
$ |
- |
|
United
States
|
|
|
32,664 |
|
|
|
21,712 |
|
Net
revenues
|
|
$ |
49,621 |
|
|
$ |
21,712 |
|
|
|
|
|
|
|
|
|
|
Income
from Continuing Operations:
|
|
|
|
|
|
|
|
|
Canada
|
|
$ |
270 |
|
|
$ |
- |
|
United
States
|
|
|
156 |
|
|
|
2,019 |
|
Income
from continuing operations
|
|
$ |
426 |
|
|
$ |
2,019 |
|
|
|
|
|
|
|
|
|
|
–Loss
from Discontinued Operations:
|
|
|
|
|
|
|
|
|
Canada
|
|
$ |
- |
|
|
$ |
- |
|
United
States
|
|
|
- |
|
|
|
(159 |
) |
Loss
from discontinued operations
|
|
$ |
- |
|
|
$ |
(159 |
) |
|
|
|
|
|
|
|
|
|
The
geographic information on Canada includes TOG’s business activity from August 1,
2007, the effective date of the acquisition of TOG.
Additional
geographic information is summarized as follows for the year ended December 31,
2007 (in thousands):
|
|
United
States
|
|
|
Canada
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
15,049 |
|
|
$ |
6,816 |
|
|
$ |
21,865 |
|
Depreciation
and Amortization
|
|
|
476 |
|
|
|
47 |
|
|
|
523 |
|
Capital
Expenditures
|
|
|
918 |
|
|
|
- |
|
|
|
918 |
|
Goodwill
|
|
|
2,544 |
|
|
|
1,693 |
|
|
|
4,237 |
|
Intangible
Assets
|
|
|
1,078 |
|
|
|
1,987 |
|
|
|
3,065 |
|
Goodwill
Additions
|
|
|
- |
|
|
|
1,613 |
|
|
|
1,613 |
|
Intangible
Asset Additions
|
|
|
380 |
|
|
|
2,031 |
|
|
|
2,411 |
|
Interest
Expense
|
|
|
199 |
|
|
|
90 |
|
|
|
289 |
|
The
Company had no operations in Canada in 2006.
NOTE
14 – COMMITMENTS AND CONTINGENCIES:
Operating Lease
Commitments
The
Company leases locations for both its Company-owned and franchised stores, as
well as its executive and administrative offices. As of December 31,
2007, minimum future rental payments for Company-owned stores and the Company’s
executive and administrative offices, as well as for stores leased by the
Company and subleased to franchisees, in the aggregate, are as follows (in
thousands):
|
|
Total
Lease Obligations
|
|
|
Sublease
Rentals
|
|
|
Net
Company Obligations
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$ |
3,994 |
|
|
$ |
3,262 |
|
|
$ |
732 |
|
2009
|
|
|
1,573 |
|
|
|
1,389 |
|
|
|
184 |
|
2010
|
|
|
1,156 |
|
|
|
982 |
|
|
|
174 |
|
2011
|
|
|
935 |
|
|
|
781 |
|
|
|
154 |
|
2012
|
|
|
865 |
|
|
|
773 |
|
|
|
92 |
|
Thereafter
|
|
|
3,040 |
|
|
|
2,925 |
|
|
|
115 |
|
|
|
$ |
11,563 |
|
|
$ |
10,112 |
|
|
$ |
1,451 |
|
The
Company holds the master lease on certain of its franchised locations and, as
part of the franchise agreement, sublets the subject premises to the franchisee.
In addition to the fixed rent payable under such master leases, most master
leases require payment of a pro rata portion of common area maintenance expenses
and real estate taxes, as well as percentage rent based upon the sales volume of
the store in question. As required by SFAS No. 13 “Accounting for
Leases,” the Company recognizes its rent expense on a straight-line basis over
the life of the related lease. In most cases, however, the Company’s obligations
are limited due to the holding of leases in a leasehold corporation with limited
guarantees from the Company. Rent expense (which was net of sublease
rentals of approximately $4,819,000 and $4,714,000, respectively) was
approximately $1,555,000 and $1,149,000 for the years ended December 31, 2007
and 2006, respectively. Contingent rents include, amongst other
items, percentage rent and certain year-end common area and real estate tax
adjustments. The Company currently does not anticipate that such
charges would be material in nature for the Company-owned stores and franchise
locations. With respect to franchise locations, the Company acts in
an agent capacity with respect to those charges. Additionally, the
Company does not hold any of the leases on COM Member locations.
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. In January 2008, this action was
settled. The terms of the settlement include the payment, by the
defendant to the Company, of the aggregate sum of $40,000, and the exchange of
mutual general releases.
In August
2006, the Company and its subsidiary, Sterling Vision of California, Inc.
(“SVC”) (collectively referred to as the “Company”) filed an action against For
Eyes Optical Company (“For Eyes” or “Defendant”) in response to allegations by
For Eyes of trademark infringement for Plaintiff’s use of the trademark “Site
For Sore Eyes”. The Company claims, among other things, that (i)
there is no likelihood of confusion between the Company’s and Defendant’s mark,
and that the Company has not infringed, and is not infringing, Defendant’s mark;
ii) the Company is not bound by that certain settlement agreement, executed in
1981 by a prior owner of the Site For Sore Eyes trademark; and iii) Defendant’s
mark is generic and must be cancelled. For Eyes, in its Answer,
asserted defenses to the Company’s claims, and asserted counterclaims against
the Company, including, among others, that i) the Company has infringed For
Eyes’ mark; (ii) the Company wrongfully obtained a trademark registration for
its mark and that said registration should be cancelled; and (iii) the acts of
the Company constitute a breach of the aforementioned settlement
agreement. For Eyes seeks injunctive relief, cancellation of the
Company’s trademark registration, trebled monetary damages, payment of any
profits made by the Company in respect of the use of such tradename, and costs
and attorney fees. The case is currently in the discovery
phase. 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 Defendant’s counterclaims.
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. In March 2008, this action was
settled. The terms of the settlement include the Company’s payment to
the plaintiff, of the aggregate sum of $175,000 and the exchange of mutual
general releases.
In
October 2007, Arnot Realty Corporation commenced an action against the Company,
in the Supreme Court of the State of New York, Chemung 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 Arnot Mall,
Horseheads, New York. The Company believes that it has a meritorious
defense to this action. As of the date hereof, the plaintiff’s motion
for summary judgment has not yet be argued before the court. 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
February 2008, Sangertown Square, LLC commenced an action against the Company,
in the Supreme Court of the State of New York, Onondaga County, alleging, among
other things, that the Company had breached its obligations under its lease for
the former Sterling Optical store located at Sangertown Square Mall, New
York. The Company believes that it has a meritorious defense to this
action. As of the date hereof, the Company’s time to answer the
complaint has not yet expired. 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.
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
In
connection with the Company’s sale of one of its laser vision correction
centers, Insight Laser Centers N.Y.I., Inc. (the “Ambulatory Center”) on May 31,
2001, the Company agreed to guarantee certain of the potential ongoing
liabilities of the Ambulatory Center. No such guaranteed liabilities
were accrued for as of December 31, 2007 and 2006.
In
September 2003, the Company entered into a series of agreements, with the owner
of the Ambulatory Center and the landlord of the premises, pursuant to which the
Company’s future guarantee is now expressly limited to that of the minimum base
rent and additional rent, payable under the lease for the premises, as adjusted
in accordance with the agreements. In connection with the agreements,
the Company agreed to settle its outstanding liabilities allegedly due under its
guarantee, which liabilities were settled at lower amounts than the Company had
originally accrued for. As of December 31, 2007 and 2006, the Company
had no remaining amounts owed relating to this guarantee. However,
there can be no assurance that future liabilities will not arise in connection
with this guarantee.
As of
December 31, 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
$2,396,000. 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
COM held
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
COM. The letter of credit had a one-year term that expired in
December 2007. As of December 31, 2006, 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 Restricted Cash on the
accompanying Consolidated Balance Sheets.
NOTE
15 – EXECUTIVE COMPENSATION:
The
Company has an Employment Agreement (“Agreement 1”) with its Chief Executive
Officer, which extends through November 2009. Agreement 1 provides
for an annual salary of $275,000 and certain other
benefits. Additionally, as per Agreement 1, the CEO may be eligible
for bonus compensation to be determined by the Company’s Board of Directors
based on the Company’s previous calendar’s year performance. No such
bonus was achieved for the year ended December 31, 2007.
Additionally,
in connection with the acquisition of COM, the Company entered into a five-year
Employment Agreement (“Agreement 2”) with the existing President of
Combine. Agreement 2 provides for an annual salary of $210,000,
certain other benefits, and an annual bonus based upon certain financial targets
of COM. For the years ended December 31, 2007 and 2006, there was
approximately $60,000 and $21,000, respectively, of such bonuses reflected in
the accompanying Consolidated Statement of Income. As of December 31,
2007 and 2006, there was $60,000 and $21,000, respectively, of accrued bonuses
in accounts payable and accrued liabilities in the accompanying Consolidated
Balance Sheets.
NOTE
16 – RELATED PARTY TRANSACTIONS:
On
December 31, 2002, the Company refinanced certain past due amounts, owed to
CF. In connection therewith, the Company signed a 5-year, $200,000
promissory note, in favor of CF, bearing interest at a rate of 10% per
annum. As of December 31, 2007, $8,000 remained on the accompanying
Consolidated Balance Sheet. Such note was paid in full in February
2008.
Effective
April 14, 2003, in connection with certain Rescission Transactions consummated
by the Company on December 31, 2003, the Company signed promissory notes with
two of its current directors, who are also shareholders, of the
Company. The notes, which aggregated $135,000, together with all
accrued interest, was paid in full in October 2007.
The
Company’s Chief Executive Officer serves on the Board of Directors of Newtek
Business Services, Inc. (“NBSI”), a company that provides various financial
services to both small and mid-sized businesses. The Company utilizes
the bank and non-bank card processing services of one of NBSI’s affiliated
companies. For the years ended December 31, 2007 and 2006, the
Company paid approximately $95,000 and $71,000, respectively, to such affiliate
for such services provided. Additionally, the Company utilizes
insurance administrative services of one of NBSI’s affiliated
companies. No payments are made directly to that
affiliate. The Company believes that the cost of such services were
as favorable to the Company as those which could have been obtained from an
unrelated third party.
In
connection with COM’s acquisition of Combine, the Company entered into a series
of promissory notes with Combine, owned by Neil Glachman, COM’s
President. The promissory notes amounted to $1,773,000 with $498,000
paid in October 2007; $300,000 due on October 1, 2008; $250,000 due on
October 1, 2009; $225,000 due on October 1, 2010; and $500,000 (with interest at
7% per annum) payable in sixty, equal monthly installments of $9,900.60, which
commenced on October 1, 2007. For the years ended December 31, 2007
and 2006, there was approximately $140,000 and $9,000, respectively, of interest
expense reflected in the accompanying Consolidated Statement of
Income. As of December 31, 2007 and 2006, there was $1,165,000 and
$1,752,000, respectively, of related party payables in the accompanying
Consolidated Balance Sheets.
During
2007 and 2006, COM members purchased contact lenses from Visus Formed Optics, a
contact lens manufacturer that is partially owned by COM’s
President. For the years ended December 31, 2007 and 2006, the total
cost of such contact lenses was approximately $69,000 and $32,000,
respectively. The Company believes that the cost of such product was
as favorable to COM as those which could have been obtained from an unrelated
third party.
On
January 31, 2007, the Company entered into a Software License Agreement with
Optical Business Solutions, Inc. (“OBS”), to provide software for the Company’s
new point-of-sale system. OBS is owned by one of the Company’s
current director, who is also a shareholder of the Company. As of
December 31, 2007, there was $50,000 of prepaid expenses in the accompanying
Consolidated Balance Sheets, related to the purchase of 50 user licenses for
such software.
During
the ordinary course of business, primarily due to the fact that the entities
occupied office space in the same building, and in an effort to obtain savings
with respect to certain administrative costs, the Company and CF will at times
share in the costs of minor expenses. Management believes that these
expenses have been appropriately accounted for herein.
In the
opinion of the Company’s management, all of the above transactions were
conducted at “arms-length.”
NOTE 17 –
SHAREHOLDERS’ EQUITY:
Senior Convertible Preferred
Stock
As of
December 31, 2007, there were approximately 0.74 shares of Senior Convertible
Preferred Stock outstanding with a stated value of approximately $74,000,
convertible into Common Stock at a rate of $0.75. The sole remaining
holder of the Company’s Senior Convertible Preferred Stock has the right to
vote, as a single class, with the Common Stock, on an as-converted basis, on all
matters on which the holders of the Company’s Common Stock are entitled to
vote.
Issuance of Common Stock for
Consulting Services
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 LA
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.
As of
December 31, 2007, there were 225,000 warrants vested and
exercisable. The Company incurred a non-cash charge to earnings of
approximately $2,000, representing the fair value of such warrants, which is
reflected in selling, general and administrative expenses in the accompanying
Consolidated Statements of Income.
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.
As of
December 31, 2007, there were 200,000 warrants vested and exercisable, and
120,844 of restricted stock. The Company incurred a non-cash charge
to earnings of approximately $43,000, representing the fair value of such
warrants and restricted stock, which is reflected in selling, general and
administrative expenses in the accompanying Consolidated Statements of
Income.
Rescission of Units and
Warrants
On
December 31, 2003 (effective April 14, 2003), the Company and certain of its
shareholders (the “Subject Shareholders”) agreed to, and effectuated, (a) the
rescission, ab initio,
of the exercise, by the Subject Shareholders, of 13,000,000 of the
oversubscription rights (during the Company’s 2002 Rights Offering) of the
Subject Shareholders (and, accordingly, of the issuance, to such Subject
Shareholders, of the units associated therewith), and (b) the rescission,
surrender and cancellation of all of the remaining warrants (33,210,028 in the
aggregate) that were acquired by the Subject Shareholders in the Rights Offering
(collectively, the “Rescission Transactions”). In connection with the
Rescission Transactions, the Company agreed to repay each Subject Shareholder
the original subscription amount of $0.04 (previously paid by each Subject
Shareholder) for each of the rescinded units (together with interest at a rate
of 6% per annum from the date of the original acquisition thereof), which, in
the aggregate for all of the Subject Shareholders, totaled
$520,000. This sum along with any accrued interest was paid in full
during 2007. Additionally, as a result of the Rescission
Transactions, the Company’s outstanding Common Stock decreased by 13,000,000
shares.
Recognizing
that the Subject Shareholders that participated in the Rescission Transactions
suffered certain damages in connection therewith, on December 31, 2003, the
Company granted to the Subject Shareholders, in the aggregate, new warrants to
purchase 59,210,028 shares of Company Common Stock. The exercise
prices of the new warrants issued to each of the Subject Shareholders ranged
from $0.0465 to $0.0489. These exercise prices were calculated with
the intention of allowing the Subject Shareholders to purchase equity of the
Company on substantially the same economic terms that they would have been
originally entitled pursuant to the Rights Offering, but for the Rescission
Transactions.
On
September 24, 2007, one of the Subject Shareholders performed a “cashless
exercise” of 31,067,776 warrants, with the exercise price paid by surrendering
to the Company 4,367,764 of the warrants, having an approximate aggregate value
of $1,485,040, or $0.34 per share of Common Stock surrendered. As a
result, the Company’s Common Stock increased $267,000, which was offset by a
charge to Accumulated Paid-in Capital to account for the “cashless exercise”
component of the transaction.
On
October 2, 2007, the remaining Subject Shareholders exercised all of their
28,142,252 warrants, with a total exercise price of $1,344,835 being paid to the
Company.
Furthermore,
in order to limit the potential that future transactions could have a similar
effect on the Company’s tax attributes, the Company amended its by-laws to
provide the Board of Directors with the ability to void certain transactions in
Company securities that may impair or limit the future utilization of its tax
attributes, including its net operating loss carry-forwards.
Notwithstanding
the consummation of the Rescission Transactions and the amendment of the
by-laws, there can be no assurance that the Company has been, or will in the
future be, successful in preventing an event which could materially impair or
limit the Company’s utilization of its net operating loss carry-forwards and
other tax attributes.
NOTE
18 – STOCK OPTIONS AND WARRANTS:
Sterling Stock Option
Plan
In
February 2005, the Company amended its 1995 Stock Incentive Plan (the “Plan”) to
increase the number of shares of Common Stock permitted to issue thereunder from
7,000,000 to 25,000,000. The Plan permits the issuance of options to
selected employees and directors of, and consultants to, the Company and
provides that the term of each award be determined by the Compensation Committee
(the “Committee”), which is charged with administering the Plan. The Plan
provides the Board with the ability to grant options in excess of the number of
shares reserved for issuance in connection with the Plan, provided that the
Board obtains shareholder approval to amend the Plan to increase the shares
reserved for issuance underlying option grants within 12 months of the date of
grant. Under the terms of the Plan, options may be qualified or
non-qualified and granted at exercise prices and for terms to be determined by
the Committee. Additionally, certain options previously issued under
the Plan provide that notwithstanding the termination of the Company’s
employment of any such employee/holder, he/she will retain the right to exercise
those options that have previously vested in his/her favor until such time that
the options expire in accordance with the terms of the original
grant.
A summary
of the options issued under the Plan is presented in the table
below:
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
outstanding, beginning of period
|
|
|
20,132,240 |
|
|
$ |
0.44 |
|
|
|
17,151,615 |
|
|
$ |
0.55 |
|
Granted
|
|
|
575,000 |
|
|
$ |
0.38 |
|
|
|
3,815,625 |
|
|
$ |
0.15 |
|
Exercised
|
|
|
(6,000 |
) |
|
$ |
0.14 |
|
|
|
- |
|
|
$ |
- |
|
Canceled,
forfeited or expired
|
|
|
(133,333 |
) |
|
$ |
5.12 |
|
|
|
(835,000 |
) |
|
$ |
1.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
outstanding, end of period
|
|
|
20,567,907 |
|
|
$ |
0.41 |
|
|
|
20,132,240 |
|
|
$ |
0.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable, end of period
|
|
|
20,467,907 |
|
|
$ |
0.41 |
|
|
|
19,942,240 |
|
|
$ |
0.44 |
|
Of the
total options outstanding as of December 31, 2007, there were 14,465,615 held by
current employees of the Company, and 6,102,292 held by non-employee directors
of the Company, the Company’s independent contractors, former employees and
former directors. Of the total options granted during 2007, 125,000
were granted to current employees, 375,000 were granted to certain members of
the board of directors of the Company, and 75,000 were granted to independent
contractors.
On
November 22, 2005, the Committee granted an aggregate of 570,000 stock options
to certain of the Company’s employees, all at an exercise price of $0.16, which
was the closing price on the date of grant. The stock options vest
according to the following schedule: (1) 190,000 vested immediately;
(2) 190,000 vested on November 22, 2006; and (3) 190,000 vested on November 22,
2007. During the year ended December 31, 2007 and 2006, the Company
incurred a non-cash charge to earnings of approximately $13,000 and $14,000,
respectively, reflected in selling, general and administrative expenses on the
accompanying Consolidated Statements of Income representing the fair value of
the options. All of these options expire 10 years from the date of
grant.
On April
27, 2006, the Committee granted an aggregate of 300,000 stock options to certain
of the Company’s independent, non-employee directors, all at an exercise price
of $0.12, which was the closing price on the date of grant. The stock
options vested immediately. During the year ended December 31, 2006,
the Company incurred a non-cash charge to earnings of approximately $12,000,
reflected in selling, general and administrative expenses on the accompanying
Consolidated Statements of Income representing the fair value of the
options. All of these options expire 10 years from the date of
grant.
On
September 29, 2006, in connection with the acquisition of Combine, the Company
granted 3,515,625 stock options to the President of Combine (currently an
employee of the Company) all at an exercise price of $0.15, which was the
closing price on the date of grant. The stock options vested
immediately. The fair value of such options, approximately $139,000,
was calculated using the Black-Scholes method, was included as part of the
purchase price and is reflected in excess costs over net assets acquired on the
accompanying Consolidated Balance Sheets as of December 31, 2006. All
of these options expire 10 years from the date of
grant. Additionally, commencing on September 29, 2010, and expiring
September 28, 2016, 2,187,500 options may be put back to the Company at a put
price per share of $0.32.
On May
16, 2007, the 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) 100,000 vested immediately; and (2) 100,000 vest on May
21, 2008. During the year ended December 31, 2007, the Company
incurred a non-cash charge to earnings of approximately $8,000, which is
reflected in selling, general and administrative expenses on the accompanying
Consolidated Statements of Income representing the fair value of the
options. There remains approximately $2,000 of non-cash charges to
earnings for the portion of the options that have not vested as of December 31,
2007, which charges will be reflected in future Consolidated Statements of
Income. All of these options expire 10 years from the date of
grant.
On June
11, 2007, the Committee granted an aggregate of 375,000 stock options to the
Company’s 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 year ended December 31, 2007, the Company
incurred a non-cash charge to earnings of approximately $46,000, which is
reflected in selling, general and administrative expenses on the accompanying
Consolidated Statements of Income representing the fair value of the
options. All of these options expire 10 years from the date of
grant.
The
following table summarizes information about stock options outstanding and
exercisable as of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Range
of
|
|
|
|
|
|
Remaining
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.05
to $0.08 |
|
|
|
400,000 |
|
|
|
5.41 |
|
|
$ |
0.05 |
|
|
|
400,000 |
|
|
$ |
0.05 |
|
$ |
0.09
to $0.14 |
|
|
|
13,578,114 |
|
|
|
7.19 |
|
|
$ |
0.14 |
|
|
|
13,578,114 |
|
|
$ |
0.14 |
|
$ |
0.15
to $0.23 |
|
|
|
4,810,625 |
|
|
|
7.97 |
|
|
$ |
0.15 |
|
|
|
4,710,625 |
|
|
$ |
0.15 |
|
$ |
0.24
to $0.36 |
|
|
|
620,000 |
|
|
|
3.34 |
|
|
$ |
0.31 |
|
|
|
620,000 |
|
|
$ |
0.31 |
|
$ |
0.37
to $0.54 |
|
|
|
375,000 |
|
|
|
9.45 |
|
|
$ |
0.47 |
|
|
|
375,000 |
|
|
$ |
0.47 |
|
$ |
1.32
to $1.98 |
|
|
|
5,000 |
|
|
|
1.83 |
|
|
$ |
1.88 |
|
|
|
5,000 |
|
|
$ |
1.88 |
|
$ |
3.00
to $4.50 |
|
|
|
95,000 |
|
|
|
1.45 |
|
|
$ |
3.37 |
|
|
|
95,000 |
|
|
$ |
3.37 |
|
$ |
4.51
to $6.77 |
|
|
|
250,834 |
|
|
|
1.34 |
|
|
$ |
5.91 |
|
|
|
250,834 |
|
|
$ |
5.91 |
|
$ |
6.78
to $8.25 |
|
|
|
433,334 |
|
|
|
2.14 |
|
|
$ |
8.11 |
|
|
|
433,334 |
|
|
$ |
8.11 |
|
|
|
|
|
|
20,567,907 |
|
|
|
|
|
|
|
|
|
|
|
20,467,907 |
|
|
|
|
|
The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Expected
life (years)
|
|
|
1 |
|
|
|
1-2 |
|
Interest
rate
|
|
|
4.82-4.98 |
% |
|
|
5.00 |
% |
Volatility
|
|
|
54-61 |
% |
|
|
62-80 |
% |
Dividend
yield
|
|
|
- |
|
|
|
- |
|
Stock Purchase
Warrants
As a
result of certain Rescission Transactions entered into by the Company on
December 31, 2003 (Note 17), the Company issued warrants to purchase 59,210,028
shares of Company Common Stock to certain Subject Shareholders. The
exercise prices of the warrants issued ranged from $0.0465 to $0.0489 became
exercisable on April 15, 2006. On September 24, 2007, one of the
Subject Shareholders performed a “cashless exercise” of 31,067,776 warrants,
with the exercise price paid by surrendering to the Company 4,367,764 of the
warrants. On October 2, 2007, the remaining Subject Shareholders
exercised all of their 28,142,252 warrants. There are no remaining
warrants as of December 31, 2007.
On April
11, 2007, the Company issued warrants to purchase 300,000 shares the Company’s
Common Stock to Dubois at an exercise price of $0.30. The warrants
vest in twelve (12) equal monthly installments of 25,000 commencing on April 11,
2007. As of December 31, 2007, 225,000 warrants had
vested. As a result of this issuance, the Company incurred a non-cash
charge to earnings of approximately $2,000, which is reflected in selling,
general and administrative expenses on the accompanying Consolidated Statement
of Income representing the fair value of the warrants. The warrants
expire on April 10, 2010. There were no warrants exercised as of
December 31, 2007.
On May 7,
2007, the Company issued warrants to purchase 300,000 shares the Company’s
Common Stock to RD at an exercise price of $0.21. The warrants vest
in twelve (12) equal monthly installments of 25,000 commencing on May 7,
2007. As of December 31, 2007, 200,000 warrants had
vested. As a result of this issuance, the Company incurred a non-cash
charge to earnings of approximately $10,000, which is reflected in selling,
general and administrative expenses on the accompanying Consolidated Statement
of Income representing the fair value of the warrants. The warrants
expire on May 6, 2010. There were no warrants exercised as of
December 31, 2007.
A summary
of the warrants issued is presented in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
outstanding, beginning of period
|
|
|
60,690,913 |
|
|
$ |
0.05 |
|
|
|
60,690,913 |
|
|
$ |
0.05 |
|
Granted
|
|
|
425,000 |
|
|
$ |
0.26 |
|
|
|
- |
|
|
$ |
- |
|
Exercised
|
|
|
(54,842,264 |
) |
|
$ |
0.05 |
|
|
|
- |
|
|
$ |
- |
|
Canceled,
forfeited or expired
|
|
|
(4,367,764 |
) |
|
$ |
0.05 |
|
|
|
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
outstanding, end of period
|
|
|
1,905,885 |
|
|
$ |
0.17 |
|
|
|
60,690,913 |
|
|
$ |
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
exercisable, end of period
|
|
|
1,905,885 |
|
|
$ |
0.17 |
|
|
|
60,690,913 |
|
|
$ |
0.05 |
|
The
following table summarizes information about warrants outstanding and
exercisable as of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Range
of
|
|
|
|
|
|
Remaining
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.09
to $0.14 |
|
|
|
1,380,885 |
|
|
|
7.00 |
|
|
$ |
0.14 |
|
|
|
1,380,885 |
|
|
$ |
0.14 |
|
$ |
0.15
to $0.23 |
|
|
|
200,000 |
|
|
|
2.35 |
|
|
$ |
0.21 |
|
|
|
200,000 |
|
|
$ |
0.21 |
|
$ |
0.24
to $0.30 |
|
|
|
325,000 |
|
|
|
4.48 |
|
|
$ |
0.28 |
|
|
|
325,000 |
|
|
$ |
0.28 |
|
|
|
|
|
|
1,905,885 |
|
|
|
|
|
|
|
|
|
|
|
1,905,885 |
|
|
|
|
|
The fair
value of each warrant granted during 2007 was estimated on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions:
|
|
2007
|
|
|
|
|
|
Expected
life (years)
|
|
|
1 |
|
Interest
rate
|
|
|
4.98 |
% |
Volatility
|
|
|
48-55 |
% |
Dividend
yield
|
|
|
- |
|
NOTE
19 – LITIGATION SETTLEMENT
On
November 5, 2007, the Company settled an adversary proceeding (the “Adversary
Proceeding”) against BAL Global Finance, LLC, formerly known as Sanwa Business
Credit Corporation that had been pending in the United States Bankruptcy Court
for the Southern District of New York since 1995. The material terms
of the settlement of the Adversary Proceeding include a cash payment to the
Company, in the amount of $1,270,000 (less certain costs and expenses incurred
in the litigation, including attorney fees of $258,000), and the mutual release
of all claims between the parties. Such payment was received by the
Company in November 2007.
NOTE
20 – 401(K) EMPLOYEE SAVINGS PLANS:
Emerging
Vision, Inc. and VisionCare of California, Inc., each sponsor a 401(k) Employee
Savings Plan (the “401(k) Plan”) to provide all qualified employees of these
entities with retirement benefits. Presently, the administrative
costs of each 401(k) Plan are paid entirely by such qualified employees, with no
matching contributions having been provided by the Company.
NOTE 21 – FOURTH
QUARTER CHARGES:
In the
fourth quarter of 2007, the Company recorded bad debt expense of approximately
$268,000 related to certain of its franchisee rent receivables and its managed
care receivables that management deemed uncollectible, incurred expenses of
approximately $263,000 related to the closing of two Company-owned stores, and
incurred $178,000 of depreciation and amortizations expense ($47,000 related to
the assets acquired from TOG). Additionally, the Company incurred
$129,000 of consulting expenses related to the implementation of controls
necessary under Section 404 of the Sarbanes-Oxley Act (“SOX”), which
requires the Company to perform an evaluation of its internal controls over
financial reporting for fiscal 2007, incurred approximately $99,000 of
start-up expenses related to the Company’s new cash advance business, and
incurred $72,000 of interest expense related to financing costs associated with
the acquisition of TOG.
NOTE
22 – SUBSEQUENT EVENTS:
On March
5, 2008, Dr. Robert Cohen resigned as a director on the Company’s Board of
Directors and its Executive Committee. Earlier this month, Cohen
Fashion Optical, Inc., of which Dr. Cohen is a chief executive and shareholder,
sold its retail optical franchise division to an affiliate of Houchens
Industries, Inc. As a component of such sale, Dr. Cohen executed an
employment agreement and other agreements with such affiliate, which, among
other things, prohibit Dr. Cohen from serving as a director on the Company’s
Board.
Item
9. Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
Not
applicable.
Item
9A. Controls and Procedures
Report
on Disclosure Controls and Procedures
The
Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”)
with the participation of the Company’s management (“Management”) and through
the guidance of an independent internal control consulting firm (“Consultants”)
conducted an evaluation of the effectiveness of the Company’s disclosure
controls and procedures. These disclosure controls and procedures are
designed to ensure that information required to be disclosed by the Company in
the reports that it files or submits under the Securities Exchange Act of 1934,
within the time periods specified by the SEC rules and forms, is recorded,
processed, summarized and reported, and is communicated to Management, as
appropriate, to allow for timely decisions based on the required
disclosures. Based on this evaluation, the Company’s CEO and CFO
concluded that the Company’s disclosure controls and procedures were effective
as of December 31, 2007.
Report
on Internal Control over Financial Reporting
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting. Internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with accounting principles generally accepted in the
United States of America. Under the supervision of the Consultants
and with the participation of Management, the CEO and CFO, an evaluation was
conducted of the effectiveness of the internal control over financial reporting
based on the framework set forth by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO) in Internal Control – Integrated
Framework. Based on this evaluation, the Company’s CEO and CFO
concluded that the Company’s internal control over financial reporting was
effective as of December 31, 2007; however, there were certain significant
deficiencies that were identified as of December 31, 2007 that may affect
financial reporting in the future. A description of such deficiencies
is as follows:
·
|
Ineffective controls related to
employee review of the Company’s Code of Ethics: For
fiscal year ended December 31, 2007, the Company did not require all
current employees and any newly hired employees to review the Company’s
Code of Ethics, to ensure their understanding of their role
within the Company’s internal controls over financial
reporting. In fiscal 2008, the Company will require all current
employees and any new hires to review and acknowledge that they have read
and understand their role in ensuring the Company’s internal controls over
financial reporting are working
effectively.
|
·
|
Ineffective controls related to
the creation and authorization of purchase orders: For
fiscal year ended December 31, 2007, the Company did not require purchase
orders for all corporate purchases, mainly relating to supplies and other
miscellaneous office expenses. In fiscal 2008, the Company will
require purchase orders for all purchases made by the
Company.
|
·
|
Ineffective controls related to
IT change management procedures: The Company did not
have a vendor management policy in place as of December 31, 2007 to ensure
that the IT consultants the Company engages do not have unauthorized
access to the Company’s financial reporting systems. Because
this process was not in place, the Company could be vulnerable to
unauthorized access to financial systems and facilities, which could
result in changes to the actual systems or financial data. In
2008, the Company implemented a vendor management policy, which will
restrict access rights to IT consultants, thus ensuring that financial
systems and data will not be
compromised.
|
A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, have been detected. These inherent
limitations include the realities that judgments in decision making can be
faulty, and that breakdowns can occur because of simple errors.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. The design of any system of controls is also based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.
This
report does not include an attestation report of the Company’s Registered Public
Accounting Firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by the
Company’s Registered Public Accounting Firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
Management’s report in this Annual Report.
Changes
in Internal Control over Financial Reporting
There has
been no change in the Company’s internal control over financial
reporting identified in connection with the evaluation required by
paragraph (d) of Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of
1934, as amended, that occurred during the fourth quarter of the
2007 fiscal year that has materially affected or is reasonably likely to
materially affect the Company’s internal control over financial reporting. However, there
were several immaterial control improvements which Management made in an effort
to further strengthen its overall system of internal control as well as the
changes described above to eliminate significant deficiencies in 2008.
These changes were immaterial both individually and in the
aggregate.
Item
9B. Other Information
Not
applicable.
PART
III
Item
10. Directors and Executive Officers of the Registrant
The
information required by this Item is incorporated into this Annual Report on
Form 10-K by reference to the Proxy Statement for our 2008 Annual Meeting of
Shareholders, but not to be filed later than April 29, 2008 (120 days after the
close of our fiscal year ended December 31, 2007).
Item
11. Executive Compensation
The
information required by this Item is incorporated into this Annual Report on
Form 10-K by reference to the Proxy Statement for our 2008 Annual Meeting of
Shareholders, but not to be filed later than April 29, 2008 (120 days after the
close of our fiscal year ended December 31, 2007).
Item
12. Security Ownership of Certain Beneficial Owners, Management and Related
Shareholder Matters
The
information required by this Item is incorporated into this Annual Report on
Form 10-K by reference to the Proxy Statement for our 2008 Annual Meeting of
Shareholders, but not to be filed later than April 29, 2008 (120 days after the
close of our fiscal year ended December 31, 2007).
Item
13. Certain Relationships and Related Transactions
The
information required by this Item is incorporated into this Annual Report on
Form 10-K by reference to the Proxy Statement for our 2008 Annual Meeting of
Shareholders, but not to be filed later than April 29, 2008 (120 days after the
close of our fiscal year ended December 31, 2007).
Item
14. Principal Accountant Fees and Services
The
information required by this Item is incorporated into this Annual Report on
Form 10-K by reference to the Proxy Statement for our 2008 Annual Meeting of
Shareholders, but not to be filed later than April 29, 2008 (120 days after the
close of our fiscal year ended December 31, 2007).
PART
IV
Item
15. Exhibits and Financial Statement Schedules
(a) The
following documents are filed as a part of this Report:
|
|
1. Financial
Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2. Financial
Statement Schedules:
|
|
All
financial statement schedules have been omitted because they are not
applicable, are not required, or the information required to be set forth
therein is included in the Consolidated Financial Statements or Notes
thereto.
|
|
3. Exhibits
|
EXHIBIT
INDEX
Exhibit
Number
(2.1)Asset
Purchase Agreement, dated September 29, 2006, among Emerging Vision, Inc.,
COM Acquisition, Inc., Combine Optical Management Corp. and Neil Glachman
(incorporated by reference to Exhibit 2.1 to the Company’s Quarterly
Report on Form 10-Q, dated November 14, 2006)
|
|
(2.2)Promissory
Note, dated September 29, 2006, made payable by COM Acquisition, Inc. and
Emerging Vision, Inc. to the order of Combine Optical Management Corp., in
the original principal amount of $1,273,000 (incorporated by reference to
Exhibit 2.2 to the Company’s Quarterly Report on Form 10-Q, dated November
14, 2006)
|
|
(2.3)Promissory
Note, dated September 29, 2006, made payable by COM Acquisition, Inc. and
Emerging Vision, Inc. to the order of Combine Optical Management Corp., in
the original principal amount of $500,000 (incorporated by reference to
Exhibit 2.3 to the Company’s Quarterly Report on Form 10-Q, dated November
14, 2006)
|
(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)
|
|
(3.1)Restated
Certificate of Incorporation of Sterling Vision, Inc., filed on December
20, 1995 (incorporated by reference to Exhibit 3.1 to the Company's Annual
Report on Form 10-K/A for the year ended December 31,
1995)
|
|
(3.2)Amended
and Restated By-Laws of Sterling Vision, Inc., dated December 18, 1995
(incorporated by reference to Exhibit 3.2 to the Company's Annual Report
on Form 10-K/A for the year ended December 31, 1995)
|
|
(3.3)Certificate
of Amendment of the Certificate of Incorporation of Sterling Vision, Inc.,
filed on January 26, 2000 (incorporated by reference to Exhibit 3.3 to the
Company’s Annual Report on Form 10-K for the year ended December 31, 2002,
Securities and Exchange Commission ("SEC") File Number 001-14128, Film
Number 03630359)
|
|
(3.4)Form
of Certificate of Amendment of the Certificate of Incorporation of
Sterling Vision, Inc., filed on February 8, 2000 (incorporated by
reference to Exhibit 10.94 to the Company’s Current Report on Form 8-K,
dated February 8, 2000, SEC File Number 001-14128, Film Number
03630359)
|
|
(3.5)Form
of Certificate of Amendment of the Certificate of Incorporation of
Sterling Vision, Inc., filed on February 10, 2000 (incorporated by
reference to Exhibit 10.96 to the Company’s Current Report on Form 8-K,
dated February 8, 2000, SEC File Number 001-14128, Film Number
03630359)
|
|
(3.6)Certificate
of Amendment of the Certificate of Incorporation of Sterling Vision, Inc.,
filed on April 17, 2000 (incorporated by reference to Exhibit 3.6 to the
Company’s Annual Report on Form 10-K for the year ended December 31, 2002,
SEC File Number 001-14128, Film Number 03630359)
|
|
(3.7)Certificate
of Amendment of the Certificate of Incorporation of Emerging Vision, Inc.,
filed on July 15, 2002 (incorporated by reference to Exhibit 3.7 to the
Company’s Annual Report on Form 10-K for the year ended December 31, 2002,
SEC File Number 001-14128, Film Number 03630359)
|
|
(3.8)First
Amendment to Amended and Restated By-Laws of Emerging Vision Inc., dated
November 13, 2003 (incorporated by reference to Exhibit 3.8 to the
Company’s Current Report in Form 8-K, dated December 31,
2003)
|
|
(4.1)Specimen
of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to
the Company's Registration Statement No. 33-98368)
|
|
(4.2)Form
of Warrant issued to Subject Shareholders in connection with Settlement
Agreements (incorporated by reference to Exhibit 4.8 to the Company's
Annual Report on Form 10-K for the year ended December 31,
2003)
|
|
(10.1)Sterling
Vision, Inc.'s 1995 Stock Incentive Plan (incorporated by reference to
Exhibit 10.2 to the Company's Registration Statement No.
33-98368)
|
|
(10.2)Form
of Sterling Vision, Inc.'s Franchise Agreement (incorporated by reference
to Exhibit 10.3 to the Company's Registration Statement No.
33-98368)
|
|
(10.3)Form
of Franchisee Stockholder Agreement to be entered into between Sterling
Vision, Inc. and certain of its Franchisees (incorporated by reference to
Exhibit 10.47 to the Company's Registration Statement No.
33-98368)
|
|
(10.4)First
Amendment to Sterling Vision, Inc.’s 1995 Stock Incentive Plan
(incorporated by reference to Exhibit 10.63 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996, File Number
000-27394, Film Number 96615244)
|
|
(10.5)Form
of Settlement Agreement and General Release, dated as of April 1, 2002,
between Emerging Vision, Inc. and each of V.C. Enterprises, Inc., Bridget
Licht, Sitescope, Inc., Eyemagination Eyeworks, Inc. and Susan Assael,
including the form of Area Representation Agreement annexed thereto as an
Exhibit (incorporated by reference to Exhibit 10.37 to the Company’s
Annual Report on Form 10-K for the year ended December 31,
2001)
|
|
(10.6)Credit
Agreement, dated August 19, 2005, between Emerging Vision, Inc. and
Manufacturers and Traders Trust Corporation (incorporated by reference to
Exhibit 10.14 to the Company’s Annual Report on Form 10-K for the year
ended December 31, 2005)
|
|
(10.7)Standard
LIBOR Grid Note, dated August 19, 2005, between Emerging Vision, Inc. and
Manufacturers and Traders Trust Corporation (incorporated by reference to
Exhibit 10.15 to the Company’s Annual Report on Form 10-K for the year
ended December 31, 2005)
|
|
(10.8)Security
Agreement, dated August 19, 2005, between Emerging Vision, Inc. and
Manufacturers and Traders Trust Corporation (incorporated by reference to
Exhibit 10.16 to the Company’s Annual Report on Form 10-K for the year
ended December 31, 2005)
|
|
(10.9)Trademark
Security Agreement, dated August 19, 2005, between Emerging Vision, Inc.
and Manufacturers and Traders Trust Corporation (incorporated by reference
to Exhibit 10.17 to the Company’s Annual Report on Form 10-K for the year
ended December 31, 2005)
|
|
(10.10)VisionCare
Guaranty, dated August 19, 2005, between Emerging Vision, Inc. and
Manufacturers and Traders Trust Corporation (incorporated by reference to
Exhibit 10.18 to the Company’s Annual Report on Form 10-K for the year
ended December 31, 2005)
|
|
(10.11) Employment
Agreement, dated September 29, 2006, between Emerging Vision, Inc. and
Neil Glachman (incorporated by reference to Exhibit 10.19 to the Company’s
Annual Report on Form 10-K for the year ended December 31,
2006)
|
|
(10.12) Employment
Agreement, dated December 1, 2006, between Emerging Vision, Inc. and
Christopher G. Payan (incorporated by reference to Exhibit 10.20 to the
Company’s Annual Report on Form 10-K for the year ended December 31,
2006)
|
(10.13)Business
Acquisition Agreement, dated June 29, 2007, by and among 1725758 Ontario
Inc. d/b/a The Optical Group, Corowl Optical Credit Services, Inc., Grant
Osborne and OG Acquisition, Inc. (incorporated by reference to Exhibit
10.1 the Company’s Current Report on Form 8-K, dated July 5,
2007)
(10.14)Revolving
Line of Credit Note and Credit Agreement , dated as of August 7, 2007,
executed by Emerging Vision, Inc. in favor of Manufacturers and Traders
Trust Company (incorporated by reference to Exhibit 10.1 of the Company’s
Current Report on Form 8-K, dated August 14, 2007)
(10.15)Absolute
Assignment of Franchisee Notes and Proceeds Due, dated as of August 7,
2007, executed by Emerging Vision, Inc. in favor of Manufacturers and
Traders Trust Company (incorporated by reference to Exhibit 10.2 of
the Company’s Current Report on Form 8-K, dated August 14,
2007)
(10.16)General
Security Agreement –, dated as of August 7, 2007, executed
by Emerging Vision, Inc. in favor of Manufacturers and Traders Trust
Company(incorporated by reference to Exhibit 10.3 of the Company’s Current
Report on Form 8-K, dated August 14, 2007)
(10.17)General
Security Agreement –, dated as of August 7, 2007, executed by Combine
Buying Group, Inc. in favor of Manufacturers and Traders Trust
Company (incorporated by reference to Exhibit 10.4 of the Company’s
Current Report on Form 8-K, dated August 14, 2007)
(10.18)General
Security Agreement –, dated as of August 7, 2007, executed by OG
Acquisition, Inc. in favor of Manufacturers and Traders Trust Company
(incorporated by reference to Exhibit 10.5 of the Company’s Current Report
on Form 8-K, dated August 14, 2007)
(10.19)General
Security Agreement –, dated as of August 7, 2007, executed by 1725758
Ontario Inc. d/b/a The Optical Group in favor of Manufacturers and Traders
Trust Company (incorporated by reference to Exhibit 10.6 of the Company’s
Current Report on Form 8-K, dated August 14, 2007)
(10.20)Continuing
Guaranty –, dated as of August 7, 2007, executed by Combine Buying
Group, Inc. in favor of Manufacturers and Traders Trust Company
(incorporated by reference to Exhibit 10.7 of the Company’s Current Report
on Form 8-K, dated August 14, 2007)
(10.21)Continuing
Guaranty –, dated as of August 7, 2007, executed by OG Acquisition,
Inc. in favor of Manufacturers and Traders Trust Company (incorporated by
reference to Exhibit 10.8 of the Company’s Current Report on Form 8-K,
dated August 14, 2007)
(10.22)Continuing
Guaranty –, dated as of August 7, 2007, executed by 1725758 Ontario
Inc. d/b/a The Optical Group in favor of Manufacturers and Traders Trust
Company (incorporated by reference to Exhibit 10.9 of the Company’s
Current Report on Form 8-K, dated August 14, 2007)
(10.23)Pledge
Agreement and Assignment, dated as of August 7, 2007, by and between OG
Acquisition, Inc. and Manufacturers and Traders Trust
Company (incorporated by reference to Exhibit 10.10 of the Company’s
Current Report on Form 8-K, dated August 14, 2007)
(10.24)United
States Trademark Collateral Assignment and Security Agreement,
executed by Emerging Vision, Inc. in favor of Manufacturers and
Traders Trust Company (incorporated by reference to Exhibit
10.11 of the Company’s Current Report on Form 8-K, dated August 14,
2007)
|
(14.1)Corporate
Code of Ethics and Conduct of Emerging Vision, Inc., dated November 14,
2005 (incorporated by reference to Exhibit 14.1 to the Company’s Annual
Report on Form 10-K for the year ended December 31,
2005)
|
|
|
|
|
|
|
|
|
|
* Exhibit
being filed herewith
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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, thereunto duly authorized.
EMERGING VISION, INC.
By: /s/ Christopher G.
Payan
|
Christopher G.
Payan
|
Chief Executive
Officer
|
Date: March 31,
2008
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
|
|
|
/s/ Christopher G. Payan
|
Chief
Executive Officer and Director
|
March
31, 2008
|
Christopher
G. Payan
|
(Principal
Executive Officer)
|
|
|
|
|
/s/ Brian P. Alessi
|
Chief
Financial Officer and Treasurer
|
March
31, 2008
|
Brian
P. Alessi
|
(Principal
Financial and Accounting Officer)
|
|
|
|
|
/s/ Dr. Alan Cohen
|
Chairman
of the Board of Directors
|
March
31, 2008
|
Dr.
Alan Cohen
|
|
|
|
|
|
/s/ Joel L. Gold
|
Director
|
March
31, 2008
|
Joel
L. Gold
|
|
|
|
|
|
/s/ Harvey Ross
|
Director
|
March
31, 2008
|
Harvey
Ross
|
|
|
|
|
|
/s/ Seymour G. Siegel
|
Director
|
March
31, 2008
|
Seymour
G. Siegel
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