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,
2010
|
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.)
520
Eighth Avenue, 23rd
Floor
New
York, NY 10018
(Address
and zip code of principal executive offices)
Registrant’s
telephone number, including area code: (646) 737-1500
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.
Large
accelerated filer __
|
Accelerated
filer __
|
|
Non-accelerated
filer __
(Do
not check if a smaller reporting company)
|
Smaller
reporting company X
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act):
As of
August 16, 2010, there were 125,292,806 outstanding shares of the Issuer’s
Common Stock, par value $0.01 per share.
TABLE
OF CONTENTS
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PAGE
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4
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5
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6-7
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8-17
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18-29
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30
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30
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31
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31
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31
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31
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31
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31
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31-33
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34
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CONSOLIDATED
CONDENSED BALANCE SHEETS
(In
Thousands, Except Share Data)
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ASSETS
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June
30,
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December
31,
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2010
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2009
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(unaudited)
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|
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Current
assets:
|
|
|
|
|
|
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Cash
and cash equivalents
|
|
$ |
1,349 |
|
|
$ |
1,576 |
|
Franchise
receivables, net of allowance of $179 and $188,
respectively
|
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|
1,849 |
|
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|
1,665 |
|
Optical
purchasing group receivables, net of allowance of $154 and $155,
respectively
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6,166 |
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|
4,594 |
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Other
receivables, net of allowance of $47 and $15, respectively
|
|
|
291 |
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|
237 |
|
Current
portion of franchise notes receivable, net of allowance of
$42
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|
242 |
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|
221 |
|
Inventories,
net
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|
342 |
|
|
|
309 |
|
Prepaid
expenses and other current assets
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|
376 |
|
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|
447 |
|
Deferred
tax assets
|
|
|
171 |
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|
|
276 |
|
Total
current assets
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|
10,786 |
|
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|
9,325 |
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|
|
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Property
and equipment, net
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|
|
779 |
|
|
|
872 |
|
Franchise
notes receivable
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|
|
366 |
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|
|
290 |
|
Deferred
tax asset, net of current portion
|
|
|
614 |
|
|
|
534 |
|
Goodwill
|
|
|
3,651 |
|
|
|
3,651 |
|
Intangible
assets, net
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|
|
2,747 |
|
|
|
2,839 |
|
Other
assets
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|
|
272 |
|
|
|
238 |
|
Total
assets
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$ |
19,215 |
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$ |
17,749 |
|
LIABILITIES AND SHAREHOLDERS’
EQUITY
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Current
liabilities:
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Accounts
payable and accrued liabilities
|
|
$ |
4,530 |
|
|
$ |
4,564 |
|
Optical
purchasing group payables
|
|
|
5,703 |
|
|
|
4,336 |
|
Put
option liability – related party
|
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|
700 |
|
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|
700 |
|
Short-term
debt
|
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|
4,122 |
|
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|
1,116 |
|
Related
party obligations
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|
|
338 |
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|
|
334 |
|
Total
current liabilities
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|
15,393 |
|
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|
11,050 |
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Long-term
debt
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|
|
27 |
|
|
|
3,792 |
|
Related
party borrowings, net of current portion
|
|
|
25 |
|
|
|
83 |
|
Franchise
deposits and other liabilities
|
|
|
280 |
|
|
|
262 |
|
Total
liabilities
|
|
|
15,725 |
|
|
|
15,187 |
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Commitments
and contingencies
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Shareholders'
equity:
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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
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74 |
|
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|
74 |
|
Common
stock, $0.01 par value per share; 150,000,000 shares authorized;
125,475,143 and 128,992,938 shares issued, respectively, and 125,292,806
and 128,810,601 shares outstanding, respectively
|
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1,254 |
|
|
|
1,289 |
|
Additional
paid-in capital
|
|
|
128,059 |
|
|
|
128,024 |
|
Accumulated
comprehensive loss
|
|
|
(328 |
) |
|
|
(150 |
) |
Accumulated
deficit
|
|
|
(125,365 |
) |
|
|
(126,471 |
) |
Treasury
stock, at cost, 182,337 shares
|
|
|
(204 |
) |
|
|
(204 |
) |
Total
shareholders' equity
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|
3,490 |
|
|
|
2,562 |
|
Total
liabilities and shareholders' equity
|
|
$ |
19,215 |
|
|
$ |
17,749 |
|
The
accompanying notes are an integral part of these consolidated condensed
financial statements.
CONSOLIDATED
CONDENSED STATEMENTS OF OPERATIONS
AND
COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In Thousands, Except Per Share Data)
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|
|
For
the Three Months Ended June 30,
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|
For
the Six Months
Ended
June 30,
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|
2010
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|
2009
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|
2010
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2009
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Revenues:
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|
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|
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Optical
purchasing group sales
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|
$ |
15,105 |
|
|
$ |
14,062 |
|
|
$ |
28,012 |
|
|
$ |
25,365 |
|
Franchise
royalties
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|
|
1,386 |
|
|
|
1,410 |
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|
2,871 |
|
|
|
2,900 |
|
Membership
fees – VisionCare of California
|
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|
891 |
|
|
|
872 |
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|
1,781 |
|
|
|
1,747 |
|
Retail
sales – Company-owned stores
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|
684 |
|
|
|
500 |
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|
1,633 |
|
|
|
1,030 |
|
Franchise
related fees and other revenues
|
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|
153 |
|
|
|
65 |
|
|
|
241 |
|
|
|
143 |
|
Total
revenues
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|
18,219 |
|
|
|
16,909 |
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|
34,538 |
|
|
|
31,185 |
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Costs
and operating expenses:
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|
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|
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Cost
of optical purchasing group sales
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|
14,454 |
|
|
|
13,469 |
|
|
|
26,712 |
|
|
|
24,254 |
|
Cost
of retail sales – Company-owned stores
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|
|
218 |
|
|
|
99 |
|
|
|
411 |
|
|
|
259 |
|
Selling,
general and administrative expenses
|
|
|
3,065 |
|
|
|
3,371 |
|
|
|
6,306 |
|
|
|
6,451 |
|
Total
costs and operating expenses
|
|
|
17,737 |
|
|
|
16,939 |
|
|
|
33,429 |
|
|
|
30,964 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
482 |
|
|
|
(30 |
) |
|
|
1,109 |
|
|
|
221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
(expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on franchise notes receivable
|
|
|
8 |
|
|
|
6 |
|
|
|
15 |
|
|
|
13 |
|
Other
income, net
|
|
|
24 |
|
|
|
15 |
|
|
|
166 |
|
|
|
58 |
|
Interest
expense, net
|
|
|
(58 |
) |
|
|
(58 |
) |
|
|
(104 |
) |
|
|
(115 |
) |
Total
other (expense) income
|
|
|
(26 |
) |
|
|
(37 |
) |
|
|
77 |
|
|
|
(44 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before provision for (benefit from) income taxes
|
|
|
456 |
|
|
|
(67 |
) |
|
|
1,186 |
|
|
|
177 |
|
Provision
for (benefit from) income taxes
|
|
|
30 |
|
|
|
(3 |
) |
|
|
80 |
|
|
|
11 |
|
Net
income (loss)
|
|
|
426 |
|
|
|
(64 |
) |
|
|
1,106 |
|
|
|
166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
(175 |
) |
|
|
(264 |
) |
|
|
(178 |
) |
|
|
54 |
|
Comprehensive
income (loss)
|
|
$ |
251 |
|
|
$ |
(328 |
) |
|
$ |
928 |
|
|
$ |
220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$ |
0.00 |
|
|
$ |
(0.00 |
) |
|
$ |
0.01 |
|
|
$ |
0.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
128,666 |
|
|
|
125,293 |
|
|
|
128,738 |
|
|
|
125,293 |
|
Diluted
|
|
|
128,749 |
|
|
|
125,293 |
|
|
|
128,862 |
|
|
|
125,560 |
|
The
accompanying notes are an integral part of these consolidated condensed
financial statements.
CONSOLIDATED
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
|
|
|
|
For
the Six Months
Ended
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
1,106 |
|
|
$ |
166 |
|
Adjustments
to reconcile net income to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
275 |
|
|
|
321 |
|
Provision
for doubtful accounts
|
|
|
21 |
|
|
|
183 |
|
Deferred
tax assets
|
|
|
25 |
|
|
|
- |
|
Loss
on the sale of property and equipment
|
|
|
22 |
|
|
|
- |
|
Disposal
of property and equipment
|
|
|
- |
|
|
|
15 |
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Franchise
and other receivables
|
|
|
(275 |
) |
|
|
(47 |
) |
Optical
purchasing group receivables
|
|
|
(1,556 |
) |
|
|
(1,831 |
) |
Notes
receivable
|
|
|
(97 |
) |
|
|
(47 |
) |
Inventories
|
|
|
(33 |
) |
|
|
(22 |
) |
Prepaid
expenses and other current assets
|
|
|
71 |
|
|
|
(41 |
) |
Other
assets
|
|
|
(4 |
) |
|
|
(35 |
) |
Accounts
payable and accrued liabilities
|
|
|
(34 |
) |
|
|
(346 |
) |
Optical
purchasing group payables
|
|
|
1,367 |
|
|
|
1,652 |
|
Franchise
deposits and other liabilities
|
|
|
18 |
|
|
|
(34 |
) |
Net
cash provided by (used in) operating activities
|
|
|
906 |
|
|
|
(66 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Settlement
on accounts payable related to enhancing trademark value
|
|
|
- |
|
|
|
102 |
|
Proceeds
from sale of Company-owned store
|
|
|
50 |
|
|
|
- |
|
Costs
associated with enhancing trademark value
|
|
|
- |
|
|
|
(98 |
) |
Purchases
of property and equipment
|
|
|
(132 |
) |
|
|
(18 |
) |
Net
cash used in investing activities
|
|
|
(82 |
) |
|
|
(14 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Costs
associated with extending credit facility
|
|
|
(60 |
) |
|
|
- |
|
Borrowings
under credit facility
|
|
|
- |
|
|
|
150 |
|
Payments
under credit facility
|
|
|
(750 |
) |
|
|
(500 |
) |
Payments
on related party obligations and other debt
|
|
|
(63 |
) |
|
|
(58 |
) |
Net
cash used in financing activities
|
|
|
(873 |
) |
|
|
(408 |
) |
Net
decrease in cash before effect of foreign exchange rate
changes
|
|
|
(49 |
) |
|
|
(488 |
) |
Effect
of foreign exchange rate changes
|
|
|
(178 |
) |
|
|
54 |
|
Net
decrease in cash and cash equivalents
|
|
|
(227 |
) |
|
|
(434 |
) |
Cash
and cash equivalents – beginning of period
|
|
|
1,576 |
|
|
|
2,090 |
|
Cash
and cash equivalents – end of period
|
|
$ |
1,349 |
|
|
$ |
1,656 |
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
98 |
|
|
$ |
102 |
|
Income
taxes
|
|
$ |
26 |
|
|
$ |
16 |
|
Notes
receivable in connection with franchisee settlement (inclusive of all
franchise related receivables)
|
|
$ |
113 |
|
|
$ |
95 |
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated condensed
financial statements.
EMERGING
VISION, INC. AND SUBSIDIARIES
(UNAUDITED)
NOTE
1 – ORGANIZATION:
Business
Emerging
Vision, Inc. and subsidiaries (collectively, the “Company” or “EVI”) operates
one of the largest chains of retail optical stores and one of the largest
franchise optical chains in the United States, based upon management’s beliefs,
domestic sales and the number of locations of Company-owned and franchised
stores (collectively “Sterling Stores”). The Company also targets
retail optical stores within the United States and within Canada to become
members of its two optical purchasing groups, Combine Buying Group, Inc.
(“Combine” or “COM”) and The Optical Group (“TOG”). Additionally, the
Company operates VisionCare of California, Inc. (“VCC”), a wholly owned
subsidiary that is a specialized health care maintenance organization licensed
by the State of California, Department of Managed Health Care. VCC
employs licensed optometrists who render services in offices located immediately
adjacent to, or within, most Sterling Stores located in California.
As of
June 30, 2010, there were 129 Sterling Stores in operation, consisting of 6
Company-owned stores (inclusive of one store operated by a third party pursuant
to a management agreement) and 123 franchised stores, 755 COM members that made
one or more purchases in June 2010, and 554 TOG members that made one or more
purchases in June 2010.
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.
Basis of Presentation
The
accompanying Consolidated Condensed Financial Statements have been prepared in
accordance with accounting principles generally accepted for interim financial
statement presentation and in accordance with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles in the United States (“GAAP”) 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, 2009.
As of
June 30, 2010, the Company had a working capital deficit of approximately
$4,607,000 and an accumulated deficit of approximately
$125,365,000. The Company's working capitcal is not sufficient for
the Company to conduct its short and long-term business operations. These
factors indicate that the Company may be unable to continue as a going concern
if it is unsuccessful in extending its Credit Facility or if the Company is
unable to find alternative means of financing. If the Company is unable to
extend the Credit Facility and unable to obtain additional or alternative debt
or equity financing, the Company will have to seek additional debt or equity
financing to fund its operations. The Company is currently seeking new
business opportunities that might, if successful, mitigate these factors.
The Company's plans include the following: (1) obtaining additional capital from
the sale of certain of the Company's assets; (2) obtaining financing from
various financial institutions, where possible; and (3) negotiating a long-term
extension with M&T Bank on the Company's Credit Facility. The Company
has no current commitments or arrangements with respect to, or immediate sources
of funding. Further, there can be no assurances that funding is available
or available to the Company on acceptable terms. The Company's inability
to obtain funding could have a materially adverse affect on the Company's plan
of operations and will continue to diminish the Company's efforts and burden
operating cash flow.
NOTE
2 – SIGNIFICANT ACCOUNTING POLICIES:
Revenue
Recognition
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 revenues generated by the sale of products and
services, at discounted pricing, to optical purchasing group
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 royalty payments are received;
Retail sales – Company-owned stores
– Represents sales from eye-care products and related services generated
at Company-owned stores;
Membership fees – VisionCare of
California – Represents membership fees generated by VCC, a wholly owned
subsidiary of the Company, for optometric services provided to individual
patients (members).
Franchise related fees and other
revenues – Represents certain franchise fees collected by the Company
under the terms of franchise agreements (including, but not limited to, initial
franchise, transfer, renewal and conversion fees). Initial franchise
fees, which are non-refundable, are recognized when the related franchise
agreement is signed. For the three months ended June 30, 2010 and
2009, the Company recognized $50,000 and $69,000, respectively, of such
franchise related fees. For the six months ended June 30, 2010 and
2009, the Company recognized $130,000 and $140,000, respectively, of such
franchise related fees.
Comprehensive
Income
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 only comprehensive income item
is the cumulative translation adjustment arising from the translation of foreign
currency denominated 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
$175,000 and $264,000 translation loss from the conversion of Canadian Dollars
to U.S. Dollars is included as a component of Comprehensive Income for the three
months ended June 30, 2010 and 2009, respectively, and the resulting $178,000
translation loss and $54,000 translation gain from the conversion of Canadian
Dollars to U.S. Dollars is included as a component of Comprehensive Income for
the six months ended June 30, 2010 and 2009, respectively. Each of
the translation adjustments are recorded directly to accumulated comprehensive
loss within the Consolidated Condensed Balance Sheets.
Income
Taxes
The
Company accounts for income taxes under the liability method as required by
GAAP. Under the liability method the income tax effect of
transactions are recorded in the same year that the transactions occur to
determine net income, regardless of when the transactions are recognized for tax
purposes. Deferred taxes are provided to reflect the income tax
effects of amounts included in the Company’s financial statements in different
periods than for tax purposes, based on the differences between the financial
statement and income tax basis of assets and liabilities.
GAAP
requires that, in applying the liability method, the financial statement effects
of an uncertain tax position be recognized based on the outcome that is more
likely than not to occur. Under this criterion the most likely
resolution of an uncertain tax position should be analyzed based on technical
merits and on the outcome that will likely be sustained under
examination. There were no adjustments related to uncertain tax
positions recognized during the six months June 30, 2010 and 2009,
respectively.
The
Company operates in multiple tax jurisdictions within the United States of
America and Canada. Although management 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, 2010, a summary of the tax years that remains subject to examination
in the Company’s major tax jurisdictions are: United States – Federal
and State – 2006 and forward; and Canada – Federal and Provincial – 2005 and
forward. The Company does not expect to have a material change to
unrecognized tax positions within the next twelve months.
The
provision for income taxes for the three and six months ended June 30, 2010 and
2009 reflects the Company’s estimated utilization of net operating loss
carryforwards resulting in an effective tax rate that is lower than the federal
and state statutory income tax rate.
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, impairment of long-lived
assets, 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:
Basic
earnings per share of common stock (“Basic EPS”) is computed by dividing the net
income by the weighted-average number of shares of common stock
outstanding. Diluted earnings per share of common stock (“Diluted
EPS”) is computed by dividing the net income by the weighted-average number of
shares of common stock, and dilutive common stock equivalents and convertible
securities then outstanding. GAAP requires the presentation of both
Basic EPS and Diluted EPS on the face of the Company’s Consolidated Condensed
Statements of Income and Comprehensive Income. Common stock
equivalents totaling 21,940,519 and 22,485,311 were excluded from the
computation of Diluted EPS for the three and six months ended June 30, 2010 and
2009, respectively, as their effect on the computation of Diluted EPS would have
been anti-dilutive.
The
following table sets forth the computation of basic and diluted per share
information (in thousands except net income per share):
|
|
For
the Three Months Ended June 30,
|
|
|
For
the Six Months Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss):
|
|
$ |
426 |
|
|
$ |
(64 |
) |
|
$ |
1,106 |
|
|
$ |
166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
shares of common stock outstanding
|
|
|
128,666 |
|
|
|
125,293 |
|
|
|
128,738 |
|
|
|
125,293 |
|
Dilutive
effect of stock options, warrants and restricted stock
|
|
|
83 |
|
|
|
- |
|
|
|
124 |
|
|
|
267 |
|
Weighted-average
shares of common stock outstanding, assuming dilution
|
|
|
128,749 |
|
|
|
125,293 |
|
|
|
128,862 |
|
|
|
125,560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$ |
0.00 |
|
|
$ |
(0.00 |
) |
|
$ |
0.01 |
|
|
$ |
0.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE
4 – CREDIT FACILITY:
On August
8, 2007, the Company entered into a Revolving Line of Credit Note and 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, which was subsequently amended on November 11,
2009 to $5,750,000. On March 31, 2010, the Company extended and modified the
Credit Facility and entered into a Non-Revolving Line of Credit Note and Credit
Agreement (the “Credit Agreement”), which is secured by substantially all of the
assets of the Company. The Credit Agreement expires on April 30, 2011. The
Credit Agreement includes a Letter of Credit limit of $745,067, of which the
Company is utilizing the entire $745,067 to hold letters of credit in favor of
two key vendors of Combine to ensure payment of any outstanding invoices not
paid by Combine, as well as in favor of the landlord of the Company’s corporate
office for the rent security deposit. Additionally, the Company had outstanding
borrowings of $3,356,854 as of June 30, 2010, which is 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 fifty
(350) basis points in excess to LIBOR with a minimum rate of 4.5%, with all
unpaid principal due on April 30, 2011.
The
Company also executed a $1,000,000 Libor Term Note (the “Term Note”) in favor of
M&T, dated as of March 31, 2010, which provides for twelve equal, monthly
principal payments of $83,333, plus interest, due on the last day of each month
during the term of the Term Note, which matures on April 30, 2011. The interest
is calculated at the variable rate of three hundred fifty (350) basis points in
excess of LIBOR (unless converted by M&T to a base rate) with a minimum rate
of 4.5%. In connection with the Term Note, the Company paid $200,000 to M&T
on March 31, 2010 to reduce the outstanding borrowings and paid $250,000 during
the second quarter of 2010 to reduce the principal balance due on the Term Note
to $750,000 as of June 30, 2010.
On June
17, 2010, the Company and M&T amended the Credit Facility in which M&T
released its second lien security interest in the assets of Combine until such
time as Combine’s existing indebtedness to Combine Optical Management
Corporation (the “COMC Indebtedness”) is satisfied or otherwise
terminated. In consideration of such release, the Company paid
$150,000 towards the Line of Credit balance and agreed to make an additional
payment of $150,000 to be applied towards the Line of Credit balance on
September 1, 2010. Pursuant to the amendment,upon satisfaction or
termination of the COMC Indebtedness, Combine agreed to grant M&T a first
lien security interest in all of its assets.
As of
June 30, 2010, the Company had outstanding borrowings of $4,106,854 under the
Credit Facility, of which the entire amount is included in Short-term Debt on
the accompanying Consolidated Condensed Balance Sheet. The Credit Facility also
included various financial covenants as of December 31, 2010 including minimum
net worth, maximum funded debt and debt service ratio requirements. In
connection with the modified Credit Agreement, new financial covenants were
established including to (i) maintain a minimum net worth to be met quarterly,
effective March 31, 2010; (ii) have no net losses to be tested quarterly,
effective March 31, 2010; and (iii) attain a minimum earnings before
interest, taxes, depreciation and amortization (“EBITDA”) of $500,000 for the
three month period ended June 30, 2010. As of June 30, 2010, the
Company was in compliance with all such covenants.
The
Company is no longer able to borrow additional amounts under the terms of
modified Credit Agreement. As such, the Company is currently
exploring and willing to continue to explore certain options available to it
including refinancing such debt prior to April 2011. The Company may not be able
to extend or refinance the debt, and it cannot guarantee that extending or
refinancing the debt will be on terms favorable to the Company.
NOTE
5 – SEGMENT REPORTING
Business
Segments
Operating
segments are organized internally primarily by the type of services provided,
and in accordance with ASC 280-10, “Segment Reporting.” 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 products and
services, salaries and related benefits, depreciation and amortization, interest
expense on financing these acquisitions, and allocated overhead.
(2) The
Franchise segment consists of 123 franchise locations as of June 30, 2010 and
130 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 allocated overhead.
(3) The
Company Store segment consists of six Company-owned retail optical stores as of
June 30, 2010 (inclusive of one store operated by a third party pursuant to a
management agreement) and six stores as of June 30, 2009 (also inclusive of one
store operated by a third party pursuant to a management
agreement). Revenues generated by these stores are from sales of eye
care products and services including 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
the eye care products, doctor and store staff salaries and related benefits,
rent, advertising, and allocated 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
optometric services provided to individual patients
(members). Expenses include salaries and related benefits for the
doctors that render such optometric services, and allocated
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,
regulatory 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 reportable segments. Revenues
generated by this segment consist of the sales of contact lenses from a retail,
limited access facility the Company operates which is located within another
retail optical center. Revenues generated by this segment also
include the sales of eye care products and services, as described in the Company
Store segment above, within transitional locations. Transitional
locations could include a Company-owned location that is being sold to a
Franchisee or a Franchise-owned location that is being taken back by the
Company. These locations are in a transition period where operations
are being wound down or built up and therefore would be improperly compared to
stores in the other reportable segments. Expenses include the direct
costs for such eye care products, doctor and store staff salaries and related
benefits, rent, advertising, and allocated overhead.
Certain
business segment information is as follows (in thousands):
|
|
As
of
June
30,
2010
|
|
|
As
of December 31, 2009
|
|
|
|
(unaudited)
|
|
|
|
|
Total
Assets:
|
|
|
|
|
|
|
Optical
Purchasing Group Business
|
|
$ |
12,370 |
|
|
$ |
11,161 |
|
Franchise
|
|
|
5,166 |
|
|
|
4,915 |
|
Company
Store
|
|
|
775 |
|
|
|
655 |
|
VisionCare
of California
|
|
|
574 |
|
|
|
630 |
|
Corporate
Overhead
|
|
|
323 |
|
|
|
386 |
|
Other
|
|
|
7 |
|
|
|
2 |
|
Total
assets
|
|
$ |
19,215 |
|
|
$ |
17,749 |
|
Total
Goodwill:
|
|
|
|
|
|
|
Optical
Purchasing Group Business
|
|
$ |
2,385 |
|
|
$ |
2,385 |
|
Franchise
|
|
|
1,266 |
|
|
|
1,266 |
|
Company
Store
|
|
|
- |
|
|
|
- |
|
VisionCare
of California
|
|
|
- |
|
|
|
- |
|
Corporate
Overhead
|
|
|
- |
|
|
|
- |
|
Other
|
|
|
- |
|
|
|
- |
|
Total
goodwill
|
|
$ |
3,651 |
|
|
$ |
3,651 |
|
Total
Intangible Assets:
|
|
|
|
|
|
|
Optical
Purchasing Group Business
|
|
$ |
1,793 |
|
|
$ |
1,885 |
|
Franchise
|
|
|
954 |
|
|
|
954 |
|
Company
Store
|
|
|
- |
|
|
|
- |
|
VisionCare
of California
|
|
|
- |
|
|
|
- |
|
Corporate
Overhead
|
|
|
- |
|
|
|
- |
|
Other
|
|
|
- |
|
|
|
- |
|
Total
intangible assets
|
|
$ |
2,747 |
|
|
$ |
2,839 |
|
|
|
|
|
|
|
|
|
|
|
|
For
the Three Months
Ended
June 30,
|
|
|
For
the Six Months
Ended
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Net
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Optical
Purchasing Group Business
|
|
$ |
15,105 |
|
|
$ |
14,062 |
|
|
$ |
28,012 |
|
|
$ |
25,365 |
|
Franchise
|
|
|
1,436 |
|
|
|
1,479 |
|
|
|
3,001 |
|
|
|
3,040 |
|
VisionCare
of California
|
|
|
891 |
|
|
|
872 |
|
|
|
1,781 |
|
|
|
1,747 |
|
Company
Store
|
|
|
684 |
|
|
|
500 |
|
|
|
1,633 |
|
|
|
1,030 |
|
Corporate
Overhead
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other
|
|
|
103 |
|
|
|
(4 |
) |
|
|
111 |
|
|
|
3 |
|
Net
revenues
|
|
$ |
18,219 |
|
|
$ |
16,909 |
|
|
$ |
34,538 |
|
|
$ |
31,185 |
|
Income
(loss) before (Benefit from) Provision for Income Taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Optical
Purchasing Group Business
|
|
$ |
277 |
|
|
$ |
158 |
|
|
$ |
613 |
|
|
$ |
382 |
|
Franchise
|
|
|
925 |
|
|
|
486 |
|
|
|
1,979 |
|
|
|
1,189 |
|
VisionCare
of California
|
|
|
(1 |
) |
|
|
12 |
|
|
|
13 |
|
|
|
28 |
|
Company
Store
|
|
|
(35 |
) |
|
|
(133 |
) |
|
|
(28 |
) |
|
|
(234 |
) |
Corporate
Overhead
|
|
|
(672 |
) |
|
|
(585 |
) |
|
|
(1,342 |
) |
|
|
(1,189 |
) |
Other
|
|
|
(38 |
) |
|
|
(5 |
) |
|
|
(49 |
) |
|
|
1 |
|
Income
(loss) before (benefit from) provision for income taxes
|
|
$ |
456 |
|
|
$ |
(67 |
) |
|
$ |
1,186 |
|
|
$ |
177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and Amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Optical
Purchasing Group Business
|
|
$ |
70 |
|
|
$ |
77 |
|
|
$ |
143 |
|
|
$ |
153 |
|
Franchise
|
|
|
14 |
|
|
|
63 |
|
|
|
33 |
|
|
|
124 |
|
VisionCare
of California
|
|
|
7 |
|
|
|
6 |
|
|
|
11 |
|
|
|
11 |
|
Company
Store
|
|
|
14 |
|
|
|
27 |
|
|
|
30 |
|
|
|
33 |
|
Corporate
Overhead
|
|
|
22 |
|
|
|
- |
|
|
|
49 |
|
|
|
- |
|
Other
|
|
|
9 |
|
|
|
- |
|
|
|
9 |
|
|
|
- |
|
Total
depreciation and amortization
|
|
$ |
136 |
|
|
$ |
173 |
|
|
$ |
275 |
|
|
$ |
321 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense, Net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Optical
Purchasing Group Business
|
|
$ |
47 |
|
|
$ |
45 |
|
|
$ |
82 |
|
|
$ |
88 |
|
Franchise
|
|
|
4 |
|
|
|
13 |
|
|
|
8 |
|
|
|
27 |
|
VisionCare
of California
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Company
Store
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Corporate
Overhead
|
|
|
7 |
|
|
|
- |
|
|
|
14 |
|
|
|
- |
|
Other
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
interest expense, net
|
|
$ |
58 |
|
|
$ |
58 |
|
|
$ |
104 |
|
|
$ |
115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Optical
Purchasing Group Business
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
8 |
|
|
$ |
- |
|
Franchise
|
|
|
- |
|
|
|
2 |
|
|
|
4 |
|
|
|
8 |
|
VisionCare
of California
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Company
Store
|
|
|
30 |
|
|
|
- |
|
|
|
36 |
|
|
|
3 |
|
Corporate
Overhead
|
|
|
8 |
|
|
|
1 |
|
|
|
84 |
|
|
|
7 |
|
Other
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
capital expenditures
|
|
$ |
38 |
|
|
$ |
3 |
|
|
$ |
132 |
|
|
$ |
18 |
|
Geographic
Information
The
Company also operates in two separate geographic areas; the United States and
Canada. Certain geographic information is as follows (in
thousands):
|
|
For
the Three Months
Ended
June 30,
|
|
|
For
the Six Months
Ended
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Net
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
6,860 |
|
|
$ |
6,652 |
|
|
$ |
13,572 |
|
|
$ |
13,102 |
|
Canada
|
|
|
11,359 |
|
|
|
10,257 |
|
|
|
20,966 |
|
|
|
18,083 |
|
Net
revenues
|
|
$ |
18,219 |
|
|
$ |
16,909 |
|
|
$ |
34,538 |
|
|
$ |
31,185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(Loss) before (Benefit from) Provision for Income Taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
207 |
|
|
$ |
(289 |
) |
|
$ |
614 |
|
|
$ |
(305 |
) |
Canada
|
|
|
249 |
|
|
|
222 |
|
|
|
572 |
|
|
|
482 |
|
Income
(loss) before (benefit from) provision for income taxes
|
|
$ |
456 |
|
|
$ |
(67 |
) |
|
$ |
1,186 |
|
|
$ |
177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
geographic information on Canada consists of TOG’s business
activities.
Additional
geographic information is summarized as follows as of June 30, 2010 (in
thousands):
|
|
As
of
June
30,
2010
|
|
|
As
of December 31, 2009
|
|
|
|
(unaudited)
|
|
|
|
|
Total
Assets:
|
|
|
|
|
|
|
United
States
|
|
$ |
14,583 |
|
|
$ |
14,195 |
|
Canada
|
|
|
4,632 |
|
|
|
3,554 |
|
Total
assets
|
|
$ |
19,215 |
|
|
$ |
17,749 |
|
Total
Goodwill:
|
|
|
|
|
|
|
United
States
|
|
$ |
3,651 |
|
|
$ |
3,651 |
|
Canada
|
|
|
- |
|
|
|
- |
|
Total
goodwill
|
|
$ |
3,651 |
|
|
$ |
3,651 |
|
Total
Intangible Assets, net:
|
|
|
|
|
|
|
United
States
|
|
$ |
2,747 |
|
|
$ |
2,839 |
|
Canada
|
|
|
- |
|
|
|
- |
|
Total
intangible assets, net
|
|
$ |
2,747 |
|
|
$ |
2,839 |
|
Additional
geographic information is summarized as follows for the three and six months
ended June 30, 2010 and 2009 (in thousands):
|
|
For
the Three Months
Ended
June 30,
|
|
|
For
the Six Months
Ended
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Depreciation
and Amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
136 |
|
|
$ |
170 |
|
|
$ |
275 |
|
|
$ |
315 |
|
Canada
|
|
|
- |
|
|
|
3 |
|
|
|
- |
|
|
|
6 |
|
Total
depreciation and amortization
|
|
$ |
136 |
|
|
$ |
173 |
|
|
$ |
275 |
|
|
$ |
321 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
58 |
|
|
$ |
58 |
|
|
$ |
104 |
|
|
$ |
115 |
|
Canada
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Interest
expense, net
|
|
$ |
58 |
|
|
$ |
58 |
|
|
$ |
104 |
|
|
$ |
115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
38 |
|
|
$ |
3 |
|
|
$ |
132 |
|
|
$ |
18 |
|
Canada
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Capital
expenditures
|
|
$ |
38 |
|
|
$ |
3 |
|
|
$ |
132 |
|
|
$ |
18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE
6 – COMMITMENTS AND CONTINGENCIES:
Litigation
In March
2010, Shoppes at Isla Verde, Ltd. commenced an action against the Company and
its subsidiary Sterling Vision of Royal Palm Beach, Inc., in the Circuit Court
of the State of Florida, Palm Beach County, alleging, among other things, that
the Company had breached its obligations under its lease for the former Sterling
Optical store located in Wellington, Florida. 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 recorded an accrual for probable losses in the event that the Company shall
be held liable in respect of plaintiff’s claims, and the Company does not
believe that it is reasonably possible that such loss would exceed the amount
accrued.
In June
2010, the Company and its subsidiary, Combine Buying Group, Inc. (“Combine”)
(collectively referred to as the “Company”) filed an action in the United States
District Court for the Southern District of Florida against Neil Glachman
(former President of Combine, referred to as “Glachman”), Combine Optical
Management Corporation (owned by Glachman, referred to as “COMC”), James
Lashenick (former bookkeeper of Combine) and various entities which Glachman
(collectively referred to as the “Defendants”) purportedly owns and/or
operates. The Company claims, amongst other things, that (i) Glachman
and COMC breached the Asset Purchase Agreement (“APA”); (ii) Glachman breached
his Employment Agreement and his common law fiduciary duty of loyalty; and (iii)
the various Glachman entities, COMC and Mr. Lashenick aided such breach of
fiduciary duty. The Defendants, in their Answer, asserted defenses to
the Company’s claims, and Glachman and COMC asserted counterclaims against the
Company, including, amongst others, that the Company (i) breached the Security
Agreement executed in connection with the APA; (ii) anticipatorily
breached the APA; and (iii) breached the Employment Agreement with
Glachman by terminating him. The Defendants seek injunctive relief,
including monetary damages, assurances of the Company’s obligation of payment on
Glachman’s $700,000 Put Option, assurances of the Company’s obligation of
payment under the terms of the $225,000 promissory note due October 1, 2010, 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, however,
the Company has accrued for the $700,000 Put Option and $225,000 promissory note
payment, both of which are included in the accompanying Consolidated Condensed
Balance Sheets as of June 30, 2010. The Company believes that it has
a meritorious defense to such action. As of the date hereof, these
proceedings were in the discovery stage.
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.
Although
the Company 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 always be successful.
Guarantees
As of
June 30, 2010, 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
$2,606,000. 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 entered into an Employment Agreement (the “Spina Employment Agreement”)
with Glenn Spina, the Company’s Chief Executive Officer, which began on December
1, 2009 and extends through December 31, 2012. The Spina Employment
Agreement provides for an annual salary of $250,000 and certain other
benefits. Additionally, Mr. Spina will also be eligible for annual
bonus compensation of 5% of our EBITDA (earnings before interest, taxes,
depreciations and amortization) of greater than $2,000,000 during the associated
fiscal year.
In the
event the Spina Employment Agreement is terminated by the Company for certain
reasons provided for in the Spina Employment Agreement, Mr. Spina shall be
entitled to (i) a prorated share of his annual base compensation of $250,000 for
the lesser of (x) 6 months or (y) the number of months until the end of the term
and (ii) the Performance Bonus (as defined in the Spina Employment Agreement),
if any, prorated for the year in which such termination occurs.
Additionally,
in connection with the acquisition of Combine, the Company entered into a
five-year Employment Agreement (the “Glachman Employment Agreement”) with Neil
Glachman. The Glachman Employment Agreement provides for the payment
of an annual salary of $210,000, certain other benefits, and an annual bonus
based upon certain financial targets of Combine. On June 10, 2010,
the Company terminated Mr. Glachman’s employment with the Company for “Cause” as
defined in the Glachman Employment Agreement. On June 14, 2010, Mr.
Glachman notified the Company that the reasons for his termination were
contested. The Company is currently continuing to pay Mr. Glachman’s
salary in accordance with the Glachman Employment Agreement.
NOTE
7 – EQUITY TRANSACTIONS:
Share-Based
Compensation
On April
22, 2010, the Compensation Committee (the “Committee”) of the Board of Directors
of the Company granted an aggregate of 750,000 stock options to the Company’s
non-employee directors, all at an exercise price of $0.10, which was the closing
price on the date of grant. The stock options vested immediately and have a ten
year term. However, the stock options are not exercisable until the
approval by the Company’s shareholders of the authorization of a sufficient
number of shares of common stock to enable the exercise and/or conversion of all
options and derivative securities outstanding at the time the increase of shares
is authorized, therefore no charges have been recognized.
On April
22, 2010, the Committee also granted an aggregate of 3,000,000 stock options to
Glenn Spina, the Company’s Chief Executive Officer (“CEO”), all at an exercise
price of $0.10, which was the closing price on the date of grant. The
stock options shall vest to the extent of 1,000,000 shares on January 1, 2011,
1,000,000 shares on January 1, 2012, and 1,000,000 shares on January 1,
2013. All of these options expire 10 years from the date of
grant. However, the stock options are not exercisable until the
approval by the Company’s shareholders of the authorization of a sufficient
number of shares of common stock to enable the exercise and/or conversion of all
options and derivative securities outstanding at the time the increase of shares
is authorized, therefore no charges have been recognized.
Rescission of Stock
Options
On June
2, 2010, the Company and its former COO, Myles Lewis, agreed to, and effectuated
the rescission of the exercise, by Mr. Lewis (in July 2009), of 804,679 common
stock options. In connection with the rescission transaction, the
Company and Mr. Lewis agreed to rescind the exercise at which point Mr. Lewis’
stock option agreement expired. As a result of such rescission
transactions, the Company’s outstanding Common Stock decreased by 804,679
shares.
On June
29, 2010, the Company and its former CEO, Christopher G. Payan, agreed to, and
effectuated the rescission of the exercise, by Mr. Payan (in July 2009), of
2,713,116 common stock options. In connection with the rescission
transaction, the Company and Mr. Payan agreed to rescind the exercise and
reinstate and modify certain terms of Mr. Payan’s original stock option
agreement. As a result of such rescission transactions, the Company’s
outstanding Common Stock decreased by 2,713,116 shares.
NOTE
8 – SUBSEQUENT EVENTS:
The
Company has evaluated subsequent events from the balance sheet date through the
date the accompanying financial statements became available to be
issued. The following are material subsequent events.
Registration
Statement
On July
29, 2010, the Company filed a registration statement on Form S-8, as required
under the Securities Act of 1933, as amended, to register an additional
7,208,220 shares of the Company’s common stock, par value $.01 per share (the
“Common Stock”), issuable to the former CEO of the Company pursuant to his
Option Agreement under the Sterling Vision, Inc. 1995 Stock Incentive
Plan.
There
were no other significant subsequent events requiring disclosure.
This
Quarterly Report on Form 10-Q (the “Report”) contains forward-looking statements
as that term is defined in the federal securities laws. The events
described in forward-looking statements contained in this Report may not
occur. Generally, these statements relate to our business plans or
strategies, projected or anticipated benefits or other consequences of our plans
or strategies, financing plans, projected or anticipated benefits from
acquisitions that we may make, or projections involving anticipated revenues,
earnings or other aspects of our operating results or financial position, and
the outcome of any contingencies. Any such forward-looking statements
are based on current expectations, estimates and projections of
management. We intend for these forward-looking statements to be
covered by the safe-harbor provisions for forward-looking
statements. Words such as “may,” “will,” “expect,” “believe,”
“anticipate,” “project,” “plan,” “intend,” “estimate,” and “continue,” and their
opposites and similar expressions are intended to identify forward-looking
statements. We caution you that these statements are not guarantees
of future performance or events and are subject to a number of uncertainties,
risks and other influences, many of which are beyond the Company’s control,
which may influence the accuracy of the statements and the projections upon
which the statements are based. Factors that could cause actual
results to differ materially from those set forth or implied by any
forward-looking statements include, but are not limited to, economic conditions,
the implication of “penny stock rules,” prospective conflicts of interest,
reliance on franchisees and other outside parties, market competition,
regulatory issues, reliance on computer systems, our potential inability to
service debt obligations, foreign currency risks and those certain risk factors
detailed in “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the
fiscal year ended December 31, 2009, as well as other risks and uncertainties
discussed in our reports filed with the Securities and Exchange
Commission. Copies of these filings are available at www.sec.gov.
Any one
or more of these uncertainties, risks and other influences could materially
affect our results of operations and whether forward-looking statements made by
us ultimately prove to be accurate. Our actual results, performance
and achievements could differ materially from those expressed or implied in
these forward-looking statements. We undertake no obligation to
publicly update or revise any forward-looking statements, whether from new
information, future events or otherwise.
Segment
results for the three and six months ended June 30, 2010, as compared to the
three and six months ended June 30, 2009
Consolidated
Segment Results
Our total
revenue increased approximately $1,310,000, or 7.7%, to $18,219,000 for the
three months ended June 30, 2010, as compared to $16,909,000 for the three
months ended June 30, 2009, and increased approximately $3,353,000, or 10.8%, to
$34,538,000 for the six months ended June 30, 2010, as compared to $31,185,000
for the six months ended June 30, 2009. These increases were mainly a
result of the increase in Optical Purchasing Group revenues during the
comparable periods due to current economic trends in the U.S. and Canadian
economies as well as currency fluctuations between the U.S. and Canadian
dollars. Additionally, the Company experienced an increase in the
average number of Company-owned stores in operation from four for the six months
ended June 30, 2009 compared to six for the six months ended June 30, 2010,
which resulted in increased revenues for the Company-stores.
Our total
costs, and selling, general and administrative expenses increased approximately
$798,000, or 4.7%, to $17,737,000 for the three months ended June 30, 2010, as
compared to $16,939,000 for the three months ended June 30, 2009, and increased
approximately $2,465,000, or 8.0%, to $33,429,000 for the six months ended June
30, 2010, as compared to $30,964,000 for the six months ended June 30,
2009. These increases were mainly a result of the increases described
above, offset, in part, by various personnel and the related overhead
reductions, changes to the product mix and advertising initiatives within the
Company-owned locations and decreased costs related to our decision not to
exhibit at the two Vision Expo Trade Shows and to not hold an Annual Franchise
convention.
Optical
Purchasing Group Business Segment
|
|
For
the Three Months Ended June 30 (in thousands):
|
|
|
|
2010
|
|
|
2009
|
|
|
$
Change
|
|
|
%
Change
|
|
Net
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Optical
purchasing group sales
|
|
$ |
15,105 |
|
|
$ |
14,062 |
|
|
$ |
1,043 |
|
|
|
7.4 |
% |
Cost
of optical purchasing group sales
|
|
|
14,454 |
|
|
|
13,469 |
|
|
|
985 |
|
|
|
7.3 |
% |
Gross
margin
|
|
|
651 |
|
|
|
593 |
|
|
|
58 |
|
|
|
9.8 |
% |
Selling,
General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and related benefits
|
|
|
124 |
|
|
|
132 |
|
|
|
(8 |
) |
|
|
(6.1 |
%) |
Depreciation
and amortization
|
|
|
70 |
|
|
|
77 |
|
|
|
(7 |
) |
|
|
(9.1 |
%) |
Rent
and related overhead
|
|
|
62 |
|
|
|
56 |
|
|
|
6 |
|
|
|
10.7 |
% |
Credit
card and bank fees
|
|
|
36 |
|
|
|
25 |
|
|
|
11 |
|
|
|
44.0 |
% |
Professional
fees
|
|
|
36 |
|
|
|
48 |
|
|
|
(12 |
) |
|
|
(25.0 |
%) |
Bad
debt (recovery)
|
|
|
(1 |
) |
|
|
91 |
|
|
|
(92 |
) |
|
|
(101.1 |
%) |
Other
general and administrative costs
|
|
|
28 |
|
|
|
4 |
|
|
|
24 |
|
|
|
600.0 |
% |
Total
selling, general and administrative expenses
|
|
|
355 |
|
|
|
433 |
|
|
|
(78 |
) |
|
|
(18.0 |
%) |
Operating
Income
|
|
|
296 |
|
|
|
160 |
|
|
|
136 |
|
|
|
85.0 |
% |
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
28 |
|
|
|
43 |
|
|
|
(15 |
) |
|
|
(34.9 |
%) |
Interest
expense, net
|
|
|
(47 |
) |
|
|
(45 |
) |
|
|
(2 |
) |
|
|
(4.4 |
%) |
Total
other expense
|
|
|
(19 |
) |
|
|
(2 |
) |
|
|
(17 |
) |
|
|
(850.0 |
%) |
Income
before provision for (benefit from) income taxes
|
|
$ |
277 |
|
|
$ |
158 |
|
|
$ |
119 |
|
|
|
75.3 |
% |
|
|
For
the Six Months Ended June 30 (in thousands):
|
|
|
|
2010
|
|
|
2009
|
|
|
$
Change
|
|
|
%
Change
|
|
Net
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Optical
purchasing group sales
|
|
$ |
28,012 |
|
|
$ |
25,365 |
|
|
$ |
2,647 |
|
|
|
10.4 |
% |
Cost
of optical purchasing group sales
|
|
|
26,712 |
|
|
|
24,254 |
|
|
|
2,458 |
|
|
|
10.1 |
% |
Gross
margin
|
|
|
1,300 |
|
|
|
1,111 |
|
|
|
189 |
|
|
|
17.0 |
% |
Selling,
General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and related benefits
|
|
|
236 |
|
|
|
231 |
|
|
|
5 |
|
|
|
2.2 |
% |
Depreciation
and amortization
|
|
|
143 |
|
|
|
153 |
|
|
|
(10 |
) |
|
|
(6.5 |
%) |
Rent
and related overhead
|
|
|
123 |
|
|
|
116 |
|
|
|
7 |
|
|
|
6.0 |
% |
Professional
fees
|
|
|
88 |
|
|
|
73 |
|
|
|
15 |
|
|
|
20.5 |
% |
Credit
card and bank fees
|
|
|
63 |
|
|
|
45 |
|
|
|
18 |
|
|
|
40.0 |
% |
Bad
debt (recovery)
|
|
|
(16 |
) |
|
|
91 |
|
|
|
(107 |
) |
|
|
(117.6 |
%) |
Other
general and administrative costs
|
|
|
35 |
|
|
|
15 |
|
|
|
20 |
|
|
|
133.3 |
% |
Total
selling, general and administrative expenses
|
|
|
672 |
|
|
|
724 |
|
|
|
(52 |
) |
|
|
(7.2 |
%) |
Operating
Income
|
|
|
628 |
|
|
|
387 |
|
|
|
241 |
|
|
|
62.3 |
% |
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
67 |
|
|
|
83 |
|
|
|
(16 |
) |
|
|
(19.3 |
%) |
Interest
expense
|
|
|
(82 |
) |
|
|
(88 |
) |
|
|
6 |
|
|
|
6.8 |
% |
Total
other expense
|
|
|
(15 |
) |
|
|
(5 |
) |
|
|
(10 |
) |
|
|
(200.0 |
%) |
Income
before provision for (benefit from) income taxes
|
|
$ |
613 |
|
|
$ |
382 |
|
|
$ |
231 |
|
|
|
60.5 |
% |
Optical
Purchasing Group revenues increased approximately $1,043,000, or 7.4%, to
$15,105,000 for the three months ended June 30, 2010, as compared to $14,062,000
for the three months ended June 30, 2009, and increased approximately $2,647,000
or 10.4%, to $28,012,000 for the six months ended June 30, 2010, as compared to
$25,365,000 for the six months ended June 30, 2009. These increases
were due to stronger sales generated at The Optical Group (“TOG”) due to
increased membership as well as new vendors programs initiated in the first six
months 2010. As of June 30, 2010, there were 554 members that made
one or more purchases in June 2010, as compared to 539 members that made one or
more purchases in June 2009. Additionally, we benefited from a
favorable fluctuation of the foreign currency exchange rate between the Canadian
and U.S. Dollar. The rate averaged $0.96 USD for every Canadian
Dollar during the first six months of 2010, as compared to $0.83 USD for every
Canadian Dollar during the first six months of 2009. Individually,
TOG revenues increased approximately $1,102,000, or 10.7%, to $11,359,000 for
the three months ended June 30, 2010, as compared to $10,257,000 for the three
months ended June 30, 2009, and increased approximately $2,883,000, or 15.9%, to
$20,966,000 for the six months ended June 30, 2010, as compared to $18,083,000
for the six months ended June 30, 2009. Individually, Combine’s
revenues decreased approximately $152,000, or 4.0%, to $3,607,000 for the three
months ended June 30, 2010, as compared to $3,759,000 for the three months ended
June 30, 2009, and decreased approximately $420,000, or 5.8%, to $6,791,000 for
the six months ended June 30, 2010, as compared to $7,213,000 for the six months
ended June 30, 2009. These decreases were due to a decrease in
membership. As of June 30, 2010, there were 755 members that made one
or more purchases in June 2010, as compared to 818 members that made one or more
purchases in June 2009.
Costs of
Optical Purchasing Group sales increased approximately $985,000, or 7.3%, to
$14,454,000 for the three months ended June 30, 2010, as compared to $13,469,000
for the three months ended June 30, 2009, and increased approximately
$2,458,000, or 10.1%, to $26,712,000 for the six months ended June 30, 2010, as
compared to $24,254,000 for the six months ended June 30,
2009. Individually, TOG’s cost of sales increases approximately
$1,071,000, or 10.8%, to $11,008,000 for the three months ended June 30, 2010,
as compared to $9,937,000 for the three months ended June 30, 2009, and
increased approximately $2,768,000, or 15.9%, to $20,206,000 for the six months
ended June 30, 2010, as compared to $17,438,000 for the six months ended June
30, 2009. Individually, Combine’s cost of sales decreased
approximately $161,000, or 4.6%, to $3,337,000 for the three months ended June
30, 2010, as compared to $3,494,000 for the three months ended June 30, 2009,
and decreased approximately $457,000, or 6.8%, to $6,310,000 for the six months
ended June 30, 2010, as compared to $6,763,000 for the six months ended June 30,
2009. Both of these decreases were a direct result of, and
proportionate to, the revenue fluctuations described above.
Selling,
general and administrative expenses of the Optical Purchasing Group segment
decreased approximately $78,000, or 18.0%, to $355,000 for the three months
ended June 30, 2010, as compared to $433,000 for the three months ended June 30,
2009, and decreased approximately $52,000, or 7.2%, to $672,000 for the six
months ended June 30, 2010, as compared to $724,000 for the six months ended
June 30, 2009. These decreases were mainly a result of settlements
with certain Combine members whose receivables were previously written off, thus
creating a bad debt recovery of approximately $16,000 during the first six
months of 2010, whereas during the 2nd
quarter of 2009, we charged $91,000 to bad debt expense on Combine member
receivables that were considered uncollectible as of June 30,
2009. These decreases were offset, in part, by an increase in
professional fees of $15,000 for the six months ended June 30, 2010 as Combine
and TOG engaged the services of consultants (at a cost of $10,000 per month) in
May 2009 (such engagement expired on April 30, 2010) to enhance vendor programs
designed to encourage greater spending by the members while achieving greater
profit margins. Additionally, TOG incurred certain one-time expenses
related to the relocation of TOG’s offices at the end of December 2009, and
TOG’s total expenses increased due to the exchange rate fluctuations described
above.
Other
income includes interest on past due invoices (finance charges) for TOG and
Combine members who have not paid for their respective purchases in a timely
manner. Interest expense relates to payments made under our Credit
Facility with M&T, and payments on our related party debt (the debt
associated with the purchase financing with the previous owner and former
President of Combine).
Franchise
Segment
|
|
For
the Three Months Ended June 30 (in thousands):
|
|
|
|
2010
|
|
|
2009
|
|
|
$
Change
|
|
|
%
Change
|
|
Net
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalties
|
|
$ |
1,386 |
|
|
$ |
1,410 |
|
|
$ |
(24 |
) |
|
|
(1.7 |
%) |
Franchise
and other related fees
|
|
|
50 |
|
|
|
69 |
|
|
|
(19 |
) |
|
|
(27.5 |
%) |
Net
revenues
|
|
|
1,436 |
|
|
|
1,479 |
|
|
|
(43 |
) |
|
|
(2.9 |
%) |
Selling,
General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and related benefits
|
|
|
211 |
|
|
|
336 |
|
|
|
(125 |
) |
|
|
(37.2 |
%) |
Professional
fees
|
|
|
149 |
|
|
|
153 |
|
|
|
(4 |
) |
|
|
(2.6 |
%) |
Rent
and related overhead
|
|
|
55 |
|
|
|
122 |
|
|
|
(67 |
) |
|
|
(54.9 |
%) |
Bad
debt
|
|
|
38 |
|
|
|
45 |
|
|
|
(7 |
) |
|
|
(15.6 |
%) |
POS
system installation costs
|
|
|
20 |
|
|
|
21 |
|
|
|
(1 |
) |
|
|
(4.8 |
%) |
Depreciation
|
|
|
14 |
|
|
|
63 |
|
|
|
(49 |
) |
|
|
(77.8 |
%) |
Convention
and trade show expenses
|
|
|
2 |
|
|
|
91 |
|
|
|
(89 |
) |
|
|
(97.8 |
%) |
Other
general and administrative costs
|
|
|
21 |
|
|
|
117 |
|
|
|
(96 |
) |
|
|
(82.1 |
%) |
Total
selling, general and administrative expenses
|
|
|
510 |
|
|
|
948 |
|
|
|
(438 |
) |
|
|
(46.2 |
%) |
Operating
Income
|
|
|
926 |
|
|
|
531 |
|
|
|
395 |
|
|
|
74.4 |
% |
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on franchise notes receivable
|
|
|
8 |
|
|
|
6 |
|
|
|
2 |
|
|
|
33.3 |
% |
Other
expense, net
|
|
|
(5 |
) |
|
|
(38 |
) |
|
|
33 |
|
|
|
86.8 |
% |
Interest
expense, net
|
|
|
(4 |
) |
|
|
(13 |
) |
|
|
9 |
|
|
|
69.2 |
% |
Total
other expense
|
|
|
(1 |
) |
|
|
(45 |
) |
|
|
44 |
|
|
|
97.8 |
% |
Income
before provision for (benefit from) income taxes
|
|
$ |
925 |
|
|
$ |
486 |
|
|
$ |
439 |
|
|
|
90.3 |
% |
|
|
For
the Six Months Ended June 30 (in thousands):
|
|
|
|
2010
|
|
|
2009
|
|
|
$
Change
|
|
|
%
Change
|
|
Net
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalties
|
|
$ |
2,871 |
|
|
$ |
2,900 |
|
|
$ |
(29 |
) |
|
|
(1.0 |
%) |
Franchise
and other related fees
|
|
|
130 |
|
|
|
140 |
|
|
|
(10 |
) |
|
|
(7.1 |
%) |
Net
revenues
|
|
|
3,001 |
|
|
|
3,040 |
|
|
|
(39 |
) |
|
|
(1.3 |
%) |
Selling,
General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and related benefits
|
|
|
494 |
|
|
|
710 |
|
|
|
(216 |
) |
|
|
(30.4 |
%) |
Professional
fees
|
|
|
336 |
|
|
|
280 |
|
|
|
56 |
|
|
|
20.0 |
% |
Rent
and related overhead
|
|
|
141 |
|
|
|
227 |
|
|
|
(86 |
) |
|
|
(37.9 |
%) |
POS
system installation costs
|
|
|
43 |
|
|
|
24 |
|
|
|
19 |
|
|
|
79.2 |
% |
Depreciation
|
|
|
33 |
|
|
|
124 |
|
|
|
(91 |
) |
|
|
(73.4 |
%) |
Convention
and trade show expenses
|
|
|
24 |
|
|
|
175 |
|
|
|
(151 |
) |
|
|
(86.3 |
%) |
Other
general and administrative costs
|
|
|
55 |
|
|
|
261 |
|
|
|
(206 |
) |
|
|
(78.9 |
%) |
Total
selling, general and administrative expenses
|
|
|
1,126 |
|
|
|
1,801 |
|
|
|
(675 |
) |
|
|
(37.5 |
%) |
Operating
Income
|
|
|
1,875 |
|
|
|
1,239 |
|
|
|
636 |
|
|
|
51.3 |
% |
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on franchise notes receivable
|
|
|
15 |
|
|
|
13 |
|
|
|
2 |
|
|
|
15.4 |
% |
Other
income (expense), net
|
|
|
97 |
|
|
|
(36 |
) |
|
|
133 |
|
|
|
369.4 |
% |
Interest
expense, net
|
|
|
(8 |
) |
|
|
(27 |
) |
|
|
19 |
|
|
|
70.4 |
% |
Total
other income (expense)
|
|
|
104 |
|
|
|
(50 |
) |
|
|
154 |
|
|
|
308.0 |
% |
Income
before provision for (benefit from) income taxes
|
|
$ |
1,979 |
|
|
$ |
1,189 |
|
|
$ |
790 |
|
|
|
66.4 |
% |
Franchise
royalties decreased approximately $24,000, or 1.7%, to $1,386,000 for the three
months ended June 30, 2010, as compared to $1,410,000 for the three months ended
June 30, 2009, and decreased approximately $29,000, or 1.0%, to $2,871,000 for
the six months ended June 30, 2010, as compared to $2,900,000 for the six months
ended June 30, 2009. Franchise sales decreased approximately
$511,000, or 2.7%, for the three months ended June 30, 2010, as compared to the
three months ended June 30, 2009, and decreased approximately $1,256,000, or
3.2%, for the six months ended June 30, 2010, as compared to the six months
ended June 30, 2009, both of which led to a decrease in royalties. On
average, based on historical performance, there were 11 fewer stores in
operation during the six months ended June 30, 2010. On average,
those 11 stores would have generated approximately $132,000 of
royalties. As of June 30, 2010 and 2009, there were 123 and 130
franchised stores in operation, respectively.
Franchise
and other related fees (which includes initial franchise fees, renewal fees,
conversion fees and store transfer fees) decreased approximately $19,000, or
27.5%, to $50,000 for the three months ended June 30, 2010, as compared to
$69,000 for the three months ended June 30, 2009, and decreased approximately
$10,000, or 7.1%, to $130,000 for the six months ended June 30, 2010, as
compared to $140,000 for the six months ended June 30, 2009. These
fluctuations were primarily attributable to 7 franchise agreement renewals
($90,000) and 3 new franchise agreements ($50,000) during the first six months
of 2010, as compared to 7 franchise agreement renewals ($71,000), 1 independent
store conversions ($10,000), and 4 new franchise agreements ($59,000) during the
first six months of 2009. 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.
Selling,
general and administrative expenses of the franchise segment decreased
approximately $438,000, or 46.2%, to $510,000 for the three months ended June
30, 2010, as compared to $948,000 for the three months ended June 30, 2009, and
decreased approximately $675,000, or 37.5%, to $1,126,000 for the six months
ended June 30, 2010, as compared to $1,801,000 for the six months ended June 30,
2009. These decreases were partially a result of decreases in
salaries and related benefits of $125,000 and $216,000 due to the reductions and
restructuring of personnel as our new CEO reassigned certain job functions to
improve the efficiency of our operations in 2010. Some of these job
functions included assigning our franchise field support team to manage
individual company stores, which reallocated their salaries and related benefits
to such stores, and the elimination of the Company’s franchise business
development department. We also did not exhibit at the Vision Expo
East trade show in March 2010, and we do not anticipate having an annual
franchise meeting in 2010, expenses that were included in the $91,000 and
$175,000 convention and trade show expenses incurred during the three and six
months ended June 30, 2009, respectively. Additionally, we settled
litigation with a franchisee whose receivables were previously written off, thus
creating a bad debt recovery of approximately $35,000 in the first quarter of
2010. These decreases were offset, in part, by an increase in
professional fees of $56,000 during the six comparable months mainly due to
legal expenses related to the litigation described above as well as increased
management services paid to consultants who oversee the growth and development
of the Company’s Site for Sore Eyes trade name.
Company
Store Segment
|
|
For
the Three Months Ended June 30 (in thousands):
|
|
|
|
2010
|
|
|
2009
|
|
|
$
Change
|
|
|
%
Change
|
|
Net
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
sales
|
|
$ |
575 |
|
|
$ |
433 |
|
|
$ |
142 |
|
|
|
32.8 |
% |
Exam
fees
|
|
|
109 |
|
|
|
67 |
|
|
|
42 |
|
|
|
62.7 |
% |
Net
revenues
|
|
|
684 |
|
|
|
500 |
|
|
|
184 |
|
|
|
36.8 |
% |
Cost
of retail sales
|
|
|
177 |
|
|
|
99 |
|
|
|
78 |
|
|
|
78.8 |
% |
Gross
margin
|
|
|
507 |
|
|
|
401 |
|
|
|
106 |
|
|
|
26.4 |
% |
Selling,
General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and related benefits
|
|
|
304 |
|
|
|
228 |
|
|
|
76 |
|
|
|
33.3 |
% |
Rent
and related overhead
|
|
|
157 |
|
|
|
227 |
|
|
|
(70 |
) |
|
|
(30.8 |
%) |
Advertising
|
|
|
(14 |
) |
|
|
30 |
|
|
|
(44 |
) |
|
|
(146.7 |
%) |
Other
general and administrative costs
|
|
|
95 |
|
|
|
49 |
|
|
|
46 |
|
|
|
93.9 |
% |
Total
selling, general and administrative expenses
|
|
|
542 |
|
|
|
534 |
|
|
|
8 |
|
|
|
1.5 |
% |
Loss
before provision for (benefit from) income taxes
|
|
$ |
(35 |
) |
|
$ |
(133 |
) |
|
$ |
98 |
|
|
|
73.7 |
% |
|
|
For
the Six Months Ended June 30 (in thousands):
|
|
|
|
2010
|
|
|
2009
|
|
|
$
Change
|
|
|
%
Change
|
|
Net
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
sales
|
|
$ |
1,398 |
|
|
$ |
856 |
|
|
$ |
542 |
|
|
|
63.3 |
% |
Exam
fees
|
|
|
235 |
|
|
|
174 |
|
|
|
61 |
|
|
|
35.1 |
% |
Net
revenues
|
|
|
1,633 |
|
|
|
1,030 |
|
|
|
603 |
|
|
|
58.5 |
% |
Cost
of retail sales
|
|
|
364 |
|
|
|
259 |
|
|
|
105 |
|
|
|
40.5 |
% |
Gross
margin
|
|
|
1,269 |
|
|
|
771 |
|
|
|
498 |
|
|
|
64.6 |
% |
Selling,
General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and related benefits
|
|
|
663 |
|
|
|
478 |
|
|
|
185 |
|
|
|
38.7 |
% |
Rent
and related overhead
|
|
|
381 |
|
|
|
393 |
|
|
|
(12 |
) |
|
|
(3.1 |
%) |
Advertising
|
|
|
53 |
|
|
|
60 |
|
|
|
(7 |
) |
|
|
(11.7 |
%) |
Other
general and administrative costs
|
|
|
200 |
|
|
|
74 |
|
|
|
126 |
|
|
|
170.3 |
% |
Total
selling, general and administrative expenses
|
|
|
1,297 |
|
|
|
1,005 |
|
|
|
292 |
|
|
|
29.1 |
% |
Loss
before provision for (benefit from) income taxes
|
|
$ |
(28 |
) |
|
$ |
(234 |
) |
|
$ |
206 |
|
|
|
88.0 |
% |
Net
revenues for our Company store segment increased approximately $184,000, or
36.8%, to $684,000 for the three months ended June 30, 2010, as compared to
$500,000 for the three months ended June 30, 2009, and increased approximately
$603,000, or 58.5%, to $1,633,000 for the six months ended June 30, 2010, as
compared to $1,030,000 for the six months ended June 30, 2009. These
increases were attributable to having more Company-owned store locations open
during the comparable periods, as well as a 22% increase in same store sales for
the comparable periods. As of June 30, 2010, there were 5
Company-owned stores, as compared to 5 Company-owned stores as of June 30, 2009.
Over the last 12
months, we reacquired 2 Company-owned locations from franchisees due to the
termination of such stores’ franchise agreements. Those 2 stores
generated net revenues of approximately $72,000 and $384,000 for the three and
six months ended June 30, 2010, respectively. On a same
store basis (for the 4 stores that operated as a Company-owned store during the
entirety of both the three and six months ended June 30, 2010 and 2009),
comparative net sales increased approximately $112,000, or 24.9%, to $561,000
for the three months ended June 30, 2010, as compared to $449,000 for the three
months ended June 30, 2009 and increased approximately $216,000, or 22.0%, to
$1,200,000 for the six months ended June 30, 2010, as compared to $984,000 for
the six months ended June 30, 2009. These increases were primarily a
result of the changes we instituted in January 2010. Some of the
changes included; a) shifting our field support team to include managing at
least one company store, b) increased advertising, as noted in the table above,
that targeted new customers under the direction of a new ad campaign, c)
negotiated rent reductions (many of which occur in the 2nd
quarter of 2010 and forward, d) new price points for product, which reduced the
per transaction profit margin, but increased the sales volume, and e) more
effective and efficient consumer tracking and store personnel
training. We believe that these changes have only started to have a
positive impact on earnings and we anticipate that these changes, along with
changes to our current optometrist relationships, will continue to lead to
increased revenues and income.
The
Company-owned store’s gross profit margin decreased by 3.1%, to 73.1%, for the
three months ended June 30, 2010, as compared to 76.2% for the three months
ended June 30, 2009, and increased by 3.6%, to 73.3% for the six months ended
June 30, 2010, as compared to 69.7% for the six months ended June 30,
2009. The six month increase was due, in part, to some of the changes
made in our Company stores as described above, as well as the improvement on
gross profit margins with respect to certain vendor programs initiated during
the 4th
quarter of 2009 that have helped improve our lab/lens
costs. 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
the stabilization in our gross profit margin in the future. Our 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.
Selling,
general and administrative expenses of the Company store segment increased
approximately $8,000, or 1.5%, to $542,000 for the three months ended June 30,
2010, as compared to $534,000 for the three months ended June 30, 2009, and
increased approximately $292,000, or 29.1%, to $1,297,000 for the six months
ended June 30, 2010, as compared to $1,005,000 for the six months ended June 30,
2009. These increases were mainly a result of having more
Company-owned stores in operation during the six months ended June 30, 2010 as
described. This was offset, in part, by vendor cooperative
contributions which offset some of our advertising costs and decreases to
individual store expenses as we streamlined certain store payroll coverage to
reduce salaries and related benefits.
VisionCare
of California Segment
|
|
For
the Three Months Ended June 30 (in thousands):
|
|
|
|
2010
|
|
|
2009
|
|
|
$
Change
|
|
|
%
Change
|
|
Net
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership
fees
|
|
$ |
891 |
|
|
$ |
872 |
|
|
$ |
19 |
|
|
|
2.2 |
% |
Selling,
General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and related benefits
|
|
|
798 |
|
|
|
773 |
|
|
|
25 |
|
|
|
3.2 |
% |
Rent
and related overhead
|
|
|
42 |
|
|
|
41 |
|
|
|
1 |
|
|
|
2.4 |
% |
Other
general and administrative costs
|
|
|
53 |
|
|
|
56 |
|
|
|
(3 |
) |
|
|
(5.4 |
%) |
Total
selling, general and administrative expenses
|
|
|
893 |
|
|
|
870 |
|
|
|
23 |
|
|
|
2.6 |
% |
Operating
(Loss) Income
|
|
|
(2 |
) |
|
|
2 |
|
|
|
(4 |
) |
|
|
(200.0 |
%) |
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
1 |
|
|
|
10 |
|
|
|
(9 |
) |
|
|
(90.0 |
%) |
Total
other income
|
|
|
1 |
|
|
|
10 |
|
|
|
(9 |
) |
|
|
(90.0 |
%) |
(Loss)
income before provision for (benefit from) income taxes
|
|
$ |
(1 |
) |
|
$ |
12 |
|
|
$ |
(13 |
) |
|
|
(108.3 |
%) |
|
|
For
the Six Months Ended June 30 (in thousands):
|
|
|
|
2010
|
|
|
2009
|
|
|
$
Change
|
|
|
%
Change
|
|
Net
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership
fees
|
|
$ |
1,781 |
|
|
$ |
1,747 |
|
|
$ |
34 |
|
|
|
1.9 |
% |
Selling,
General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and related benefits
|
|
|
1,580 |
|
|
|
1,550 |
|
|
|
30 |
|
|
|
1.9 |
% |
Rent
and related overhead
|
|
|
86 |
|
|
|
80 |
|
|
|
6 |
|
|
|
7.5 |
% |
Other
general and administrative costs
|
|
|
104 |
|
|
|
100 |
|
|
|
4 |
|
|
|
4.0 |
% |
Total
selling, general and administrative expenses
|
|
|
1,770 |
|
|
|
1,730 |
|
|
|
40 |
|
|
|
2.3 |
% |
Operating
Income
|
|
|
11 |
|
|
|
17 |
|
|
|
(6 |
) |
|
|
(35.3 |
%) |
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
2 |
|
|
|
11 |
|
|
|
(9 |
) |
|
|
(81.8 |
%) |
Total
other income
|
|
|
2 |
|
|
|
11 |
|
|
|
(9 |
) |
|
|
(81.8 |
%) |
Income
before provision for (benefit from) income taxes
|
|
$ |
13 |
|
|
$ |
28 |
|
|
$ |
(15 |
) |
|
|
(53.6 |
%) |
Revenues
generated by our wholly-owned subsidiary, VisionCare of California, Inc.
(“VCC”), a specialized health care maintenance organization licensed by the
State of California Department of Managed Health Care, increased approximately
$19,000, or 2.2%, to $891,000 for the three months ended June 30, 2010, as
compared to $872,000 for the three months ended June 30, 2009, and increased
approximately $34,000, or 1.9%, to $1,781,000 for the six months ended June 30,
2010, as compared to $1,747,000 for the six months ended June 30,
2009. These increases were a direct result of a new VCC office that
opened in August of 2009, which, on average, generates approximately $22,000 of
membership fees each month. This was offset by a decrease in revenues
generated at Site for Sore Eyes franchise locations of approximately $270,000,
or 2.7%, from the first six months of 2009, which led to a decrease in
membership fee revenues.
Selling,
general and administrative expenses of the VCC segment increased $23,000, or
2.6%, to $893,000 for the three months ended June 30, 2010, as compared to
$870,000 for the three months ended June 30, 2009, and increased approximately
$40,000, or 2.3%, to $1,770,000 for the six months ended June 30, 2010, as
compared to $1,730,000 for the six months ended June 30, 2009. Most
of the individual “line item” expenses for VCC remained consistent quarter over
quarter; however, each of the increases were mainly due to the new office
location described above.
Corporate
Overhead Segment
|
|
For
the Three Months Ended June 30 (in thousands):
|
|
|
|
2010
|
|
|
2009
|
|
|
$
Change
|
|
|
%
Change
|
|
Selling,
General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and related benefits
|
|
$ |
321 |
|
|
$ |
351 |
|
|
$ |
(30 |
) |
|
|
(8.5 |
%) |
Professional
fees
|
|
|
193 |
|
|
|
162 |
|
|
|
31 |
|
|
|
19.1 |
% |
Rent
and related overhead
|
|
|
46 |
|
|
|
26 |
|
|
|
20 |
|
|
|
76.9 |
% |
Depreciation
and amortization
|
|
|
22 |
|
|
|
- |
|
|
|
22 |
|
|
|
n/a |
|
Insurance
|
|
|
21 |
|
|
|
40 |
|
|
|
(19 |
) |
|
|
(47.5 |
%) |
Other
general and administrative costs
|
|
|
62 |
|
|
|
6 |
|
|
|
56 |
|
|
|
933.3 |
% |
Total
selling, general and administrative expenses
|
|
|
665 |
|
|
|
585 |
|
|
|
80 |
|
|
|
13.7 |
% |
Operating
Loss
|
|
|
(665 |
) |
|
|
(585 |
) |
|
|
(80 |
) |
|
|
(13.7 |
%) |
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
(7 |
) |
|
|
- |
|
|
|
(7 |
) |
|
|
n/a |
|
Total
other expense
|
|
|
(7 |
) |
|
|
- |
|
|
|
(7 |
) |
|
|
n/a |
|
Loss
before provision for (benefit from) income taxes
|
|
$ |
(672 |
) |
|
$ |
(585 |
) |
|
$ |
(87 |
) |
|
|
(14.9 |
%) |
|
|
For
the Six Months Ended June 30 (in thousands):
|
|
|
|
2010
|
|
|
2009
|
|
|
$
Change
|
|
|
%
Change
|
|
Selling,
General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and related benefits
|
|
$ |
657 |
|
|
$ |
720 |
|
|
$ |
(63 |
) |
|
|
(8.8 |
%) |
Professional
fees
|
|
|
362 |
|
|
|
286 |
|
|
|
76 |
|
|
|
26.6 |
% |
Rent
and related overhead
|
|
|
110 |
|
|
|
51 |
|
|
|
59 |
|
|
|
115.7 |
% |
Insurance
|
|
|
61 |
|
|
|
118 |
|
|
|
(57 |
) |
|
|
(48.3 |
%) |
Depreciation
and amortization
|
|
|
49 |
|
|
|
- |
|
|
|
49 |
|
|
|
n/a |
|
Other
general and administrative costs
|
|
|
89 |
|
|
|
14 |
|
|
|
75 |
|
|
|
535.7 |
% |
Total
selling, general and administrative expenses
|
|
|
1,328 |
|
|
|
1,189 |
|
|
|
139 |
|
|
|
11.7 |
% |
Operating
Loss
|
|
|
(1,328 |
) |
|
|
(1,189 |
) |
|
|
(139 |
) |
|
|
(11.7 |
%) |
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
(14 |
) |
|
|
- |
|
|
|
(14 |
) |
|
|
n/a |
|
Total
other expense
|
|
|
(14 |
) |
|
|
- |
|
|
|
(14 |
) |
|
|
n/a |
|
Loss
before provision for (benefit from) income taxes
|
|
$ |
(1,342 |
) |
|
$ |
(1,189 |
) |
|
$ |
(153 |
) |
|
|
(12.9 |
%) |
There
were no revenues generated by the Corporate Overhead segment.
Selling,
general and administrative expenses increased approximately $80,000, or 13.7%,
to $665,000 for the three months ended June 30, 2010, as compared to $585,000
for the three months ended June 30, 2009, and increased approximately $139,000,
or 11.7%, to $1,328,000 for the six months ended June 30, 2010, as compared to
$1,189,000 for the six months ended June 30, 2009. These increases
were a result of an increase in professional fees due to additional services
provided by our SEC counsel due to increased filing requirements including the
review of our modified Credit Agreement with M&T, as well as increased
services provided by a third party valuation company surrounding the valuation
of our goodwill and intangible assets . These increases offset a
decrease to salaries and related benefits of $30,000 and $63,000, respectively,
related to reductions and restructuring of personnel as our new CEO reassigned
certain job functions to improve the efficiency of our operations in
2010. Additionally, we obtained approximately $100,000 of annual
premium savings on our Director and Officer’s insurance policy in May
2009.
Other
Segment
|
|
For
the Three Months Ended June 30 (in thousands):
|
|
|
|
2010
|
|
|
2009
|
|
|
$
Change
|
|
|
%
Change
|
|
Net
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Transitional
store revenues
|
|
$ |
92 |
|
|
$ |
- |
|
|
$ |
92 |
|
|
|
n/a |
|
Other
|
|
|
11 |
|
|
|
(4 |
) |
|
|
15 |
|
|
|
375.0 |
% |
Net
revenues
|
|
|
103 |
|
|
|
(4 |
) |
|
|
107 |
|
|
|
2,675.0 |
% |
Cost
of sales
|
|
|
41 |
|
|
|
- |
|
|
|
41 |
|
|
|
n/a |
|
Gross
profit
|
|
|
62 |
|
|
|
(4 |
) |
|
|
66 |
|
|
|
1,650.0 |
% |
Selling,
General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and related benefits
|
|
|
58 |
|
|
|
- |
|
|
|
58 |
|
|
|
n/a |
|
Rent
and related overhead
|
|
|
23 |
|
|
|
- |
|
|
|
23 |
|
|
|
n/a |
|
Depreciation
and amortization
|
|
|
9 |
|
|
|
- |
|
|
|
9 |
|
|
|
n/a |
|
Advertising
|
|
|
5 |
|
|
|
- |
|
|
|
5 |
|
|
|
n/a |
|
Other
general and administrative costs
|
|
|
5 |
|
|
|
1 |
|
|
|
4 |
|
|
|
400.0 |
% |
Total
selling, general and administrative expenses
|
|
|
100 |
|
|
|
1 |
|
|
|
99 |
|
|
|
9,900.0 |
% |
Loss
before provision for (benefit from) income taxes
|
|
$ |
(38 |
) |
|
$ |
(5 |
) |
|
$ |
(33 |
) |
|
|
(660.0 |
%) |
|
|
For
the Six Months Ended June 30 (in thousands):
|
|
|
|
2010
|
|
|
2009
|
|
|
$
Change
|
|
|
%
Change
|
|
Net
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Transitional
store revenues
|
|
$ |
92 |
|
|
$ |
- |
|
|
$ |
92 |
|
|
|
n/a |
|
Other
|
|
|
19 |
|
|
|
3 |
|
|
|
16 |
|
|
|
533.3 |
% |
Net
revenues
|
|
|
111 |
|
|
|
3 |
|
|
|
108 |
|
|
|
3,600.0 |
% |
Cost
of sales
|
|
|
47 |
|
|
|
- |
|
|
|
47 |
|
|
|
n/a |
|
Gross
Profit
|
|
|
64 |
|
|
|
3 |
|
|
|
61 |
|
|
|
2,033.3 |
% |
Selling,
General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and related benefits
|
|
|
69 |
|
|
|
1 |
|
|
|
68 |
|
|
|
6,800.0 |
% |
Rent
and related overhead
|
|
|
23 |
|
|
|
- |
|
|
|
23 |
|
|
|
n/a |
|
Depreciation
and amortization
|
|
|
9 |
|
|
|
- |
|
|
|
9 |
|
|
|
n/a |
|
Advertising
|
|
|
5 |
|
|
|
- |
|
|
|
5 |
|
|
|
n/a |
|
Other
general and administrative costs
|
|
|
7 |
|
|
|
1 |
|
|
|
6 |
|
|
|
600.0 |
% |
Total
selling, general and administrative expenses
|
|
|
113 |
|
|
|
2 |
|
|
|
111 |
|
|
|
5,550.0 |
% |
(Loss)
Income before provision for (benefit from) income taxes
|
|
$ |
(49 |
) |
|
$ |
1 |
|
|
$ |
(50 |
) |
|
|
(5,000.0 |
%) |
Revenues
generated by the Other segment consisted of the operations of Emerging Vision
Contacts (“EVC”), a company that sells contact lenses in Bakersfield, California
that is located within another optical company’s retail space. We
began operations of EVC in August 2009. Also included in the
Other segment was the operation of one of our Company stores, which was sold in
April 2010 with an effective date of June 1, 2010. As the operations
of this store immediately changed upon such sale, we believe it is no longer was
appropriate to include the operations of this store in the Company Store
segment.
Selling,
general and administrative expenses of the Other segment included the operations
of both EVC and the transitional Company owned location inclusive of labor, and
rent and related overhead expenses.
Use
of Non-GAAP Performance Indicators
The
following section expands on our financial performance detailing our
EBITDA. EBITDA is calculated as net earnings before interest, taxes,
depreciation and amortization. We refer to EBITDA because it is a
widely accepted financial indicator of a company’s ability to service or incur
indebtedness.
Management
has provided an EBITDA calculation to provide a greater level of understanding
of our performance had it not been for certain 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 Income and Comprehensive
Income.
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 Generally Accepted
Accounting Principles) 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):
|
|
|
|
2010
|
|
|
2009
|
|
|
$
Change
|
|
|
%
Change
|
|
EBITDA
Reconciliation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
426 |
|
|
$ |
(64 |
) |
|
$ |
490 |
|
|
|
765.6 |
% |
Interest
|
|
|
58 |
|
|
|
58 |
|
|
|
- |
|
|
|
0.0 |
% |
Taxes
|
|
|
30 |
|
|
|
(3 |
) |
|
|
33 |
|
|
|
1,100.0 |
% |
Depreciation
and amortization
|
|
|
136 |
|
|
|
173 |
|
|
|
(37 |
) |
|
|
(21.4 |
%) |
EBITDA
|
|
$ |
650 |
|
|
$ |
164 |
|
|
$ |
486 |
|
|
|
296.3 |
% |
|
|
For
the Six Months Ended June 30 (in thousands):
|
|
|
|
2010
|
|
|
2009
|
|
|
$
Change
|
|
|
%
Change
|
|
EBITDA
Reconciliation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
1,106 |
|
|
$ |
166 |
|
|
$ |
940 |
|
|
|
566.3 |
% |
Interest
|
|
|
104 |
|
|
|
115 |
|
|
|
(11 |
) |
|
|
(9.6 |
%) |
Taxes
|
|
|
80 |
|
|
|
11 |
|
|
|
69 |
|
|
|
627.3 |
% |
Depreciation
and amortization
|
|
|
275 |
|
|
|
321 |
|
|
|
(46 |
) |
|
|
(14.3 |
%) |
EBITDA
|
|
$ |
1,565 |
|
|
$ |
613 |
|
|
$ |
952 |
|
|
|
155.3 |
% |
Liquidity
and Capital Resources
As of
June 30, 2010, we had a working capital deficit of approximately $4,607,000 and
an accumulated deficit of approximately $125,365,000. Our working
capitcal is not sufficient for us to conduct our short and long-term business
operations. These factors indicate that we may be unable to continue as a
going concern if we are unsuccessful in extending our Credit Facility or if we
are unable to find alternative means of financing. If we
are unable to extend the Credit Facility and unable to obtain additional or
alternative debt or equity financing, we will have to seek additional debt or
equity financing to fund our operations. We are currently seeking new
business opportunities that might, if successful, mitigate these factors.
Our plans include the following: (1) obtaining additional capital from the sale
of certain of our assets; (2) obtaining financing from various financial
institutions, where possible; and (3) negotiating a long-term extension with
M&T Bank on our Credit Facility. We have no current commitments or
arrangements with respect to, or immediate sources of funding. Further,
there can be no assurances that funding is available or available to us on
acceptable terms. Our inability to obtain funding could have a materially
adverse affect on our plan of operations and will continue to diminish our
efforts and burden operating cash flow.
During
the six months ended June 30, 2010, cash flows provided by operating activities
were $906,000. This was principally due to the net income and other
non-cash expenses totaling $1,449,000 and an increase in optical purchasing
group payables of $1,367,000 due to increased optical purchasing group sales
during June of 2010 as compared to December 2009. This was offset, in
part, by an increase in optical purchasing group receivables of $1,556,000, also
due to increased optical purchasing group sales, as well as an increase in
franchise receivables of $275,000 due, in part, to an increase in vendor
cooperative contributions to be received during the 3rd and
4th
quarters of 2010, which will help subsidize franchise and company store
advertising costs. We hope to continue to improve our operating cash
flows through the continued implementation of our Point-of-Sales (“POS”) system
to improve the franchise sales reporting process, the addition of new franchise
locations, future acquisitions, new vendor programs, and continued efficiencies
as it relates to corporate overhead expenses.
For the
six months ended June 30, 2010, cash flows used in investing activities were
$82,000 mainly due to the purchase of certain leaseholds improvements, equipment
and office furniture related to the relocation of our corporate offices in March
2010, offset by proceeds ($50,000) received as a result of the sale of a
Company-owned store in June 2010. Management does anticipate certain
capital expenditures over the next 12 months, including expenditures to continue
to implement the POS system within the Franchise community, due to the
relocation of our corporate office in March 2010, and to enhance our technology
infrastructure and related internal controls. Such improvements to
the IT infrastructure include the relocation of Combine’s operations from
Florida to New York that occurred in July of 2010.
For the
six months ended June 30, 2010, cash used in financing activities was $873,000
mainly due to the payment of our related party borrowings (approximately
$54,000) and payments made under our Credit Facility (approximately
$750,000). We entered into a new Credit Agreement with M&T,
effective March 31, 2010, which agreement, provided, among other things, that
all unpaid principal is due on or before April 30, 2011. We also
executed a $1,000,000 Libor Term Note in favor of M&T, dated as of March 31,
2010, which note committed us to pay twelve equal, monthly principal payments of
$83,333, plus interest, by April 30, 2011. Although we believe that
we will be able to continue to make such monthly payments, we currently cannot
assure that we will be able to do so, nor can we assure that we will be able to
pay the remaining principal balance due under the Credit Agreement on or before
April 30, 2011. Additionally, we do not know if we will be able to
extend or refinance the debt, and cannot guarantee that extending or refinancing
the debt will be on terms favorable to us.
We have
been able to utilize the earnings from the operations of Combine to support the
repayment of our related party debt with the previous owner and former President
of Combine (“COM President”). Management believes we 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 us 2,187,500 options at a put price per share of $0.32
($700,000). We believe we may need additional financing should COM
President decide to put back such options and are currently exploring certain
options available to make such payment. However, there can be no
assurance that we will find financing or, if we do, that such financing will be
on terms favorable to us.
Credit
Facility
On April 14, 2010, we
entered into a Non-Revolving Line of Credit Note and Credit Agreement (the
“Credit Facility”) with M&T, effective
as of March 31, 2010, to extend, reduce, modify, convert to non-revolving and
restate a Revolving Line of Credit Note and Credit Agreement entered into with M&T on August 8, 2007 (the
“Original Credit Agreement”), that established a revolving credit
facility for
aggregate borrowings of up to $6,000,000 and
that was subsequently amended on November 14, 2008, April 1, 2009 and November 11, 2009, which
amendments, among other things, reduced the credit facility to
$5,750,000. The Credit Facility has been extended to April 30, 2011,
and further reduced the credit facility, by the $1,000,000 being refinanced and
amortized under the Term Note (as defined below), to $4,251,921, inclusive of a
Letter of Credit sublimit of $745,067 and outstanding borrowings of
$3,506,854, which are repayable, interest only, on a monthly basis,
commencing on the first day of each month during the term of the Restated Credit Agreement, calculated at the variable rate of 350
basis points in excess of LIBOR with a minimum rate of 4.5%. All unpaid principal is due on April 30, 2011.
On April 14, 2010, we also executed a $1,000,000
Libor Term Note (the “Term Note”) in favor of M&T, effective as of March 31, 2010, which provides
for twelve equal, monthly principal payments of $83,333 plus interest due on the last day of each
month during the term of the Term Note, which matures on April 30,
2011. The interest is calculated at the variable rate of 350 basis
points in excess of LIBOR (unless converted by M&T to a base rate) with a
minimum rate of 4.5%.
In
connection with the Term Note, we paid
$200,000 to M&T on March 31, 2010 to reduce the outstanding
borrowings. As of June 30, 2010, we had outstanding borrowings of
$4,106,854 under the Credit Facility, of which the entire amount was included in
Short-Term Debt on the accompanying Consolidated Condensed Balance
Sheet.
In connection with the Credit Facility, M&T waived
non-compliance of our financial covenants contained in the Original Credit
Agreement, as amended, with respect to affirmative covenants for the fourth
quarter of 2009, and replaced them with the new financial covenants set forth in
the Credit Facility, including minimum net worth to be tested quarterly,
commencing March 31, 2010, and annually at December 31, 2010, minimum EBITDA to
be tested quarterly, commencing June 30, 2010, and annually at December 31, 2010
and no net losses to be tested quarterly, commencing March 31, 2010. As of June 30, 2010, we were in compliance
with all such covenants.
In order to secure repayment of our aggregate borrowings
made under the Restated Credit Agreement and the Term Note, (1) we and certain
of our subsidiaries, Combine Buying Group, Inc. (“Combine”), OG Acquisition,
Inc. (“OG Acquisition”) and 1725758 Ontario Inc. d/b/a The Optical Group
(“Ontario”), (a) reaffirmed the respective Security Agreements with M&T in
connection with the Original Credit Agreement, pursuant to which the Company,
Combine, OG Acquisition and Ontario granted M&T a security interest in
substantially all of our respective assets and (b) reaffirmed our respective
Guarantees in connection with the Original Credit Agreement, pursuant to which
Combine, OG Acquisition and Ontario guaranteed the performance of our
obligations to M&T; (2) the Company and OG Acquisition reaffirmed our
respective Assignment Agreements in connection with the Original Credit
Agreement, pursuant to which the Company and OG Acquisition (a) assigned to
M&T all of our right, title and interest to our respective franchisee
documents and proceeds due under such documents, (b) assigned to M&T all of
our respective rents and subleases, (c) granted to M&T a security interest
in all of our respective trademarks and (d) granted M&T a security interest
in substantially all of our respective assets; (3) VCC executed a Continuing
Guaranty, pursuant to which VCC guaranteed the performance of our obligations to
M&T with respect to the Restated Credit Agreement; (4) all of our
subsidiaries, except for Combine, OG Acquisition, Ontario and VCC, executed a
Continuing Guaranty, pursuant to which each such subsidiary guaranteed the
performance of our obligations to M&T with respect to the Credit Facility;
(5) VCC executed a General Security Agreement, pursuant to which VCC granted
M&T a security interest in substantially all of its assets; (6) the Company,
Ontario and M&T executed a United States Trademark Collateral Assignment and
Security Agreement, pursuant to which the Company and Ontario granted M&T a
security interest in all of our respective trademarks; and (7) we entered into
with M&T (a) an Absolute Assignment of Franchisee Notes and Proceeds Due,
pursuant to which we assigned to M&T all of our right, title and interest to
the franchisee documents and proceeds due under such documents, and (b) an
Assignment of Rents and Subleases, pursuant to which we assigned to M&T all
of our rents and subleases.
On June
17, 2010, we amended our Credit Facility with M&T in which M&T released
its second lien security interest in the assets of Combine until such time as
Combine’s existing indebtedness to Combine Optical Management Corporation (the
“COMC Indebtedness”) is satisfied or otherwise
terminated. In consideration of such release, we paid $150,000
towards the Line of Credit balance and agreed to make an additional payment of
$150,000 to be applied towards the Line of Credit balance on September 1,
2010. Pursuant to the amendment, Combine agreed to grant M&T a
first lien security interest in all of its assets upon satisfaction or
termination of the COMC Indebtedness.
We are no
longer able to borrow additional amounts under the terms of modified Credit
Agreement. As such, we are currently exploring and willing to
continue to explore certain options available to us including refinancing such
debt prior to April 2011. We may not be able to extend or refinance
the debt, and we cannot guarantee that extending or refinancing the debt will be
on terms favorable to us.
Off-Balance
Sheet Arrangements
We do not
have any off-balance sheet financing or unconsolidated variable interest
entities, with the exception of certain guarantees on leases. We
refer the reader to the Notes to the Consolidated Condensed Financial Statements
included in Item 1 of this Quarterly Report for information regarding our lease
guarantees.
Management’s
Discussion of Critical Accounting Policies and Estimates
High-quality
financial statements require the rigorous application of appropriate or relevant
accounting standards. 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 our Consolidated Financial
Statements because their application places the most significant demands on
management’s judgment, with financial reporting results relying on estimation
about the effect of matters that are inherently uncertain.
Management’s
estimate of the allowances on receivables is based on historical sales,
historical loss levels, and an analysis of the collectability of individual
accounts.
Management’s
estimate of the valuation allowance on deferred tax assets is based on whether
it is more likely than not that our net operating loss carry-forwards will be
utilized. Factors that could impact estimated utilization of our net
operating loss carry-forwards are the success of its stores and franchisees, and
the optical purchasing groups, our 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.
Revenues
are recorded when persuasive evidence of an arrangement exists, delivery has
occurred or services have been rendered, our 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, we recognize such revenues when the cash is
received.
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.
Not
applicable to smaller reporting companies.
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,
2010.
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.
In June
2010, we and our subsidiary, Combine Buying Group, Inc. (“Combine”) filed an
action in the United States District Court for the Southern District of Florida
against Neil Glachman (former President of Combine, referred to as “Glachman”),
Combine Optical Management Corporation (owned by Glachman, referred to as
“COMC”), James Lashenick (former bookkeeper of Combine) and various entities
which Glachman (collectively referred to as the “Defendants”) purportedly owns
and/or operates. We claim, amongst other things, that (i) Glachman
and COMC breached the Asset Purchase Agreement (“APA”); (ii) Glachman breached
his Employment Agreement and his common law fiduciary duty of loyalty; and (iii)
the various Glachman entities, COMC and Mr. Lashenick aided such breach of
fiduciary duty. The Defendants, in their Answer, asserted defenses to
our claims, and Glachman and COMC asserted counterclaims against us, including,
amongst others, that we (i) breached the Security Agreement executed in
connection with the APA; (ii) anticipatorily breached the APA; and
(iii) breached the Employment Agreement with Glachman by terminating
him. The Defendants seek injunctive relief, including monetary
damages, assurances of our obligation of payment on Glachman’s $700,000 Put
Option, assurances of our obligation of payment under the terms of the $225,000
promissory note due October 1, 2010, and costs and attorney fees. We
have not recorded an accrual for a loss in this action, as we do not believe it
is probable that we will be held liable in respect of Defendant’s counterclaims,
however, we have accrued for the $700,000 Put Option and $225,000 promissory
note payment, both of which are included in the accompanying Consolidated
Condensed Balance Sheets as of June 30, 2010. We believe that we have
a meritorious defense to such action. As of the date hereof, these
proceedings were in the discovery stage.
Not
applicable.
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 the Company’s Annual
Report on Form 10-K/A for the year ended December 31,
1995)
|
3.2
|
Amended
and Restated By-Laws of Sterling Vision, Inc., dated December 18, 1995
(incorporated by reference to Exhibit 3.2 to the Company’s Annual Report
on Form 10-K/A for the year ended December 31,
1995)
|
3.3
|
Certification
of Amendment of the Certificate of Incorporation of Sterling Vision, Inc.,
filed on January 26, 2000 (incorporated by reference to Exhibit 3.3 to the
Company’s Annual Report on Form 10-K for the year ended December 31, 2002,
SEC File Number 001-14128, Film Number
03630359)
|
3.4
|
Certification
of Amendment of the Certificate of Incorporation of Sterling Vision, Inc.,
filed on February 8, 2000 (incorporated by reference to Exhibit 10.94 to
the Company’s Current Report on Form 8-K, dated February 8, 2000, SEC File
Number 001-14128, Film Number
549404)
|
3.5
|
Certification
of Amendment of the Certificate of Incorporation of Sterling Vision, Inc.,
filed on February 10, 2000 (incorporated by reference to Exhibit 10.96 to
the Company’s Current Report on Form 8-K, dated February 8, 2000, SEC File
Number 001-14128, Film Number
549404)
|
3.6
|
Certification
of Amendment of the Certificate of Incorporation of Sterling Vision, Inc.,
filed on April 17, 2000 (incorporated by reference to Exhibit 3.6 to the
Company’s Annual Report on Form 10-K for the year ended December 31, 2002,
SEC File Number 001-14128, Film Number
03630359)
|
3.7
|
Certification
of Amendment of the Certificate of Incorporation of Emerging Vision, Inc.,
filed on July 15, 2002 (incorporated by reference to Exhibit 3.7 to the
Company’s Annual Report on Form 10-K for the year ended December 31, 2002,
SEC File Number 001-14128, Film Number
03630359)
|
3.8
|
First
Amendment to Amended and Restated By-Laws of Emerging Vision, Inc., dated
November 13, 2003 (incorporated by reference to Exhibit 3.8 to the
Company’s Current Report on Form 8-K, dated December 31, 2003, SEC File
Number 001-14128, Film Number
04610079)
|
3.9
|
Second
Amendment to Amended and Restated By-Laws of Emerging Vision, Inc., dated
May 24, 2004 (incorporated by reference to Exhibit 3.9 to the Company’s
Current Report on Form 8-K, dated May 24, 2004, SEC File Number 001-14128,
Film Number 04866428)
|
4.1
|
Specimen
of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to
the Company’s Registration Statement No.
33-98368)
|
4.2
|
Form
of Warrant Certificate and Agreement (incorporated by reference to Exhibit
4.8 to the Company’s Annual Report on Form 10-K for the year ended
December 31, 2003, SEC File Number 001-14128, Film Number
04717075)
|
10.1
|
Non-Revolving
Line of Credit Note and Credit Agreement, dated as of March 31, 2010,
executed by Emerging Vision, Inc. in favor of Manufacturers and Traders
Trust Company (incorporated by reference to Exhibit 10.1 of the Company’s
Current Report on Form 8-K, dated April 14,
2010)
|
10.2
|
LIBOR
Term Note, dated as of March 31, 2010, executed by Emerging Vision, Inc.
in favor of Manufacturers and Traders Trust Company (incorporated by
reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K,
dated April 14, 2010)
|
10.3
|
Limited
Waiver and Amendment, dated as of March 31, 2010, by and among
Manufacturers and Traders Trust Company, Emerging Vision, Inc. and
subsidiaries of Emerging Vision, Inc. (incorporated by reference to
Exhibit 10.3 of the Company’s Current Report on Form 8-K, dated April 14,
2010)
|
10.4
|
Letter
of Reaffirmation of General Security Agreement, dated as of March 31,
2010, executed by Emerging Vision, Inc., Combine Buying Group, Inc., OG
Acquisition, Inc., 1725758 Ontario Inc. d/b/a The Optical Group in favor
of Manufacturers and Traders Trust Company (incorporated by reference to
Exhibit 10.4 of the Company’s Current Report on Form 8-K, dated April 14,
2010)
|
10.5
|
Letter
of Reaffirmation of Guaranty, dated as of March 31, 2010, by and between
Combine Buying Group, Inc., OG Acquisition, Inc., 1725758 Ontario Inc.
d/b/a The Optical Group in favor of Manufacturers and Traders Trust
Company (incorporated by reference to Exhibit 10.5 to the Company’s
Current Report on Form 8-K, dated April 14,
2010)
|
10.6
|
Letter
of Reaffirmation of Absolute Assignment of Franchise Notes and Proceeds
Due, Assignment of Rents and Subleases, Pledge Agreement and Assignment
and United States Trademark Collateral Assignment and Security Agreement,
dated as of March 31, 2010, executed by Emerging Vision, Inc. and OG
Acquisition, Inc. in favor of Manufacturers and Traders Trust Company
(incorporated by reference to Exhibit 10.6 to the Company’s Current Report
on Form 8-K, dated April 14, 2010)
|
10.7
|
Continuing
Guaranty, dated as of March 31, 2010, executed by Visioncare of California
in favor of Manufacturers and Traders Trust Company (incorporated by
reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K,
dated April 14, 2010)
|
10.8
|
Continuing
Guaranty, dated as of March 31, 2010, executed by certain subsidiaries of
Emerging Vision, Inc. in favor of Manufacturers and Traders Trust Company
(incorporated by reference to Exhibit 10.8 to the Company’s Current Report
on Form 8-K, dated April 14, 2010)
|
10.9
|
General
Security Agreement, dated as of March 31, 2010, executed by Visioncare of
California in favor of Manufacturers and Traders Trust Company
(incorporated by reference to Exhibit 10.9 to the Company’s Current Report
on Form 8-K, dated April 14, 2010)
|
10.10
|
United
States Trademark Collateral Assignment and Security Agreement, dated as of
March 31, 2010, executed by Emerging Vision, Inc. and 1725758 Ontario Inc.
d/b/a The Optical Group in favor of Manufacturers and Traders Trust
Company (incorporated by reference to Exhibit 10.10 to the Company’s
Current Report on Form 8-K, dated April 14,
2010)
|
10.11
|
Absolute
Assignment of Franchise Notes and Proceeds Due, dated as of March 31,
2010, executed by Emerging Vision, Inc. in favor of Manufacturers and
Traders Trust Company (incorporated by reference to Exhibit 10.11 to the
Company’s Current Report on Form 8-K, dated April 14,
2010)
|
10.12
|
Assignment
of Rents and Subleases, dated as of March 31, 2010, executed by certain
subsidiaries of Emerging Vision, Inc. in favor of Manufacturers and
Traders Trust Company (incorporated by reference to Exhibit 10.12 to the
Company’s Current Report on Form 8-K, dated April 14,
2010)
|
10.13
|
Agreement,
dated as of April 14, 2010, by and among Emerging Vision, Inc., Insight
IPA of New York, Inc., Insight Managed Vision Care and Vision World, LLC
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report
on Form 8-K, dated April 14, 2010)
|
10.14
|
Agreement,
dated as of June 17, 2010, by and among Manufacturers and Traders Trust
Company, Combine Buying Group, Inc., Emerging Vision, Inc. and certain
guarantors (incorporated by reference to Exhibit 10.1 to the Company’s
Current Report on Form 8-K, dated June 17,
2010)
|
31.1
|
Certification
of Chief Executive Officer pursuant to Securities Exchange Act Rules
13a-14(a) and 15d-14(a)
|
31.2
|
Certification
of Chief Financial Officer pursuant to Securities Exchange Act Rules
13a-14(a) and 15d-14(a)
|
32.1
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
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/Glenn
Spina
Glenn
Spina
Chief
Executive Officer
(Principal
Executive Officer)
BY:
/s/Brian P.
Alessi
Brian P. Alessi
Chief Financial Officer
(Principal Financial and Accounting
Officer)
Dated: August 16, 2010