UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
one)
[X]
|
Quarterly
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for the
quarterly period ended June 30,
2009
|
OR
[ ]
|
Transition
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for the transition period from _____________ to
_____________
|
Commission
file number: 1-14128
EMERGING
VISION, INC.
(Exact
name of Registrant as specified in its charter)
NEW
YORK
(State or
other jurisdiction of incorporation or organization)
11-3096941
(I.R.S.
Employer Identification No.)
100
Quentin Roosevelt Boulevard
Garden
City, NY 11530
(Address
and zip code of principal executive offices)
Telephone
Number: (516) 390-2100
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days:
Indicate
by check mark whether the Registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
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 (Check One):
Large
accelerated filer __
|
Accelerated
filer __
|
Non
accelerated filer __
|
Smaller
reporting company X
|
(Do not check if a smaller reporting
company)
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act):
As of
August 14, 2009, there were 129,157,103 outstanding shares of the Issuer’s
Common Stock, par value $0.01 per share.
EMERGING
VISION, INC. AND SUBSIDIARIES
(In
Thousands, Except Share Data)
|
|
ASSETS
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(unaudited)
|
|
|
(audited)
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
1,656 |
|
|
$ |
2,090 |
|
Franchise
receivables, net of allowance of $148 and $140,
respectively
|
|
|
1,793 |
|
|
|
1,744 |
|
Optical
purchasing group receivables, net of allowance of $95 and $172,
respectively
|
|
|
5,961 |
|
|
|
4,221 |
|
Other
receivables, net of allowance of $6 and $7, respectively
|
|
|
199 |
|
|
|
322 |
|
Current
portion of franchise notes receivable, net of allowance of
$29
|
|
|
218 |
|
|
|
107 |
|
Inventories
|
|
|
344 |
|
|
|
322 |
|
Prepaid
expenses and other current assets
|
|
|
584 |
|
|
|
543 |
|
Deferred
tax assets
|
|
|
351 |
|
|
|
351 |
|
Total
current assets
|
|
|
11,106 |
|
|
|
9,700 |
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
1,025 |
|
|
|
1,191 |
|
Franchise
notes receivable
|
|
|
267 |
|
|
|
302 |
|
Deferred
tax asset, net of current portion
|
|
|
803 |
|
|
|
803 |
|
Goodwill
|
|
|
4,127 |
|
|
|
4,127 |
|
Intangible
assets, net
|
|
|
3,116 |
|
|
|
3,218 |
|
Other
assets
|
|
|
277 |
|
|
|
296 |
|
Total
assets
|
|
$ |
20,721 |
|
|
$ |
19,637 |
|
LIABILITIES AND SHAREHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
$ |
4,002 |
|
|
$ |
4,362 |
|
Optical
purchasing group payables
|
|
|
5,361 |
|
|
|
3,709 |
|
Accrual
for store closings
|
|
|
160 |
|
|
|
146 |
|
Short-term
debt
|
|
|
4,971 |
|
|
|
14 |
|
Related
party obligations
|
|
|
356 |
|
|
|
353 |
|
Total
current liabilities
|
|
|
14,850 |
|
|
|
8,584 |
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
43 |
|
|
|
5,358 |
|
Related
party borrowings, net of current portion
|
|
|
364 |
|
|
|
417 |
|
Franchise
deposits and other liabilities
|
|
|
276 |
|
|
|
310 |
|
Total
liabilities
|
|
|
15,533 |
|
|
|
14,669 |
|
|
|
|
|
|
|
|
|
|
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 125,475,143 shares
outstanding
|
|
|
1,254 |
|
|
|
1,254 |
|
Treasury
stock, at cost, 182,337 shares
|
|
|
(204 |
) |
|
|
(204 |
) |
Additional
paid-in capital
|
|
|
128,059 |
|
|
|
128,059 |
|
Accumulated
comprehensive loss
|
|
|
(213 |
) |
|
|
(267 |
) |
Accumulated
deficit
|
|
|
(123,782 |
) |
|
|
(123,948 |
) |
Total
shareholders' equity
|
|
|
5,188 |
|
|
|
4,968 |
|
Total
liabilities and shareholders' equity
|
|
$ |
20,721 |
|
|
$ |
19,637 |
|
The
accompanying notes are an integral part of these consolidated condensed
financial statements.
EMERGING
VISION, INC. AND SUBSIDIARIES
(In
Thousands, Except Per Share Data)
|
|
|
|
For
the Three Months Ended June 30,
|
|
|
For
the Six Months Ended
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Optical
purchasing group sales
|
|
$ |
14,148 |
|
|
$ |
17,235 |
|
|
$ |
25,524 |
|
|
$ |
31,530 |
|
Franchise
royalties
|
|
|
1,410 |
|
|
|
1,595 |
|
|
|
2,900 |
|
|
|
3,246 |
|
Membership
fees – VisionCare of California
|
|
|
872 |
|
|
|
877 |
|
|
|
1,747 |
|
|
|
1,720 |
|
Retail
sales – Company-owned stores
|
|
|
500 |
|
|
|
954 |
|
|
|
1,030 |
|
|
|
2,096 |
|
Franchise
related fees and other revenues
|
|
|
65 |
|
|
|
18 |
|
|
|
143 |
|
|
|
248 |
|
Total
revenue
|
|
|
16,995 |
|
|
|
20,679 |
|
|
|
31,344 |
|
|
|
38,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of optical purchasing group sales
|
|
|
13,469 |
|
|
|
16,494 |
|
|
|
24,254 |
|
|
|
30,027 |
|
Cost
of retail sales – Company-owned stores
|
|
|
99 |
|
|
|
246 |
|
|
|
259 |
|
|
|
511 |
|
Selling,
general and administrative expenses
|
|
|
3,414 |
|
|
|
3,723 |
|
|
|
6,527 |
|
|
|
7,444 |
|
Total
costs and operating expenses
|
|
|
16,982 |
|
|
|
20,463 |
|
|
|
31,040 |
|
|
|
37,982 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
13 |
|
|
|
216 |
|
|
|
304 |
|
|
|
858 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on franchise notes receivable
|
|
|
6 |
|
|
|
7 |
|
|
|
13 |
|
|
|
14 |
|
Other
(expense) income, net
|
|
|
(28 |
) |
|
|
14 |
|
|
|
(25 |
) |
|
|
48 |
|
Interest
expense, net
|
|
|
(58 |
) |
|
|
(69 |
) |
|
|
(115 |
) |
|
|
(161 |
) |
Total
other expense
|
|
|
(80 |
) |
|
|
(48 |
) |
|
|
(127 |
) |
|
|
(99 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income before income tax benefit (provision)
|
|
|
(67 |
) |
|
|
168 |
|
|
|
177 |
|
|
|
759 |
|
Income
tax benefit (provision)
|
|
|
3 |
|
|
|
139 |
|
|
|
(11 |
) |
|
|
265 |
|
Net
(loss) income
|
|
|
(64 |
) |
|
|
307 |
|
|
|
166 |
|
|
|
1,024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
(loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
(264 |
) |
|
|
9 |
|
|
|
54 |
|
|
|
33 |
|
Comprehensive
(loss) income
|
|
$ |
(328 |
) |
|
$ |
316 |
|
|
$ |
220 |
|
|
$ |
1,057 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$ |
(0.00 |
) |
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
125,475 |
|
|
|
125,475 |
|
|
|
125,475 |
|
|
|
125,475 |
|
Diluted
|
|
|
125,475 |
|
|
|
130,965 |
|
|
|
125,742 |
|
|
|
131,357 |
|
The
accompanying notes are an integral part of these consolidated condensed
financial statements.
EMERGING
VISION, INC. AND SUBSIDIARIES
(Dollars
in Thousands)
|
|
|
|
For
the Six Months Ended
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
166 |
|
|
$ |
1,024 |
|
Adjustments
to reconcile net income to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
321 |
|
|
|
313 |
|
Provision
for bad debt
|
|
|
183 |
|
|
|
12 |
|
Deferred
tax assets
|
|
|
- |
|
|
|
(265 |
) |
Gain
on the sale of property and equipment
|
|
|
- |
|
|
|
(19 |
) |
Disposal
of property and equipment
|
|
|
15 |
|
|
|
- |
|
Non-cash
compensation charges related to options and warrants
|
|
|
- |
|
|
|
46 |
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Franchise
and other receivables
|
|
|
(47 |
) |
|
|
(42 |
) |
Optical
purchasing group receivables
|
|
|
(1,831 |
) |
|
|
(2,527 |
) |
Inventories
|
|
|
(22 |
) |
|
|
4 |
|
Prepaid
expenses and other current assets
|
|
|
(41 |
) |
|
|
(222 |
) |
Other
assets
|
|
|
(35 |
) |
|
|
(7 |
) |
Accounts
payable and accrued liabilities
|
|
|
(346 |
) |
|
|
(1,081 |
) |
Optical
purchasing group payables
|
|
|
1,652 |
|
|
|
2,289 |
|
Franchise
deposits and other liabilities
|
|
|
(34 |
) |
|
|
(82 |
) |
Net
cash used in operating activities
|
|
|
(19 |
) |
|
|
(557 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from franchise and other notes receivable
|
|
|
84 |
|
|
|
126 |
|
Settlement
on accounts payable related to enhancing trademark value
|
|
|
102 |
|
|
|
- |
|
Costs
associated with enhancing trademark value
|
|
|
(98 |
) |
|
|
(228 |
) |
Franchise
notes receivable issued
|
|
|
(131 |
) |
|
|
(20 |
) |
Purchases
of property and equipment
|
|
|
(18 |
) |
|
|
(21 |
) |
Net
cash used in investing activities
|
|
|
(61 |
) |
|
|
(143 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Borrowings
under credit facility
|
|
|
150 |
|
|
|
- |
|
Payments
under credit facility
|
|
|
(500 |
) |
|
|
- |
|
Payments
on related party obligations and other debt
|
|
|
(58 |
) |
|
|
(74 |
) |
Net
cash used in financing activities
|
|
|
(408 |
) |
|
|
(74 |
) |
Net
decrease in cash before effect of foreign exchange rate
changes
|
|
|
(488 |
) |
|
|
(774 |
) |
Effect
of foreign exchange rate changes
|
|
|
54 |
|
|
|
2 |
|
Net
decrease in cash and cash equivalents
|
|
|
(434 |
) |
|
|
(772 |
) |
Cash
and cash equivalents – beginning of period
|
|
|
2,090 |
|
|
|
2,846 |
|
Cash
and cash equivalents – end of period
|
|
$ |
1,656 |
|
|
$ |
2,074 |
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
Interest
|
|
$ |
102 |
|
|
$ |
158 |
|
Taxes
|
|
$ |
16 |
|
|
$ |
32 |
|
|
|
|
|
|
|
|
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
Notes
receivable in connection with the sale of two Company-owned stores
(inclusive of all inventory and property and equipment)
|
|
$ |
- |
|
|
$ |
169 |
|
Notes
receivable in connection with franchisee settlement (inclusive of all
franchise related receivables)
|
|
$ |
95 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated condensed
financial statements.
EMERGING
VISION, INC. AND SUBSIDIARIES
(UNAUDITED)
NOTE
1 – ORGANIZATION:
Emerging
Vision, Inc. and subsidiaries (collectively, the “Company”) 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”) 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
June 30, 2009, there were 136 Sterling Stores in operation, consisting of 6
Company-owned stores (inclusive of 1 store operated under the terms of a
management agreement) and 130 franchised stores, 818 active members of Combine,
and 539 active members of TOG.
|
Principles
of Consolidation
|
The
Consolidated Condensed Financial Statements include the accounts of Emerging
Vision, Inc. and its operating and non-operating subsidiaries, all of which are
wholly-owned. All intercompany balances and transactions have been eliminated in
consolidation.
The
accompanying Consolidated Condensed Financial Statements of the Company have
been prepared in accordance with accounting principles generally accepted for
interim financial statement presentation and in accordance with the instructions
to Form 10-Q and Articles 8 and 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by accounting
principles generally accepted for complete financial statement
presentation. In the opinion of management, all adjustments for a
fair statement of the results of operations and financial position for the
interim periods presented have been included. All such adjustments
are of a normal recurring nature. This financial information should
be read in conjunction with the Consolidated Financial Statements and Notes
thereto included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2008.
NOTE
2 – SIGNIFICANT ACCOUNTING POLICIES:
Share-Based
Compensation
The
Company follows the provisions of Financial Accounting Standards Board’s
(“FASB”) Statement of Financial Accounting Standards (“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.
Share-based
compensation cost of approximately $41,000 and $46,000 is reflected in selling,
general and administrative expenses on the accompanying Consolidated Condensed
Statements of Operations for the three and six months ended June 30, 2008,
respectively. There was no such expense during the three and six
months ended June 30, 2009. The Company determined the fair value of
options and warrants issued during 2008 using the Black-Scholes option pricing
model.
Revenue
Recognition
The
Company recognizes revenues in accordance with the Securities and Exchange
Commission (“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
collectability 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. 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. The Company recognized franchise related fees of $69,000 and
$10,000 for the three months ended June 30, 2009 and 2008, respectively, and
$140,000 and $160,000 for the six months ended June 30, 2009 and 2008,
respectively. Other revenues are revenues that are not generated by
one of the other five principal sources including 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 revenue.
Comprehensive
Income
The
Company follows the provisions of SFAS No. 130, “Reporting Comprehensive
Income,” which establishes standards 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 (loss) income is comprised solely of the cumulative
translation adjustment arising from the translation of TOG’s financial
statements.
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
$264,000 translation loss and $9,000 translation gain from the conversion of
foreign currency to U.S. Dollars is included as a component of comprehensive
income for the three months ended June 30, 2009 and 2008, respectively, and the
resulting $54,000 and $33,000 translation gain from the conversion of foreign
currency to U.S. Dollars is included as a component of comprehensive income for
the six months ended June 30, 2009 and 2008, respectively. Each of
the translation adjustments are recorded directly to accumulated comprehensive
loss within the Consolidated Condensed Balance Sheets.
Income
Taxes
The
Company follows 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. There were no adjustments
related to uncertain tax positions recognized during the three and six months
ended June 30, 2009 and 2008, respectively.
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 June 30, 2009 and December
31, 2008, respectively.
The
Company operates in multiple tax jurisdictions within the United States of
America and Canada. Although the Company does not believe that the
Company is currently under examination in any major tax jurisdiction in which it
operates, the Company remains subject to examination in all of those tax
jurisdictions until the applicable statutes of limitation expire. As
of June 30, 2009, a summary of the tax years that remains subject to examination
in the Company’s 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.
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, allowances on optical purchasing group
receivables, costs of current and potential litigation, and the allowance on
deferred tax assets
Reclassification
Certain
reclassifications have been made to prior year’s consolidated condensed
financial statements to conform to the current year presentation.
NOTE
3 – PER SHARE INFORMATION:
In
accordance with SFAS No. 128, “Earnings Per Share”, basic earnings per share of
common stock (“Basic EPS”) is computed by dividing the net (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 Condensed Statements of Operations. Common stock
equivalents totaling 22,485,311 and 3,522,687 were excluded from the computation
of Diluted EPS for the three months ended June 30, 2009 and 2008, respectively,
and 22,485,311 and 3,522,687 were excluded for the six months ended June 30,
2009 and 2008, respectively, as their effect on the computation of Diluted EPS
would have been anti-dilutive.
The
following table sets forth the computation of basic and diluted per share
information:
|
|
For
the Three Months Ended June 30,
|
|
|
For
the Six Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income (in thousands):
|
|
$ |
(64 |
) |
|
$ |
307 |
|
|
$ |
166 |
|
|
$ |
1,024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
shares of common stock outstanding
|
|
|
125,475 |
|
|
|
125,475 |
|
|
|
125,475 |
|
|
|
125,475 |
|
Dilutive
effect of stock options, warrants and restricted stock
|
|
|
- |
|
|
|
5,490 |
|
|
|
267 |
|
|
|
5.882 |
|
Weighted-average
shares of common stock outstanding, assuming dilution
|
|
|
125,475 |
|
|
|
130,965 |
|
|
|
125,742 |
|
|
|
131,357 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$ |
(0.00 |
) |
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE
4 – CREDIT FACILITY:
On August
8, 2007, the Company entered into a Revolving Line of Credit Note and Credit
Agreement (the “Credit Agreement”) with Manufacturers and Traders Trust Company
(“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, which is secured by
substantially all of the assets of the Company, other than the assets of
Combine, which assets are used to secure the repayment of Combine’s
debt. The Credit Facility is set to mature on 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. The
Company is currently exploring certain options available to it to
extend or refinance, prior to April 2010, provided, however, that the Company
does not know if it will be able to extend or refinance the debt and cannot
guarantee that extending or refinancing the debt will be on terms favorable to
the Company.
As of
June 30, 2009, the Company had outstanding borrowings of $4,956,854 under the
Credit Facility, which amount was included in Short-term Debt on the
accompanying Consolidated Condensed 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. Additionally, the Company had $543,146 available under the
Credit Facility for future borrowings.
The
Credit Facility includes various financial covenants including minimum net
worth, maximum funded debt and debt service ratio requirements. As of
June 30, 2009, the Company was not in compliance with two of the financial
covenants, however, M&T granted the Company a waiver and agreed that, as of
June 30, 2009, it was now in compliance with such covenants.
NOTE
5 – SEGMENT REPORTING
Business
Segments
Operating
segments are organized internally primarily by the type of services provided,
and in accordance with SFAS 131, “Disclosures About Segments of an
Enterprise and Related Information.” The Company has aggregated
similar operating characteristics into six reportable segments: (1) Optical
Purchasing Group Business, (2) Franchise, (3) Company Store, (4) VisionCare of
California, (5) Corporate Overhead and (6) Other.
(1) The
Optical Purchasing Group Business segment consists of the operations of Combine
and TOG. 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.
(2) The
Franchise segment consists of 130 franchise locations as of June 30,
2009. 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
office salaries and related benefits, convention and trade show expenses,
consulting fees, and other overhead.
(3) The
Company Store segment consists of six Company-owned retail optical stores
(including one under the terms of a management agreement) as of June 30,
2009. 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.
(4) 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.
(5) 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,
Sarbanes-Oxley compliance, board of director fees, and director and officer
insurance), other salaries and related benefits, rent, other professional fees,
and depreciation and amortization.
(6) 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 June
30,
2009
|
|
|
As
of December 31, 2008
|
|
|
|
(unaudited)
|
|
|
(audited)
|
|
Total
Assets:
|
|
|
|
|
|
|
Optical
Purchasing Group Business
|
|
$ |
13,609 |
|
|
$ |
12,246 |
|
Franchise
|
|
|
5,356 |
|
|
|
5,386 |
|
VisionCare
of California
|
|
|
668 |
|
|
|
632 |
|
Company
Store
|
|
|
439 |
|
|
|
547 |
|
Corporate
Overhead
|
|
|
634 |
|
|
|
814 |
|
Other
|
|
|
15 |
|
|
|
12 |
|
Total
assets
|
|
$ |
20,721 |
|
|
$ |
19,637 |
|
|
|
As
of June
30,
2009
|
|
|
As
of December 31, 2008
|
|
|
|
(unaudited)
|
|
|
(audited)
|
|
Capital
Expenditures:
|
|
|
|
|
|
|
Optical
Purchasing Group Business
|
|
$ |
- |
|
|
$ |
42 |
|
Franchise
|
|
|
8 |
|
|
|
40 |
|
VisionCare
of California
|
|
|
- |
|
|
|
2 |
|
Company
Store
|
|
|
3 |
|
|
|
139 |
|
Corporate
Overhead
|
|
|
7 |
|
|
|
121 |
|
Other
|
|
|
- |
|
|
|
- |
|
Total
capital expenditures
|
|
$ |
18 |
|
|
$ |
344 |
|
Total
Goodwill:
|
|
|
|
|
|
|
Optical
Purchasing Group Business
|
|
$ |
2,861 |
|
|
$ |
2,861 |
|
Franchise
|
|
|
1,266 |
|
|
|
1,266 |
|
VisionCare
of California
|
|
|
- |
|
|
|
- |
|
Company
Store
|
|
|
- |
|
|
|
- |
|
Corporate
Overhead
|
|
|
- |
|
|
|
- |
|
Other
|
|
|
- |
|
|
|
- |
|
Total
goodwill
|
|
$ |
4,127 |
|
|
$ |
4,127 |
|
Total
Intangible Assets:
|
|
|
|
|
|
|
Optical
Purchasing Group Business
|
|
$ |
2,209 |
|
|
$ |
2,307 |
|
Franchise
|
|
|
907 |
|
|
|
911 |
|
VisionCare
of California
|
|
|
- |
|
|
|
- |
|
Company
Store
|
|
|
- |
|
|
|
- |
|
Corporate
Overhead
|
|
|
- |
|
|
|
- |
|
Other
|
|
|
- |
|
|
|
- |
|
Total
intangible assets
|
|
$ |
3,116 |
|
|
$ |
3,218 |
|
Total
Intangible Asset Additions:
|
|
|
|
|
|
|
Optical
Purchasing Group Business
|
|
$ |
- |
|
|
$ |
- |
|
Franchise
|
|
|
(4 |
) |
|
|
601 |
|
VisionCare
of California
|
|
|
- |
|
|
|
- |
|
Company
Store
|
|
|
- |
|
|
|
- |
|
Corporate
Overhead
|
|
|
- |
|
|
|
- |
|
Other
|
|
|
- |
|
|
|
- |
|
Total
intangible asset additions
|
|
$ |
(4 |
) |
|
$ |
601 |
|
|
|
For
the Three Months Ended
June 30,
|
|
|
For
the Six Months Ended
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Net
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Optical
Purchasing Group Business
|
|
$ |
14,148 |
|
|
$ |
17,235 |
|
|
$ |
25,524 |
|
|
$ |
31,530 |
|
Franchise
|
|
|
1,479 |
|
|
|
1,605 |
|
|
|
3,040 |
|
|
|
3,406 |
|
VisionCare
of California
|
|
|
872 |
|
|
|
877 |
|
|
|
1,747 |
|
|
|
1,720 |
|
Company
Store
|
|
|
500 |
|
|
|
954 |
|
|
|
1,030 |
|
|
|
2,096 |
|
Corporate
Overhead
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other
|
|
|
(4 |
) |
|
|
8 |
|
|
|
3 |
|
|
|
88 |
|
Net
revenues
|
|
$ |
16,995 |
|
|
$ |
20,679 |
|
|
$ |
31,344 |
|
|
$ |
38,840 |
|
(Loss)
Income before Income Tax Benefit (Provision):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Optical
Purchasing Group Business
|
|
$ |
158 |
|
|
$ |
319 |
|
|
$ |
382 |
|
|
$ |
640 |
|
Franchise
|
|
|
486 |
|
|
|
808 |
|
|
|
1,189 |
|
|
|
1,904 |
|
VisionCare
of California
|
|
|
12 |
|
|
|
4 |
|
|
|
28 |
|
|
|
6 |
|
Company
Store
|
|
|
(133 |
) |
|
|
(193 |
) |
|
|
(234 |
) |
|
|
(211 |
) |
Corporate
Overhead
|
|
|
(585 |
) |
|
|
(710 |
) |
|
|
(1,189 |
) |
|
|
(1,535 |
) |
Other
|
|
|
(5 |
) |
|
|
(60 |
) |
|
|
1 |
|
|
|
(45 |
) |
(Loss)
income before income tax benefit (provision)
|
|
$ |
(67 |
) |
|
$ |
168 |
|
|
$ |
177 |
|
|
$ |
759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and Amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Optical
Purchasing Group Business
|
|
$ |
77 |
|
|
$ |
77 |
|
|
$ |
153 |
|
|
$ |
153 |
|
Franchise
|
|
|
63 |
|
|
|
54 |
|
|
|
124 |
|
|
|
110 |
|
VisionCare
of California
|
|
|
6 |
|
|
|
5 |
|
|
|
11 |
|
|
|
11 |
|
Company
Store
|
|
|
27 |
|
|
|
16 |
|
|
|
33 |
|
|
|
35 |
|
Corporate
Overhead
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other
|
|
|
- |
|
|
|
4 |
|
|
|
- |
|
|
|
4 |
|
Total
depreciation and amortization
|
|
$ |
173 |
|
|
$ |
156 |
|
|
$ |
321 |
|
|
$ |
313 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense, Net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Optical
Purchasing Group Business
|
|
$ |
45 |
|
|
$ |
55 |
|
|
$ |
88 |
|
|
$ |
140 |
|
Franchise
|
|
|
13 |
|
|
|
14 |
|
|
|
27 |
|
|
|
21 |
|
VisionCare
of California
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Company
Store
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Corporate
Overhead
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
interest expense, net
|
|
$ |
58 |
|
|
$ |
69 |
|
|
$ |
115 |
|
|
$ |
161 |
|
Geographic
Information
The
business of the Company is concentrated into two separate geographic areas; the
United States and Canada. Certain geographic information for
continuing operations is as follows:
|
|
For
the Three Months Ended
June 30,
|
|
|
For
the Six Months Ended
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Net
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
6,666 |
|
|
$ |
11,623 |
|
|
$ |
13,125 |
|
|
$ |
21,940 |
|
Canada
|
|
|
10,329 |
|
|
|
9,056 |
|
|
|
18,219 |
|
|
|
16,900 |
|
Net
revenues
|
|
$ |
16,995 |
|
|
$ |
20,679 |
|
|
$ |
31,344 |
|
|
$ |
38,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
Income before Income Tax Benefit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
(289 |
) |
|
$ |
(81 |
) |
|
$ |
(305 |
) |
|
$ |
277 |
|
Canada
|
|
|
222 |
|
|
|
249 |
|
|
|
482 |
|
|
|
482 |
|
(Loss)
income before income tax benefit (provision)
|
|
$ |
(67 |
) |
|
$ |
168 |
|
|
$ |
177 |
|
|
$ |
759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
geographic information on Canada includes TOG’s business
activities. 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.
Additional
geographic information is summarized as follows for the six months ended June
30, 2009 (in thousands):
|
|
United
States
|
|
|
Canada
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
16,360 |
|
|
$ |
4,361 |
|
|
$ |
20,721 |
|
Property
and Equipment
|
|
|
994 |
|
|
|
31 |
|
|
|
1,025 |
|
Depreciation
and Amortization
|
|
|
315 |
|
|
|
6 |
|
|
|
321 |
|
Capital
Expenditures
|
|
|
18 |
|
|
|
- |
|
|
|
18 |
|
Goodwill
|
|
|
4,127 |
|
|
|
- |
|
|
|
4,127 |
|
Intangible
Assets
|
|
|
3,116 |
|
|
|
- |
|
|
|
3,116 |
|
Intangible
Asset Additions
|
|
|
(4 |
) |
|
|
- |
|
|
|
(4 |
) |
Interest
Expense
|
|
|
115 |
|
|
|
- |
|
|
|
115 |
|
Geographic
information is summarized as follows for the year ended December 31, 2008 (in
thousands) (audited):
|
|
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 |
|
NOTE
6 – COMMITMENTS AND CONTINGENCIES:
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. In June
2009, this action was settled. The terms of the settlement include
the payment, by the Company to Irondequoit Mall, LLC, of an aggregate sum of
$75,000, of which $50,000 was paid in July 2009 and $25,000 is due prior to
September 30, 2009, and the exchange of mutual general releases.
In August
2006, the Company and its subsidiary, Sterling Vision of California, Inc.
(“SVC”) (collectively referred to as the “Company”) filed an action against For
Eyes Optical Company (“For Eyes” or “Defendant”) in response to allegations by
For Eyes of trademark infringement for Plaintiff’s use of the trademark “Site
For Sore Eyes”. The Company claims, among other things, that (i)
there is no likelihood of confusion between the Company’s and Defendant’s mark,
and that the Company has not infringed, and is not infringing, Defendant’s mark;
ii) the Company is not bound by that certain settlement agreement, executed in
1981 by a prior owner of the Site For Sore Eyes trademark; and iii) Defendant’s
mark is generic and must be cancelled. For Eyes, in its Answer,
asserted defenses to the Company’s claims, and asserted counterclaims against
the Company, including, among others, that (i) the Company has infringed For
Eyes’ mark; (ii) the Company wrongfully obtained a trademark registration for
its mark and that said registration should be cancelled; and (iii) the acts of
the Company constitute a breach of the aforementioned settlement
agreement. For Eyes seeks injunctive relief, cancellation of the
Company’s trademark registration, trebled monetary damages, payment of any
profits made by the Company in respect of the use of such trade name, and costs
and attorney fees. 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. Currently, the parties are in settlement discussions,
provided, however, that there can be no assurance that the litigation will be
settled, or, if it is settled, that the terms of such settlement will be
favorable to the Company.
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
As of
June 30, 2009, the Company was a guarantor of certain leases of retail optical
stores franchised and subleased to its franchisees. Such guarantees
generally expire one year from the month the rent was last paid. In
the event that all of such franchisees defaulted on their respective subleases,
the Company would be obligated for aggregate lease obligations of approximately
$2,429,000. 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.
Employment
Agreements
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.
The
Company has an Employment Agreement (“Agreement 2”) with the President of
Combine, which extends through September 2011. Agreement 2 provides
for an annual salary of $210,000, certain other benefits, and an annual bonus
based upon certain financial targets of Combine.
NOTE
7 – SUBSEQUENT EVENTS:
The
Company has evaluated subsequent events from the balance sheet date through
August 14, 2009, the date the accompanying financial statements were
issued. The following is a material subsequent event.
Equity
Transactions:
On July
13, 2009, certain executives of the Company elected to exercise their
outstanding common stock options totaling 8,128,810 on a cash-less
basis. As of August 14, 2009, those executives and the Company’s
Board of Directors are in negotiations to rescind such transactions, provided,
however, that there can be no assurances such negotiations will result in a
rescission or, if a rescission occurs it will be on terms favorable to the
Company.
In
addition, a material subsequent event has been disclosed in Note 4.
This
Quarterly Report, as of and for the three and six months ended June 30, 2009,
(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 the Company’s Annual Report on Form
10-K for the year ended December 31, 2008 and those described from time to time
in previous and future reports filed with the Securities and Exchange
Commission. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those described herein with the forward-looking
statements referred to above and as set forth in this Report. The
Company does not intend to update these forward-looking statements for new
information, or otherwise, for the occurrence of future events.
Segment
results for the three and six months ended June 30, 2009, as compared to the
three and six months ended June 30, 2008
Consolidated
Segment Results
Total
revenues for the Company decreased approximately $3,684,000, or 17.8%, to
$16,995,000 for the three months ended June 30, 2009, as compared to $20,679,000
for the three months ended June 30, 2008, and decreased approximately
$7,496,000, or 19.3%, to $31,344,000 for the six months ended June 30, 2009, as
compared to $38,840,000 for the six months ended June 30, 2008. These
decreases were mainly a result of the decrease in Optical Purchasing Group
revenues during the comparable periods due to current economic trends in the US
and Canadian economies as well as currency fluctuations between the US and
Canadian dollars. Additionally, the Company experienced a decrease in
the average number of Company-owned stores in operation from 10 for the six
months ended June 30, 2008 compared to 6 for the six months ended June 30, 2009,
and a decrease in the average number of franchise locations in operation from
145 for the six months ended June 30, 2008 compared to 131 for the six months
ended June 30, 2009, which resulted in decreased revenues for the Company-store
and franchise segments.
Total
costs and operating expenses for the Company decreased approximately $3,481,000,
or 17.0%, to $16,982,000 for the three months ended June 30, 2009, as compared
to $20,463,000 for the three months ended June 30, 2008, and decreased
approximately $6,942,000, or 18.3%, to $31,040,000 for the six months ended June
30, 2009, as compared to $37,982,000 for the six months ended June 30,
2008. The decreases in Optical Purchasing Group cost of sales were a
direct result of the currency fluctuations described
above. Additionally, the Company made an effort to streamline certain
corporate office administrative functions and expenses during 2009, including
the elimination of in-house counsel and moving franchise business development to
a commission based structure. Selling, general and administrative
expenses also decreased due to the reduction of certain administrative job
functions and the decrease in the number of Company stores in operations during
2009.
Optical
Purchasing Group Business Segment
|
|
For
the Three Months Ended June 30 (in thousands):
|
|
|
|
2009
|
|
|
2008
|
|
|
$
Change
|
|
|
%
Change
|
|
Net
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Optical
purchasing group sales
|
|
$ |
14,148 |
|
|
$ |
17,235 |
|
|
$ |
(3,087 |
) |
|
|
(17.9 |
%) |
Cost
of optical purchasing group sales
|
|
|
13,469 |
|
|
|
16,494 |
|
|
|
(3,025 |
) |
|
|
(18.3 |
%) |
Gross
margin
|
|
|
679 |
|
|
|
741 |
|
|
|
(62 |
) |
|
|
(8.4 |
%) |
Selling,
General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and related benefits
|
|
|
132 |
|
|
|
110 |
|
|
|
22 |
|
|
|
20.0 |
% |
Bad
debt
|
|
|
91 |
|
|
|
- |
|
|
|
91 |
|
|
|
n/a |
|
Depreciation
and amortization
|
|
|
77 |
|
|
|
77 |
|
|
|
- |
|
|
|
0.0 |
% |
Rent
and related overhead
|
|
|
56 |
|
|
|
88 |
|
|
|
(32 |
) |
|
|
(36.4 |
%) |
Credit
card and bank fees
|
|
|
67 |
|
|
|
76 |
|
|
|
(9 |
) |
|
|
(11.8 |
%) |
Professional
fees
|
|
|
48 |
|
|
|
3 |
|
|
|
45 |
|
|
|
1500.0 |
% |
Other
general and administrative costs
|
|
|
5 |
|
|
|
13 |
|
|
|
(8 |
) |
|
|
(61.5 |
%) |
Total
selling, general and administrative expenses
|
|
|
476 |
|
|
|
367 |
|
|
|
109 |
|
|
|
29.7 |
% |
Operating
Income
|
|
|
203 |
|
|
|
374 |
|
|
|
(171 |
) |
|
|
(45.7 |
%) |
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
(45 |
) |
|
|
(55 |
) |
|
|
10 |
|
|
|
18.2 |
% |
Total
other expense
|
|
|
(45 |
) |
|
|
(55 |
) |
|
|
10 |
|
|
|
18.2 |
% |
Income
before income tax benefit
|
|
$ |
158 |
|
|
$ |
319 |
|
|
$ |
(161 |
) |
|
|
(50.5 |
%) |
|
|
For
the Six Months Ended June 30 (in thousands):
|
|
|
|
2009
|
|
|
2008
|
|
|
$
Change
|
|
|
%
Change
|
|
Net
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Optical
purchasing group sales
|
|
$ |
25,524 |
|
|
$ |
31,530 |
|
|
$ |
(6,006 |
) |
|
|
(19.0 |
%) |
Cost
of optical purchasing group sales
|
|
|
24,254 |
|
|
|
30,027 |
|
|
|
(5,773 |
) |
|
|
(19.2 |
%) |
Gross
margin
|
|
|
1,270 |
|
|
|
1,503 |
|
|
|
(233 |
) |
|
|
(15.5 |
%) |
Selling,
General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and related benefits
|
|
|
231 |
|
|
|
225 |
|
|
|
6 |
|
|
|
2.7 |
% |
Depreciation
and amortization
|
|
|
153 |
|
|
|
153 |
|
|
|
- |
|
|
|
0.0 |
% |
Credit
card and bank fees
|
|
|
121 |
|
|
|
136 |
|
|
|
(15 |
) |
|
|
(11.0 |
%) |
Rent
and related overhead
|
|
|
122 |
|
|
|
162 |
|
|
|
(40 |
) |
|
|
(24.7 |
%) |
Bad
debt
|
|
|
91 |
|
|
|
- |
|
|
|
91 |
|
|
|
n/a |
|
Professional
fees
|
|
|
62 |
|
|
|
16 |
|
|
|
46 |
|
|
|
287.5 |
% |
Other
general and administrative costs
|
|
|
20 |
|
|
|
31 |
|
|
|
(11 |
) |
|
|
(35.5 |
%) |
Total
selling, general and administrative expenses
|
|
|
800 |
|
|
|
723 |
|
|
|
77 |
|
|
|
10.7 |
% |
Operating
Income
|
|
|
470 |
|
|
|
780 |
|
|
|
(310 |
) |
|
|
(39.7 |
%) |
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(88 |
) |
|
|
(140 |
) |
|
|
52 |
|
|
|
37.1 |
% |
Total
other expense
|
|
|
(88 |
) |
|
|
(140 |
) |
|
|
52 |
|
|
|
37.1 |
% |
Income
before income tax benefit
|
|
$ |
382 |
|
|
$ |
640 |
|
|
$ |
(258 |
) |
|
|
(40.3 |
%) |
Optical
purchasing group revenues decreased approximately $3,087,000, or 17.9%, to
$14,148,000 for the three months ended June 30, 2009, as compared to $17,235,000
for the three months ended June 30, 2008, and decreased approximately $6,006,000
or 19.0%, to $25,524,000 for the six months ended June 30, 2009, as compared to
$31,530,000 for the six months ended June 30, 2008. Individually,
Combine’s revenues decreased approximately $970,000, or 20.5%, to $3,773,000 for
the three months ended June 30, 2009, as compared to $4,743,000 for the three
months ended June 30, 2008, and decreased approximately $1,486,000, or 17.0%, to
$7,236,000 for the six months ended June 30, 2009, as compared to $8,722,000 for
the six months ended June 30, 2008. These decreases were due to a
generally weaker economy that began to affect Combine in the 2nd half of
2008 and carried through the first six months of 2009. As of June 30,
2009, there were 818 active members, as compared to 852 active members as of
June 30, 2008. Individually, TOG revenues decreased approximately
$2,163,000, or 17.3%, to $10,329,000 for the three months ended June 30, 2009,
as compared to $12,492,000 for the three months ended June 30, 2008, and
decreased approximately $4,589,000, or 20.1%, to $18,219,000 for the six months
ended June 30, 2009, as compared to $22,808,000 for the six months ended June
30, 2008. These decreases were 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
first six months of 2008, as compared to $0.83 for every Canadian Dollar during
the first six months of 2009. Additionally, similar to the U.S.
economy, the Canadian economy experienced a downturn beginning in the 2nd half of
2008.
Costs of
optical purchasing group sales decreased approximately $3,025,000, or 18.3%, to
$13,469,000 for the three months ended June 30, 2009, as compared to $16,494,000
for the three months ended June 30, 2008, and decreased approximately
$5,773,000, or 19.2%, to $24,254,000 for the six months ended June 30, 2009, as
compared to $30,027,000 for the six months ended June 30,
2008. Individually, Combine’s cost of sales decreased approximately
$968,000, or 21.7%, to $3,494,000 for the three months ended June 30, 2009, as
compared to $4,462,000 for the three months ended June 30, 2008, and decreased
approximately $1,385,000, or 17.0%, to $6,763,000 for the six months ended June
30, 2009, as compared to $8,148,000 for the six months ended June 30,
2008. Individually, TOG’s cost of sales decreased approximately
$2,485,000, or 20.7%, to $9,547,000 for the three months ended June 30, 2009, as
compared to $12,032,000 for the three months ended June 30, 2008, and decreased
approximately $4,442,000, or 20.3%, to $17,437,000 for the six months ended June
30, 2009, as compared to $21,879,000 for the six months ended June 30,
2008. Both of these decreases were a direct result of, and
proportionate to, the revenue fluctuations described above.
Operating
expenses of the optical purchasing group segment increased approximately
$109,000, or 29.7%, to $476,000 for the three months ended June 30, 2009, as
compared to $367,000 for the three months ended June 30, 2008, and increased
approximately $77,000, or 10.7%, to $800,000 for the six months ended June 30,
2009, as compared to $723,000 for the six months ended June 30,
2008. These increases were mainly due to bad debt incurred on certain
member receivables during the three and six months ended June 30, 2009 of
approximately $91,000 as certain Combine members went out of business due to the
current economic conditions. Additionally, Combine and TOG engaged
the services of consultants ($10,000 per month) in May 2009 to enhance vendor
programs designed to encourage greater spending by the members while achieving
greater profit margins. These increases were offset, in part, by the
fluctuation of the foreign currency exchange rate as described
above.
Interest
expense related to the optical purchasing group segment decreased approximately
$10,000, or 18.2%, to $45,000 for the three months ended June 30, 2009, as
compared to $55,000 for the three months ended June 30, 2008, and decreased
approximately $52,000, or 37.1%, to $88,000 for the six months ended June 30,
2009, as compared to $140,000 for the six months ended June 30,
2008. These decreases were related to a decrease in the interest
rates on the borrowings under the Company’s Credit Facility with Manufacturers
and Traders Trust Corporation (“M&T”). Additionally, as Combine
continues to pay down its related party debt, the Company continues to incur
less interest.
Franchise
Segment
|
|
For
the Three Months Ended June 30 (in thousands):
|
|
|
|
2009
|
|
|
2008
|
|
|
$
Change
|
|
|
%
Change
|
|
Net
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalties
|
|
$ |
1,410 |
|
|
$ |
1,595 |
|
|
$ |
(185 |
) |
|
|
(11.6 |
%) |
Franchise
and other related fees
|
|
|
69 |
|
|
|
10 |
|
|
|
59 |
|
|
|
590.0 |
% |
Net
revenues
|
|
|
1,479 |
|
|
|
1,605 |
|
|
|
(126 |
) |
|
|
(7.9 |
%) |
Selling,
General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and related benefits
|
|
|
336 |
|
|
|
364 |
|
|
|
(28 |
) |
|
|
(7.7 |
%) |
Professional
fees
|
|
|
153 |
|
|
|
111 |
|
|
|
42 |
|
|
|
37.8 |
% |
Rent
and related overhead
|
|
|
122 |
|
|
|
93 |
|
|
|
29 |
|
|
|
31.2 |
% |
Convention
and trade show expenses
|
|
|
91 |
|
|
|
99 |
|
|
|
(8 |
) |
|
|
(8.1 |
%) |
Depreciation
|
|
|
63 |
|
|
|
54 |
|
|
|
9 |
|
|
|
16.7 |
% |
Bad
debt
|
|
|
45 |
|
|
|
- |
|
|
|
45 |
|
|
|
n/a |
|
Other
general and administrative costs
|
|
|
138 |
|
|
|
77 |
|
|
|
61 |
|
|
|
79.2 |
% |
Total
selling, general and administrative expenses
|
|
|
948 |
|
|
|
798 |
|
|
|
150 |
|
|
|
18.8 |
% |
Operating
Income
|
|
|
531 |
|
|
|
807 |
|
|
|
(276 |
) |
|
|
(34.2 |
%) |
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on franchise notes receivable
|
|
|
6 |
|
|
|
7 |
|
|
|
(1 |
) |
|
|
(14.3 |
%) |
Other
(expense) income, net
|
|
|
(38 |
) |
|
|
8 |
|
|
|
(46 |
) |
|
|
(575.0 |
%) |
Interest
expense, net
|
|
|
(13 |
) |
|
|
(14 |
) |
|
|
1 |
|
|
|
7.1 |
% |
Total
other (expense) income
|
|
|
(45 |
) |
|
|
1 |
|
|
|
(46 |
) |
|
|
(4600.0 |
%) |
Income
before income tax benefit
|
|
$ |
486 |
|
|
$ |
808 |
|
|
$ |
(322 |
) |
|
|
(39.9 |
%) |
|
|
For
the Six Months Ended June 30 (in thousands):
|
|
|
|
2009
|
|
|
2008
|
|
|
$
Change
|
|
|
%
Change
|
|
Net
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalties
|
|
$ |
2,900 |
|
|
$ |
3,246 |
|
|
$ |
(346 |
) |
|
|
(10.7 |
%) |
Franchise
and other related fees
|
|
|
140 |
|
|
|
160 |
|
|
|
(20 |
) |
|
|
(12.5 |
%) |
Net
revenues
|
|
|
3,040 |
|
|
|
3,406 |
|
|
|
(366 |
) |
|
|
(10.7 |
%) |
Selling,
General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and related benefits
|
|
|
710 |
|
|
|
789 |
|
|
|
(79 |
) |
|
|
(10.0 |
%) |
Professional
fees
|
|
|
280 |
|
|
|
221 |
|
|
|
59 |
|
|
|
26.7 |
% |
Rent
and related overhead
|
|
|
227 |
|
|
|
154 |
|
|
|
73 |
|
|
|
47.4 |
% |
Convention
and trade show expenses
|
|
|
175 |
|
|
|
164 |
|
|
|
11 |
|
|
|
6.7 |
% |
Depreciation
|
|
|
124 |
|
|
|
110 |
|
|
|
14 |
|
|
|
12.7 |
% |
Other
general and administrative costs
|
|
|
285 |
|
|
|
97 |
|
|
|
188 |
|
|
|
193.8 |
% |
Total
selling, general and administrative expenses
|
|
|
1,801 |
|
|
|
1,535 |
|
|
|
266 |
|
|
|
17.3 |
% |
Operating
Income
|
|
|
1,239 |
|
|
|
1,871 |
|
|
|
(632 |
) |
|
|
(33.8 |
%) |
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on franchise notes receivable
|
|
|
13 |
|
|
|
14 |
|
|
|
(1 |
) |
|
|
(7.1 |
%) |
Other
(expense) income, net
|
|
|
(36 |
) |
|
|
40 |
|
|
|
(76 |
) |
|
|
(190.0 |
%) |
Interest
expense, net
|
|
|
(27 |
) |
|
|
(21 |
) |
|
|
(6 |
) |
|
|
(28.6 |
%) |
Total
other (expense) income
|
|
|
(50 |
) |
|
|
33 |
|
|
|
(83 |
) |
|
|
(251.5 |
%) |
Income
before income tax benefit
|
|
$ |
1,189 |
|
|
$ |
1,904 |
|
|
$ |
(715 |
) |
|
|
(37.6 |
%) |
Franchise
royalties decreased approximately $185,000, or 11.6%, to $1,410,000 for the
three months ended June 30, 2009, as compared to $1,595,000 for the three months
ended June 30, 2008, and decreased approximately $346,000, or 10.7%, to
$2,900,000 for the six months ended June 30, 2009, as compared to $3,246,000 for
the six months ended June 30, 2008. Franchise sales decreased
approximately $1,264,000, or 6.2%, for the three months ended June 30, 2009, as
compared to the three months ended June 30, 2008, and decreased approximately
$2,325,000, or 5.6%, for the six months ended June 30, 2009, as compared to the
six months ended June 30, 2008. This led to decreased royalty income
of approximately $101,000 and $186,000 for the three and six months ended June
30, 2009, respectively, mainly due to 12 fewer stores in operations during
2009. As of June 30, 2009 and 2008, there were 130 and 142 franchised
stores in operation, respectively.
Franchise
and other related fees (which includes initial franchise fees, renewal fees,
conversion fees and store transfer fees) increased approximately $59,000, or
590.0%, to $69,000 for the three months ended June 30, 2009, as compared to
$10,000 for the three months ended June 30, 2008, and decreased approximately
$20,000, or 12.5%, to $140,000 for the six months ended June 30, 2009, as
compared to $160,000 for the six months ended June 30, 2008. These
fluctuations were primarily attributable to 7 franchise agreement renewals
($71,000), 1 independent store conversion ($10,000), and 3 new franchise
agreements ($55,000) in 2009, as compared to 4 franchise agreement renewals
($40,000), 3 independent store conversions ($21,000), and 5 new franchise
agreements ($100,000) in 2008. In the future, franchise fees are
likely to fluctuate depending on the timing of franchise agreement expirations,
new store openings, franchise store transfers, and the approval of the Franchise
Disclosure Document, which is renewed annually in April.
Operating
expenses of the franchise segment increased approximately $150,000, or 18.8%, to
$948,000 for the three months ended June 30, 2009, as compared to $798,000 for
the three months ended June 30, 2008, and increased approximately $266,000, or
17.3%, to $1,801,000 for the six months ended June 30, 2009, as compared to
$1,535,000 for the six months ended June 30, 2008. These increases
were partially a result of increases in; professional fees as the Company began
utilizing outside counsel to administer franchise agreement transactions (during
fiscal 2008 the Company employed in-house counsel to handle such work), rent and
related overhead as the Company reallocated certain expenses from the corporate
segment to the franchise segment as well as $55,000 due to a rent subsidy the
Company is provided on certain franchise locations during the first six months
of 2009, which was not provided in the first six months of
2008. Additionally, the franchise segment incurred travel, training,
and related costs associated with the installation of the Company’s new
Point-of-Sale computer system (initiated March 2008). These increases
were offset, in part, by a decrease in certain salaries and related expenses as
the Company continued to stream-line certain operations, including franchise
business development to commission-based compensation.
Company
Store Segment
|
|
For
the Three Months Ended June 30 (in thousands):
|
|
|
|
2009
|
|
|
2008
|
|
|
$
Change
|
|
|
%
Change
|
|
Net
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
sales
|
|
$ |
500 |
|
|
$ |
954 |
|
|
$ |
(454 |
) |
|
|
(47.6 |
%) |
Cost
of retail sales
|
|
|
99 |
|
|
|
246 |
|
|
|
(147 |
) |
|
|
(59.8 |
%) |
Gross
margin
|
|
|
401 |
|
|
|
708 |
|
|
|
(307 |
) |
|
|
(43.4 |
%) |
Selling,
General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and related benefits
|
|
|
228 |
|
|
|
427 |
|
|
|
(199 |
) |
|
|
(46.6 |
%) |
Rent
and related overhead
|
|
|
227 |
|
|
|
294 |
|
|
|
(67 |
) |
|
|
(22.8 |
%) |
Advertising
|
|
|
30 |
|
|
|
65 |
|
|
|
(35 |
) |
|
|
(53.8 |
%) |
Other
general and administrative costs
|
|
|
49 |
|
|
|
115 |
|
|
|
(66 |
) |
|
|
(57.4 |
%) |
Total
selling, general and administrative expenses
|
|
|
534 |
|
|
|
901 |
|
|
|
(367 |
) |
|
|
(40.7 |
%) |
Operating
Loss
|
|
$ |
(133 |
) |
|
$ |
(193 |
) |
|
$ |
60 |
|
|
|
31.1 |
% |
|
|
For
the Six Months Ended June 30 (in thousands):
|
|
|
|
2009
|
|
|
2008
|
|
|
$
Change
|
|
|
%
Change
|
|
Net
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
sales
|
|
$ |
1,030 |
|
|
$ |
2,096 |
|
|
$ |
(1,066 |
) |
|
|
(50.9 |
%) |
Cost
of retail sales
|
|
|
259 |
|
|
|
511 |
|
|
|
(252 |
) |
|
|
(49.3 |
%) |
Gross
margin
|
|
|
771 |
|
|
|
1,585 |
|
|
|
(814 |
) |
|
|
(51.4 |
%) |
Selling,
General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and related benefits
|
|
|
478 |
|
|
|
925 |
|
|
|
(447 |
) |
|
|
(48.3 |
%) |
Rent
and related overhead
|
|
|
393 |
|
|
|
569 |
|
|
|
(176 |
) |
|
|
(30.9 |
%) |
Advertising
|
|
|
60 |
|
|
|
133 |
|
|
|
(73 |
) |
|
|
(54.9 |
%) |
Other
general and administrative costs
|
|
|
74 |
|
|
|
169 |
|
|
|
(95 |
) |
|
|
(56.2 |
%) |
Total
selling, general and administrative expenses
|
|
|
1,005 |
|
|
|
1,796 |
|
|
|
(791 |
) |
|
|
(44.0 |
%) |
Operating
Loss
|
|
$ |
(234 |
) |
|
$ |
(211 |
) |
|
$ |
(23 |
) |
|
|
(10.9 |
%) |
Retail
sales for the Company store segment decreased approximately $454,000, or 47.6%,
to $500,000 for the three months ended June 30, 2009, as compared to $954,000
for the three months ended June 30, 2008, and decreased approximately
$1,066,000, or 50.9%, to $1,030,000 for the six months ended June 30, 2009, as
compared to $2,096,000 for the six months ended June 30, 2008. This
decrease was mainly attributable to fewer Company-owned store locations open
during the comparable periods. As of June 30, 2009, there were 6
Company-owned stores, as compared to 9 Company-owned stores as of June 30, 2008
(both periods inclusive of one store operated by a franchisee under the terms of
a management agreement). Over the last 12 months,
the Company has closed one Company-owned location and franchised one other that
were part of the store count as of June 30, 2008. The two stores
generated retail sales of $608,000 for the twelve months ended June 30, 2008, as
compared to $268,000 for the twelve months ended June 30, 2009. On a same
store basis (for stores that operated as a Company-owned store during the
entirety of all of the periods ended June 30, 2009 and 2008), comparative net
sales decreased approximately $99,000, or 18.1%, to $449,000 for the three
months ended June 30, 2009, as compared to $548,000 for the three months ended
June 30, 2008, and decreased approximately $119,000, or 10.8%, to $983,000 for
the six months ended June 30, 2009, as compared to $1,102,000 for the six months
ended June 30, 2008. The decrease in overall revenues for both
periods were partially a result of the Company reserving, in January 2009, the
total amount of managed care receivables generated by such stores and
recognizing the income on such receivables when cash receipts are
recovered. Additionally, management believes that the decreases were
a direct result of current economic conditions, as well as the loss of a key
optometrist in the 2nd quarter
of 2009, which led to reduced exam fee revenues.
The
Company-owned store’s gross profit margin, which calculation does not include
the exam fee revenues of $67,000 and $117,000 for the three months ended June
30, 2009 and 2008, respectively, and $174,000 and $257,000 for the six months
ended June 30, 2009 and 2008, respectively, generated by such Company-owned
stores, increased by 6.4%, to 76.2%, for the three months ended June 30, 2009,
as compared to 69.8% for the three months ended June 30, 2008, and decreased by
2.9%, to 69.7% for the six months ended June 30, 2009, as compared to 72.6% for
the six months ended June 30, 2008. The six month decrease was a
direct result of the decrease in managed care revenues as described
above. The three month improvement on gross profit margins is
attributable to certain vendor programs initiated during the 4th quarter
of 2008 that has helped improve the Company’s lab/lens
costs. Additionally, 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
such stores, competitive pricing, and certain one-time sales
promotions.
Operating
expenses of the Company store segment decreased approximately $367,000, or
40.7%, to $534,000 for the three months ended June 30, 2009, as compared to
$901,000 for the three months ended June 30, 2008, and decreased approximately
$791,000, or 44.0%, to $1,005,000 for the six months ended June 30, 2009, as
compared to $1,796,000 for the six months ended June 30, 2008. These
decreases were mainly a result of having fewer Company-owned stores in operation
during the three and six months ended June 30, 2009. Additionally,
the Company streamlined certain store payroll coverage in its stores to reduced
salaries and related benefits, the loss of the optometrist as noted above, and
enhanced the media plans for each store, which reduced advertising costs on a
by-store basis.
VisionCare
of California Segment
|
|
For
the Three Months Ended June 30 (in thousands):
|
|
|
|
2009
|
|
|
2008
|
|
|
$
Change
|
|
|
%
Change
|
|
Net
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership
fees
|
|
$ |
872 |
|
|
$ |
877 |
|
|
$ |
(5 |
) |
|
|
(0.6 |
%) |
Selling,
General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and related benefits
|
|
|
773 |
|
|
|
812 |
|
|
|
(39 |
) |
|
|
(4.8 |
%) |
Rent
and related overhead
|
|
|
41 |
|
|
|
35 |
|
|
|
6 |
|
|
|
17.1 |
% |
Other
general and administrative costs
|
|
|
56 |
|
|
|
32 |
|
|
|
24 |
|
|
|
75.0 |
% |
Total
selling, general and administrative expenses
|
|
|
870 |
|
|
|
879 |
|
|
|
(9 |
) |
|
|
(1.0 |
%) |
Operating
Income (Loss)
|
|
|
2 |
|
|
|
(2 |
) |
|
|
4 |
|
|
|
200.0 |
% |
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
10 |
|
|
|
6 |
|
|
|
4 |
|
|
|
66.7 |
% |
Total
other income
|
|
|
10 |
|
|
|
6 |
|
|
|
4 |
|
|
|
66.7 |
% |
Income
before income tax benefit
|
|
$ |
12 |
|
|
$ |
4 |
|
|
$ |
8 |
|
|
|
200.0 |
% |
|
|
For
the Six Months Ended June 30 (in thousands):
|
|
|
|
2009
|
|
|
2008
|
|
|
$
Change
|
|
|
%
Change
|
|
Net
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership
fees
|
|
$ |
1,747 |
|
|
$ |
1,720 |
|
|
$ |
27 |
|
|
|
1.6 |
% |
Selling,
General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and related benefits
|
|
|
1,550 |
|
|
|
1,594 |
|
|
|
(44 |
) |
|
|
(2.8 |
%) |
Rent
and related overhead
|
|
|
80 |
|
|
|
73 |
|
|
|
7 |
|
|
|
9.6 |
% |
Other
general and administrative costs
|
|
|
100 |
|
|
|
55 |
|
|
|
45 |
|
|
|
81.8 |
% |
Total
selling, general and administrative expenses
|
|
|
1,730 |
|
|
|
1,722 |
|
|
|
8 |
|
|
|
0.5 |
% |
Operating
Income (Loss)
|
|
|
17 |
|
|
|
(2 |
) |
|
|
19 |
|
|
|
950.0 |
% |
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
11 |
|
|
|
8 |
|
|
|
3 |
|
|
|
37.5 |
% |
Total
other income
|
|
|
11 |
|
|
|
8 |
|
|
|
3 |
|
|
|
37.5 |
% |
Income
before income tax benefit
|
|
$ |
28 |
|
|
$ |
6 |
|
|
$ |
22 |
|
|
|
366.7 |
% |
Revenues
generated by the Company’s wholly-owned subsidiary, VisionCare of California,
Inc. (“VCC”), a specialized health care maintenance organization licensed by the
State of California Department of Managed Health Care, decreased approximately
$5,000, or 0.6%, to $872,000 for the three months ended June 30, 2009, as
compared to $877,000 for the three months ended June 30, 2008, and increased
approximately $27,000, or 1.6%, to $1,747,000 for the six months ended June 30,
2009, as compared to $1,720,000 for the six months ended June 30,
2008. The increase for the six months ended June 30, 2009 related to
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,
decreasing only $9,000, or 1.0%, to $870,000 for the three months ended June 30,
2009, as compared to $879,000 for the three months ended June 30, 2008, and
increased approximately $8,000, or 0.5%, to $1,730,000 for the six months ended
June 30, 2009, as compared to $1,722,000 for the six months ended June 30,
2008. The increase for the six months ended June 30, 2009 related to
increased doctor salaries and related benefits paid by VCC, which will be offset
in future quarters due to the increase in the daily membership fees as discussed
above.
Corporate
Overhead Segment
|
|
For
the Three Months Ended June 30 (in thousands):
|
|
|
|
2009
|
|
|
2008
|
|
|
$
Change
|
|
|
%
Change
|
|
Selling,
General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and related benefits
|
|
$ |
351 |
|
|
$ |
382 |
|
|
$ |
(31 |
) |
|
|
(8.1 |
%) |
Professional
fees
|
|
|
162 |
|
|
|
168 |
|
|
|
(6 |
) |
|
|
(3.6 |
%) |
Insurance
|
|
|
40 |
|
|
|
38 |
|
|
|
2 |
|
|
|
5.3 |
% |
Rent
and related overhead
|
|
|
26 |
|
|
|
60 |
|
|
|
(34 |
) |
|
|
(56.6 |
%) |
Compensation
expense
|
|
|
- |
|
|
|
41 |
|
|
|
(41 |
) |
|
|
(100.0 |
%) |
Other
general and administrative costs
|
|
|
6 |
|
|
|
21 |
|
|
|
(15 |
) |
|
|
(71.4 |
%) |
Total
selling, general and administrative expenses
|
|
|
585 |
|
|
|
710 |
|
|
|
(125 |
) |
|
|
(17.6 |
%) |
Operating
Loss
|
|
$ |
(585 |
) |
|
$ |
(710 |
) |
|
$ |
125 |
|
|
|
17.6 |
% |
|
|
For
the Six Months Ended June 30 (in thousands):
|
|
|
|
2009
|
|
|
2008
|
|
|
$
Change
|
|
|
%
Change
|
|
Selling,
General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and related benefits
|
|
$ |
720 |
|
|
$ |
853 |
|
|
$ |
(133 |
) |
|
|
(15.6 |
%) |
Professional
fees
|
|
|
286 |
|
|
|
302 |
|
|
|
(16 |
) |
|
|
(5.3 |
%) |
Insurance
|
|
|
118 |
|
|
|
126 |
|
|
|
(8 |
) |
|
|
(6.3 |
%) |
Rent
and related overhead
|
|
|
51 |
|
|
|
121 |
|
|
|
(70 |
) |
|
|
(57.9 |
%) |
Compensation
expense
|
|
|
- |
|
|
|
46 |
|
|
|
(46 |
) |
|
|
(100.0 |
%) |
Other
general and administrative costs
|
|
|
14 |
|
|
|
87 |
|
|
|
(73 |
) |
|
|
(83.9 |
%) |
Total
selling, general and administrative expenses
|
|
|
1,189 |
|
|
|
1,535 |
|
|
|
(346 |
) |
|
|
(22.5 |
%) |
Operating
Loss
|
|
$ |
(1,189 |
) |
|
$ |
(1,535 |
) |
|
$ |
346 |
|
|
|
22.5 |
% |
There
were no revenues generated by the corporate overhead segment.
Operating
expenses decreased approximately $125,000, or 17.6%, to $585,000 for the three
months ended June 30, 2009, as compared to $710,000 for the three months ended
June 30, 2008, and decreased approximately $346,000, or 22.5%, to $1,189,000 for
the six months ended June 30, 2009, as compared to $1,535,000 for the six months
ended June 30, 2008. The decreases for the three and six months ended
June 30, 2009 were a result of decreases to salaries and related benefits of
$31,000 and $151,000, respectively, due, in part, to decreases, in May 2008, in
the Company’s medical and dental insurance premiums and the utilization, in
January 2009, of an outside attorney to handle all franchise agreement
transactions (during 2008 the Company utilized an “in-house”
counsel). Additionally, the Company reallocated certain rent and
related overhead expenses to the franchise segment due to certain overhead
reductions that occurred in the first quarter of 2009, the Company incurred
compensation expense of approximately $41,000 in May 2008 due to the granting of
stock options to the directors of the Company (there were no such grants during
the first six months of 2009), and the Company absorbed the entire increase in
medical and dental benefits of VCC for the first quarter of 2008.
Other
Segment
|
|
For
the Three Months Ended June 30 (in thousands):
|
|
|
|
2009
|
|
|
2008
|
|
|
$
Change
|
|
|
%
Change
|
|
Net
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions
|
|
$ |
- |
|
|
$ |
12 |
|
|
$ |
(12 |
) |
|
|
(100.0 |
%) |
Other
|
|
|
(4 |
) |
|
|
(4 |
) |
|
|
- |
|
|
|
n/a |
|
Net
revenues
|
|
|
(4 |
) |
|
|
8 |
|
|
|
(12 |
) |
|
|
(150.0 |
%) |
Selling,
General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and related benefits
|
|
|
- |
|
|
|
8 |
|
|
|
(8 |
) |
|
|
(100.0 |
%) |
Advertising
|
|
|
- |
|
|
|
50 |
|
|
|
(50 |
) |
|
|
(100.0 |
%) |
Other
general and administrative costs
|
|
|
1 |
|
|
|
10 |
|
|
|
(9 |
) |
|
|
(90.0 |
%) |
Total
selling, general and administrative expenses
|
|
|
1 |
|
|
|
68 |
|
|
|
(67 |
) |
|
|
(98.5 |
%) |
Operating
Loss
|
|
$ |
(5 |
) |
|
$ |
(60 |
) |
|
$ |
55 |
|
|
|
91.7 |
% |
|
|
For
the Six Months Ended June 30 (in thousands):
|
|
|
|
2009
|
|
|
2008
|
|
|
$
Change
|
|
|
%
Change
|
|
Net
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions
|
|
$ |
3 |
|
|
$ |
69 |
|
|
$ |
(66 |
) |
|
|
(95.7 |
%) |
Other
|
|
|
- |
|
|
|
19 |
|
|
|
(19 |
) |
|
|
(100.0 |
%) |
Net
revenues
|
|
|
3 |
|
|
|
88 |
|
|
|
(85 |
) |
|
|
(96.6 |
%) |
Selling,
General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and related benefits
|
|
|
1 |
|
|
|
28 |
|
|
|
(27 |
) |
|
|
(96.4 |
%) |
Advertising
|
|
|
- |
|
|
|
92 |
|
|
|
(92 |
) |
|
|
(100.0 |
%) |
Other
general and administrative costs
|
|
|
1 |
|
|
|
13 |
|
|
|
(12 |
) |
|
|
(92.3 |
%) |
Total
selling, general and administrative expenses
|
|
|
2 |
|
|
|
133 |
|
|
|
(131 |
) |
|
|
(98.5 |
%) |
Operating
Income (Loss)
|
|
$ |
1 |
|
|
$ |
(45 |
) |
|
$ |
46 |
|
|
|
102.2 |
% |
Revenues
generated by the other segment decreased approximately $85,000, or 96.6%, to
$3,000 for the six months ended June 30, 2009, as compared to $88,000 for the
six months ended June 30, 2008. 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 decreased approximately $131,000, or 98.5%, to
$2,000 for the six months ended June 30, 2009, as compared to $133,000 for the
six months ended June 30, 2008. The decrease was due to the cease in
operations as described above.
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 Three Months Ended June 30 (in thousands):
|
|
|
|
2009
|
|
|
2008
|
|
|
$
Change
|
|
|
%
Change
|
|
EBITDA
Reconciliation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
(64 |
) |
|
$ |
307 |
|
|
$ |
(371 |
) |
|
|
(120.8 |
%) |
Interest
|
|
|
58 |
|
|
|
69 |
|
|
|
(11 |
) |
|
|
(15.9 |
%) |
Taxes
|
|
|
(3 |
) |
|
|
(139 |
) |
|
|
136 |
|
|
|
97.8 |
% |
Depreciation
and amortization
|
|
|
173 |
|
|
|
156 |
|
|
|
17 |
|
|
|
10.9 |
% |
EBITDA
|
|
$ |
164 |
|
|
$ |
393 |
|
|
$ |
(229 |
) |
|
|
(58.3 |
%) |
|
|
For
the Six Months Ended June 30 (in thousands):
|
|
|
|
2009
|
|
|
2008
|
|
|
$
Change
|
|
|
%
Change
|
|
EBITDA
Reconciliation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
166 |
|
|
$ |
1,024 |
|
|
$ |
(858 |
) |
|
|
(83.8 |
%) |
Interest
|
|
|
115 |
|
|
|
161 |
|
|
|
(46 |
) |
|
|
(28.6 |
%) |
Taxes
|
|
|
11 |
|
|
|
(265 |
) |
|
|
276 |
|
|
|
104.2 |
% |
Depreciation
and amortization
|
|
|
321 |
|
|
|
313 |
|
|
|
8 |
|
|
|
2.6 |
% |
EBITDA
|
|
$ |
613 |
|
|
$ |
1,233 |
|
|
$ |
(620 |
) |
|
|
(50.3 |
%) |
The
Company also incurred other non-cash charges that effected earnings including
compensation expenses related to the grant of common stock options and warrants
of $41,000 and $46,000 for the three and six months ended June 30,
2008. No such charges were incurred for the three and six months
ended June 30, 2009.
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, many of which were incurred as a result of the acquisitions of Combine
and TOG. These charges, such as depreciation and amortization, and
interest expense, are included in selling, general and administrative expenses
on the Consolidated Condensed Statements of Operations.
Liquidity
and Capital Resources
As of
June 30, 2009, the Company had a working capital deficit of $3,744,000 due, in
part, to the reclassification of the Company’s outstanding principal on the
M&T line of credit from long-term to short-term (approximately
$4,957,000). The Company had cash on hand of
$1,656,000. The outstanding principal under the Credit Facility is
due on April 1, 2010. The Company’s ability to meet its obligations
will be dependent upon its ability to generate future profitability and/or its
ability to obtain additional financing or obtain an extension of the expiration
of the Credit Facility from M&T, however, the Company does not know if it
will be able to extend or refinance the debt and cannot guarantee that extending
or refinancing the debt will be on terms favorable to the Company.
During
the six months ended June 30, 2009, cash flows used in operating activities were
$19,000. This was principally due to an increase in optical
purchasing group receivables of $1,831,000 due to increased optical purchasing
group sales, as well as a decrease in accounts payable and accrued expenses of
$346,000, partially due to the decrease in the number of Company-owned stores in
operation leading to a reduction in product purchased, and the payment of
approximately $501,000 of legal invoices outstanding as of December 31, 2008
related to the For Eyes litigation. This was offset, in part, by net
income and other non-cash expenses of $685,000, as well as an increase in
optical purchasing group payables of $1,652,000 for the reason described
above. The Company hopes to continue to improve its operating cash
flows through the continued implementation of the Company’s Point-of-Sales
(“POS”) system to improve the franchise sales reporting process, the addition of
new franchise locations, its current and future acquisitions, new vendor
programs, and continued efficiencies as it relates to corporate overhead
expenses.
For the
six months ended June 30, 2009, cash flows used in investing activities were
$61,000 mainly due to the issuance of new promissory notes (including
approximately $67,000 for the acquisition of a franchise location) and capital
expenditures related to improvements to the Company’s IT infrastructure and the
implementation of the POS system. Management does anticipate certain
capital expenditures over the next 12 months, including expenditures to continue
to implement the POS system within the Franchise community, and enhance the
Company’s technology infrastructure and related internal
controls. Such improvements to the IT infrastructure could include
the relocation of Combine’s operations from Florida to New York, which could
result in capital expenditures of approximately
$100,000. Additionally, Management does not know the extent of the
legal costs associated with the continuance of litigation in defending one of
the Company’s trademarks; however, the Company is in settlement discussions with
its adversary, which settlement could reduce future litigation costs, provided,
however, that there can be no assurance that the litigation will be settled, or,
if it is settled, that the terms of such settlement will be favorable to the
Company.
For the
six months ended June 30, 2009, cash used in financing activities was $408,000
due to additional borrowings under the Company’s Credit Facility of $150,000,
offset by the repayment of the Company’s related party borrowings and repayment
on the Credit Facility of $500,000. In April 2010, the Company’s
Credit Facility will expire and all outstanding borrowings will be
due. The Company is currently exploring certain options available to
it to extend or refinance, prior to April 2010, provided, however, that the
Company does not know if it will be able to extend or refinance the debt and
cannot guarantee that extending or refinancing the debt will be on terms
favorable to the Company.
The
Company has been able to utilize the earnings from the operations of Combine to
support the repayment of its related party debt with the previous owner and
current President of Combine (“COM President”). Management believes
it will continue to be able to utilize the earnings of Combine to repay the
remaining amounts due, however, commencing on September 29, 2010, and expiring
September 28, 2016, COM President may put back to the Company 2,187,500 options
at a put price per share of $0.32 ($700,000). The Company believes it
will need additional financing should COM President decide to put back such
options and is currently exploring certain options available to make such
payment. However, there can be no assurance that the Company will
find financing or that such financing will be on terms favorable to the
Company.
Credit
Facility
On August
8, 2007, the Company entered into a Revolving Line of Credit Note and Credit
Agreement (the “Credit Agreement”) with Manufacturers and Traders Trust Company
(“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, which is secured by
substantially all of the assets of the Company, other than the assets of
Combine, which assets are used to secure the repayment of Combine’s
debt. The Credit Facility is set to mature on 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. The Company is
currently exploring certain options available to it to extend or refinance,
prior to April 2010, provided, however, that the Company does not know if it
will be able to extend or refinance the debt and cannot guarantee that extending
or refinancing the debt will be on terms favorable to the Company.
As of
June 30, 2009, the Company had outstanding borrowings of $4,956,854 under the
Credit Facility, which amount was included in Short-term Debt on the
accompanying Consolidated Condensed 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. Additionally, the Company had $543,146 available under the
Credit Facility for future borrowings.
The
Credit Facility includes various financial covenants including minimum net
worth, maximum funded debt and debt service ratio requirements. As of
June 30, 2009, the Company was not in compliance with two of the financial
covenants, however, M&T granted the Company a waiver and agreed that, as of
June 30, 2009, it was now in compliance with such covenants.
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. The Company refers the reader to the Notes to the
Consolidated Condensed Financial Statements included in Item 1 of this Quarterly
Report for information regarding the Company’s lease guarantees.
Management’s
Discussion of Critical Accounting Policies and Estimates
High-quality
financial statements require rigorous application of high-quality accounting
policies. Management believes that its policies related to revenue
recognition, deferred tax assets, legal contingencies, impairment on goodwill
and intangible assets, and allowances on franchise, notes and other receivables
are critical to an understanding of the Company’s Consolidated Condensed
Financial Statements because their application places the most significant
demands on management’s judgment, with financial reporting results relying on
estimation about the effect of matters that are inherently
uncertain.
Management’s
estimate of the allowances on receivables is based on historical sales,
historical loss levels, and an analysis of the collectability 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 $18,000
and $1,000 higher/lower for the six months ended June 30, 2009 and 2008,
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 $1,463,000 and $1,536,000 higher/lower for the six
months ended June 30, 2009 and 2008, 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 collectability is reasonably assured. To
the extent that collectability 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 $115,000 and $112,000 higher for the six months ended June 30, 2009
and 2008, respectively.
Management’s
performs an annual impairment analysis to determine the fair value of goodwill
and certain intangible assets. In determining the fair value of such
assets, management uses a variety of methods and assumptions including a
discounted cash flow analysis along with various qualitative
tests. To the extent that management needed to impair its goodwill or
certain intangible assets by 10 percent, consolidated net income would be an
estimated $724,000 and $744,000 lower for the six months ended June 30, 2009 and
2008, respectively.
The
quarterly report does not include information for Item 3 pursuant to the rules
of the Securities and Exchange Commission that permit “smaller reporting
companies” to omit such information.
Disclosure
Controls and Procedures
We
maintain disclosure controls and procedures (as defined in Exchange Act Rule
13a-15(e)) that are designed to ensure that information required to be disclosed
in our Exchange Act of reports is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission’s
rules and forms, and that such information is accumulated and communicated to
management, including our principal executive officer and principal financial
officer, as appropriate, to allow timely decisions regarding required
disclosure.
As
required by Exchange Act Rule 13a-15(b), as of the end of the period covered by
this Quarterly Report, with the participation of our principal executive officer
and principal financial officer, we evaluated the effectiveness of our
disclosure controls and procedures. Based on this evaluation, our
principal executive officer and principal financial officer concluded that our
disclosure controls and procedures were effective as of June 30,
2009.
Changes
in Internal Control over Financial Reporting
There was
no change in our internal control over financial reporting, identified in
connection with the evaluation required by paragraph (d) of Rule 13a-15 of the
Exchange Act, that occurred during our most recently completed fiscal quarter
that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
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. In June
2009, this action was settled. The terms of the settlement include
the payment, by the Company to Irondequoit Mall, LLC, of an aggregate sum of
$75,000, of which $50,000 was paid in July 2009 and $25,000 is due prior to
September 30, 2009, and the exchange of mutual general releases.
There
have been no material changes to the disclosure related to risk factors made in
the Company Annual Report on Form 10-K for the year ended December 31,
2008.
None.
None.
None.
None.
3.1
|
Restated
Certificate of Incorporation of Sterling Vision, Inc., filed on December
20, 1995 (incorporated by reference to Exhibit 3.1 to Sterling Vision,
Inc.’s Annual Report on Form 10-K/A for the year ended December 31,
1995).
|
3.2
|
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
Sterling Vision, Inc.’s Annual Report on Form 10-K for the fiscal year
ended December 31, 2002, Securities and Exchange Commission (“SEC”) File
Number 001-14128, Film Number
03630359).
|
3.3
|
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
Sterling Vision, Inc.’s Current Report on Form 8-K, dated February 8,
2000, SEC File Number 001-14128, Film Number
549404).
|
3.4
|
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
Sterling Vision, Inc.’s Current Report on Form 8-K, dated February 8,
2000, SEC File Number 001-14128, Film Number
549404).
|
3.5
|
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
Sterling Vision, Inc.’s Annual Report on Form 10-K for the fiscal year
ended December 31, 2002, SEC File Number 001-14128, Film Number
03630359).
|
3.6
|
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
Emerging Vision, Inc.’s Annual Report on Form 10-K for the fiscal year
ended December 31, 2002, SEC File Number 001-14128, Film Number
03630359).
|
3.7
|
Amended
and Restated By-Laws of Sterling Vision, Inc., dated December 18, 1995
(incorporated by reference to Exhibit 3.2 to Sterling Vision, Inc.’s
Annual Report on Form 10-K/A for the fiscal year ended December 31,
1995).
|
3.8
|
First
Amendment to Amended and Restated By-Laws of Emerging Vision, Inc.
(incorporated by reference to Exhibit 3.8 to the Company’s Current Report
in Form 8-K, dated December 31, 2003, SEC File Number 001-14128, Film
Number 04610079).
|
10.1
|
Revolving
Line of Credit Amendment, dated as of April 1, 2009, by and among Emerging
Vision, Inc., OG Acquisition, Inc., Combine Buying Group, Inc., 1725758
Ontario Inc. d/b/a The Optical Group and Manufacturers and Traders Trust
Company (incorporated by reference to Exhibit 10.1 to Emerging
Vision, Inc.’s Current Report on Form 8-K, as filed with the SEC on April
13, 2009).
|
10.2
|
Allonge
(Revision Agreement of Note), dated as of April 1, 2009, by and among
Emerging Vision, Inc., OG Acquisition, Inc., Combine Buying Group, Inc.,
1725758 Ontario Inc. d/b/a The Optical Group and Manufacturers and Traders
Trust Company (incorporated by reference to Exhibit 10.2 to Emerging
Vision, Inc.’s Current Report on Form 8-K, as filed with the SEC on April
13, 2009).
|
10.3
|
Letter
of Reaffirmation of General Security Agreement, dated as of April 1, 2009,
delivered by Emerging Vision, Inc., OG Acquisition, Inc., Combine Buying
Group, Inc. and 1725758 Ontario Inc. d/b/a The Optical Group to
Manufacturers and Traders Trust Company (incorporated by reference to
Exhibit 10.3 to Emerging Vision, Inc.’s Current Report on Form 8-K,
as filed with the SEC on April 13,
2009).
|
10.4
|
Letter
of Reaffirmation of Guaranty, dated as of April 1, 2009, delivered by OG
Acquisition, Inc., Combine Buying Group, Inc. and 1725758 Ontario Inc.
d/b/a The Optical Group to Manufacturers and Traders Trust Company
(incorporated by reference to Exhibit 10.4 to Emerging Vision, Inc.’s
Current Report on Form 8-K, as filed with the SEC on April 13,
2009).
|
10.5
|
Letter
of Reaffirmation of Absolute Assignment of Franchisee Notes and Proceeds
Due, Assignment of Rents and Subleases, Pledge Agreement, and United
States Trademark Collateral Assignment and Security Agreement, dated as of
April 1, 2009, delivered by Emerging Vision, Inc. and OG Acquisition, Inc.
to Manufacturers and Traders Trust Company (incorporated by reference to
Exhibit 10.5 to Emerging Vision, Inc.’s Current Report on Form 8-K,
as filed with the SEC on April 13,
2009).
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned hereunto duly authorized.
EMERGING VISION, INC.
(Registrant)
BY:
/s/ Christopher G.
Payan
Christopher
G. Payan
Chief
Executive Officer
(Principal
Executive Officer)
BY:
/s/ Brian P.
Alessi
Brian P. Alessi
Chief Financial Officer
(Principal Financial and Accounting
Officer)
Dated: August 14, 2009