form10k.htm
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,
2008
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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, 2008, was $21,437,695.
Number of
shares outstanding as of March 31, 2009:
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
2009.
Part
I
Item
1. Business
GENERAL
Emerging
Vision, Inc. (the “Registrant” and, together with its subsidiaries, hereinafter
the “Company” or “EVI”) 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 “Combine”) 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.
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.
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.
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
Retail Stores 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.
As of
December 31, 2008, there were 139 Sterling Stores in operation, consisting of 6
Company-owned stores (inclusive of 1 store being managed for the Company under
the terms of a Management Agreement) and 133 franchised
stores. Sterling Stores are located in 14 states, the District of
Columbia and the U.S. Virgin Islands.
The
following chart sets forth the breakdown of Sterling Stores in operation as of
December 31, 2008 and 2007:
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December
31,
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I.
COMPANY-OWNED STORES:
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2008 |
* |
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2007
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Company-owned
stores
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5
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11 |
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Company-owned
stores managed by franchisee
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1 |
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1 |
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Total
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6 |
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12 |
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(*)
Existing store locations: Maryland (1), New York (4) and Pennsylvania
(1).
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December
31,
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2008
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*
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2007
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II.
FRANCHISED STORES:
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133 |
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146 |
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(*)
Existing store locations: California (41), Delaware (3), Florida (2),
Illinois (1), Kentucky (2), Louisiana (2), Maryland (10), New Jersey (7),
New York (37), North Dakota (3), Pennsylvania (8), Virginia (6),
Washington D.C. (1), West Virginia (1), Wisconsin (7), 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”),
franchisees opening a location that has limited public access (a “Limited
Access Facility”), 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 or Limited Access Facility 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. Royalties on the gross revenues generated in excess
of those base sales will be calculated at 8%. Additionally,
Franchisees of Limited Access Facilities pay ongoing royalties at reduced
rates increasing from 1% to 4% in year 3 and each year
thereafter. 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.
Franchisees of Limited Access Facilities, however, must make ongoing
contributions equal to 4% 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 2008, the assets of (as well
as possession of) two franchised stores were reacquired by the
Company. Substantially all of the assets located in such stores
were voluntarily surrendered and transferred back to the Company in
connection with the termination of the related Franchise Agreements. In
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,
Combine, which is based in the state of Florida, is one of the leading optical
purchasing groups in the United States. Combine operates an optical
purchasing group business, which provides its members (“Combine Members”) with
vendor discounts on optical products for resale. Combine Members are
typically independent optical retailers. As of December 31, 2008, Combine had
842 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 also 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, 2008 TOG had 535
active members in its optical purchasing group.
INSIGHT
MANAGED VISION CARE
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) who
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 it believes it will be more
attractive to managed care payers.
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 30, 2009, the Company employed approximately 116 individuals, of which
approximately 62% 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
current U.S. and global economic conditions have affected and will
continue to affect the Company’s results of operations and financial
position. The current economic conditions have resulted in
decreased revenues, retail store count, operating income and cash
flow. This downturn might also lead to a reduction of certain
overhead expenses as well as stronger restrictions on customer
credit. These uncertainties about future economic conditions
make it difficult for the Company to forecast future operating results and
cash flows from operations.
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·
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The
Company’s common stock is trading on the Over-The-Counter Bulletin Board
(“OTCBB”). The OTCBB is generally considered a less efficient market that
is does not have national exposure to prospective
shareholders. As such, 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 30, 2009, the last reported sales price of the
Company’s common stock was $0.19. 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 Combine
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 Combine 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 Combine Member locations. These competing businesses
could reduce the revenues generated at the Company’s competing Sterling
Stores and/or from Combine 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 Combine 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
Combine 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 most of the Sterling Stores
that operate under its name, nor does it control any of the Combine or TOG
Members, and these stores may be managed by unsuccessful franchisees,
Combine Members and/or TOG Members, which would reduce the Company’s
revenues from these stores. The Company relies, in substantial
part, on franchisees, Combine 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, Combine Member location and/or TOG Member
location. The Company, together with a substantial number of
franchisees, has recently experienced a significant decrease in sales,
mainly due to current economic conditions, generated from the operation of
Sterling Stores, and cannot predict what will happen with the economy in
the future. If a substantial number of franchisees, Combine
Members and/or TOG Members experience a future decline in their sales
and/or are ultimately not successful; revenues from franchisees, Combine
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, continuing current
economic climate, increased competition by large discount eyewear chains,
which increases the need for franchisees, Combine 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.
|
·
|
The
Company often offers incentives to its customers, which lower profit
margins. At times when major competitors offer significantly
lower prices for their products, it then becomes in the Company’s best
interest to do the same. Certain of the major competitors offer
promotional incentives to their customers including free eye exams, "50%
Off" on designer frames and "Buy One, Get One Free" eye care
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.
|
·
|
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.
|
·
|
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.
|
·
|
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.
|
·
|
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 eye care 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.
|
·
|
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, Combine 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,
Combine 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, Combine Members and/or TOG
Members could generate from their
operations.
|
·
|
Certain
events could result in a dilution of your ownership of the Company’s
common stock. As of December 31, 2008, the Company had
23,218,311 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 $0.05 to $8.06 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.
|
·
|
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.
|
·
|
Combine
Members operate retail optical stores similar to Sterling Stores in the
states of California, Delaware, Florida, Illinois, Kentucky, Louisiana,
Maryland, New Jersey, New York, North Dakota, Pennsylvania, Virginia, West
Virginia, Wisconsin, and in the District of Columbia and the Virgin
Islands. As of the date hereof, many Combine 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 Combine
Members. These competing businesses could reduce the revenues
generated at, both, the Company’s Sterling Stores and Combine Member
locations, or could cause Combine Members to leave Combine because they
view Combine as the competition.
|
·
|
Combine
and TOG operations and success are highly dependent upon the purchases of
eye care products by independent optical retailers (Combine/TOG
Members). If Combine/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 Combine and/or
TOG would decrease. A decrease in the number of Combine/TOG Members
could reduce Combine and/or TOG profit margins, net income and cash
flow.
|
·
|
Combine
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 Combine and/or TOG, or ceases to exist,
Combine and/or TOG could see a decrease in the amount of product purchased
by its members, thus decreasing its revenues and net
income.
|
·
|
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.
|
·
|
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.
|
·
|
The
Company may be unable to service its debt obligations. In
connection with the purchases of Combine and TOG, along with other debt
obligations, the Company has approximately $6,077,000 of outstanding debt
as of December 31, 2008. 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.
|
Additionally,
the amount outstanding on the Company’s Revolving Line of Credit Note and Credit
Agreement (the “Credit Agreement”) with Manufacturers and Traders Trust Company
(“M&T”) was $4,806,854 as of March 31, 2009. All remaining
principal on the Credit Agreement is due in April 2010. The Company
currently cannot guarantee that it will be able to make such principal payments
on or before April 2010 and cannot guarantee that M&T will refinance on
favorable terms, if at all.
·
|
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 trade name, 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 trade
name.
|
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 $880,000 of costs related to such litigation.
·
|
The
Company is exposed to foreign currency risk associated with TOG operations
as the financial position and operating results of TOG, which operations
are being calculated in Canadian Dollars and then translated into U.S.
Dollars for consolidation. The Company has not implemented a
hedging strategy to potentially reduce foreign currency
risk.
|
Item 1B. Unresolved Staff
Comments
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
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.
Combine’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 expires in July 2009.
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 Combine or TOG 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 May 23,
2008. Having received approximately 86.3% of the votes cast, Joel
Gold, Christopher G. Payan and Jeffrey Rubin were re-elected to serve as Class
II directors of the Company, for a term of two years expiring in
2010. Approximately 57.0% 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:
|
|
|
|
|
|
|
Quarter Ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31
|
|
$ |
0.25 |
|
|
$ |
0.17 |
|
|
$ |
0.21 |
|
|
$ |
0.15 |
|
June
30
|
|
$ |
0.21 |
|
|
$ |
0.16 |
|
|
$ |
0.47 |
|
|
$ |
0.17 |
|
September
30
|
|
$ |
0.20 |
|
|
$ |
0.12 |
|
|
$ |
0.38 |
|
|
$ |
0.22 |
|
December
31
|
|
$ |
0.19 |
|
|
$ |
0.06 |
|
|
$ |
0.33 |
|
|
$ |
0.18 |
|
The
approximate number of shareholders of record of the Company's Common Stock as of
March 31, 2009 was 278.
There was
one shareholder of record of the Company’s Senior Convertible Preferred Stock as
of March 31, 2009.
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 (the “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 and as set forth in this Report. The
Company does not intend to update these forward-looking statements for new
information, or otherwise, for the occurrence of future events.
In order
to more accurately detail our financial information and performance, the Company
has made changes to the format of this Report and changed its segment
reporting. The Company has simplified its Consolidated Statements of
Operations to expand the segment reporting to detail each segment’s revenue and
expense. Management’s discussion and analysis of financial conditions
and results of operations concentrates on describing segment performance through
the use of new detailed financial tables, which will assist the reader in
understanding each business segment and how it relates to the overall
performance of the Company.
COMPARISON
OF OPERATING SEGMENT RESULTS FOR THE YEAR ENDED DECEMBER 31, 2008, AS COMPARED
TO THE YEAR ENDED DECEMBER 31, 2007
Consolidated
Segment Results
Total
revenues for the Company increased approximately $22,188,000, or 44.7%, to
$71,809,000 for the year ended December 31, 2008, as compared to $49,621,000 for
the year ended December 31, 2007. This increase was mainly a result
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. This was offset, in part, by a decrease in the
average number of Company-owned stores in operation from 10.8 for fiscal 2007
compared to 7.8 for fiscal 2008, and a decrease in the average number of
Franchise locations in operation from 146 in fiscal 2007 compared to 141 in
fiscal 2008, which resulted in decreased revenues for the Company-store and
Franchise segments.
Total
costs, and selling, general and administrative expenses for the Company
increased approximately $20,729,000, or 41.2% to $71,060,000 for the year ended
December 31, 2008, as compared to $50,331,000 for the year ended December 31,
2007. This increase was mainly a result of the acquisition of TOG,
offset, in part, by the retail store count decreases described
above.
Optical
Purchasing Group Business Segment
|
|
For
the Year Ended December 31 (in thousands):
|
|
|
|
2008
|
|
|
2007
|
|
|
$
Change
|
|
|
%
Change
|
|
Net
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Optical
purchasing group sales
|
|
$ |
57,914 |
|
|
$ |
33,848 |
|
|
$ |
24,066 |
|
|
|
71.1 |
% |
Cost
of optical purchasing group sales
|
|
|
55,152 |
|
|
|
32,105 |
|
|
|
23,047 |
|
|
|
71.8 |
% |
Gross
margin
|
|
|
2,762 |
|
|
|
1,743 |
|
|
|
1,019 |
|
|
|
58.5 |
% |
Selling,
General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and related benefits
|
|
|
455 |
|
|
|
326 |
|
|
|
129 |
|
|
|
39.6 |
% |
Depreciation
and amortization
|
|
|
303 |
|
|
|
203 |
|
|
|
100 |
|
|
|
49.3 |
% |
Credit
card and bank fees
|
|
|
277 |
|
|
|
152 |
|
|
|
125 |
|
|
|
82.2 |
% |
Rent
and related overhead
|
|
|
260 |
|
|
|
190 |
|
|
|
70 |
|
|
|
36.8 |
% |
Bad
debt expense
|
|
|
112 |
|
|
|
20 |
|
|
|
92 |
|
|
|
460.0 |
% |
Other
general and administrative costs
|
|
|
116 |
|
|
|
63 |
|
|
|
53 |
|
|
|
84.1 |
% |
Total
selling, general and administrative expenses
|
|
|
1,523 |
|
|
|
954 |
|
|
|
569 |
|
|
|
59.6 |
% |
Operating
Income
|
|
|
1,239 |
|
|
|
789 |
|
|
|
450 |
|
|
|
57.0 |
% |
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
(260 |
) |
|
|
(213 |
) |
|
|
(47 |
) |
|
|
(22.1 |
%) |
Total
other expense
|
|
|
(260 |
) |
|
|
(213 |
) |
|
|
(47 |
) |
|
|
(22.1 |
%) |
Income
before provision for (benefit from) income taxes
|
|
$ |
979 |
|
|
$ |
576 |
|
|
$ |
403 |
|
|
|
70.0 |
% |
This
segment consists of the operations of Combine and TOG. TOG’s activity
for the period August 1, 2007 through December 31, 2007 has been included in the
Company’s results of operations for the year ended December 31,
2007.
Optical
purchasing group revenues increased approximately $24,066,000, or 71.1%, to
$57,914,000 for the year ended December 31, 2008, as compared to $33,848,000 for
the year ended December 31, 2007. Only five months of the operations
of TOG were including in the results of operations for the year ended December
31, 2007. Individually, Combine’s revenues decreased approximately
$661,000, or 3.9%, to $16,230,000 for the year ended December 31, 2008, as
compared to $16,891,000 for the year ended December 31, 2007. This
decrease was due to a generally weaker economy during the 2nd half of
2008, as well as a slight decrease in the total number of active members of
Combine. As of December 31, 2008, there were 842 active members, as
compared to 856 active members as of December 31, 2007. Additionally,
for the comparable five-month period ended December 31, 2008, TOG revenues
decreased approximately $2,092,000, or 12.3%, to $14,865,000 as compared to
$16,957,000 for the five-month period ended December 31, 2007. This
decrease was mainly due to the fluctuation of the foreign currency exchange rate
between the Canadian and US Dollar. The rate averaged $0.99 for every
Canadian Dollar during the five-month period ended December 31, 2007, as
compared to $0.87 for every Canadian Dollar during the same five-month period in
2008. Additionally, the Canadian economy experienced the same
downturn the US economy faced during the 2nd half of
2008.
Costs of
optical purchasing group sales increased approximately $23,047,000, or 71.8% to
$55,152,000 for the year ended December 31, 2008, as compared to $32,105,000 for
the year ended December 31, 2007. This increase was also a direct
result of the TOG acquisition. Individually, Combine’s cost of sales
decreased approximately $580,000, or 3.7%, to $15,179,000 for the year ended
December 31, 2008, as compared to $15,759,000 for the year ended December 31,
2007. These fluctuations were a direct result of, and proportionate
to, the revenue fluctuations described above. Additionally, for the
comparable five-month period ended December 31, 2008, TOG’s cost of sales
decreased approximately $2,107,000, or 12.9%, to $14,238,000, as compared to
$16,345,000 for the year ended December 31, 2007. These fluctuations
were a direct result of, and proportionate to, the TOG revenue fluctuations
described above.
Operating
expenses of the optical purchasing group segment increased approximately
$569,000, or 59.6%, to $1,523,000 for the year ended December 31, 2008, as
compared to $954,000 for the year ended December 31, 2007. This
increase was also a direct result of the TOG
acquisition. Individually, Combine’s operating expenses increased
approximately $86,000, or 12.2%, to $789,000 for the year ended December 31,
2008, as compared to $703,000 for the year ended December 31,
2007. Additionally, for the comparable five-month period ended
December 31, 2008, TOG’s operating expenses increased approximately $94,000, or
37.5% to $345,000, as compared to $251,000 for the year ended December 31,
2007. The increase related to increases in employee compensation as
well as increases related to expenses for displaying at some of the optical
industry trade shows. Additionally, management increased its
allowance on doubtful accounts by approximately $62,000 for member receivables
potentially uncollectible. These increases were offset by a decrease
due to the exchange rate fluctuations described above.
Interest
expense related to the optical purchasing group segment increased approximately
$64,000, or 27.8%, to $294,000 for the year ended December 31, 2008, as compared
to $230,000 for the year ended December 31, 2007. This increase was
related to the borrowings under the Company’s Credit Facility with Manufacturers
and Traders Trust Corporation (“M&T”) to fund the acquisition of
TOG. TOG incurred a full year of interest expense during 2008 as
compared to five months of interest expense during 2007.
Franchise
Segment
|
|
For
the Year Ended December 31 (in thousands):
|
|
|
|
2008
|
|
|
2007
|
|
|
$
Change
|
|
|
%
Change
|
|
Net
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalties
|
|
$ |
6,211 |
|
|
$ |
6,626 |
|
|
$ |
(415 |
) |
|
|
(6.3 |
%) |
Franchise
and other related fees
|
|
|
299 |
|
|
|
241 |
|
|
|
58 |
|
|
|
24.1 |
% |
Net
revenues
|
|
|
6,510 |
|
|
|
6,867 |
|
|
|
(357 |
) |
|
|
(5.2 |
%) |
Selling,
General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and related benefits
|
|
|
1,070 |
|
|
|
1,210 |
|
|
|
(140 |
) |
|
|
(11.6 |
%) |
Professional
fees
|
|
|
513 |
|
|
|
641 |
|
|
|
(128 |
) |
|
|
(20.0 |
%) |
Convention
related expenses
|
|
|
389 |
|
|
|
384 |
|
|
|
5 |
|
|
|
1.3 |
% |
Rent
and related overhead
|
|
|
351 |
|
|
|
415 |
|
|
|
(64 |
) |
|
|
(15.4 |
%) |
Bad
debt
|
|
|
247 |
|
|
|
139 |
|
|
|
108 |
|
|
|
77.7 |
% |
Depreciation
and amortization
|
|
|
127 |
|
|
|
93 |
|
|
|
34 |
|
|
|
36.6 |
% |
Other
general and administrative costs
|
|
|
195 |
|
|
|
157 |
|
|
|
38 |
|
|
|
24.2 |
% |
Total
selling, general and administrative expenses
|
|
|
2,892 |
|
|
|
3,039 |
|
|
|
(147 |
) |
|
|
(4.8 |
%) |
Operating
Income
|
|
|
3,618 |
|
|
|
3,828 |
|
|
|
(210 |
) |
|
|
(5.5 |
%) |
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on franchise notes receivable
|
|
|
24 |
|
|
|
35 |
|
|
|
(11 |
) |
|
|
(31.4 |
%) |
Other
income
|
|
|
27 |
|
|
|
46 |
|
|
|
(19 |
) |
|
|
(41.3 |
%) |
Gain
on settlement of litigation
|
|
|
- |
|
|
|
1,012 |
|
|
|
(1,012 |
) |
|
|
- |
|
Interest
expense, net
|
|
|
(45 |
) |
|
|
(24 |
) |
|
|
(21 |
) |
|
|
(87.5 |
%) |
Total
operating income
|
|
|
6 |
|
|
|
1,069 |
|
|
|
(1,063 |
) |
|
|
(99.4 |
%) |
Income
before provision for (benefit from) income taxes
|
|
$ |
3,624 |
|
|
$ |
4,897 |
|
|
$ |
(1,273 |
) |
|
|
(26.0 |
%) |
Franchise
royalties decreased approximately $415,000, or 6.3%, to $6,211,000 for the year
ended December 31, 2008, as compared to $6,626,000 for the year ended December
31, 2007. Management believes this
decrease was due to current economic conditions, and a decrease in royalties
generated from franchise store audits of $54,000 for the year ended December 31,
2008, which audits were conducted over an equivalent sample size of franchise
locations for each period audited. Additionally, franchise sales
during both of the comparable periods decreased approximately $4,442,000, or
5.2%, which led to a decrease royalty income, and on average, there were 5 fewer
stores in operation during fiscal 2008. On average, 5 fewer stores
would have lead to a decrease of approximately $220,000 of royalties. As of
December 31, 2008 and 2007, there were 133 and 146 franchised stores in
operation, respectively.
Franchise
and other related fees (which include initial franchise fees, renewal fees,
conversion fees and store transfer fees) increased approximately $58,000, or
24.1%, to $299,000 for the year ended December 31, 2008, as compared to $241,000
for the year ended December 31, 2007. This fluctuation was primarily
attributable to 6 franchise agreement renewals ($70,000), 2 independent
store conversions ($20,000), and 10 new franchise agreements ($186,000) in 2008,
as compared to 2 franchise agreement renewals ($20,000), 6 independent store
conversions ($55,000), and 10 new franchise agreements ($161,000) in
2007. In the future, franchise fees are likely to fluctuate depending
on the timing of franchise agreement expirations, new store openings and
franchise store transfers.
Operating
expenses of the franchise segment decreased approximately $147,000, or 4.8%, to
$2,892,000 for the year ended December 31, 2008, as compared to $3,039,000 for
the year ended December 31, 2007. This decrease was partially a
result of decreases to rent and related overhead of $64,000 due to reductions of
back office expenses such as new phone services (the Company changed to
voice-over-IP services in the 4th quarter
of 2007), professional fees of $128,000, inclusive of legal fees of $49,000
relating to proactive litigation to enforce franchise agreements during the
three months ended March 31, 2007, and salaries and related benefits
of $140,000 partially due to a decrease in medical and dental insurance premiums
in May 2008. These decreases were offset, in part, by increases in
bad debt due to recoveries of $100,000 relating to a litigation settlement
during the three months ended March 31, 2007. Additionally, the
franchise segment incurred travel, training, and related costs ($22,000 plus the
associated employees’ time) related to the installation of the Company’s new
Point-of-Sale computer system (initiated March 2008).
Other
income decreased approximately $1,063,000, or 99.4%, to $6,000 for the year
ended December 31, 2008, as compared to $1,069,000 for the year ended December
31, 2007 mainly due to a favorable litigation settlement that occurred in
November 2007. The settlement included 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), thus generating $1,012,000 of
other income.
Company
Store Segment
|
|
For
the Year Ended December 31 (in thousands):
|
|
|
|
2008
|
|
|
2007
|
|
|
$
Change
|
|
|
%
Change
|
|
Net
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
sales
|
|
$ |
3,715 |
|
|
$ |
5,393 |
|
|
$ |
(1,678 |
) |
|
|
(31.1 |
%) |
Cost
of retail sales
|
|
|
932 |
|
|
|
1,469 |
|
|
|
(537 |
) |
|
|
36.6 |
% |
Gross
margin
|
|
|
2,783 |
|
|
|
3,924 |
|
|
|
(1,141 |
) |
|
|
(29.1 |
%) |
Selling,
General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and related benefits
|
|
|
1,667 |
|
|
|
2,471 |
|
|
|
(804 |
) |
|
|
(32.5 |
%) |
Rent
and related overhead
|
|
|
1,076 |
|
|
|
1,454 |
|
|
|
(378 |
) |
|
|
(26.0 |
%) |
Advertising
|
|
|
267 |
|
|
|
733 |
|
|
|
(466 |
) |
|
|
(63.6 |
%) |
Other
general and administrative costs
|
|
|
200 |
|
|
|
295 |
|
|
|
(95 |
) |
|
|
(32.2 |
%) |
Total
selling, general and administrative expenses
|
|
|
3,210 |
|
|
|
4,953 |
|
|
|
(1,743 |
) |
|
|
(35.2 |
%) |
Operating
Loss
|
|
$ |
(427 |
) |
|
$ |
(1,029 |
) |
|
$ |
602 |
|
|
|
58.5 |
% |
Retail
sales for the Company store segment decreased approximately $1,678,000, or
31.1%, to $3,715,000 for the year ended December 31, 2008, as compared to
$5,393,000 for the year ended December 31, 2007. This decrease was
mainly attributable to fewer Company-owned store locations open during the
comparable periods. As of December 31, 2008, there were 5
Company-owned stores, as compared to 11 Company-owned stores as of December 31,
2007. Over the
last 12 months, the Company has closed 4 Company-owned locations and franchised
3 others that were part of the store count as of December 31,
2007. Those 7 stores generated retail sales of $2,919,000 for the
year ended December 31, 2007, as compared to $1,155,000 for the year ended
December 31, 2008. 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, 2008 and 2007), comparative net
sales decreased approximately $138,000, or 5.7%, to $2,295,000 for the year
ended December 31, 2008, as compared to $2,433,000 for the year ended December
31, 2007. Management believes that these decreases were a direct
result of current economic conditions, and changes to key personnel, mainly
optometrists, during the second quarter of 2008, which led to reduced exam fee
revenues.
The
Company-owned store’s gross profit margin, which calculation did not include the
exam fee revenues of $505,000 and $650,000 for the years ended December 31, 2008
and 2007, respectively, generated by such Company-owned stores, increased by
2.0%, to 71.0%, for the year ended December 31, 2008, as compared to 69.0% for
the year ended December 31, 2007. Management continues to work to
improve the profit margin through increased training at the Company-store level
and improved vendor partnerships, among 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.
Operating
expenses of the Company store segment decreased approximately $1,743,000, or
35.2%, to $3,210,000 for the year ended December 31, 2008, as compared to
$4,953,000 for the year ended December 31, 2007. This decrease was
mainly a result of having fewer Company-owned stores in operation during the
year ended December 31, 2008. Additionally, the Company streamlined
certain store payroll coverage in its stores to reduced salaries and related
benefits, and enhanced the media plans for each store, which reduced advertising
costs on a by-store basis.
VisionCare
of California Segment
|
|
For
the Year Ended December 31 (in thousands):
|
|
|
|
2008
|
|
|
2007
|
|
|
$
Change
|
|
|
%
Change
|
|
Net
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership
fees
|
|
$ |
3,551 |
|
|
$ |
3,513 |
|
|
$ |
38 |
|
|
|
1.1 |
% |
Selling,
General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and related benefits
|
|
|
3,189 |
|
|
|
3,199 |
|
|
|
(10 |
) |
|
|
(0.3 |
%) |
Rent
and related overhead
|
|
|
154 |
|
|
|
152 |
|
|
|
2 |
|
|
|
1.3 |
% |
Other
general and administrative costs
|
|
|
172 |
|
|
|
153 |
|
|
|
19 |
|
|
|
12.4 |
% |
Total
selling, general and administrative expenses
|
|
|
3,515 |
|
|
|
3,504 |
|
|
|
11 |
|
|
|
0.3 |
% |
Operating
Income
|
|
|
36 |
|
|
|
9 |
|
|
|
27 |
|
|
|
300.0 |
% |
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
8 |
|
|
|
29 |
|
|
|
(21 |
) |
|
|
(72.4 |
%) |
Total
other income (expense)
|
|
|
8 |
|
|
|
29 |
|
|
|
(21 |
) |
|
|
(72.4 |
%) |
Income
before provision for (benefit from) income taxes
|
|
$ |
44 |
|
|
$ |
38 |
|
|
$ |
6 |
|
|
|
15.8 |
% |
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
$38,000, or 1.1%, to $3,551,000 for the year ended December 31, 2008, as
compared to $3,513,000 for the year ended December 31, 2007. This
increase was a direct result of an increase in the daily membership fee charged
by VCC effective June 2008.
Operating
expenses of the VCC segment remained consistent with last year’s expenses,
increasing only $11,000 to $3,515,000 for the year ended December 31, 2008, as
compared to $3,504,000 for the year ended December 31, 2007. Most of
the individual “line item” expenses for VCC remained consistent year over
year.
Corporate
Overhead Segment
|
|
For
the Year Ended December 31 (in thousands):
|
|
|
|
2008
|
|
|
2007
|
|
|
$
Change
|
|
|
%
Change
|
|
Selling,
General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and related benefits
|
|
$ |
2,119 |
|
|
$ |
2,164 |
|
|
$ |
(45 |
) |
|
|
(2.1 |
%) |
Professional
fees
|
|
|
609 |
|
|
|
489 |
|
|
|
120 |
|
|
|
24.5 |
% |
Insurance
|
|
|
276 |
|
|
|
247 |
|
|
|
29 |
|
|
|
11.7 |
% |
Rent
and related overhead
|
|
|
192 |
|
|
|
607 |
|
|
|
(415 |
) |
|
|
(68.4 |
%) |
Travel
and related expenses
|
|
|
173 |
|
|
|
228 |
|
|
|
(55 |
) |
|
|
(24.1 |
%) |
Compensation
expense
|
|
|
88 |
|
|
|
113 |
|
|
|
(25 |
) |
|
|
(22.1 |
%) |
Bad
debt expense
|
|
|
30 |
|
|
|
140 |
|
|
|
(110 |
) |
|
|
(78.6 |
%) |
Other
general and administrative costs
|
|
|
159 |
|
|
|
102 |
|
|
|
57 |
|
|
|
55.9 |
% |
Total
selling, general and administrative expenses
|
|
|
3,646 |
|
|
|
4,090 |
|
|
|
(444 |
) |
|
|
(10.9 |
%) |
Operating
(Loss) Income
|
|
$ |
(3,646 |
) |
|
$ |
(4,090 |
) |
|
$ |
444 |
|
|
|
10.9 |
% |
There
were no revenues generated by the corporate overhead segment.
Operating
expenses decreased approximately $444,000, or 10.9%, to $3,646,000 for the year
ended December 31, 2008, as compared to $4,090,000 for the year ended December
31, 2007. This decrease was partially a result of decreases to
salaries and related benefits of $45,000 related to decreases, in May
2008, in the Company’s medical and dental insurance premiums, rent
and related overhead expenses of $415,000 due to a favorable litigation
settlement in 2008 ($87,000 less than the Company anticipated) as well as
$236,000 of expenses related to that same litigation that was accrued for during
December 2007, the phone changes described above in the Franchise segment
discussion, as well as decreases in office expenses such as office supplies and
postage, compensation expense of $25,000 related to the vesting of certain
options granted during the 3rd quarter
of 2007, and bad debt expense of $110,000 related to the write-off of certain
managed care receivables.
Other
Segment
|
|
For
the Year Ended December 31 (in thousands):
|
|
|
|
2008
|
|
|
2007
|
|
|
$
Change
|
|
|
%
Change
|
|
Net
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions
|
|
$ |
96 |
|
|
$ |
- |
|
|
$ |
96 |
|
|
|
- |
|
Other
|
|
|
23 |
|
|
|
- |
|
|
|
23 |
|
|
|
- |
|
Net
revenues
|
|
|
119 |
|
|
|
- |
|
|
|
119 |
|
|
|
- |
|
Selling,
General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
|
|
|
95 |
|
|
|
126 |
|
|
|
(31 |
) |
|
|
(24.6 |
%) |
Salaries
and related benefits
|
|
|
30 |
|
|
|
2 |
|
|
|
28 |
|
|
|
1400.0 |
% |
Convention
related expenses
|
|
|
- |
|
|
|
37 |
|
|
|
(37 |
) |
|
|
- |
|
Other
general and administrative costs
|
|
|
65 |
|
|
|
52 |
|
|
|
13 |
|
|
|
25.0 |
% |
Total
selling, general and administrative expenses
|
|
|
190 |
|
|
|
217 |
|
|
|
(27 |
) |
|
|
(12.4 |
%) |
Operating
Loss
|
|
$ |
(71 |
) |
|
$ |
(217 |
) |
|
$ |
146 |
|
|
|
67.3 |
% |
Revenues
generated by the other segment include approximately $96,000 of commission
income and credit card residuals for the year ended December 31, 2008,
respectively. Additionally, there were revenues generated from
employee purchases of optical products as defined under the Company’s optical
benefit plan. The Company began generating commission revenues in
January 2008 under operations of the Company that do not fall within one of the
other operating segments. Those operations ceased during the 2nd half of
fiscal 2008.
Operating
expenses of the other segment related to the operations that began in January
2008, as described above, however, the Company began advertising and promoting
such operations during the 4th quarter
of 2007 including exhibiting at the Vision Expo West trade show in October
2007.
Use
of Non-GAAP Performance Indicators
The
following section expands on the financial performance of the Company detailing
the Company’s EBITDA. EBITDA is calculated as net earnings before
interest, taxes, depreciation and amortization. The Company refers to
EBITDA because it is a widely accepted financial indicator of a company’s
ability to service or incur indebtedness.
EBITDA
does not represent cash flow from operations as defined by generally accepted
accounting principles, is not necessarily indicative of cash available to fund
all cash flow needs, should not be considered an alternative to net income or to
cash flow from operations (as determined in accordance with GAAP) and should not
be considered an indication of our operating performance or as a measure of
liquidity. EBITDA is not necessarily comparable to similarly titled
measures for other companies.
EBITDA
Reconciliation
|
|
For
the Year Ended December 31 (in thousands):
|
|
|
|
2008
|
|
|
2007
|
|
|
$
Change
|
|
|
%
Change
|
|
EBITDA
Reconciliation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$ |
(88 |
) |
|
$ |
426 |
|
|
$ |
(514 |
) |
|
|
(120.7 |
%) |
Interest
|
|
|
346 |
|
|
|
289 |
|
|
|
57 |
|
|
|
19.7 |
% |
Provision
for (benefit from) income taxes
|
|
|
591 |
|
|
|
(251 |
) |
|
|
842 |
|
|
|
(335.5 |
%) |
Depreciation
and amortization
|
|
|
654 |
|
|
|
523 |
|
|
|
131 |
|
|
|
25.0 |
% |
EBITDA
|
|
$ |
1,503 |
|
|
$ |
987 |
|
|
$ |
516 |
|
|
|
52.3 |
% |
The
Company also incurred other non-cash charges that effected earnings including
compensation expenses related to the grant of common stock options of $88,000
and $112,000 for the years ended December 31, 2008 and 2007, respectively, and
general and property taxes of $12,000 and $37,000 for the years ended December
31, 2008 and 2007, respectively. EBITDA increased $516,000, or 52.3%,
to $1,503,000 for the year ended December 31, 2008, as compared to $987,000 for
the year ended December 31, 2007 mainly due to income before the provision for
income taxes. This increase was offset, in part, by the net gain on
settlement of ligation during the quarter ended September 30, 2007 of
$1,012,000.
Management
has provided an EBITDA calculation to provide a greater level of understanding
of the Company’s performance had it not been for certain significant non-cash
charges. These charges, such as depreciation and amortization, and
compensation expense, are included in selling, general and administrative
expenses on the Consolidated Statements of Operations and Comprehensive (Loss)
Income.
Cash
Flows from EBITDA
|
|
|
|
For
the Year Ended December 31, 2008
|
|
|
|
Original
|
|
|
EBITDA
|
|
|
Difference
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(88 |
) |
|
$ |
1,503 |
|
|
$ |
1,591 |
|
Adjustments
to reconcile net loss to net cash (used in) provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
654 |
|
|
|
- |
|
|
|
(654 |
) |
Provision
for doubtful accounts
|
|
|
462 |
|
|
|
462 |
|
|
|
- |
|
Deferred
tax assets
|
|
|
520 |
|
|
|
- |
|
|
|
(520 |
) |
Disposal
of property and equipment
|
|
|
250 |
|
|
|
250 |
|
|
|
- |
|
Non-cash
compensation charges related to options and warrants
|
|
|
88 |
|
|
|
88 |
|
|
|
- |
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise
and other receivables
|
|
|
(513 |
) |
|
|
(513 |
) |
|
|
- |
|
Optical
purchasing group receivables
|
|
|
619 |
|
|
|
619 |
|
|
|
- |
|
Inventories
|
|
|
144 |
|
|
|
144 |
|
|
|
- |
|
Prepaid
expenses and other current assets
|
|
|
(96 |
) |
|
|
(96 |
) |
|
|
- |
|
Other
assets
|
|
|
37 |
|
|
|
37 |
|
|
|
- |
|
Accounts
payable and accrued liabilities
|
|
|
(1,271 |
) |
|
|
(1,342 |
) |
|
|
(71 |
) |
Optical
purchasing group payables
|
|
|
(751 |
) |
|
|
(751 |
) |
|
|
- |
|
Accrual
for store closings
|
|
|
(154 |
) |
|
|
(154 |
) |
|
|
- |
|
Franchise
deposits and other liabilities
|
|
|
(132 |
) |
|
|
(132 |
) |
|
|
- |
|
Net
cash (used in) provided by operating activities
|
|
|
(231 |
) |
|
|
115 |
|
|
|
346 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise
notes receivable issued
|
|
|
(117 |
) |
|
|
(117 |
) |
|
|
- |
|
Proceeds
from franchise and other notes receivable
|
|
|
216 |
|
|
|
216 |
|
|
|
- |
|
Purchases
of property and equipment
|
|
|
(344 |
) |
|
|
(344 |
) |
|
|
- |
|
Costs
associated with defending trademark value
|
|
|
(601 |
) |
|
|
(601 |
) |
|
|
- |
|
Net
cash used in investing activities
|
|
|
(846 |
) |
|
|
(846 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings
under credit facility
|
|
|
950 |
|
|
|
950 |
|
|
|
- |
|
Payments
on related party obligations and other debt
|
|
|
(438 |
) |
|
|
(784 |
) |
|
|
(346 |
) |
Net
cash provided by used in financing activities
|
|
|
512 |
|
|
|
166 |
|
|
|
(346 |
) |
Net
decrease in cash before effect of foreign exchange rate
changes
|
|
|
(565 |
) |
|
|
(565 |
) |
|
|
- |
|
Effect
of foreign exchange rate changes
|
|
|
(191 |
) |
|
|
(191 |
) |
|
|
- |
|
Net
decrease increase in cash and cash equivalents
|
|
|
(756 |
) |
|
|
(756 |
) |
|
|
- |
|
Cash
and cash equivalents – beginning of year
|
|
|
2,846 |
|
|
|
2,846 |
|
|
|
- |
|
Cash
and cash equivalents – end of year
|
|
$ |
2,090 |
|
|
$ |
2,090 |
|
|
$ |
- |
|
LIQUIDITY
AND CAPITAL RESOURCES
As of
December 31, 2008, the Company had working capital of $1,116,000 and cash on
hand of $2,090,000.
During
the year ended December 31, 2008, cash flows used in operating activities were
$231,000. This was principally due to a decrease in optical
purchasing group payables of $751,000 due to decreased optical purchasing group
sales, as well as a decrease in accounts payable and accrued expenses of
$1,271,000, partially due to the decrease in the number of Company-owned stores
in operation leading to reduction in product purchased, and a decrease in the
accrual for store closings of $154,000 as the Company settled certain landlord
related litigation. These were offset, in part, by other non-cash expenses of
$1,974,000 and an increase in optical purchasing group receivables of $619,000
for reasons described above. The Company believes it will continue to
improve its operating cash flows through the implementation of the Company’s new
Point-of-Sales system to improve the franchise sales reporting process, the
addition of new franchise locations, its current and future acquisitions, and
continued efficiencies as it relates to corporate overhead
expenses.
For the
year ended December 31, 2008, cash flows used in investing activities were
$846,000 mainly due to an increase in intangible assets for legal costs
associated with defending one of the Company’s trademarks offset by proceeds
received on certain franchise promissory notes and capital expenditures related
to improvements to the Company’s IT infrastructure. Management does
not anticipate any major capital expenditures over the next 12 months, other
than normal expenditures to continue to enhance the Company’s technology
infrastructure and the Company’s internal controls. However,
Management does not know the extent of the legal costs associated with the
continuance of litigation in defending one of the Company’s trademarks as the
litigation is still in the discovery phase.
For the
year ended December 31, 2008, cash flows provided by financing activities
were $512,000 due to additional borrowings in the 4th quarter
of 2008 under the Company’s Credit Facility of $950,000, offset by the repayment
of the Company’s related party borrowings to Combine Optical Management
Corporation. The Company will continue to repay such borrowings with
cash flows generated by the current operations. In April 2010, the
Company’s Credit Facility will expire and all outstanding borrowings will be
due. The Company is currently exploring all options available to
enable it make such payment.
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 was to expire in August
2009, however, on April 1, 2009, M&T agreed to extend the maturity date of
the Credit Facility to April 1, 2010. 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 three hundred (300) basis points in
excess of LIBOR, and all principal drawn by the Company is payable on April 1,
2010. All other terms of the Credit Facility remained the
same.
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, 2008, the Company
had outstanding borrowings of $5,306,854 under the Credit Facility, which amount
was included in Long-term Debt on the accompanying Consolidated Balance Sheet,
and was utilizing $500,000 of the Credit Facility to hold a letter of credit in
favor of a key vendor of Combine to ensure payment of any outstanding invoices
not paid by Combine. The Company was not in compliance with one of
the financial covenants, however, on April 1, 2009, M&T granted the Company
a waiver and agreed that such covenant was now in compliance as of December 31,
2008. Additionally, the Company had $193,146 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 $46,000
and $30,000 higher/lower for each of the years ended December 31, 2008 and 2007,
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, and the optical purchasing groups, 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 $1,460,000 and $1,563,000 higher/lower
for the years ended December 31, 2008 and 2007, 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 $193,000 and $187,000 higher for the years ended December 31, 2008 and
2007, 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, consultation with third party consultants and
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 $620,000 and $560,000 lower for the years ended
December 31, 2008 and 2007, respectively.
RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS
In
February 2008, the FASB issued FASB Staff Position (“FSP”) No. 157-1,
Application of FASB Statement No. 157 to FASB Statement No. 13 and
Other Accounting Pronouncements That Address Fair Value Measurements for
Purposes of Lease Classification or Measurement under Statement 13, which
removed leasing transactions accounted for under FAS No. 13 and related
guidance from the scope of FAS No. 157. Also in February 2008, the FASB
issued FSP No.157-2, Partial Deferral of the Effective Date of Statement 157,
which deferred the effective date of FASB No. 157 for all nonfinancial
assets and nonfinancial liabilities to fiscal years beginning after
November 15, 2008. The Company does not anticipate any impact of adopting
FSP 157-1 and FSP 157-2 on its financial position, cash flows, and results of
operations.
In March
2008, the FASB issued Statement of Financial Accounting Standards (“SFAS”)
No. 161, Disclosures about Derivative Instruments and Hedging Activities-an
amendment of FASB Statement No. 133. SFAS 161 requires enhanced
disclosure related to derivatives and hedging activities and thereby seeks to
improve the transparency of financial reporting. Under SFAS 161, entities
are required to provide enhanced disclosures relating to: (a) how and why
an entity uses derivative instruments; (b) how derivative instruments and
related hedge items are accounted for under Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities (“SFAS 133”), and its related interpretations; and (c) how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows. SFAS 161 must be applied
prospectively to all derivative instruments and non-derivative instruments that
are designated and qualify as hedging instruments and related hedged items
accounted for under SFAS 133 for all financial statements issued for fiscal
years and interim periods beginning after November 15, 2008, with early
application encouraged. The Company does not anticipate any impact of
adopting SFAS 161 on its financial position, cash flows, and results of
operations.
In April
2008, the FASB issued FSP No. FAS 142-3, Determination of the Useful Life
of Intangible Assets (“FSP 142-3”). FSP 142-3 amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under SFAS 142, Goodwill and
Other Intangible Assets. FSP 142-3 is effective for fiscal years beginning after
December 31, 2008, and interim periods within those fiscal years.
Early adoption is prohibited. The Company is currently assessing the
impact that FSP 142-3 will have on its financial position, cash flows, and
results of operations.
In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles. SFAS 162 is intended to improve financial reporting
by identifying a consistent framework, or hierarchy, for selecting accounting
principles to be used in financial statements that are presented in conformity
with U.S. generally accepted accounting principles for nongovernmental
entities. SFAS 162 is effective 60 days following the SEC’s approval of
the Public Company Accounting Oversight Board amendments to AU Section 411,
The Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles. The Company does not anticipate any impact of adopting SFAS
162 on its financial position, cash flows, and results of
operations.
In May
2008, the FASB issued FSP No. APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement) (“APB 14-1”). APB 14-1 requires that issuers of
convertible debt instruments that, upon conversion, may be settled fully or
partially in cash must separately account for the liability and equity
components in a manner that will reflect the entity’s nonconvertible debt
borrowing rate when interest cost is recognized in subsequent
periods. APB 14-1 is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years and is to be applied retrospectively to all past periods
presented, even if the instrument has matured, converted, or otherwise been
extinguished as of APB 14-1 effective date. The Company is currently
assessing the impact APB 14-1 will have on its financial position, cash flows,
and results of operations.
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
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 sheet of Emerging Vision, Inc. (a
New York corporation) and subsidiaries (the “Company”) as of December 31, 2008,
and the related consolidated statements of operations and comprehensive (loss)
income, shareholders' equity and cash flows for the year then
ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Emerging Vision, Inc. and
subsidiaries as of December 31, 2008, and the consolidated results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States.
/S/ ROSEN
SEYMOUR SHAPSS MARTIN & COMPANY LLP
New York,
New York
April 8,
2009
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Shareholders of Emerging Vision, Inc. and
Subsidiaries:
We have
audited the accompanying consolidated balance sheet of Emerging Vision, Inc. (a
New York corporation) and subsidiaries (the “Company”) as of December 31, 2007,
and the related consolidated statements of operations and comprehensive (loss)
income, shareholders' equity and cash flows for the year 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 audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides 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 the consolidated results of their
operations and their cash flows for the year 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
(In
Thousands, Except Share Data)
|
|
ASSETS
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
2,090 |
|
|
$ |
2,846 |
|
Franchise
receivables, net of allowance of $140 and $147,
respectively
|
|
|
1,744 |
|
|
|
1,842 |
|
Optical
purchasing group receivables, net of allowance of $172 and $60,
respectively
|
|
|
4,221 |
|
|
|
4,840 |
|
Other
receivables, net of allowance of $7 and $5, respectively
|
|
|
322 |
|
|
|
369 |
|
Current
portion of franchise notes receivable, net of allowance of $29 and $38,
respectively
|
|
|
107 |
|
|
|
191 |
|
Inventories
|
|
|
322 |
|
|
|
466 |
|
Prepaid
expenses and other current assets
|
|
|
543 |
|
|
|
447 |
|
Deferred
tax asset
|
|
|
351 |
|
|
|
600 |
|
Total
current assets
|
|
|
9,700 |
|
|
|
11,601 |
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
1,191 |
|
|
|
1,493 |
|
Franchise
notes receivable, net
|
|
|
302 |
|
|
|
121 |
|
Deferred
tax asset, net of current portion
|
|
|
803 |
|
|
|
1,074 |
|
Goodwill
|
|
|
4,127 |
|
|
|
4,127 |
|
Intangible
assets, net
|
|
|
3,218 |
|
|
|
2,819 |
|
Other
assets
|
|
|
296 |
|
|
|
389 |
|
Total
assets
|
|
$ |
19,637 |
|
|
$ |
21,624 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
$ |
4,362 |
|
|
$ |
5,633 |
|
Optical
purchasing group payables
|
|
|
3,709 |
|
|
|
4,460 |
|
Accrual
for store closings
|
|
|
146 |
|
|
|
300 |
|
Short-term
debt
|
|
|
14 |
|
|
|
32 |
|
Related
party obligations
|
|
|
353 |
|
|
|
404 |
|
Total
current liabilities
|
|
|
8,584 |
|
|
|
10,829 |
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
5,358 |
|
|
|
4,424 |
|
Related
party obligations, net of current portion
|
|
|
417 |
|
|
|
770 |
|
Franchise
deposits and other liabilities
|
|
|
310 |
|
|
|
442 |
|
Total
liabilities
|
|
|
14,669 |
|
|
|
16,465 |
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
1,254 |
|
Treasury
stock, at cost, 182,337 shares
|
|
|
(204 |
) |
|
|
(204 |
) |
Additional
paid-in capital
|
|
|
128,059 |
|
|
|
127,971 |
|
Accumulated
comprehensive loss
|
|
|
(267 |
) |
|
|
(76 |
) |
Accumulated
deficit
|
|
|
(123,948 |
) |
|
|
(123,860 |
) |
Total
shareholders' equity
|
|
|
4,968 |
|
|
|
5,159 |
|
Total
liabilities and shareholders' equity
|
|
$ |
19,637 |
|
|
$ |
21,624 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
(In
Thousands, Except Per Share Data)
|
|
|
|
For
the Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
Optical
purchasing group sales
|
|
$ |
57,914 |
|
|
$ |
33,848 |
|
Franchise
royalties
|
|
|
6,211 |
|
|
|
6,626 |
|
Retail
sales – Company-owned stores
|
|
|
3,715 |
|
|
|
5,393 |
|
Membership
fees – VisionCare of California
|
|
|
3,551 |
|
|
|
3,513 |
|
Franchise
related fees and other revenues
|
|
|
418 |
|
|
|
241 |
|
Total
revenue
|
|
|
71,809 |
|
|
|
49,621 |
|
|
|
|
|
|
|
|
|
|
Costs
and operating expenses:
|
|
|
|
|
|
|
|
|
Cost
of optical purchasing group sales
|
|
|
55,152 |
|
|
|
32,105 |
|
Cost
of retail sales – Company-owned stores
|
|
|
932 |
|
|
|
1,469 |
|
Selling,
general and administrative expenses
|
|
|
14,976 |
|
|
|
16,494 |
|
Provision
for store closings
|
|
|
- |
|
|
|
263 |
|
Total
costs and operating expenses
|
|
|
71,060 |
|
|
|
50,331 |
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
749 |
|
|
|
(710 |
) |
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
Interest
on franchise notes receivable
|
|
|
24 |
|
|
|
35 |
|
Other
income
|
|
|
49 |
|
|
|
70 |
|
Gain
on settlement of litigation
|
|
|
- |
|
|
|
1,012 |
|
Interest
expense, net of interest income of $26 and $57,
respectively
|
|
|
(319 |
) |
|
|
(232 |
) |
Total
other (expense) income
|
|
|
(246 |
) |
|
|
885 |
|
|
|
|
|
|
|
|
|
|
Income
before provision for (benefit from) income taxes
|
|
|
503 |
|
|
|
175 |
|
Provision
for (benefit from) income taxes
|
|
|
591 |
|
|
|
(251 |
) |
Net
(loss) income
|
|
|
(88 |
) |
|
|
426 |
|
|
|
|
|
|
|
|
|
|
Comprehensive
(loss) income:
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
(191 |
) |
|
|
(76 |
) |
Comprehensive
(loss) income
|
|
$ |
(279 |
) |
|
$ |
350 |
|
|
|
|
|
|
|
|
|
|
Net
(loss) income per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.00 |
) |
|
$ |
0.01 |
|
Diluted
|
|
$ |
(0.00 |
) |
|
$ |
0.00 |
|
|
|
|
|
|
|
|
|
|
Weighted-average number of
common shares outstanding –
|
|
|
|
|
|
|
|
|
Basic
|
|
|
125,293 |
|
|
|
84,489 |
|
Diluted
|
|
|
125,293 |
|
|
|
93,131 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007
(In
Thousands, Except Share Data)
|
|
|
|
Senior
Convertible Preferred
Stock
|
|
|
Common Stock
|
|
|
Treasury
Stock,
at cost
|
|
|
Additional
Paid-In
|
|
|
Accumulated
Other Comprehensive
|
|
|
Accumulated
|
|
|
Total
Shareholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Loss
|
|
|
Deficit
|
|
|
Equity
|
|
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
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(76 |
) |
|
|
- |
|
|
|
(76 |
) |
Net
income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
426 |
|
|
|
426 |
|
Balance
– December 31, 2007
|
|
|
1 |
|
|
$ |
74 |
|
|
|
125,475,143 |
|
|
$ |
1,254 |
|
|
|
182,337 |
|
|
$ |
(204 |
) |
|
$ |
127,971 |
|
|
$ |
(76 |
) |
|
$ |
(123,860 |
) |
|
$ |
5,159 |
|
Issuance
of stock options
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
88 |
|
|
|
- |
|
|
|
- |
|
|
|
88 |
|
Effects
of foreign currency translation adjustments
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(191 |
) |
|
|
- |
|
|
|
(191 |
) |
Net
loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(88 |
) |
|
|
(88 |
) |
Balance
– December 31, 2008
|
|
|
1 |
|
|
$ |
74 |
|
|
|
125,475,143 |
|
|
$ |
1,254 |
|
|
|
182,337 |
|
|
$ |
(204 |
) |
|
$ |
128,059 |
|
|
$ |
(267 |
) |
|
$ |
(123,948 |
) |
|
$ |
4,968 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Dollars
in Thousands)
|
|
|
|
For
the Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
(loss) income
|
|
$ |
(88 |
) |
|
$ |
426 |
|
Adjustments
to reconcile net (loss) income to net cash (used in) provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
654 |
|
|
|
523 |
|
Provision
for doubtful accounts
|
|
|
462 |
|
|
|
319 |
|
Deferred
tax assets
|
|
|
520 |
|
|
|
(274 |
) |
Provision
for store closings
|
|
|
- |
|
|
|
263 |
|
Non-cash
compensation charges related to options and warrants
|
|
|
88 |
|
|
|
112 |
|
Disposal
of property and equipment
|
|
|
250 |
|
|
|
(13 |
) |
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Franchise
and other receivables
|
|
|
(513 |
) |
|
|
(455 |
) |
Optical
purchasing group receivables
|
|
|
619 |
|
|
|
688 |
|
Inventories
|
|
|
144 |
|
|
|
(35 |
) |
Prepaid
expenses and other current assets
|
|
|
(96 |
) |
|
|
60 |
|
Other
assets
|
|
|
37 |
|
|
|
(34 |
) |
Accounts
payable and accrued liabilities
|
|
|
(1,271 |
) |
|
|
1,013 |
|
Optical
purchasing group payables
|
|
|
(751 |
) |
|
|
(950 |
) |
Accrual
for store closings
|
|
|
(154 |
) |
|
|
- |
|
Franchise
deposits and other liabilities
|
|
|
(132 |
) |
|
|
(45 |
) |
Net
cash (used in) provided by operating activities
|
|
|
(231 |
) |
|
|
1,598 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Franchise
notes receivable issued
|
|
|
(117 |
) |
|
|
(252 |
) |
Proceeds
from franchise and other notes receivable
|
|
|
216 |
|
|
|
293 |
|
Proceeds
from the sale of property and equipment
|
|
|
- |
|
|
|
33 |
|
Purchases
of property and equipment
|
|
|
(344 |
) |
|
|
(918 |
) |
Costs
associated with defending trademark value
|
|
|
(601 |
) |
|
|
(310 |
) |
Acquisition
of 1725758 Ontario Inc.
|
|
|
- |
|
|
|
(3,609 |
) |
Net
cash used in investing activities
|
|
|
(846 |
) |
|
|
(4,763 |
) |
|
|
|
|
|
|
|
|
|
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 |
|
Borrowings
under credit facility
|
|
|
950 |
|
|
|
4,299 |
|
Payments
on related party obligations and other debt
|
|
|
(438 |
) |
|
|
(1,175 |
) |
Net
cash provided by financing activities
|
|
|
512 |
|
|
|
4,798 |
|
Net
(decrease) increase in cash before effect of foreign exchange rate
changes
|
|
|
(565 |
) |
|
|
1,633 |
|
Effect
of foreign exchange rate changes
|
|
|
(191 |
) |
|
|
(76 |
) |
Net
(decrease) increase in cash and cash equivalents
|
|
|
(756 |
) |
|
|
1,557 |
|
Cash
and cash equivalents – beginning of year
|
|
|
2,846 |
|
|
|
1,289 |
|
Cash
and cash equivalents – end of year
|
|
$ |
2,090 |
|
|
$ |
2,846 |
|
(Continued)
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
Interest
|
|
$ |
294 |
|
|
$ |
59 |
|
Taxes
|
|
$ |
33 |
|
|
$ |
36 |
|
|
|
|
|
|
|
|
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
Notes
receivable in connection with the sale of three Company-owned stores
(inclusive of all inventory and property and equipment)
|
|
$ |
151 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
Notes
receivable in connection with franchisee settlement (inclusive of all
franchise related receivables)
|
|
$ |
130 |
|
|
$ |
- |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1 –
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
Business
Emerging
Vision, Inc. and subsidiaries (collectively, the “Company” or “EVI”) 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 “Sterling Stores”). The Company also targets
retail optical stores within the United States and within Canada to become
members of its two optical purchasing groups, Combine Buying Group, Inc.
(“Combine” or “COM”) and The Optical Group (“TOG”). Additionally, the
Company operates VisionCare of California, Inc. (“VCC”), a wholly owned
subsidiary that is 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. The Company 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, 2008, there were 139 Sterling Stores in operation, consisting of 6
Company-owned stores (inclusive of 1 store operated under the terms of a
management agreement) and 133 franchised stores, 842 active members of COM, and
535 active members of TOG.
Basis of
Presentation
The
Consolidated Financial Statements include the operations of the Company’s retail
optical store operations, VCC, Combine and TOG.
Principles of
Consolidation
The
Consolidated Financial Statements include the accounts of EVI and its operating
and non-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 various
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 and in Canadian treasury
accounts.
Fair Value of Financial
Instruments
In
determining the carrying values of the Company’s cash and cash equivalents,
short-term franchise and other receivables, and accounts payable, the Company
approximates their fair value due to the short-term maturities of such accounts
as of each balance sheet date. In determining the fair value of its
other 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 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
Inventories
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. Amortization expense is recorded on a straight-line basis
over the remaining term of the associated lease. All depreciation and
amortization costs are reflected in selling, general and administrative expenses
in the accompanying Consolidated Statements of Operations.
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 Operations.
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,
2008. 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, 2008 and 2007, 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 five principal
sources:
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. Continuing
franchise royalties are based upon a percentage of the gross revenues generated
by each franchised location. To the extent that collectability of
royalties is not reasonably assured, the Company recognizes such revenue when
the cash is received;
Retail sales – Company-owned stores
– Represents sales from eye care products and related services generated
at a Company-owned store;
Membership fees – VisionCare of
California – Represents membership fees generated by VisionCare of
California, Inc. (“VCC”), a wholly owned subsidiary of the Company, 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;
Franchise related fees and other revenues –
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). Initial franchise fees, which
are non-refundable, are recognized when the related franchise agreement is
signed. For the years ended December 31, 2008 and 2007, the Company
recognized $299,000 and $241,000, respectively, of such franchise related
fees. Other revenues are revenues not generated by one of the other
five principal sources such as commission income and employee optical
sales.
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 Combine 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
overhead, 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 $390,000 and $875,000 for the years ended December 31,
2008 and 2007, respectively, and is reflected in selling, general and
administrative expenses on the accompanying Consolidated Statements of
Operations. Advertising fees received from franchisees are not
accounted for in the Consolidated Statements of Operations 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 TOG were measured using TOG’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
$191,000 and $76,000 translation loss from the conversion of foreign currency to
U.S. Dollars for the years ended December 31, 2008 and 2007, respectively, is
included as a component of comprehensive (loss) income for the years ended
December 31, 2008 and 2007, respectively, and is recorded directly to
accumulated comprehensive loss within the Consolidated Balance Sheets as of
December 31, 2008, and 2007, respectively.
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 years
ended December 31, 2008 and 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, 2008 and
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, 2008, a summary of the tax
years that remain subject to examination in our major tax jurisdictions
are: United States – Federal and State – 2005 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 follows 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 the options, warrants and restricted stock
issued during 2008 and 2007 using the Black-Scholes option pricing model with
the following assumptions: 1 to 5-year expected life; 3 to 10-year
expiration period; risk-free interest rates ranging from 2.34% to 4.98%; stock
price volatility ranging from 54% to 74%; with no dividends over the expected
life.
The
Company recognized stock-based compensation expenses of approximately $2,000 and
$7,000 related to the issuance of stock options to certain employees for the
years ended December 31, 2008 and 2007, respectively, which expenses are
reflected in selling, general and administrative expenses on the accompanying
Consolidated Statement of Income.
The
Company recognized stock-based compensation expense of approximately $5,000
and $60,000 related to its issuance of restricted stock and stock warrants to
certain non-employee investor relation consultants for the years ended December
31, 2008 and 2007, respectively, which expenses are reflected in selling,
general and administrative expenses on the accompanying Consolidated Statements
of Operations.
The
Company recognized stock-based compensation expense of approximately
$81,000 and $46,000 related to its issuance of stock options certain
non-employee directors for the years ended December 31, 2008 and 2007,
respectively, which expenses are reflected in selling, general and
administrative expenses on the accompanying Consolidated Statements of
Operations.
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 (“CDIC”) 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. Uninsured cash as of December 31, 2008 was approximately
$622,000, including $470,000 in Canada where the CDIC limit is
$60,000.
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
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 such
franchise sales reporting such as the installation, across the franchise chain,
of a uniform Point-of-Sale computer system.
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, 2008 and 2007, optical purchasing group payables relating to its
three most significant vendors as a percentage were as follows:
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Vendor
A
|
|
|
20.4 |
% |
|
|
32.5 |
% |
Vendor
B
|
|
|
15.2 |
% |
|
|
12.0 |
% |
Vendor
C
|
|
|
5.4 |
% |
|
|
5.0 |
% |
|
|
|
41.0 |
% |
|
|
49.5 |
% |
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). Effective January 1, 2008, the Company
began reporting on the operations of six reportable business
segments.
Reclassifications
Certain
reclassifications have been made to prior years’ consolidated financial
statements to conform to the current year presentation.
NOTE
2 – ACQUISITIONS:
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. (“OG”), 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). 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 535 active members in its optical
purchasing group business as of December 31, 2008.
The
Company utilized the services of ValueScope, Inc. (“ValueScope”), independent
valuation experts, to determine the estimated fair value of the
acquisition. In determining fair value, ValueScope reviewed the
historical financials of TOG, interim financials, the Business Acquisition
Agreement between OG and TOG, TOG vendor agreements, comparable companies within
the industry, along with other pertinent information, the acquisition was
accounted for as a business purchase and recorded at the estimated fair value
(based on ValueScope’s valuation) of the assets acquired and liabilities assumed
on August 1, 2007, as follows:
Purchase
Price
|
|
|
|
|
$ |
3,609,000 |
|
Working
Capital
|
|
|
1,000 |
|
|
|
|
|
Accounts
receivable
|
|
|
3,817,000 |
|
|
|
|
|
Property
and equipment
|
|
|
41,000 |
|
|
|
|
|
Intangible
assets
|
|
|
1,844,000 |
|
|
|
|
|
Accounts
payable
|
|
|
(3,676,000 |
) |
|
|
2,027,000 |
|
Goodwill
|
|
|
|
|
|
$ |
1,582,000 |
|
|
|
|
|
|
|
|
|
|
Property
and equipment is being 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 and the amortizable intangible
assets are being 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 TOG, assuming the acquisition were consummated at
the beginning of the year ended December 31, 2007:
|
|
(In
thousands)
|
|
|
|
2007
|
|
Business
Segment Net Revenues:
|
|
|
|
Retail
Optical Stores
|
|
$ |
15,773 |
|
Optical
Purchasing Group Business
|
|
|
57,390 |
|
Net
revenues
|
|
$ |
73,163 |
|
|
|
|
|
|
Business
Segment (Loss) Income before Benefit from Income Taxes:
|
|
|
|
|
Retail
Optical Stores
|
|
$ |
(401 |
) |
Optical
Purchasing Group Business
|
|
|
1,116 |
|
Income
before benefit from income taxes
|
|
$ |
715 |
|
|
|
|
|
|
Business
Segment Net (Loss) Income:
|
|
|
|
|
Retail
Optical Stores
|
|
$ |
(150 |
) |
Optical
Purchasing Group Business
|
|
|
1,116 |
|
Net
income
|
|
$ |
966 |
|
|
|
|
|
|
Business
Segment Net (Loss) Income Per Share – Basic and Diluted:
|
|
|
|
|
Retail
Optical Stores
|
|
$ |
(0.00 |
) |
Optical
Purchasing Group Business
|
|
|
0.01 |
|
Net
income per share – Basic and Diluted
|
|
$ |
0.01 |
|
|
|
|
|
|
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 (loss) 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 (loss) 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 Operations. Common stock equivalents
totaling 7,678,418 and 2,202,687 were excluded from the computation of Diluted
EPS for the years ended December 31, 2008 and 2007, respectively, as their
effect on the computation of Diluted EPS would have been
anti-dilutive. For the year ended December 31, 2008, 3,398,687 of
common stock equivalents could potentially dilute the earnings per share
calculations, but were not included because their effect was anti-dilutive in
2008.
The
following table sets forth the computation of basic and diluted per share
information:
|
|
(In
thousands)
|
|
|
|
2008
|
|
|
2007
|
|
Numerator:
|
|
|
|
|
|
|
Net
(loss) income
|
|
$ |
(88 |
) |
|
$ |
426 |
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
125,293 |
|
|
|
84,489 |
|
Dilutive
effect of stock options and warrants
|
|
|
- |
|
|
|
8,642 |
|
Weighted
average common shares outstanding, assuming dilution
|
|
|
125,293 |
|
|
|
93,131 |
|
|
|
|
|
|
|
|
|
|
Per Share Information:
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.00 |
) |
|
$ |
0.01 |
|
Diluted
|
|
$ |
(0.00 |
) |
|
$ |
0.00 |
|
NOTE 4 – FRANCHISE
NOTES RECEIVABLE:
Franchise
notes held by the Company consist of purchase money notes related to
Company-financed conveyances of Company-owned store assets to franchisees,
certain franchise notes receivable obtained by the Company in connection with
acquisitions in prior years, and promissory notes in connection with the
settlement of past due fees due to sales
underreporting. 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, 2008, these
notes generally provided for interest ranging from 6% to 12%.
Scheduled
maturities of notes receivable as of December 31, 2008, are as follows (in
thousands):
2009
|
|
$ |
136 |
|
2010
|
|
|
111 |
|
2011
|
|
|
67 |
|
2012
|
|
|
39 |
|
2013
|
|
|
79 |
|
Thereafter
|
|
|
6 |
|
|
|
|
438 |
|
Less:
allowance for doubtful accounts
|
|
|
(29 |
) |
|
|
$ |
409 |
|
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,
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Franchise
Receivables:
|
|
|
|
|
|
|
Balance,
beginning of year
|
|
$ |
147 |
|
|
$ |
110 |
|
Charged
to expense
|
|
|
243 |
|
|
|
91 |
|
Reductions,
including write-offs
|
|
|
(250 |
) |
|
|
(55 |
) |
Additions
and transfers
|
|
|
- |
|
|
|
1 |
|
Balance,
end of year
|
|
$ |
140 |
|
|
$ |
147 |
|
|
|
|
|
|
|
|
|
|
Optical
Purchasing Group Receivables:
|
|
|
|
|
|
|
|
|
Balance,
beginning of year
|
|
$ |
60 |
|
|
$ |
40 |
|
Charged
to expense
|
|
|
160 |
|
|
|
41 |
|
Reductions,
including write-offs
|
|
|
(48 |
) |
|
|
(21 |
) |
Additions
and transfers
|
|
|
- |
|
|
|
- |
|
Balance,
end of year
|
|
$ |
172 |
|
|
$ |
60 |
|
|
|
|
|
|
|
|
|
|
Franchise
Notes Receivables:
|
|
|
|
|
|
|
|
|
Balance,
beginning of year
|
|
$ |
38 |
|
|
$ |
49 |
|
Charged
to expense
|
|
|
- |
|
|
|
27 |
|
Reductions,
including write-offs
|
|
|
- |
|
|
|
(37 |
) |
Additions
and transfers
|
|
|
(9 |
) |
|
|
(1 |
) |
Balance,
end of year
|
|
$ |
29 |
|
|
$ |
38 |
|
|
|
|
|
|
|
|
|
|
Other
Company Receivables:
|
|
|
|
|
|
|
|
|
Balance,
beginning of year
|
|
$ |
5 |
|
|
$ |
2 |
|
Charged
to expense
|
|
|
59 |
|
|
|
160 |
|
Reductions,
including write-offs
|
|
|
(57 |
) |
|
|
(157 |
) |
Additions
and transfers
|
|
|
- |
|
|
|
- |
|
Balance,
end of year
|
|
$ |
7 |
|
|
$ |
5 |
|
|
|
|
|
|
|
|
|
|
Accrual
for Store Closings:
|
|
|
|
|
|
|
|
|
Balance,
beginning of year
|
|
$ |
300 |
|
|
$ |
37 |
|
Charged
to expense
|
|
|
- |
|
|
|
236 |
|
Reductions,
including write-offs
|
|
|
(269 |
) |
|
|
- |
|
Additions
and transfers
|
|
|
115 |
|
|
|
27 |
|
Balance,
end of year
|
|
$ |
146 |
|
|
$ |
300 |
|
NOTE
6 – PROPERTY AND EQUIPMENT, NET:
Property
and equipment, net, consists of the following:
|
|
(In
thousands)
As
of December 31,
|
|
Estimated
|
|
|
2008
|
|
|
2007
|
|
Useful
Lives
|
|
|
|
|
|
|
|
|
Furniture
and fixtures
|
|
$ |
383 |
|
|
$ |
379 |
|
5-7
years
|
Machinery
and equipment
|
|
|
2,112 |
|
|
|
2,084 |
|
3-5
years
|
Software
|
|
|
920 |
|
|
|
846 |
|
3-5
years
|
Leasehold
improvements
|
|
|
1,299 |
|
|
|
1,347 |
|
10
years*
|
|
|
|
4,714 |
|
|
|
4,656 |
|
|
Less:
accumulated depreciation
|
|
|
(3,523 |
) |
|
|
(3,163 |
) |
|
Property
and equipment, net
|
|
$ |
1,191 |
|
|
$ |
1,493 |
|
|
|
|
|
|
|
|
|
|
|
|
* 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, 2008 and 2007 was $396,000 and $369,000, respectively, and is reflected in
selling, general and administrative expenses in the accompanying Consolidated
Statements of Operations.
NOTE
7 – INTANGIBLE ASSETS, NET:
Intangible
assets, net, consist of the following:
|
|
(In
thousands)
As
of December 31,
|
|
Estimated
|
|
|
2008
|
|
|
2007
|
|
Useful
Lives
|
|
|
|
|
|
|
|
|
Customer
lists
|
|
$ |
1,057 |
|
|
$ |
1,057 |
|
10-11
years
|
Non-compete
agreement
|
|
|
453 |
|
|
|
453 |
|
5
years
|
Trade
name
|
|
|
2,078 |
|
|
|
1,477 |
|
Indefinite
|
|
|
|
3,588 |
|
|
|
2,987 |
|
|
Less:
accumulated amortization
|
|
|
(370 |
) |
|
|
(168 |
) |
|
Intangible
assets, net
|
|
$ |
3,218 |
|
|
$ |
2,819 |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
expense on intangible assets for the years ended December 31, 2008 and 2007 was
$202,000 and $135,000, respectively, and is reflected in selling, general and
administrative expenses in the accompanying Consolidated Statements of
Operations. Amortization expense of $193,000, $193,000, $169,000,
$121,000 and $102,000 will be reflected in future Consolidated Statements of
Operations for the years ending December 31, 2009, 2010, 2011, 2012 and 2013,
respectively.
NOTE
8 – ACCRUAL FOR STORE CLOSINGS:
The
Company follows the provisions of SFAS No. 146, “Accounting for Costs Associated
with Exit or Disposal Activities,” which superseded 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, 2008. As of
December 31, 2008 and 2007, $146,000 and $300,000, 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,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
2,309 |
|
|
$ |
2,961 |
|
Accrued
payroll and fringe benefits
|
|
|
533 |
|
|
|
536 |
|
Accrued
professional fees
|
|
|
114 |
|
|
|
128 |
|
Accrued
advertising
|
|
|
871 |
|
|
|
1,310 |
|
Accrued
rent under sublease
|
|
|
166 |
|
|
|
227 |
|
Accrued
income and other taxes
|
|
|
129 |
|
|
|
95 |
|
Other
accrued expenses
|
|
|
240 |
|
|
|
376 |
|
|
|
$ |
4,362 |
|
|
$ |
5,633 |
|
NOTE 10 – LONG-TERM
DEBT (INCLUDING RELATED PARTY BORROWINGS):
As of
December 31, 2008, principal payments due on the Company's long-term debt and
related party borrowings are as follows (in thousands):
Year
|
|
Related
Party
Borrowings
(1)
|
|
|
Long-Term
(2)
|
|
|
Other
Debt
(3)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$ |
353 |
|
|
$ |
- |
|
|
$ |
14 |
|
|
$ |
367 |
|
2010
|
|
|
334 |
|
|
|
5,307 |
|
|
|
16 |
|
|
|
5,657 |
|
2011
|
|
|
83 |
|
|
|
- |
|
|
|
17 |
|
|
|
100 |
|
2012
|
|
|
- |
|
|
|
- |
|
|
|
18 |
|
|
|
18 |
|
|
|
$ |
770 |
|
|
$ |
5,307 |
|
|
$ |
65 |
|
|
$ |
6,142 |
|
1)
|
In
connection with the acquisition of all of the net tangible assets of
Combine Optical Management Corporation (“COMC”), the Company entered into
two promissory notes with COMC. 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. In order to secure repayment, the Company
entered into Security Agreements with COMC granting COMC a security
interest in substantially all of the assets of
Combine.
|
2)
|
The
Company had outstanding borrowings of $5,306,854 under its Credit Facility
with M&T Bank (“M&T”), which borrowings are payable (interest
only) monthly and bear interest at a rate of LIBOR plus
2.75%. As of December 31, 2008, the interest rate was
4.18%. The principal and any accrued interest are due and
payable in April 2010. In order to secure repayment, the
Company entered into Security Agreements with M&T granting M&T a
security interest in substantially all of the assets of the Company, other
than the assets described above securing
Combine.
|
3)
|
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 was to expire in August
2009, however, on April 1, 2009, M&T agreed to extend the maturity date of
the Credit Facility to April 1, 2010. 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 three hundred (300) basis points in
excess of LIBOR, and all principal drawn by the Company is payable on April 1,
2010. All other terms of the Credit Facility remained the
same.
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, 2008, the Company
had outstanding borrowings of $5,306,854 under the Credit Facility, which amount
was included in Long-term Debt in the accompanying Consolidated Balance Sheet,
and was utilizing $500,000 of the Credit Facility to hold a letter of credit in
favor of a key vendor of Combine to ensure payment of any outstanding invoices
not paid by Combine. The Company was not in compliance with one of
the financial covenants, however, on April 1, 2009, M&T granted the Company
a waiver and agreed that such covenant was now in compliance as of December 31,
2008. Additionally, the Company had $193,146 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
provision for (benefit from) income taxes for the years ended December 31, 2008
and 2007 was $591,000 and ($251,000), respectively.
As of
December 31, 2008 and 2007, net deferred tax assets were approximately
$15,800,000 and $17,300,000, 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 $14,600,000 and $15,600,000 as of December
31, 2008 and 2007, respectively. The valuation allowance against the
net deferred tax assets decreased by approximately $1,000,000 and $1,600,000
during the years ended December 31, 2008 and 2007, respectively.
The
Company evaluates deferred income taxes quarterly to determine if valuation
allowances are required or should be adjusted. The Company assesses
whether valuation allowances should be established against the deferred tax
assets based on consideration of all available evidence, both positive and
negative, using a more likely than not standard. This assessment
considers, among other matters, the nature, frequency of recent income and
losses, forecasts of future profitability and the duration of statutory
carryforward period. In making such judgments, significant weight is
given to evidence that can be objectively verified.
Valuation
allowances have been established for deferred tax assets based on a more likely
than not threshold. The Company’s ability to realize deferred tax
assets depends on the Company’s ability to generate sufficient taxable income
within the carryforward periods provided for in the tax law for each applicable
tax jurisdiction.
The tax
effect of temporary differences that give rise to the deferred tax asset as of
December 31, 2008 and 2007, are presented below (in thousands):
|
|
2008
|
|
|
2007
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Reserves
and allowances
|
|
$ |
143 |
|
|
$ |
1,150 |
|
Net
operating loss and credits carryforwards
|
|
|
15,725 |
|
|
|
16,003 |
|
Stock
compensation expense
|
|
|
294 |
|
|
|
258 |
|
Accrued
expenses
|
|
|
46 |
|
|
|
- |
|
Total
deferred tax assets
|
|
|
16,208 |
|
|
|
17,411 |
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
(420 |
) |
|
|
(109 |
) |
Total
deferred tax liabilities
|
|
|
(420 |
) |
|
|
(109 |
) |
|
|
|
15,788 |
|
|
|
17,302 |
|
Less:
Valuation allowance
|
|
|
(14,634 |
) |
|
|
(15,628 |
) |
Net
deferred tax asset
|
|
$ |
1,154 |
|
|
$ |
1,674 |
|
The
provision for (benefit from) income taxes for the years ended December 31, 2008
and 2007 is presented below as follows (in thousands):
|
|
2008
|
|
|
2007
|
|
Current:
|
|
|
|
|
|
|
U.S.
Federal
|
|
$ |
3 |
|
|
$ |
3 |
|
U.S.
State and local
|
|
|
1 |
|
|
|
10 |
|
Foreign
– Canada
|
|
|
67 |
|
|
|
10 |
|
Total
current
|
|
|
71 |
|
|
|
23 |
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
U.S.
Federal
|
|
|
442 |
|
|
|
(233 |
) |
U.S.
State and local
|
|
|
78 |
|
|
|
(41 |
) |
Foreign
– Canada
|
|
|
- |
|
|
|
- |
|
Total
deferred
|
|
|
520 |
|
|
|
(274 |
) |
Provision
for (benefit from) income taxes
|
|
$ |
591 |
|
|
$ |
(251 |
) |
As of
December 31, 2008 and 2007, 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
carryforwards expire as follows (in thousands):
|
|
Net
Operating Loss
|
|
|
AMT
Operating Loss
|
|
|
|
|
|
|
|
|
2011
|
|
$ |
1,518 |
|
|
$ |
1,083 |
|
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
|
|
|
21 |
|
|
|
21 |
|
2026
|
|
|
24 |
|
|
|
24 |
|
2027
|
|
|
314 |
|
|
|
314 |
|
|
|
$ |
45,094 |
|
|
$ |
44,033 |
|
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, 2008 and 2007:
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Federal
statutory rate
|
|
|
34.0 |
% |
|
|
34.0 |
% |
State
and local income taxes, net of federal tax benefit
|
|
|
0.1 |
% |
|
|
2.2 |
% |
Permanent
differences
|
|
|
25.4 |
% |
|
|
3.0 |
% |
Net
operating loss carry forward adjustments
|
|
|
1.5 |
% |
|
|
12.4 |
% |
Change
to valuation allowance
|
|
|
56.5 |
% |
|
|
(195.0 |
%) |
Effective
tax rate
|
|
|
117.5 |
% |
|
|
(143.4 |
%) |
NOTE
13 – SEGMENT REPORTING
Business
Segments
Operating
segments are organized internally primarily by the type of services provided,
and in accordance with SFAS No.131, “Disclosures About Segments of an
Enterprise and Related Information.” The Company has aggregated
similar operating segments into six reportable segments: (1) Optical Purchasing
Group Business, (2) Franchise, (3) Company Store, (4) VisionCare of California,
(5) Corporate Overhead and (6) Other.
The
Optical Purchasing Group Business segment consists of the operations of Combine,
acquired in August 2006 and TOG, acquired in August 2007. Revenues
generated by this segment represent the sale of products and services, at
discounted pricing, to Combine and TOG members. The businesses in
this segment are able to use their membership count to get better discounts from
vendors than a member could obtain on its own. Expenses include
direct costs for such product and services, salaries and related benefits,
depreciation and amortization, interest expense on financing these acquisitions,
and other overhead.
The
Franchise segment consists of 133 franchise locations as of December 31,
2008. Revenues generated by this segment represent royalties on the
total sales of the franchise locations, other franchise related fees such as
initial franchise, transfer, renewal and conversion fees, additional royalties
in connection with franchise store audits, and interest charged on franchise
financing. Expenses include the salaries and related
benefits/expenses of the Company’s franchise field support team, corporate
salaries and related benefits, convention related expenses, consulting fees, and
other overhead.
The
Company Store segment consists of 6 Company-owned retail optical stores
(including one under the terms of a management agreement) as of December 31,
2008. Revenues generated from such stores are a result of the sales
of 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. Expenses include the direct costs for
such eye care products, doctor and store staff salaries and related benefits,
rent, advertising, and other overhead.
The
VisionCare of California segment consists of optometric services provided to
patients (members) of those franchise retail optical stores located in the state
of California. Revenues consist of membership fees generated for such
optometric services provided to individual patients
(members). Expenses include salaries and related benefits for the
doctors that render such optometric services, and other overhead.
The
Corporate Overhead segment consists of expenses not allocated to one of the
other segments. There are no revenues generated by this
segment. Expenses include costs associated with being a publicly
traded company (including salaries and related benefits, professional fees,
board of director fees, and director and officer insurance), certain
Company-owned store overhead not allocated to that segment, other salaries and
related benefits, rent, other professional fees, and depreciation and
amortization.
The Other
segment includes revenues and expenses from other business activities that do
not fall within one of the other segments. Revenues generated by this
segment consist of employee optical benefit sales, commission income, and
residual income on credit card processing. Expenses primarily include
the direct cost of such employee optical benefit sales, salaries and related
benefits, commission expense, and advertising.
Certain
business segment information is as follows (in thousands):
|
|
As
of December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Total
Assets:
|
|
|
|
|
|
|
Optical
Purchasing Group Business
|
|
$ |
12,246 |
|
|
$ |
13,115 |
|
Franchise
|
|
|
5,386 |
|
|
|
5,423 |
|
Company
Store
|
|
|
547 |
|
|
|
1,209 |
|
VisionCare
of California
|
|
|
632 |
|
|
|
568 |
|
Corporate
Overhead
|
|
|
814 |
|
|
|
1,264 |
|
Other
|
|
|
12 |
|
|
|
45 |
|
Total
assets
|
|
$ |
19,637 |
|
|
$ |
21,624 |
|
|
|
As
of December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Capital
Expenditures:
|
|
|
|
|
|
|
Optical
Purchasing Group Business
|
|
$ |
42 |
|
|
$ |
119 |
|
Franchise
|
|
|
40 |
|
|
|
- |
|
Company
Store
|
|
|
139 |
|
|
|
372 |
|
VisionCare
of California
|
|
|
2 |
|
|
|
45 |
|
Corporate
Overhead
|
|
|
121 |
|
|
|
382 |
|
Other
|
|
|
- |
|
|
|
- |
|
Total
capital expenditures
|
|
$ |
344 |
|
|
$ |
918 |
|
Total
Goodwill:
|
|
|
|
|
|
|
Optical
Purchasing Group Business
|
|
$ |
2,861 |
|
|
$ |
2,861 |
|
Franchise
|
|
|
1,266 |
|
|
|
1,266 |
|
Company
Store
|
|
|
- |
|
|
|
- |
|
VisionCare
of California
|
|
|
- |
|
|
|
- |
|
Corporate
Overhead
|
|
|
- |
|
|
|
- |
|
Other
|
|
|
- |
|
|
|
- |
|
Total
goodwill
|
|
$ |
4,127 |
|
|
$ |
4,127 |
|
Total
Intangible Assets:
|
|
|
|
|
|
|
Optical
Purchasing Group Business
|
|
$ |
2,307 |
|
|
$ |
2,509 |
|
Franchise
|
|
|
911 |
|
|
|
310 |
|
Company
Store
|
|
|
- |
|
|
|
- |
|
VisionCare
of California
|
|
|
- |
|
|
|
- |
|
Corporate
Overhead
|
|
|
- |
|
|
|
- |
|
Other
|
|
|
- |
|
|
|
- |
|
Total
intangible assets
|
|
$ |
3,218 |
|
|
$ |
2,819 |
|
Total
Goodwill Additions:
|
|
|
|
|
|
|
Optical
Purchasing Group Business
|
|
$ |
- |
|
|
$ |
1,583 |
|
Franchise
|
|
|
- |
|
|
|
- |
|
Company
Store
|
|
|
- |
|
|
|
- |
|
VisionCare
of California
|
|
|
- |
|
|
|
- |
|
Corporate
Overhead
|
|
|
- |
|
|
|
- |
|
Other
|
|
|
- |
|
|
|
- |
|
Total
goodwill additions
|
|
$ |
- |
|
|
$ |
1,583 |
|
Total
Intangible Asset Additions:
|
|
|
|
|
|
|
Optical
Purchasing Group Business
|
|
$ |
- |
|
|
$ |
1,844 |
|
Franchise
|
|
|
601 |
|
|
|
310 |
|
Company
Store
|
|
|
- |
|
|
|
- |
|
VisionCare
of California
|
|
|
- |
|
|
|
- |
|
Corporate
Overhead
|
|
|
- |
|
|
|
- |
|
Other
|
|
|
- |
|
|
|
- |
|
Total
intangible asset additions
|
|
$ |
601 |
|
|
$ |
2,154 |
|
|
|
For
the Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Net
Revenues:
|
|
|
|
|
|
|
Optical
Purchasing Group Business
|
|
$ |
57,914 |
|
|
$ |
33,848 |
|
Franchise
|
|
|
6,510 |
|
|
|
6,867 |
|
Company
Store
|
|
|
3,715 |
|
|
|
5,393 |
|
VisionCare
of California
|
|
|
3,551 |
|
|
|
3,513 |
|
Corporate
Overhead
|
|
|
- |
|
|
|
- |
|
Other
|
|
|
119 |
|
|
|
- |
|
Net
revenues
|
|
$ |
71,809 |
|
|
$ |
49,621 |
|
Income
(Loss) before Provision for (Benefit from) Income Taxes:
|
|
|
|
|
|
|
|
|
Optical
Purchasing Group Business
|
|
$ |
979 |
|
|
$ |
576 |
|
Franchise
|
|
|
3,624 |
|
|
|
4,897 |
|
Company
Store
|
|
|
(427 |
) |
|
|
(1,029 |
) |
VisionCare
of California
|
|
|
44 |
|
|
|
38 |
|
Corporate
Overhead
|
|
|
(3,646 |
) |
|
|
(4,090 |
) |
Other
|
|
|
(71 |
) |
|
|
(217 |
) |
Income
before provision for (benefit from) income taxes
|
|
$ |
503 |
|
|
$ |
175 |
|
|
|
|
|
|
|
|
|
|
Depreciation
and Amortization:
|
|
|
|
|
|
|
|
|
Optical
Purchasing Group Business
|
|
$ |
303 |
|
|
$ |
203 |
|
Franchise
|
|
|
127 |
|
|
|
93 |
|
Company
Store
|
|
|
69 |
|
|
|
113 |
|
VisionCare
of California
|
|
|
22 |
|
|
|
19 |
|
Corporate
Overhead
|
|
|
127 |
|
|
|
93 |
|
Other
|
|
|
6 |
|
|
|
2 |
|
Total
depreciation and amortization
|
|
$ |
654 |
|
|
$ |
523 |
|
|
|
|
|
|
|
|
|
|
Interest
Expense:
|
|
|
|
|
|
|
|
|
Optical
Purchasing Group Business
|
|
$ |
294 |
|
|
$ |
230 |
|
Franchise
|
|
|
52 |
|
|
|
59 |
|
Company
Store
|
|
|
- |
|
|
|
- |
|
VisionCare
of California
|
|
|
- |
|
|
|
- |
|
Corporate
Overhead
|
|
|
- |
|
|
|
- |
|
Other
|
|
|
- |
|
|
|
- |
|
Total
interest expense
|
|
$ |
346 |
|
|
$ |
289 |
|
The
following table shows certain unaudited pro forma results of the Company,
assuming the Company had acquired TOG at the beginning of the year ended
December 31, 2007 (in thousands):
|
|
For
the Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
(unaudited)
|
|
Net
Revenues:
|
|
|
|
|
|
|
Optical
Purchasing Group Business
|
|
$ |
57,914 |
|
|
$ |
57,390 |
|
Franchise
|
|
|
6,510 |
|
|
|
6,867 |
|
Company
Store
|
|
|
3,715 |
|
|
|
5,393 |
|
VisionCare
of California
|
|
|
3,551 |
|
|
|
3,513 |
|
Corporate
Overhead
|
|
|
- |
|
|
|
- |
|
Other
|
|
|
119 |
|
|
|
- |
|
Net
revenues
|
|
$ |
71,809 |
|
|
$ |
73,163 |
|
Income
(Loss) before Provision for (Benefit from) Income Taxes:
|
|
|
|
|
|
|
|
|
Optical
Purchasing Group Business
|
|
$ |
979 |
|
|
$ |
1,116 |
|
Franchise
|
|
|
3,624 |
|
|
|
4,897 |
|
Company
Store
|
|
|
(427 |
) |
|
|
(1,029 |
) |
VisionCare
of California
|
|
|
44 |
|
|
|
38 |
|
Corporate
Overhead
|
|
|
(3,646 |
) |
|
|
(4,090 |
) |
Other
|
|
|
(71 |
) |
|
|
(217 |
) |
Income
before provision for (benefit from) income taxes
|
|
$ |
503 |
|
|
$ |
715 |
|
|
|
|
|
|
|
|
|
|
Depreciation
and Amortization:
|
|
|
|
|
|
|
|
|
Optical
Purchasing Group Business
|
|
$ |
303 |
|
|
$ |
216 |
|
Franchise
|
|
|
127 |
|
|
|
93 |
|
Company
Store
|
|
|
69 |
|
|
|
113 |
|
VisionCare
of California
|
|
|
22 |
|
|
|
19 |
|
Corporate
Overhead
|
|
|
127 |
|
|
|
93 |
|
Other
|
|
|
6 |
|
|
|
2 |
|
Total
depreciation and amortization
|
|
$ |
654 |
|
|
$ |
536 |
|
|
|
|
|
|
|
|
|
|
Interest
Expense:
|
|
|
|
|
|
|
|
|
Optical
Purchasing Group Business
|
|
$ |
294 |
|
|
$ |
357 |
|
Franchise
|
|
|
52 |
|
|
|
59 |
|
Company
Store
|
|
|
- |
|
|
|
- |
|
VisionCare
of California
|
|
|
- |
|
|
|
- |
|
Corporate
Overhead
|
|
|
- |
|
|
|
- |
|
Other
|
|
|
- |
|
|
|
- |
|
Total
interest expense
|
|
$ |
346 |
|
|
$ |
416 |
|
Geographic
Information
The
Company also does business in two separate geographic areas; the United States
and Canada. Certain geographic information is as
follows:
|
|
For
the Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Net
Revenues:
|
|
|
|
|
|
|
United
States
|
|
$ |
30,124 |
|
|
$ |
32,664 |
|
Canada
|
|
|
41,685 |
|
|
|
16,957 |
|
Net
revenues
|
|
$ |
71,809 |
|
|
$ |
49,621 |
|
|
|
|
|
|
|
|
|
|
Income
before Provision for (Benefit from) Income Taxes:
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
350 |
|
|
$ |
117 |
|
Canada
|
|
|
153 |
|
|
|
58 |
|
Income
before provision for (benefit from) income taxes
|
|
$ |
503 |
|
|
$ |
175 |
|
|
|
|
|
|
|
|
|
|
The
geographic information on Canada includes TOG’s business activity from August 1,
2007, the effective date of the acquisition of TOG. Canadian revenue
is generated from the Company’s optical purchasing group members located in
Canada. TOG provides customer management services, on behalf of the
Company, to such members.
Geographic
information is summarized as follows for the year ended December 31, 2008 (in
thousands):
|
|
United
States
|
|
|
Canada
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
16,678 |
|
|
$ |
2,959 |
|
|
$ |
19,637 |
|
Property
and Equipment
|
|
|
1,156 |
|
|
|
35 |
|
|
|
1,191 |
|
Depreciation
and Amortization
|
|
|
645 |
|
|
|
9 |
|
|
|
654 |
|
Capital
Expenditures
|
|
|
344 |
|
|
|
- |
|
|
|
344 |
|
Goodwill
|
|
|
4,127 |
|
|
|
- |
|
|
|
4,127 |
|
Intangible
Assets
|
|
|
3,218 |
|
|
|
- |
|
|
|
3,218 |
|
Intangible
Asset Additions
|
|
|
601 |
|
|
|
- |
|
|
|
601 |
|
Interest
Expense
|
|
|
346 |
|
|
|
- |
|
|
|
346 |
|
Geographic
information is summarized as follows for the year ended December 31, 2007 (in
thousands):
|
|
United
States
|
|
|
Canada
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
18,690 |
|
|
$ |
2,934 |
|
|
$ |
21,624 |
|
Property
and Equipment
|
|
|
1,453 |
|
|
|
40 |
|
|
|
1,493 |
|
Depreciation
and Amortization
|
|
|
520 |
|
|
|
3 |
|
|
|
523 |
|
Capital
Expenditures
|
|
|
918 |
|
|
|
- |
|
|
|
918 |
|
Goodwill
|
|
|
4,127 |
|
|
|
- |
|
|
|
4,127 |
|
Intangible
Assets
|
|
|
2,819 |
|
|
|
- |
|
|
|
2,819 |
|
Goodwill
Additions
|
|
|
1,583 |
|
|
|
- |
|
|
|
1,583 |
|
Intangible
Asset Additions
|
|
|
2,154 |
|
|
|
- |
|
|
|
2,154 |
|
Interest
Expense
|
|
|
289 |
|
|
|
- |
|
|
|
289 |
|
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,
2008, 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
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$ |
3,910 |
|
|
$ |
3,394 |
|
|
$ |
516 |
|
2010
|
|
|
1,206 |
|
|
|
1,124 |
|
|
|
82 |
|
2011
|
|
|
993 |
|
|
|
931 |
|
|
|
62 |
|
2012
|
|
|
925 |
|
|
|
925 |
|
|
|
- |
|
2013
|
|
|
808 |
|
|
|
808 |
|
|
|
- |
|
Thereafter
|
|
|
2,915 |
|
|
|
2,915 |
|
|
|
- |
|
|
|
$ |
10,757 |
|
|
$ |
10,097 |
|
|
$ |
660 |
|
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 $4,799,000 and $4,819,000, respectively) was
approximately $1,252,000 and $1,555,000 for the years ended December 31, 2008
and 2007, 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 Combine or TOG Member
locations.
Litigation
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 settlement
discussions. 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 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 trade name, 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
September 2008, Pyramid Mall of Glen Falls Newco, LLC commenced an action
against the Company and its subsidiary Sterling Vision of Aviation Mall, Inc.,
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 Aviation Mall, New
York. The Company believes that it has 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
October 2008, Crossgates Mall Company Newco, LLC commenced an action against the
Company’s subsidiary, Sterling Optical of Crossgates Mall, Inc., 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 Crossgates Mall, New York. The
Company believes that it has a meritorious defense to such action. As
of the date hereof, these proceedings were in the discovery
stage. The Company has not recorded an accrual for a loss 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.
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, 2008 and 2007.
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, 2008 and 2007, 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, 2008, 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
$2,334,000. The Company continually evaluates the credit-worthiness
of its franchisees in order to determine their ability to continue to perform
under their respective subleases. Additionally, in the event that a
franchisee defaults under its sublease, the Company has the right to take over
operation of the respective location.
Letter of
Credit
Combine
held a letter of credit with M&T Bank in favor of one of its key vendors to
ensure payment of any outstanding invoices not paid by Combine. The
letter of credit has a one-year term that will expire on October 16,
2009. As of December 31, 2008, the letter of credit totaled $500,000,
and was secured by the credit facility with M&T Bank.
NOTE
15 – EXECUTIVE COMPENSATION:
The
Company has an Employment Agreement (“Agreement 1”) with its Chief Executive
Officer (“CEO”), 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 as determined by the Company’s Board of
Directors. No bonus was approved by the Board for the year ended
December 31, 2008.
Additionally,
in connection with the acquisition of Combine, 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 Combine. For the years ended December 31, 2008 and 2007, there was
approximately $50,000 and $60,000, respectively, of such bonuses reflected in
the accompanying Consolidated Statement of Operations and Comprehensive (Loss)
Income. As of December 31, 2008 and 2007, there was $50,000 and
$60,000, respectively, of accrued bonuses in accounts payable and accrued
liabilities in the accompanying Consolidated Balance Sheets.
NOTE
16 – RELATED PARTY TRANSACTIONS:
Dr. Alan
Cohen, Chairman of the Company’s Board of Directors, is also one of the
principal members and executive officers of General Vision Services, LLC, or
GVS. GVS solicits and administers third party benefit programs, which
provides services under third party benefit plans administered by GVS, to
certain of the Company’s Sterling Stores. Such Sterling Stores pay a
processing fee to GVS to administer the processing of such third party insurance
claims. The Company believes that the cost of such services were as
favorable to the Sterling Stores as could be obtained utilizing an unrelated
third party.
On
December 31, 2002, the Company refinanced certain past due amounts, owed to
Cohen’s Fashion Optical, Inc. (“CF”), a company that was previously owned by a
current and former director of the Company. 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. The 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, 2008 and 2007, the
Company paid approximately $101,000 and $95,000, 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 Combine’s acquisition of COMC, the Company entered into a series
of promissory notes with COMC, owned by Neil Glachman, Combine’s
President. The promissory notes amounted to $1,773,000 with $498,000
paid in October 2007; $300,000 paid in September, 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, 2008
and 2007, there was approximately $75,000 and $140,000, respectively, of
interest expense reflected in the accompanying Consolidated Statements of
Operations. As of December 31, 2008 and 2007, there was $769,000 and
$1,165,000, respectively, of related party obligations in the accompanying
Consolidated Balance Sheets.
During
2008 and 2007, Combine members purchased contact lenses from Visus Formed
Optics, a contact lens manufacturer that is partially owned by Combine’s
President. For the years ended December 31, 2008 and 2007, the total
cost of such contact lenses was approximately $56,000 and $69,000,
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.
During
2008, Combine members purchased contact lenses from Ocular Insight, Inc., a
contact lens distributor that is partially owned by Combine’s
President. For the year ended December 31, 2008, the total cost of
such contact lenses was approximately $13,000. No purchases were made
during the year ended December 31, 2007. 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 current and former
directors, who are also shareholders of the Company. As of December
31, 2008, there was $27,000 of prepaid expenses in the accompanying Consolidated
Balance Sheets, related to the purchase of 27 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, 2008, 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. 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 vested in equal
monthly tranches of 25,000 shares each over the term of the LA. The LA expired
in April 2008 and the DuBois Warrant expires April 10, 2010.
As of
December 31, 2008, there were 300,000 warrants vested and
exercisable. For the years ended December 31, 2008 and 2007, the
Company recognized a non-cash charge to earnings of approximately $1,000 and
$2,000, respectively, representing the fair value of such warrants, which is
reflected in selling, general and administrative expenses in the accompanying
Consolidated Statements of Operations.
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. 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 in
equal monthly tranches of 25,000 shares each over the term of the
LOE. The LOE expired in May 2008 and the RD Warrant expires May 6,
2010.
As of
December 31, 2008, there were 300,000 warrants vested and exercisable, and
120,844 of restricted stock. For the years ended December 31, 2008,
and 2007, the Company recognized a non-cash charge to earnings of approximately
$5,000 and $43,000, respectively, 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 Operations.
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 all 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 4,361,764 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.
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 there under
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:
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
outstanding, beginning of period
|
|
|
20,567,907 |
|
|
$ |
0.41 |
|
|
|
20,132,240 |
|
|
$ |
0.44 |
|
Granted
|
|
|
625,000 |
|
|
$ |
0.21 |
|
|
|
575,000 |
|
|
$ |
0.38 |
|
Exercised
|
|
|
- |
|
|
$ |
- |
|
|
|
(6,000 |
) |
|
$ |
0.14 |
|
Canceled,
forfeited or expired
|
|
|
(154,000 |
) |
|
$ |
7.21 |
|
|
|
(133,333 |
) |
|
$ |
5.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
outstanding, end of period
|
|
|
21,038,907 |
|
|
$ |
0.35 |
|
|
|
20,567,907 |
|
|
$ |
0.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable, end of period
|
|
|
21,038,907 |
|
|
$ |
0.35 |
|
|
|
20,467,907 |
|
|
$ |
0.41 |
|
Of the
total options outstanding as of December 31, 2008, there were 14,384,115 held by
current employees of the Company, and 6,654,792 held by non-employee directors
of the Company, the Company’s independent contractors, former employees and
former directors. Of the total options granted during 2008, all
625,000 were granted to certain members of the board of directors of the
Company.
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. 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 vested on
May 21, 2008. During the years ended December 31, 2008, and 2007, the
Company incurred a non-cash charge to earnings of approximately $2,000 and
$8,000, respectively, which is reflected in selling, general and administrative
expenses on the accompanying Consolidated Statements of Operations representing
the fair value of the options. All of these options expire 10 years
from the date of grant.
On June
11, 2007, the 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 Operations representing the fair value of the
options. All of these options expire 10 years from the date of
grant.
On May 7,
2008, the Committee granted an aggregate of 625,000 stock options to the
Company’s non-employee directors, all at an exercise price of $0.21, which was
the closing price on the date of grant. The stock options vested
immediately. During the year ended December 31, 2008, the Company
incurred a non-cash charge to earnings of approximately $81,000, which is
reflected in selling, general and administrative expenses on the accompanying
Consolidated Statements of Operations 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, 2008:
|
|
|
Options
Outstanding
|
|
|
Options
Exercisable
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Range
of
|
|
|
|
|
|
Remaining
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
Exercise
Prices
|
|
|
Outstanding
|
|
|
Contractual
Life
|
|
|
Price
|
|
|
Exercisable
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.05
to $0.08 |
|
|
|
400,000 |
|
|
|
4.41 |
|
|
$ |
0.05 |
|
|
|
400,000 |
|
|
$ |
0.05 |
|
$ |
0.09
to $0.14 |
|
|
|
13,578,114 |
|
|
|
6.19 |
|
|
$ |
0.14 |
|
|
|
13,578,114 |
|
|
$ |
0.14 |
|
$ |
0.15
to $0.23 |
|
|
|
5,435,625 |
|
|
|
7.44 |
|
|
$ |
0.16 |
|
|
|
5,435,625 |
|
|
$ |
0.16 |
|
$ |
0.24
to $0.36 |
|
|
|
618,500 |
|
|
|
2.34 |
|
|
$ |
0.31 |
|
|
|
618,500 |
|
|
$ |
0.31 |
|
$ |
0.37
to $0.54 |
|
|
|
375,000 |
|
|
|
8.45 |
|
|
$ |
0.47 |
|
|
|
375,000 |
|
|
$ |
0.47 |
|
$ |
1.32
to $1.98 |
|
|
|
5,000 |
|
|
|
0.83 |
|
|
$ |
1.88 |
|
|
|
5,000 |
|
|
$ |
1.88 |
|
$ |
3.00
to $4.50 |
|
|
|
85,000 |
|
|
|
0.54 |
|
|
$ |
3.41 |
|
|
|
85,000 |
|
|
$ |
3.41 |
|
$ |
4.51
to $6.77 |
|
|
|
208,334 |
|
|
|
1.20 |
|
|
$ |
5.89 |
|
|
|
208,334 |
|
|
$ |
5.89 |
|
$ |
6.78
to $8.25 |
|
|
|
333,334 |
|
|
|
1.15 |
|
|
$ |
8.06 |
|
|
|
333,334 |
|
|
$ |
8.06 |
|
|
|
|
|
|
21,038,907 |
|
|
|
|
|
|
|
|
|
|
|
21,038,907 |
|
|
|
|
|
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:
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Expected
life (years)
|
|
|
5 |
|
|
|
1 |
|
Interest
rate
|
|
|
2.34 |
% |
|
|
4.82
- 4.98 |
% |
Volatility
|
|
|
74 |
% |
|
|
54
- 61 |
% |
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 4,361,764 of the
warrants. On October 2, 2007, the remaining Subject Shareholders
exercised all of their 28,142,252 warrants. There were 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
vested in twelve (12) equal monthly installments of 25,000 commencing on April
11, 2007. As of December 31, 2008, 300,000 warrants had
vested. As a result of this issuance, for the years ended December
31, 2008 and 2007, the Company incurred a non-cash charge to earnings of
approximately $1,000 and $2,000, respectively, 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, 2008.
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 vested
in twelve (12) equal monthly installments of 25,000 commencing on May 7,
2007. As of December 31, 2008, 300,000 warrants had
vested. As a result of this issuance, for the years ended December
31, 2008, and 2007, the Company incurred a non-cash charge to earnings of
approximately $5,000 and $10,000, respectively, 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, 2008.
A summary
of the warrants issued is presented in the table below:
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
outstanding, beginning of period
|
|
|
1,905,885 |
|
|
$ |
0.17 |
|
|
|
60,690,913 |
|
|
$ |
0.05 |
|
Granted
|
|
|
175,000 |
|
|
$ |
0.25 |
|
|
|
425,000 |
|
|
$ |
0.26 |
|
Exercised
|
|
|
- |
|
|
$ |
- |
|
|
|
(54,848,264 |
) |
|
$ |
0.05 |
|
Canceled,
forfeited or expired
|
|
|
- |
|
|
$ |
- |
|
|
|
(4,361,764 |
) |
|
$ |
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
outstanding, end of period
|
|
|
2,080,885 |
|
|
$ |
0.18 |
|
|
|
1,905,885 |
|
|
$ |
0.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
exercisable, end of period
|
|
|
2,080,885 |
|
|
$ |
0.18 |
|
|
|
1,905,885 |
|
|
$ |
0.17 |
|
The
following table summarizes information about warrants outstanding and
exercisable as of December 31, 2008:
|
|
|
Warrants
Outstanding
|
|
|
Warrants
Exercisable
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Range
of
|
|
|
|
|
|
Remaining
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
Exercise
Prices
|
|
|
Outstanding
|
|
|
Contractual
Life
|
|
|
Price
|
|
|
Exercisable
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.14 |
|
|
|
1,380,885 |
|
|
|
6.00 |
|
|
$ |
0.14 |
|
|
|
1,380,885 |
|
|
$ |
0.14 |
|
$ |
0.15
to $0.23 |
|
|
|
300,000 |
|
|
|
1.35 |
|
|
$ |
0.21 |
|
|
|
300,000 |
|
|
$ |
0.21 |
|
$ |
0.24
to $0.30 |
|
|
|
400,000 |
|
|
|
3.48 |
|
|
$ |
0.29 |
|
|
|
400,000 |
|
|
$ |
0.29 |
|
|
|
|
|
|
2,080,885 |
|
|
|
|
|
|
|
|
|
|
|
2,080,885 |
|
|
|
|
|
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 2008, the Company recorded bad debt expense of approximately
$232,000 related to certain of its franchisee receivables and Company-store
managed care receivables that management deemed uncollectible, increased its
reserve on optical purchasing group receivables approximately $112,000 for
member balances that management viewed to have collection issues, incurred
expenses of approximately $66,000 related to the closing of two Company-owned
stores, $50,000 rent related to taking one store back and shutting one store
down, and $25,000 of one-time consulting related expenses.
NOTE
22 – SUBSEQUENT EVENT:
On April
3, 2009, M&T agreed to extend the maturity date of the Company’s Credit
Facility from August 1, 2009 to April 1, 2010. The Company was
required to reaffirm each of the security agreements and
guarantees. Additionally, M&T increased the variable rate
interest will be calculated on from two hundred seventy five (275) basis points
in excess of LIBOR to three hundred (300) basis points in excess of LIBOR,
effective for the month of April 2009. All other terms of the Credit
Facility remained the same.
Item
9. Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
There
were no disagreements with accountants on accounting and financial
matters.
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”) 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,
2008.
The
Company’s CEO and CFO were able to reach the conclusion in the preceding
paragraph despite filing a Form 12b-25 Notification of Late Filing with respect
to this Annual Report. There were unresolved accounting issues as of
March 31, 2009, which caused the Company to be unable to meet the filing
deadline. Additionally, the Company received an amendment from
M&T Bank to its Credit Facility that was effectuated on April 1,
2009. M&T also granted the Company a waiver on a failed financial
covenant on April 1, 2009. The unanticipated time required to gather
the additional information, caused a delay in the completion of our financial
statements, necessitating the filing of a Form 12b-25 Notification of Late
Filing with respect to the Annual Report. The Company intends to take
steps to address this in establishing its disclosure controls and procedures for
2009.
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 and guidance of an
independent internal control consulting firm 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.
The
Company’s management assessed the effectiveness of the Company’s internal
controls over financial reporting as of December 31, 2008 and identified a
material weakness in one of the Company’s subsidiary financial
reporting. A material weakness, as defined in standards established
by the Public Company Accounting Oversight Board (United States), is a
deficiency in internal control over financial reporting that could result in the
possibility that a material misstatement of the Company’s annual or interim
financial statements will not be prevented or detected on a timely
basis.
Optical
Purchasing Group revenues were not recognized properly in that gross revenues
and the related cost of revenues from the subsidiary billing system was
completely and accurately transferred to the general ledger. As a
result, cumulative year-to-date Optical Purchasing Group sales and cost of
Optical Purchasing Group sales for the quarter ended June 30, 2008 and September
30, 2008 were understated, however, there was no effect to gross margins,
operating income or net income, as the net effect of such error was
zero. This adjustment is reflected in the Company’s audited financial
statements for the year ended December 31, 2008.
In order
to remediate this material weakness, the Company implemented increased levels of
review over the Company’s subsidiary reporting including implementing new
policies and procedures for finance and accounting personnel.
Management’s
report was not subject to an attestation report 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
2008 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 in 2009.
These changes were immaterial both individually and in the
aggregate.
Item
9B. Other Information
None.
PART
III
Item
10. Directors and Executive Officers of the Registrant
The Board
presently consists of six directors. The directors of Emerging
Vision, Inc. (“EVI” or the “Company”) are divided into two classes, designated
as Class 1 and Class 2, respectively. Directors of each Class are
elected at the Annual Meeting of the Shareholders of EVI held in the year in
which the term of such Class expires, and serve thereafter for two years, or
until their respective successors are duly elected and qualified or their
earlier resignation, removal from office, retirement or death. Dr.
Alan Cohen, Mr. Harvey Ross and Mr. Seymour G. Siegel presently serve as Class 1
Directors and are scheduled to hold office until the 2009 Annual Meeting of
Shareholders. Mr. Joel L. Gold, Mr. Christopher G. Payan and Mr.
Jeffrey Rubin presently serve as Class 2 Directors and are scheduled to hold
office until the 2010 Annual Meeting of Shareholders.
INFORMATION
CONCERNING DIRECTORS AND EXECUTIVE OFFICERS
The
directors and executive officers of EVI are as follows:
Name
|
Age
|
Director Since
|
Position
|
Alan Cohen O.D.
|
57
|
1992
|
Chairman of the Board of Directors
|
Joel L. Gold
|
67
|
1995
|
Director
|
Harvey Ross
|
69
|
2004
|
Director
|
Jeffrey Rubin
|
41
|
2008
|
Director
|
Seymour G. Siegel
|
66
|
2004
|
Director
|
Christopher G. Payan
|
34
|
2004
|
Chief Executive Officer and Director
|
Samuel Z. Herskowitz
|
39
|
|
Chief Marketing Officer
|
Brian P. Alessi
|
33
|
|
Chief Financial Officer
|
Dr. Nicholas Shashati
|
49
|
|
President – VisionCare of California, Inc. (“VCC”)
|
Neil Glachman
|
55
|
|
President – Combine Buying Group, Inc. (“COM”)
|
|
|
|
|
Dr. Alan Cohen has served as a
director of the Company since its inception; and, as of May 31, 2002, became the
Company’s Chairman of the Board of Directors. He also served as Chief
Operating Officer of the Company from 1992 until October 1995, when he became
Vice Chairman of the Board of Directors, and as the Company’s President, Chief
Executive Officer and Chief Operating Officer from October 1998 through April
17, 2000, when he became President of the Company’s retail optical store
division, which position Dr. Cohen resigned from on January 9,
2001. Dr. Cohen is part owner of Meadows Management, LLC (“Meadows”),
which, until April 9, 2000, rendered consulting services to the
Company. From 1974 to the present, Dr. Cohen has been engaged in
the retail and wholesale optical business. For more than 10 years,
Dr. Cohen has also been a director, principal shareholder and officer of
Cohen Fashion Optical, Inc. and its affiliates (“CF”), which currently maintains
its principal offices in New York City. Since January 15, 2001, Dr.
Cohen has served as President of General Vision Services, LLC (“GVS”), and,
since October 2003, has served as an officer of Vision World, LLC (“Vision
World”), each of which currently maintains its principal offices in New York
City. Dr. Cohen is also a shareholder of CF and a member of GVS
and Vision World. CF and GVS each engage in, among other things, the
operation (and, in the case of CF, franchising) of retail optical stores similar
to those operated and franchised by the Company. GVS and Vision World
also administer third party benefit programs similar to those being administered
by the Company. Dr. Cohen is also an officer and a director of
several privately held management and real estate companies and other
businesses. Dr. Cohen graduated from the Pennsylvania School of
Optometry in 1972, where he received a Doctor of Optometry degree.
Joel L. Gold has served as a
director of the Company since December 1995. He is currently Head of Investment
Banking at Andrew Garrett Inc. (“AGI”), an investment-banking firm located in
New York City. Mr. Gold has been with AGI since October
2004. From January 2000 until September 2004, he served as Executive
Vice President of Investment Banking of Berry Shino Securities, Inc., an
investment-banking firm also located in New York City. From January
1999 until December 1999, he was an Executive Vice President of Solid Capital
Markets, an investment-banking firm also located in New York
City. From September 1997 to January 1999, he served as a Senior
Managing Director of Interbank Capital Group, LLC, an investment banking firm
also located in New York City. From April 1996 to September 1997, Mr.
Gold was an Executive Vice President of LT Lawrence & Co., and from March
1995 to April 1996, a Managing Director of Fechtor Detwiler & Co., Inc., a
representative of the underwriters for the Company’s initial public
offering. Mr. Gold was a Managing Director of Furman Selz
Incorporated from January 1992 until March 1995. From April 1990
until January 1992, Mr. Gold was a Managing Director of Bear Stearns and Co.,
Inc. (“Bear Stearns”). For approximately 20 years before he became
affiliated with Bear Stearns, he held various positions with Drexel Burnham
Lambert, Inc. He is currently a director, and serves on the Audit and
Compensation Committees, of Geneva Financial Corp., a publicly held specialty,
consumer finance company and is a director of Best Energy Services Inc., an oil
services company, and of Blastbard Interntional, Inc., a provider of blast
mitigation products.
Harvey Ross has served as a
director of the Company since July 2004. Mr. Ross was Chairman and
Chief Executive Officer of Viva International Group (“Viva”) until February 2005
and has in excess of thirty-five years of experience in the optical
industry. Mr. Ross currently serves as a consultant to High Mark, the
Company that acquired Viva. From 1974 through 1977, Mr. Ross served as President
of Jan Optical, a retail distributor of optical frames. In 1978, Mr. Ross
founded Viva, a company he grew into one of the world’s largest and most
successful manufacturers and distributors of fashion eyewear in the United
States and abroad, which include offices in Australia, Brazil, Canada, France,
Germany, Hong Kong, Italy, Japan, Mexico, Spain and the United Kingdom. Viva’s
distribution of designer eyewear to more than 50 countries around the world, and
throughout the U.S., include such brands as Guess, Tommy Hilfiger, Gant,
Candies, Ellen Tracy, Harley Davidson, Bongo, Marc Ecko Scopes, Catherine
Deneuve, Viva and Savvy. From 1994 through 2003, Mr. Ross served as a
director of Vision Council of America, a national association for Vision Care
and Education formed to assist frame and lens manufacturers and
distributors. In October 2007, Mr. Ross purchased a majority interest
in, and currently serves as Chairman of Grueneyes, Inc., an upscale retail
optical company. Mr. Ross also serves as an officer and director of several real
estate investment companies.
Seymour G. Siegel has served
as a director of the Company since July 2004. Mr. Siegel is a
certified public accountant and a principal in the Business Consulting Group of
Rothstein, Kass & Company, P.C., an accounting and consulting firm. From
1974 to 1990 he was managing partner and founder of Siegel Rich and Co., P.C.,
CPAs, which merged into M.R. Weiser & Co., LLC where he was a senior
partner. He formed Siegel Rich Inc. in 1994, which in April 2000 became a
division of Rothstein, Kass & Company, P.C. Mr. Siegel has been a director,
trustee and officer of numerous businesses, philanthropic and civic
organizations. He has served as a director and member of the audit committees of
Barpoint.com, Oak Hall Capital Fund, Prime Motor Inns Limited Partnership and
Noise Cancellation Technologies, all public companies. Mr. Siegel currently
serves as a director and chairman of the audit committee of Hauppauge Digital,
Inc., Gales Industries, Inc., and is the chairman of the audit and a member of
the compensation committee of Global Aircraft Solutions, Inc.
Jeffrey Rubin joined our
Board on April 7, 2008. Mr. Rubin is currently a Managing Member of
Realstar Realty, LLC, a real estate developer for Century 21 Real Estate
franchises, Owner and President of Autoskill Inc., a financial services company
for automotive dismantlers, and the JR Group. Mr. Rubin is also a
Member of the Board of Trustees of BRT Realty Trust, a financial services
company for commercial real estate transactions. Formerly, Mr. Rubin
served as President and as a Director of Newtek Business Services,
Inc. Prior to 1998, Mr. Rubin served as an Executive and Board Member
of Optical Dynamics Corporation and was a Vice President at American European
Corporation
Christopher G. Payan joined
the Company as its Vice President of Finance in July 2001. In October
2001, he was appointed as its Senior Vice President, Chief Financial Officer,
Secretary and Treasurer; and, on April 29, 2002, was appointed as one of its
Chief Operating Officers. On March 24, 2004, Mr. Payan was appointed
to the Company’s board of directors and resigned as its Treasurer. On
June 7, 2004, Mr. Payan was appointed Chief Executive Officer and resigned from
all of his other offices. From March 1995 through July 2001, Mr.
Payan was employed by Arthur Andersen LLP, at the time, one of the world’s
largest professional services firms, where he provided various audit,
accounting, operational consulting and advisory services to various small and
mid-sized private and public companies in various industries. Mr.
Payan also serves on the boards of directors of Hauppauge Digital, Inc. and
Newtek Business Services, Inc., both public companies. Mr. Payan is
also an officer and director of several privately held management and real
estate companies. Mr. Payan is a certified public
accountant.
Samuel Z. Herskowitz joined
the Company in January 1996 and, effective April 29, 2002, was appointed as one
of its Chief Operating Officers, as well as its Chief Marketing
Officer. On December 7, 2005, Mr. Herskowitz was appointed the
Company’s sole Chief Marketing Officer and, in Jun 2007, was appointed President
of the Company’s franchise division. From 1996 to April 1997, Mr.
Herskowitz served as the Director of Operations of EVI’s then wholly owned
subsidiary, Insight Laser Centers, Inc. In April 1997, Mr. Herskowitz
became responsible for the Company’s corporate communications and, in January
1998, was appointed to the position of Director of Marketing and Advertising of
the Company, in which position he served until April 1999, when he became the
Company’s Vice President – Marketing and Advertising. From 1993 to
December 1995, Mr. Herskowitz was the Director of Public Relations for Rosenblum
Eye Centers located in New York City. Mr. Herskowitz received a
Masters in Business Administration from Baruch College of the City University of
New York.
Brian P. Alessi joined the
Company as its Assistant Controller in October 2001. In February
2002, he was appointed as its Controller, and on March 24, 2004 was appointed
Treasurer of the Company. On June 7, 2004, Mr. Alessi was appointed
Chief Financial Officer and on November 19, 2008 was appointed Secretary of the
Company. From December 1999 through October 2001, Mr. Alessi was
employed by Arthur Andersen LLP, where he provided audit, accounting and
consulting services to small and mid-sized companies in various
industries. From August 1997 through December 1999, Mr. Alessi was
employed by Yohalem Gillman & Company LLP, where he provided audit and
accounting services to small and mid-sized private companies, and tax services
to individuals. Mr. Alessi graduated from the University of Miami,
where he received a Bachelors of Business Administration degree in
Accounting.
Dr. Nicholas Shashati has been
the Director of Professional Services of the Company since July 1992 and, since
March 1, 1998, the President of the Company’s wholly owned subsidiary,
VCC. Dr. Shashati earned a Doctor of Optometry degree from Pacific
University of California in 1984, and received a Bachelor of Visual Science
degree from Pacific University and a Bachelor of Science degree in Biology from
San Diego State University. Dr. Shashati is licensed as an
optometrist in the States of New York, California, Arizona and
Oregon. He is Chairperson for the Quality Assurance Committee of the
Company, as well as a Practice Management Consultant.
Neil Glachman was appointed
President of the Company’s wholly owned subsidiary, COM, in September 2006,
following the COM’s acquisition of Combine Optical Management Corp. (“Combine”),
a company founded and currently owned by Mr. Glachman since
1989. From 1989 through 1995, under Combine, Mr. Glachman acquired
three competitive group purchasing organizations that supported independent
optical offices. In 1986, Mr. Glachman founded Ocular Insight, Inc.,
a group purchasing organization that supported optical franchise
owners. Mr. Glachman has 27 years of optical industry experience
including positions with Johnson & Johnson, Dow Corning Ophthalmics, and
American Hydron. Mr. Glachman also serves on the boards of directors
and is an officer of several private companies.
SECTION
16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires EVI’s
executive officers and directors, and persons who own more than ten percent of a
registered class of EVI’s equity securities, to file reports of ownership and
changes in ownership with the Securities and Exchange Commission (the
“SEC”). Executive officers, directors and greater than ten percent
shareholders are required, by SEC regulation, to furnish EVI with copies of all
Section 16(a) forms they may file.
Based
solely on a review of the copies of such forms furnished to EVI, or written
representations that no Forms 5 were required, EVI believes that, during the
year ended December 31, 2008, all Section 16(a) filing requirements applicable
to its executive officers, directors and greater than ten percent beneficial
owners were complied with.
AUDIT
COMMITTEE
The Audit
Committee of the Board of Directors is responsible for recommending independent
accountants to the Board, reviewing the Company’s financial statements with
management and the independent accountants, making an appraisal of the audit
effort and the effectiveness of the Company’s financial policies and practices
and consulting with management and the independent accountants with regard to
the adequacy of internal accounting controls. The Audit Committee
operates under a formal charter adopted by the Board of Directors that governs
its duties and standards of performance. The Audit Committee charter
is posted and can be obtained on the Company’s website at www.emergingvision.com.
The
members of the Audit Committee currently are Joel L. Gold, Harvey Ross and
Seymour G. Siegel. The Company’s Board of Directors has determined
that Seymour G. Siegel is an “audit committee financial expert,” as that term is
defined in Item 401(h) of Regulation S-K. The directors who serve on
the Audit Committee are “independent” directors based on the definition of
independence in the listing standards of the National Association of Securities
Dealers. During the year ended December 31, 2008, the Audit Committee
met 4 times.
CODE
OF ETHICS
The
Company adopted a Code of Ethics that applies to all of its officers, directors
and employees. The Code of Ethics covers issues such as conflicts of
interest, confidentiality and compliance with laws and
regulations. The Code of Ethics is posted and can be obtained on the
Company’s website at www.emergingvision.com.
Item
11. Executive Compensation
Summary
Compensation Table
The
following table sets forth information concerning the total compensation awarded
to, earned by or paid to our Chief Executive Officer, and the other two most
highly compensated executives, other than our Chief Executive Officer, as of
December 31, 2008 (collectively, the “Named Executive Officers”) for services
rendered to us in all capacities:
Name
and Principal Position
|
Year
|
Salary
(1)($)
|
Bonus
(2)($)
|
All
Other
Compensation
(3)($)
|
Total
($)
|
|
|
|
|
|
|
Christopher
G. Payan,
Chief
Executive Officer
|
2008
2007
|
$275,000
$275,000
|
-
-
|
$13,000
$13,000
|
$288,000
$288,000
|
|
|
|
|
|
|
Neil
Glachman, President – Combine
|
2008
2007
|
$210,000
$210,000
|
$50,000
$60,000
|
-
-
|
$260,000
$270,000
|
|
|
|
|
|
|
Samuel
Z. Herskowitz,
Chief
Marketing Officer
|
2008
2007
|
$190,000
$190,000
|
-
-
|
$10,000
$10,000
|
$200,000
$200,000
|
(1)
(2)
|
Represents
annual salary paid to the executive.
Represents
bonuses paid to Mr. Glachman for the years ended December 31, 2008 and
2007, respectively.
|
(3)
|
Represents
car allowance payments and medical and dental reimbursements.
|
Reference
is made to Note 15 to the Consolidated Financial Statements for more detailed
information regarding certain of the terms of Christopher G. Payan and Neil
Glachman employment agreements..
GRANTS
OF PLAN-BASED AWARDS IN 2008
There
were no equity-based awards granted to the Named Executive Officers nor were any
non-equity awards granted with future payouts during 2008.
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END
The
following table sets forth information regarding exercisable and unexercisable
stock options held by each of the Named Executive Officers on December 31,
2008:
Name
|
Number
of Securities Underlying Unexercised Options Exercisable
(#)
|
Option
Exercise
Price ($)
|
Option
Expiration Date
|
|
|
|
|
Christopher
G. Payan
|
7,208,220
50,000
|
0.14
0.26
|
12/29/2014
7/16/2011
|
|
|
|
|
Neil
Glachman (1)
|
3,515,625
|
0.15
|
9/28/2016
|
|
|
|
|
Samuel
Z. Herskowitz
|
1,841,180
37,500
20,000
10,000
|
0.14
0.33
6.31
3.25
|
12/29/2014
4/26/2011
12/14/2009
4/9/2009
|
(1)
|
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.
|
Reference
is made to Note 18 to the Consolidated Financial Statements for more detailed
information regarding the Company’s equity compensation plans and the associated
valuation of such equity awards.
OPTIONS
EXERCISED AND STOCK VESTED
There
were no options exercised or stock awards that vested by the Named Executive
Officers during 2008.
PENSION
BENEFITS
The
Company does not provide a pension plan for its employees.
DIRECTOR
COMPENSATION
Directors
who are not employees or executive officers of the Company receive $20,000 per
annum, payable in equal, quarterly installments of $5,000, $1,500 for each in
person meeting, and no additional compensation for telephonic meetings or
actions taken by written consent in lieu of a meeting. In the event
that multiple meetings are held on the same day, directors will receive
compensation for one meeting. Further, all directors are reimbursed
for certain expenses in connection with their attendance at board and committee
meetings.
Other
than with respect to the reimbursement of expenses, directors who are employees
or executive officers of the Company will not receive additional compensation
for serving as a director.
The
following table represents the compensation provided by the Company to each of
the persons who served as a director during 2008, except for Christopher G.
Payan, our Chief Executive Officer, whose compensation is set forth in the
Summary Compensation Table. Mr. Payan did not receive any additional
consideration for his service on the Board of Directors:
Name
|
|
Fees
earned or paid in cash
|
|
|
Stock
Awards
|
|
|
Option
Awards (2)
|
|
|
All
Other Compensation
|
|
|
Total
|
|
Alan
Cohen, O.D.
|
|
$ |
26,000 |
|
|
|
-- |
|
|
$ |
16,156 |
|
|
|
-- |
|
|
$ |
26,000 |
|
Joel
L. Gold
|
|
$ |
24,500 |
|
|
|
-- |
|
|
$ |
16,156 |
|
|
|
-- |
|
|
$ |
26,000 |
|
Harvey
Ross
|
|
$ |
26,000 |
|
|
|
-- |
|
|
$ |
16,156 |
|
|
|
-- |
|
|
$ |
23,000 |
|
Jeffrey
Rubin
|
|
$ |
19,168 |
|
|
|
-- |
|
|
$ |
16,156 |
|
|
|
-- |
|
|
$ |
37,808 |
|
Seymour
G. Siegel (1)
|
|
$ |
36,000 |
|
|
|
-- |
|
|
$ |
16,156 |
|
|
|
-- |
|
|
$ |
47,808 |
|
(1) Mr.
Siegel received an additional $10,000 during 2008 in consideration for
serving as Chairman of the Audit Committee.
|
(2) The
amounts in this column reflect the compensation expense recognized for the
year ended December 31, 2008 in connection with the 125,000 options
granted to the non-employee directors in May
2008.
|
Item
12. Security Ownership of Certain Beneficial Owners, Management and Related
Shareholder Matters
The
following table sets forth information, as of April 10, 2008, regarding the
beneficial ownership of our common stock by: (i) each shareholder known by us to
be the beneficial owner of more than five percent of the outstanding shares of
our common stock; (ii) each of our directors; (iii) each of our Named Executive
Officers (as said term is defined under the caption “Executive Compensation”
below); and (iv) all directors and executive officers of the Company as a group,
in each case, based on 70,422,217 total number of common stock outstanding as of
that date.
The
percentages in the “Percent of Class” column are calculated in accordance with
the rules of the SEC, under which a person may be deemed to be the beneficial
owner of shares if that person has or shares the power to vote or dispose of
those shares or has the right to acquire beneficial ownership of those shares
within 60 days (for example, through the exercise of an option or warrant).
Accordingly, the shares shown in the table as beneficially owned by certain
individuals may include shares owned by certain members of their respective
families. Because of these rules, more than one person may be deemed to be the
beneficial owner of the same shares. The inclusion of the shares shown in the
table is not necessarily an admission of beneficial ownership of those shares by
the person indicated. The address of Dr. Alan Cohen is c/o General
Vision Services, 520 8th Avenue,
New York, New York 10018. The address of Joel L. Gold is c/o Andrew
Garrett, 425 Park Avenue, 22nd Floor,
New York, New York 10022. The address of Harvey Ross is 3140 Route 22
West, Somerville, New Jersey 08876. The address of Jeffrey Rubin is
29 The Maples, Roslyn Estates, NY 11576. The address of Seymour G.
Siegel is c/o Rothstein Kass, 1350 Avenue of the Americas, 15th Floor,
New York, New York 10019. The address of Horizons Investors Corp. is
2830 Pitkin Avenue, Brooklyn, New York 11208. The address of all
other persons listed below is 100 Quentin Roosevelt Boulevard, Suite 508, Garden
City, New York 11530.
Name
|
Beneficial
Ownership
|
Percent
of Class
|
Dr.
Alan Cohen (a)
|
7,973,590 (1)
|
6.3%
|
Neil
Glachman (b)
|
3,515,625 (2)
|
2.7%
|
Joel
L. Gold (a)
|
561,500 (3)
|
*
|
Samuel
Z. Herskowitz (b)
|
2,008,680 (4)
|
1.6%
|
Horizons
Investors Corp.
|
50,526,543
(5)
|
40.3%
|
Christopher
G. Payan (a) (b)
|
8,470,720 (6)
|
6.4%
|
Harvey
Ross (a)
|
10,692,915 (7)
|
8.5%
|
Jeffrey
Rubin (a)
|
377,511 (8)
|
4.2%
|
Seymour
G. Siegel (a)
|
425,000
(9)
|
*
|
All
current directors and named executive officers as a group
|
34,025,541
(10)
|
24.3%
|
* less
than 1%
|
(a) Director
|
(b) Named
Executive Officer
|
(1)
|
Includes
(i) the right to acquire 475,000 shares of Common Stock upon the exercise
of presently exercisable, outstanding options, and (ii) 26,700 shares
owned by Dr. Cohen, as custodian for each of Erica and Nicole Cohen (Dr.
Cohen’s children, as to which Dr. Cohen disclaims beneficial ownership),
but excludes 16,840,528 shares, in the aggregate, held in trust for Dr.
Cohen’s minor children, Erica, Nicole, Jaclyn and Gabrielle, as
beneficiaries, in respect of which Dr. Cohen is not a trustee and has no
dispositive or investment authority, and as to which he disclaims
beneficial ownership.
|
(2)
|
Includes
the right to acquire 3,515,625 shares of Common Stock upon the exercise of
presently exercisable, outstanding options. 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.
|
(3)
|
Includes
76,500 shares of Common Stock owned by Mr. Gold’s children and the right
to acquire 485,000 shares of Common Stock upon the exercise of presently
exercisable, outstanding options, but excludes an additional 5,000 shares
of Common Stock owned by Mr. Gold’s wife, as to which Mr. Gold disclaims
beneficial ownership.
|
(4)
|
Includes
the right to acquire 1,908,680 shares of Common Stock upon the exercise of
presently exercisable, outstanding options.
|
(5)
|
Includes
shares of Common Stock owned by Horizons Investors Corp., a New York
corporation principally owned by Benito R. Fernandez, a former director of
the Company, and includes the right to acquire 100,000 shares of Common
Stock upon the exercise of presently exercisable, outstanding
options.
|
(6)
|
Includes
the right to acquire 7,258,220 shares of Common Stock upon the exercise of
presently exercisable, outstanding options.
|
(7)
|
Includes
the right to acquire 425,000 shares of Common Stock upon the exercise of
presently exercisable, outstanding options.
|
(8)
|
Includes
the right to acquire 125,000 shares of Common Stock upon the exercise of
presently exercisable, outstanding options, but excludes an additional
5,023,573 shares of Common Stock owned by Mr. Rubin’s wife, as to which
Mr. Rubin disclaims beneficial ownership.
|
(9)
|
Represents
the right to acquire 425,000 shares of Common Stock upon the exercise of
presently exercisable, outstanding options.
|
(10)
|
Includes
(i) the right to acquire 14,617,525 shares of Common Stock upon the
exercise of presently exercisable, outstanding options, and (ii) 26,700
shares owned by Dr. Cohen, as custodian for each of Erica and Nicole Cohen
(as to which Dr. Cohen disclaims beneficial ownership). In
accordance with Rule 13d-3(d)(1) under the Securities Exchange Act of
1934, as amended, the 14,617,525 shares of Common Stock for which the
Company’s directors and executive officers, as a group, hold currently
exercisable options, have been added to the total number of issued and
outstanding shares of Common Stock solely for the purpose of calculating
the percentage of such total number of issued and outstanding shares of
Common Stock beneficially owned by such directors and executive officers
as a group.
|
Reference
is made to Note 18 to the Consolidated Financial Statements for more detailed
information regarding the Company’s equity compensation plans. The
following provides certain information with respect to the Company’s equity
compensation plans as of December 31 2008:
|
(A)
|
(B)
|
(C)
|
Plan
Category
|
Number
of securities to be issued upon exercise of outstanding options and
warrants
|
Weighted-average
exercise price of outstanding options and warrants
|
Number
of securities available for future issuance under equity compensation plan
(excludes securities reflected in column (A)
|
Authorized
by shareholders
|
21,038,907
|
$0.35
|
15,284,375
|
Not
authorized by shareholders
|
2,080,885
|
$0.18
|
-
|
II.
|
SENIOR CONVERTIBLE
PREFERRED STOCK:
|
Set forth
below is the name, address, stock ownership and voting power of each person or
group of persons known by the Company to beneficially own more than 5% of the
outstanding shares of its Senior Convertible Preferred Stock:
Name
|
|
Beneficial
Ownership
|
|
|
Percent
of Class
|
|
Rita
Folger
1257
East 24th
Street
Brooklyn,
NY 11210
|
|
|
0.74 |
(1) |
|
|
100 |
% |
(1)
|
These
shares are convertible into an aggregate of 98,519 shares of Common Stock;
and the holder thereof will be entitled to cast that number of votes at
any meeting of shareholders.
|
Item
13. Certain Relationships and Related Transactions
Cohen’s
Fashion Optical
Dr. Alan
Cohen is currently the Chairman of the Board of Directors of the Company, and,
along with certain of his family members, a significant shareholder of the
Company. Through February 2008, Dr. Cohen was part owner of Cohen’s
Fashion Optical, Inc. (“CF”). In February 2008, CF was acquired by
Houchens Industries. Dr. Cohen is currently a franchisee of CF
operating 10 Cohen’s Fashion Optical retail stores. In
addition, CF also licenses to retail optical stores the right to operate under
the name “Cohen’s Kids Optical” or “Ultimate Spectacle.” As of December 31,
2008, there was 2 Ultimate Spectacle store located in the State of New York; and
REAL, as of such date, operated 3 stores (under the name “Cohen’s Fashion
Optical”), all of which were located in New York State. CF and REAL stores are
similar to our retail optical stores. CF has been offering franchises since 1979
and currently has retail optical stores in the States of Connecticut, Florida,
New Hampshire, Massachusetts, New Jersey and New York, and has one store in
Puerto Rico. In the future, Cohen’s Fashion Optical, Cohen’s Kids Optical or
Ultimate Spectacle stores may be located in additional states. As of December
31, 2008, approximately 16 CF stores (some of which were franchised by Dr.
Cohen) were located in the same shopping center or mall as, or in close
proximity to, certain of the Company’s retail optical stores. It is possible
that one or more additional CF stores, operated by Dr. Cohen, may, in the
future, be located near one or more of the Company’s retail optical stores,
thereby competing directly with such stores. In addition, some of the
Company’s retail stores and certain of Dr. Cohen’s CF’s stores jointly
participate, as providers, under certain third party benefit plans that either
the Company or CF obtained, which arrangement is anticipated to continue in the
future.
On
December 31, 2002, we refinanced certain past due amounts, owed to CF, in an
effort to improve our current cash flow position. As a result, we signed a
5-year, $200,000 promissory note, in favor of CF, bearing interest at a rate of
10% per annum, and which was payable in equal monthly installments of principal
and interest. Such note was paid in full in February
2008.
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 CF. As of
December 31, 2008, there was $27,000 of prepaid expenses related to the purchase
of 27 user licenses for such software.
In 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, we and CF will at times share in
the costs of minor expenses. Management believes it has appropriately accounted
for these expenses.
General
Vision Services
General
Vision Services, LLC, or GVS, a Delaware limited liability company located in
New York City is beneficially owned, in principal part, by Dr. Alan Cohen and
certain members of their respective immediate families (collectively, the “Cohen
Family”). In October 2007, GVS entered into franchise agreements with
CF for all of its locations. As of December 31, 2008, GVS operated
approximately 10 retail optical stores (including 2 mobile vans), principally
located in New Jersey and in the New York metropolitan area, which stores are
similar to the retail optical stores operated and franchised by the Company. In
addition, GVS solicits and administers third party benefit programs similar to
those being administered by the Company. GVS does not franchise any retail
optical stores. It is possible that a GVS store, or another retail optical store
which provides third party benefit plans administered by GVS, may now or in the
future be located near one or more of the Company’s retail optical stores and
may be competing directly with such store.
Furthermore,
the Company, CF and GVS jointly participate in certain third party benefit
plans, and certain of the Company’s retail optical stores, CF’s stores and GVS’
stores participate as providers under third party benefit plans obtained by the
Company, CF or GVS and, in all likelihood, will continue to do so in the
future.
Vision
World
In
October 2003, Vision World, LLC, a Delaware limited liability company located in
New York City and beneficially owned, in principal part, by Dr. Alan Cohen and
certain members of the Cohen Family, acquired substantially all of the assets of
Eyeglass Services Industries, Inc.’s third party administration
business. Vision World solicits and administers third party benefit
programs similar to those being administered by the Company. It is
possible that a Vision World store, or another retail optical store which
provides third party benefit plans administered by Vision World, may now or in
the future be located near one or more of the Company’s retail optical stores
and may be competing directly with such store.
Jeffrey
Rubin
Mr.
Jeffrey Rubin, director of the Company as of April 7, 2008, is part of the Cohen
Family. Between Mr. Rubin, his wife, and certain of his businesses,
the combined group has a small ownership percentage in the Company.
Newtek
Business Services
Christopher
G. Payan, the Company’s Chief Executive Officer and a director of the Company,
serves on the board of directors of Newtek Business Services, Inc., or NBSI, a
company that provides various financial services to both small and mid-sized
businesses. Additionally, Mr. Rubin was formerly a director and
President of NBSI. The Company utilizes the bank and non-bank card
processing services of one of NBSI’s affiliated companies. For the
years ended December 31, 2008 and 2007, the Company paid approximately $101,000
and $95,000, 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.
Transactions
Among the Company and the Cohen Family
On
December 31, 2003, the Company entered into agreements, with certain of the
members of the Cohen Family (collectively, the “Subject Shareholders”), pursuant
to which the Company and each of the Subject Shareholders agreed to, and
effectuated, (a) the rescission, ab initio, of the exercise,
by the Subject Shareholders, of 6,178,840 of the over-subscription rights of the
Subject Shareholders (and, accordingly, of the issuance, to such Subject
Shareholders, of the units associated therewith) granted to them in the Rights
Offering, and (b) the rescission, surrender and cancellation of all of the
remaining warrants (15,784,572 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 $247,154. In October 2007, the Company
repaid such amounts together with all accrued interest then due.
Recognizing
that the Subject Shareholders suffered certain damages in connection with the
Rescission Transactions, on December 31, 2003, (i) the Company and the
Shareholders entered into settlement agreements with each of the Subject
Shareholders, pursuant to which the Subject Shareholders released any and all
claims that they may have had against the Company as a result of the
consummation of the Rescission Transactions, and (ii) the Company, in
consideration for such releases, granted to the Subject Shareholders, in the
aggregate, new warrants to purchase 28,142,252 shares of the Company’s 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. The new warrants became exercisable
on April 15, 2006 and were all exercised in October 2007.
Transactions
Among the Company and Neil Glachman
In
connection with the acquisition of Combine Optical Management Corporation
(“COMC”), a company owned by Mr. Neil Glachman, the Company entered into a
series of promissory notes with COMC. The promissory notes amounted
to $1,773,000 with $498,000 paid in October 2007; $300,000 paid in September
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, 2006. For
the years ended December 31, 2008 and 2007, there was approximately $75,000 and
$140,000, respectively, of interest expense. As of December 31, 2008
and 2007, there was $770,000 and $1,165,000, respectively, of related party
payables remaining due under the terms of such promissory notes.
During
2008 and 2007, Combine Buying Group, Inc. (“Combine”) members purchased contact
lenses from Visus Formed Optics, a contact lens manufacturer that is partially
owned by Mr. Glachman. For the years ended December 31, 2008 and
2007, the total cost of such contact lenses was approximately $56,000 and
$69,000, respectively. The Company believes that said costs were as
favorable to Combine as those which could have been obtained from an unrelated
third party.
Item
14. Principal Accountant Fees and Services
The
following is a summary of the fees billed to us by Miller, Ellin & Company
LLP, our independent auditors, for professional services rendered for the years
ended December 31, 2008 and 2007:
Fee
Category
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Audit
Fees (1)
|
|
$ |
194,900 |
|
|
$ |
169,000 |
|
Audit-related
fees
|
|
|
- |
|
|
|
- |
|
Tax
fees (2)
|
|
|
- |
|
|
|
- |
|
All
other fees
|
|
|
- |
|
|
|
19,222 |
|
Total
fees
|
|
$ |
194,900 |
|
|
$ |
188,222 |
|
(1)
|
Audit
fees consist of aggregate fees billed for professional services rendered
for the audit of our annual financial statements and review of the interim
financial statements included in quarterly reports or services that are
normally provided by the independent auditors in connection with statutory
and regulatory filings or engagements for the years ended December 31,
2008 and 2007.
|
(2)
|
The
Company uses a different accounting firm to prepare its consolidated
federal and state tax returns in connection with IRS
regulations. For the years ended December 31, 2008 and 2007,
the fees billed to us for such services were $36,000 and $34,500,
respectively.
|
|
Policy
on Audit Committee Pre-Approval of Audit and Permissible Non-Audit
Services of Independent Auditor
|
The Audit
Committee is responsible for the appointment, compensation and oversight of the
work of the independent auditors and approves in advance any services to be
performed by the independent auditors, whether audit-related or
not. The Audit Committee reviews each proposed engagement to
determine whether the provision of services is compatible with maintaining the
independence of the independent auditors. All of the fees shown above
were pre-approved by the Audit Committee.
PART
IV
Item
15. Exhibits and Financial Statement Schedules
(a) The
following documents are filed as a part of this Report:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Franchise 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)
(10.25)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)
(10.26)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)
(10.27)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)
(10.28)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)
(10.29)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)
|
|
|
|
|
|
|
|
(23.3) *Valuation Expert’s Consent |
|
|
|
|
|
|
|
* 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: April
15, 2009
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
|
April
15, 2009
|
Christopher
G. Payan
|
(Principal
Executive Officer)
|
|
|
|
|
/s/ Brian P. Alessi
|
Chief
Financial Officer and Treasurer
|
April
15, 2009
|
Brian
P. Alessi
|
(Principal
Financial and Accounting Officer)
|
|
|
|
|
/s/ Dr. Alan Cohen
|
Chairman
of the Board of Directors
|
April
15, 2009
|
Dr.
Alan Cohen
|
|
|
|
|
|
/s/ Joel L. Gold
|
Director
|
April
15, 2009
|
Joel
L. Gold
|
|
|
|
|
|
/s/ Harvey Ross
|
Director
|
April
15, 2009
|
Harvey
Ross
|
|
|
|
|
|
/s/ Seymour G. Siegel
|
Director
|
April
15, 2009
|
Seymour
G. Siegel
|
|
|
|
|
|
/s/ Jeffrey
Rubin
|
Director
|
April
15, 2009
|
Jeffrey
Rubin
|
|
|