form10q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
one)
[X]
|
Quarterly
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for the
quarterly period ended September 30,
2008
|
OR
[ ]
|
Transition
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for the transition period from _____________ to
_____________
|
Commission
file number: 1-14128
EMERGING
VISION, INC.
(Exact
name of Registrant as specified in its charter)
NEW
YORK
(State or
other jurisdiction of incorporation or organization)
11-3096941
(I.R.S.
Employer Identification No.)
100
Quentin Roosevelt Boulevard
Garden
City, NY 11530
(Address
and zip code of principal executive offices)
Telephone
Number: (516) 390-2100
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days:
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, 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 __
|
Smaller
reporting company X
|
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act):
As of
November 14, 2008, there were 125,292,806 outstanding shares of the Issuer’s
Common Stock, par value $0.01 per share.
CONSOLIDATED
CONDENSED BALANCE SHEETS
(In
Thousands, Except Share Data)
|
|
ASSETS
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(unaudited)
|
|
|
(audited)
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
1,915 |
|
|
$ |
2,846 |
|
Franchise
receivables, net of allowance of $119 and $147,
respectively
|
|
|
1,909 |
|
|
|
1,842 |
|
Optical
purchasing group receivables, net of allowance of $60
|
|
|
6,449 |
|
|
|
4,840 |
|
Other
receivables, net of allowance of $6 and $5, respectively
|
|
|
376 |
|
|
|
369 |
|
Current
portion of franchise notes receivable, net of allowance of $29 and $38,
respectively
|
|
|
116 |
|
|
|
191 |
|
Inventories,
net
|
|
|
377 |
|
|
|
466 |
|
Prepaid
expenses and other current assets
|
|
|
713 |
|
|
|
447 |
|
Deferred
tax assets, current portion
|
|
|
623 |
|
|
|
600 |
|
Total
current assets
|
|
|
12,478 |
|
|
|
11,601 |
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
1,267 |
|
|
|
1,496 |
|
Franchise
notes receivable
|
|
|
137 |
|
|
|
121 |
|
Deferred
tax asset, net of current portion
|
|
|
1,340 |
|
|
|
1,074 |
|
Goodwill
|
|
|
4,115 |
|
|
|
4,237 |
|
Intangible
assets, net
|
|
|
3,110 |
|
|
|
3,065 |
|
Other
assets
|
|
|
239 |
|
|
|
271 |
|
Total
assets
|
|
$ |
22,686 |
|
|
$ |
21,865 |
|
LIABILITIES AND SHAREHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
$ |
4,795 |
|
|
$ |
5,607 |
|
Optical
purchasing group payables
|
|
|
5,711 |
|
|
|
4,486 |
|
Accrual
for store closings
|
|
|
212 |
|
|
|
300 |
|
Short-term
debt
|
|
|
4,371 |
|
|
|
32 |
|
Related
party obligations
|
|
|
105 |
|
|
|
404 |
|
Total
current liabilities
|
|
|
15,194 |
|
|
|
10,829 |
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
54 |
|
|
|
4,424 |
|
Related
party borrowings, net of current portion
|
|
|
694 |
|
|
|
770 |
|
Franchise
deposits and other liabilities
|
|
|
350 |
|
|
|
442 |
|
Total
liabilities
|
|
|
16,292 |
|
|
|
16,465 |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.01 par value per share; 5,000,000 shares
authorized: Senior Convertible Preferred Stock, $100,000
liquidation preference per share; 0.74 shares issued and
outstanding
|
|
|
74 |
|
|
|
74 |
|
Common
stock, $0.01 par value per share; 150,000,000 shares authorized;
125,475,143 shares issued and 125,292,806 shares
outstanding
|
|
|
1,254 |
|
|
|
1,254 |
|
Treasury
stock, at cost, 182,337 shares
|
|
|
(204 |
) |
|
|
(204 |
) |
Additional
paid-in capital
|
|
|
128,017 |
|
|
|
127,971 |
|
Accumulated
comprehensive (loss) income
|
|
|
(130 |
) |
|
|
165 |
|
Accumulated
deficit
|
|
|
(122,617 |
) |
|
|
(123,860 |
) |
Total
shareholders' equity
|
|
|
6,394 |
|
|
|
5,400 |
|
Total
liabilities and shareholders' equity
|
|
$ |
22,686 |
|
|
$ |
21,865 |
|
The
accompanying notes are an integral part of these consolidated condensed
financial statements.
CONSOLIDATED
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
(In
Thousands, Except Per Share Data)
|
|
|
|
For
the Three Months Ended September 30,
|
|
|
For
the Nine Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Optical
purchasing group sales
|
|
$ |
15,707 |
|
|
$ |
11,603 |
|
|
$ |
46,369 |
|
|
$ |
20,525 |
|
Franchise
royalties
|
|
|
1,481 |
|
|
|
1,632 |
|
|
|
4,727 |
|
|
|
5,138 |
|
Retail
sales – Company-owned stores
|
|
|
966 |
|
|
|
1,435 |
|
|
|
3,062 |
|
|
|
4,040 |
|
Membership
fees – VisionCare of California
|
|
|
928 |
|
|
|
889 |
|
|
|
2,648 |
|
|
|
2,616 |
|
Franchise
related fees and other revenues
|
|
|
31 |
|
|
|
103 |
|
|
|
279 |
|
|
|
231 |
|
Total
revenue
|
|
|
19,113 |
|
|
|
15,662 |
|
|
|
57,085 |
|
|
|
32,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of optical purchasing group sales
|
|
|
14,955 |
|
|
|
11,088 |
|
|
|
44,114 |
|
|
|
19,390 |
|
Cost
of retail sales
|
|
|
240 |
|
|
|
436 |
|
|
|
737 |
|
|
|
1,119 |
|
Selling,
general and administrative expenses
|
|
|
3,668 |
|
|
|
4,330 |
|
|
|
11,126 |
|
|
|
11,783 |
|
Total
costs and operating expenses
|
|
|
18,863 |
|
|
|
15,854 |
|
|
|
55,977 |
|
|
|
32,292 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
250 |
|
|
|
(192 |
) |
|
|
1,108 |
|
|
|
258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on franchise notes receivable
|
|
|
5 |
|
|
|
6 |
|
|
|
19 |
|
|
|
29 |
|
Gain
on settlement of litigation
|
|
|
- |
|
|
|
1,012 |
|
|
|
- |
|
|
|
1,012 |
|
Other
income
|
|
|
20 |
|
|
|
194 |
|
|
|
93 |
|
|
|
246 |
|
Interest
expense
|
|
|
(80 |
) |
|
|
(68 |
) |
|
|
(266 |
) |
|
|
(177 |
) |
Total
other (expense) income
|
|
|
(55 |
) |
|
|
1,144 |
|
|
|
(154 |
) |
|
|
1,110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before benefit from (provision for) income taxes
|
|
|
195 |
|
|
|
952 |
|
|
|
954 |
|
|
|
1,368 |
|
Benefit
from (provision for) income taxes
|
|
|
24 |
|
|
|
(45 |
) |
|
|
289 |
|
|
|
338 |
|
Net
income
|
|
|
219 |
|
|
|
907 |
|
|
|
1,243 |
|
|
|
1,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
(325 |
) |
|
|
(10 |
) |
|
|
(292 |
) |
|
|
(10 |
) |
Comprehensive
(loss) income
|
|
$ |
(106 |
) |
|
$ |
897 |
|
|
$ |
951 |
|
|
$ |
1,696 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$ |
0.00 |
|
|
$ |
0.01 |
|
|
$ |
0.01 |
|
|
$ |
0.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
125,293 |
|
|
|
72,169 |
|
|
|
125,293 |
|
|
|
70,946 |
|
Diluted
|
|
|
129,998 |
|
|
|
106,546 |
|
|
|
130,822 |
|
|
|
102,260 |
|
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 Nine Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
1,243 |
|
|
$ |
1,706 |
|
Adjustments
to reconcile net income to net cash (used in) provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
483 |
|
|
|
345 |
|
Provision
for doubtful accounts
|
|
|
58 |
|
|
|
51 |
|
Deferred
tax benefits
|
|
|
(289 |
) |
|
|
(361 |
) |
Gain
on the sale of property and equipment
|
|
|
(59 |
) |
|
|
(11 |
) |
Non-cash
compensation charges related to options and warrants
|
|
|
46 |
|
|
|
104 |
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Franchise
and other receivables
|
|
|
(246 |
) |
|
|
(959 |
) |
Settlement
receivable
|
|
|
- |
|
|
|
(1,062 |
) |
Optical
purchasing group receivables
|
|
|
(1,609 |
) |
|
|
(493 |
) |
Inventories
|
|
|
89 |
|
|
|
(64 |
) |
Prepaid
expenses and other current assets
|
|
|
(266 |
) |
|
|
(398 |
) |
Other
assets
|
|
|
32 |
|
|
|
148 |
|
Accounts
payable and accrued liabilities
|
|
|
(812 |
) |
|
|
1,285 |
|
Optical
purchasing group payables
|
|
|
1,225 |
|
|
|
245 |
|
Franchise
deposits and other liabilities
|
|
|
(180 |
) |
|
|
(49 |
) |
Net
cash (used in) provided by operating activities
|
|
|
(285 |
) |
|
|
487 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Acquisition
of 1725758 Ontario Inc.
|
|
|
- |
|
|
|
(3,517 |
) |
Proceeds
from franchise and other notes receivable
|
|
|
173 |
|
|
|
251 |
|
Costs
associated with enhancing trademark value
|
|
|
(371 |
) |
|
|
- |
|
Franchise
notes receivable issued
|
|
|
(20 |
) |
|
|
(131 |
) |
Purchases
of property and equipment
|
|
|
(22 |
) |
|
|
(863 |
) |
Net
cash used in investing activities
|
|
|
(240 |
) |
|
|
(4,260 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Borrowings
under credit facility
|
|
|
- |
|
|
|
4,359 |
|
Payments
on borrowings
|
|
|
(406 |
) |
|
|
(389 |
) |
Net
cash (used in) provided by financing activities
|
|
|
(406 |
) |
|
|
3,970 |
|
Net
cash (used in) provided by operations
|
|
|
(931 |
) |
|
|
197 |
|
Cash
and cash equivalents – beginning of period
|
|
|
2,846 |
|
|
|
1,289 |
|
Cash
and cash equivalents – end of period
|
|
$ |
1,915 |
|
|
$ |
1,486 |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
224 |
|
|
$ |
43 |
|
Taxes
|
|
$ |
33 |
|
|
$ |
34 |
|
|
|
|
|
|
|
|
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
Notes
receivable in connection with the sale of one Company-owned store
(inclusive of all inventory and property and equipment)
|
|
$ |
74 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated condensed
financial statements.
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
1 – ORGANIZATION:
Emerging
Vision, Inc. and subsidiaries (collectively, the “Company”) operates one of the
largest chains of retail optical stores and one of the largest franchise optical
chains in the United States, based upon management’s beliefs, domestic sales and
the number of locations of Company-owned and franchised stores (collectively
“Retail Stores”). The Company also targets retail optical stores
within the United States and within Canada to become members of its two optical
purchasing groups, Combine Buying Group, Inc. (“Combine”) and The Optical Group
(“TOG”). The Company was incorporated under the laws of the State of
New York in January 1992 and, in July 1992, purchased substantially all of the
assets of Sterling Optical Corp., a New York corporation, then a
debtor-in-possession under Chapter 11 of the U.S. Bankruptcy Code.
As of
September 30, 2008, there were 146 Retail Stores in operation, consisting of 138
franchised stores, 7 Company-owned stores and 1 Company-owned store being
managed by a franchisee, 859 active members of Combine, and 535 active members
of TOG.
|
Principles
of Consolidation
|
The
Consolidated Condensed Financial Statements include the accounts of Emerging
Vision, Inc. and its operating subsidiaries, all of which are wholly-owned. All
intercompany balances and transactions have been eliminated in
consolidation.
The
accompanying Consolidated Condensed Financial Statements of the Company have
been prepared in accordance with accounting principles generally accepted for
interim financial statement presentation and in accordance with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted for complete financial statement
presentation. In the opinion of management, all adjustments for a
fair statement of the results of operations and financial position for the
interim periods presented have been included. All such adjustments
are of a normal recurring nature. This financial information should
be read in conjunction with the Consolidated Financial Statements and Notes
thereto included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2007.
Effective
January 1, 2008, the Company changed its basis of presentation for its business
segments. For additional information see Note 5 of the Consolidated
Condensed Financial Statements.
NOTE
2 – SIGNIFICANT ACCOUNTING POLICIES:
Share-Based
Compensation
The
Company accounts for share-based compensation in accordance with the fair value
method provisions of Financial Accounting Standards Board’s (“FASB”)
Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based
Payment.”
Share-based
compensation cost of approximately $31,000 is reflected in selling, general and
administrative expenses on the accompanying Consolidated Condensed Statements of
Income for the three months ended September 30, 2007, and $46,000 and $105,000
for the nine months ended September 30, 2008 and 2007,
respectively. There was no such expense during the three months ended
September 30, 2008. The Company determined the fair value of options
and warrants issued using the Black-Scholes option pricing model with the
following assumptions: 1 to 2 year expected lives; 10-year expiration
period; risk-free interest rates ranging from 1.77% to 4.98%; stock price
volatilities ranging from 48.00% to 74.00%; with no dividends over the expected
life.
There
were no common stock option grants to any of the Company’s employees, or warrant
grants to any independent consultants, during the three or nine months ended
September 30, 2008, and no common stock option grants to any members of the
Company’s Board of Directors during the three months ended September 30,
2008.
Revenue
Recognition
The
Company recognizes revenues in accordance with the Securities and Exchange
Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 104, “Revenue
Recognition.” Accordingly, revenues are recorded when persuasive
evidence of an arrangement exists, delivery has occurred or services have been
rendered, the Company’s prices to buyers are fixed or determinable, and
collectibility is reasonably assured.
The
Company derives its revenues from the following five principal
sources:
Optical purchasing group
sales – Represents product pricing extended to the Company’s
optical purchasing group members associated with the sale of vendor’s eye care
products to such members;
Franchise royalties –
Represents continuing franchise royalty fees based upon a percentage of the
gross revenues generated by each franchised location. Continuing
franchise royalties are based upon a percentage of the gross revenues generated
by each franchised location. To the extent that collectibility of
royalties is not reasonably assured, the Company recognizes such revenue when
the cash is received;
Retail sales – Company-owned stores
– Represents sales from eye care products and related services generated
at a Company-owned store;
Membership fees – VisionCare of
California – Represents membership fees generated by VisionCare of
California, Inc. (“VCC”), a wholly owned subsidiary of the Company, for
optometric services provided to individual patients (members). A
portion of membership fee revenues is deferred when billed and recognized
ratably over the one-year term of the membership agreement;
Franchise related fees and other revenues –
Represents certain franchise fees collected by the Company under the terms of
franchise agreements (including, but not limited to, initial franchise,
transfer, renewal and conversion fees). Initial franchise fees, which
are non-refundable, are recognized when the related franchise agreement is
signed. Also represents all other revenues not generated by one of
the other five principal sources such as commission income and employee optical
sales.
The
Company also follows the provisions of Emerging Issue Task Force (“EITF”) Issue
01-09, “Accounting for Consideration Given by a Vendor to a Customer (Including
a Reseller of the Vendor’s Products),” and accordingly, accounts for discounts,
coupons and promotions (that are offered to its customers) as a direct reduction
of sales.
Comprehensive
Income
The
Company follows the provisions of SFAS No. 130, “Reporting Comprehensive
Income,” which establishes rules for the reporting of comprehensive income and
its components. Comprehensive income is defined as the change in
equity from transactions and other events and circumstances other than those
resulting from investments by owners and distributions to owners. The
Company’s comprehensive income is comprised of the cumulative translation
adjustment arising from the 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
$325,000 and $292,000 translation loss from the conversion of foreign currency
to U.S. Dollars is included as a component of comprehensive loss for the three
and nine months ended September 30, 2008, respectively, and is recorded directly
to accumulated comprehensive loss within the Consolidated Condensed Balance
Sheet as of September 30, 2008.
Income
Taxes
Effective
January 1, 2007, the Company adopted the provisions of FASB’s Interpretation
(“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation
of FASB No. 109.” FIN 48 prescribes a recognition threshold and
measurement attribute for how a company should recognize, measure, present, and
disclose in its financial statements uncertain tax positions that the company
has taken or expects to take on a tax return. FIN 48 requires that
the financial statements reflect expected future tax consequences of such
positions presuming the taxing authorities’ full knowledge of the position and
all relevant facts, but without considering time values. No such
amounts were accrued for as of January 1, 2007. Additionally, no
adjustments related to uncertain tax positions were recognized during the three
and nine months ended September 30, 2008 and 2007, respectively.
The
Company recognizes interest and penalties related to uncertain tax positions as
a reduction of the income tax benefit. No interest and penalties
related to uncertain tax positions were accrued as of September 30,
2008.
The
Company operates in multiple tax jurisdictions within the United States of
America and Canada. Although the Company does not believe that the
Company is currently under examination in any major tax jurisdiction in which it
operates, the Company remains subject to examination in all of those tax
jurisdictions until the applicable statutes of limitation expire. As
of September 30, 2008, a summary of the tax years that remains subject to
examination in the Company’s major tax jurisdictions are: United
States – Federal and State – 2004 and forward. The Company does not
expect to have a material change to unrecognized tax positions within the next
twelve months.
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and the disclosure of
contingent assets and liabilities as of the dates of such financial statements,
and the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates. Significant
estimates made by management include, but are not limited to, allowances on
franchise, notes and other receivables, costs of current and potential
litigation, and the allowance on deferred tax assets
Reclassification
Certain
reclassifications have been made to prior year’s consolidated condensed
financial statements to conform to the current year presentation.
NOTE
3 – PER SHARE INFORMATION:
In
accordance with SFAS No. 128, “Earnings Per Share”, basic earnings per share of
common stock (“Basic EPS”) is computed by dividing the net income by the
weighted-average number of shares of common stock
outstanding. Diluted earnings per share of common stock (“Diluted
EPS”) is computed by dividing the net income by the weighted-average number of
shares of common stock, and dilutive common stock equivalents and convertible
securities then outstanding. SFAS No. 128 requires the presentation
of both Basic EPS and Diluted EPS on the face of the Company’s Consolidated
Condensed Statements of Income. Common stock equivalents totaling
3,410,187 and 1,777,687 were excluded from the computation of Diluted EPS for
the three months ended September 30, 2008 and 2007, respectively, and 3,410,187
and 2,177,687 were excluded for the nine months ended September 30, 2008 and
2007, respectively, as their effect on the computation of Diluted EPS would have
been anti-dilutive.
The
following table sets forth the computation of basic and diluted per share
information:
|
|
For
the Three Months Ended September 30,
|
|
|
For
the Nine Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (in thousands):
|
|
$ |
219 |
|
|
$ |
907 |
|
|
$ |
1,243 |
|
|
$ |
1,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
shares of common stock outstanding
|
|
|
125,293 |
|
|
|
72,169 |
|
|
|
125,293 |
|
|
|
70,946 |
|
Dilutive
effect of stock options, warrants and restricted stock
|
|
|
4,705 |
|
|
|
34,377 |
|
|
|
5,529 |
|
|
|
31,314 |
|
Weighted-average
shares of common stock outstanding, assuming dilution
|
|
|
129,998 |
|
|
|
106,546 |
|
|
|
130,822 |
|
|
|
102,260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$ |
0.00 |
|
|
$ |
0.01 |
|
|
$ |
0.01 |
|
|
$ |
0.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE
4 – CREDIT FACILITY:
On August
8, 2007, the Company entered into a Revolving Line of Credit Note and Credit
Agreement (the “Credit Agreement”) with Manufacturers and Traders Trust Company
(“M&T”), establishing a revolving credit facility (the “Credit Facility”),
for aggregate borrowings of up to $6,000,000, to be used for general working
capital needs and certain permitted acquisitions. This Credit
Facility replaced the Company’s previous revolving line of credit facility with
M&T. The initial term of the Credit Facility expires in August
2009. Interest on all sums drawn by the Company under the Credit
Facility is repayable monthly, commencing on the first day of each month
during the term of the Credit Facility. Interest is calculated at the
variable rate of two hundred seventy five (275) basis points in excess of LIBOR,
and all principal drawn by the Company is payable on August 1,
2009.
On August
10, 2007, the Company borrowed $3,609,423 to fund the purchase price payable in
connection with the acquisitions of TOG, and borrowed $400,000 for general
working capital requirements. The Credit Facility includes various
financial covenants including minimum net worth, maximum funded debt and debt
service ratio requirements. As of September 30, 2008, the Company had
outstanding borrowings of $4,356,854 under the Credit Facility, which amount was
included in Short-term Debt on the accompanying Consolidated Balance
Sheet and had $1,643,146 available under the Credit Facility for future
borrowings. As of September 30, 2008, the Company was not in
compliance with one of the financial covenants, however, on November 14, 2008,
M&T granted the Company a waiver and agreed that such covenant was now in
compliance for the period ended September 30, 2008.
NOTE
5 – SEGMENT REPORTING
Business
Segments
Operating
segments are organized internally primarily by the type of services provided,
and in accordance with SFAS 131, “Disclosures About Segments of an
Enterprise and Related Information.” The Company has aggregated
similar operating segments into six reportable segments: Optical Purchasing
Group Business, Franchise, Company Store, VisionCare of California, Corporate
Overhead and Other.
The
Optical Purchasing Group Business segment consists of the operations of Combine,
acquired in August 2006 and TOG, acquired in August 2007. Revenues
generated by this segment represent the sale of products and services, at
discounted pricing, to Combine and TOG members. The businesses in
this segment are able to use their membership count to get better discounts from
vendors than a member could obtain on its own. Expenses include
direct costs for such product and services, salaries and related benefits,
depreciations and amortization, interest expense on financing these
acquisitions, and other overhead.
The
Franchise segment consists of 138 franchise locations as of September 30,
2008. Revenues generated by this segment represent royalties on the
total sales of the franchise locations, other franchise related fees such as
initial franchise, transfer, renewal and conversion fees, additional royalties
in connection with franchise store audits, and interest charged on franchise
financing. Expenses include the salaries and related
benefits/expenses of the Company’s franchise field support team, corporate
salaries and related benefits, convention related expenses, consulting fees, and
other overhead.
The
Company Store segment consists of 7 Company-owned retail optical stores as of
September 30, 2008. Revenues generated from such stores is a result
of the sales of eye care products and services such as prescription and
non-prescription eyeglasses, eyeglass frames, ophthalmic lenses, contact lenses,
sunglasses and a broad range of ancillary items. Expenses include the
direct costs for such eye care products, doctor and store staff salaries and
related benefits, rent, advertising, and other overhead.
The
VisionCare of California (“VCC”) segment consists of optometric services
provided to patients (members) of those franchise retail optical stores located
in the state of California. Revenues consist of membership fees
generated for such optometric services provided to individual patients
(members). Expenses include salaries and related benefits for the
doctors that render such optometric services, and other overhead.
The
Corporate Overhead segment consists of expenses not allocated to one of the
other segments. There are no revenues generated by this
segment. Expenses include costs associated with being a publicly
traded company (including salaries and related benefits, professional fees,
board of director fees, and director and officer insurance), certain
Company-owned store overhead not allocated to that segment, other salaries and
related benefits, rent, other professional fees, and depreciation and
amortization.
The Other
segment includes revenues and expenses from other business activities that do
not fall within one of the other segments. Revenues generated by this
segment consist of employee optical benefit sales, commission income, and
residual income on credit card processing. Expenses primarily include
the direct cost of such employee optical benefit sales, salaries and related
benefits, commission expense, and advertising.
Certain
business segment information is as follows (in thousands):
|
|
As
of September 30,
|
|
|
As
of December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Total
Assets:
|
|
|
|
|
|
|
Optical
Purchasing Group Business
|
|
$ |
15,203 |
|
|
$ |
11,682 |
|
Franchise
|
|
|
4,153 |
|
|
|
4,507 |
|
Company
Store
|
|
|
1,082 |
|
|
|
1,301 |
|
VisionCare
of California
|
|
|
701 |
|
|
|
568 |
|
Corporate
Overhead
|
|
|
1,486 |
|
|
|
3,731 |
|
Other
|
|
|
61 |
|
|
|
76 |
|
Total
assets
|
|
$ |
22,686 |
|
|
$ |
21,865 |
|
|
|
For
the Three Months
Ended
September 30,
|
|
|
For
the Nine Months
Ended
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Optical
Purchasing Group Business
|
|
$ |
15,707 |
|
|
$ |
11,603 |
|
|
$ |
46,369 |
|
|
$ |
20,525 |
|
Franchise
|
|
|
1,482 |
|
|
|
1,735 |
|
|
|
4,889 |
|
|
|
5,369 |
|
Company
Store
|
|
|
966 |
|
|
|
1,435 |
|
|
|
3,062 |
|
|
|
4,040 |
|
VisionCare
of California
|
|
|
928 |
|
|
|
889 |
|
|
|
2,648 |
|
|
|
2,616 |
|
Corporate
Overhead
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other
|
|
|
30 |
|
|
|
- |
|
|
|
117 |
|
|
|
- |
|
Net
revenues
|
|
$ |
19,113 |
|
|
$ |
15,662 |
|
|
$ |
57,085 |
|
|
$ |
32,550 |
|
Income
(Loss) before Income Tax Benefit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Optical
Purchasing Group Business
|
|
$ |
341 |
|
|
$ |
243 |
|
|
$ |
981 |
|
|
$ |
430 |
|
Franchise
|
|
|
748 |
|
|
|
2,031 |
|
|
|
2,916 |
|
|
|
4,343 |
|
Company
Store
|
|
|
(128 |
) |
|
|
(322 |
) |
|
|
(268 |
) |
|
|
(671 |
) |
VisionCare
of California
|
|
|
43 |
|
|
|
3 |
|
|
|
48 |
|
|
|
28 |
|
Corporate
Overhead
|
|
|
(818 |
) |
|
|
(1,003 |
) |
|
|
(2,673 |
) |
|
|
(2,762 |
) |
Other
|
|
|
9 |
|
|
|
- |
|
|
|
(50 |
) |
|
|
- |
|
Income
before income tax benefit
|
|
$ |
195 |
|
|
$ |
952 |
|
|
$ |
954 |
|
|
$ |
1,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and Amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Optical
Purchasing Group Business
|
|
$ |
73 |
|
|
$ |
39 |
|
|
$ |
226 |
|
|
$ |
116 |
|
Franchise
|
|
|
35 |
|
|
|
24 |
|
|
|
90 |
|
|
|
66 |
|
Company
Store
|
|
|
20 |
|
|
|
32 |
|
|
|
55 |
|
|
|
85 |
|
VisionCare
of California
|
|
|
5 |
|
|
|
5 |
|
|
|
16 |
|
|
|
12 |
|
Corporate
Overhead
|
|
|
35 |
|
|
|
24 |
|
|
|
90 |
|
|
|
66 |
|
Other
|
|
|
2 |
|
|
|
- |
|
|
|
6 |
|
|
|
- |
|
Total
depreciation and amortization
|
|
$ |
170 |
|
|
$ |
124 |
|
|
$ |
483 |
|
|
$ |
345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Optical
Purchasing Group Business
|
|
$ |
68 |
|
|
$ |
50 |
|
|
$ |
227 |
|
|
$ |
137 |
|
Franchise
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Company
Store
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
VisionCare
of California
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Corporate
Overhead
|
|
|
12 |
|
|
|
18 |
|
|
|
39 |
|
|
|
40 |
|
Other
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
interest expense
|
|
$ |
80 |
|
|
$ |
68 |
|
|
$ |
266 |
|
|
$ |
177 |
|
The
following table shows certain unaudited pro forma results of the Company,
assuming the Company had acquired TOG at the beginning of the three and nine
months ended September 30, 2007 (in thousands):
|
|
For
the Three Months
Ended
September 30,
|
|
|
For
the Nine Months
Ended
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Optical
Purchasing Group Business
|
|
$ |
15,707 |
|
|
$ |
15,402 |
|
|
$ |
46,369 |
|
|
$ |
44,067 |
|
Franchise
|
|
|
1,482 |
|
|
|
1,735 |
|
|
|
4,889 |
|
|
|
5,369 |
|
Company
Store
|
|
|
966 |
|
|
|
1,435 |
|
|
|
3,062 |
|
|
|
4,040 |
|
VisionCare
of California
|
|
|
928 |
|
|
|
889 |
|
|
|
2,648 |
|
|
|
2,616 |
|
Corporate
Overhead
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other
|
|
|
30 |
|
|
|
- |
|
|
|
117 |
|
|
|
- |
|
Net
revenues
|
|
$ |
19,113 |
|
|
$ |
19,461 |
|
|
$ |
57,085 |
|
|
$ |
56,092 |
|
Income
(Loss) before Income Tax Benefit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Optical
Purchasing Group Business
|
|
$ |
341 |
|
|
$ |
389 |
|
|
$ |
981 |
|
|
$ |
874 |
|
Franchise
|
|
|
748 |
|
|
|
2,031 |
|
|
|
2,916 |
|
|
|
4,343 |
|
Company
Store
|
|
|
(128 |
) |
|
|
(322 |
) |
|
|
(268 |
) |
|
|
(671 |
) |
VisionCare
of California
|
|
|
43 |
|
|
|
3 |
|
|
|
48 |
|
|
|
28 |
|
Corporate
Overhead
|
|
|
(818 |
) |
|
|
(1,003 |
) |
|
|
(2,673 |
) |
|
|
(2,762 |
) |
Other
|
|
|
9 |
|
|
|
- |
|
|
|
(50 |
) |
|
|
- |
|
Income
before income tax benefit
|
|
$ |
195 |
|
|
$ |
1,098 |
|
|
$ |
954 |
|
|
$ |
1,812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and Amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Optical
Purchasing Group Business
|
|
$ |
73 |
|
|
$ |
67 |
|
|
$ |
226 |
|
|
$ |
207 |
|
Franchise
|
|
|
35 |
|
|
|
24 |
|
|
|
90 |
|
|
|
66 |
|
Company
Store
|
|
|
20 |
|
|
|
32 |
|
|
|
55 |
|
|
|
85 |
|
VisionCare
of California
|
|
|
5 |
|
|
|
5 |
|
|
|
16 |
|
|
|
12 |
|
Corporate
Overhead
|
|
|
35 |
|
|
|
24 |
|
|
|
90 |
|
|
|
66 |
|
Other
|
|
|
2 |
|
|
|
- |
|
|
|
6 |
|
|
|
- |
|
Total
depreciation and amortization
|
|
$ |
170 |
|
|
$ |
152 |
|
|
$ |
483 |
|
|
$ |
436 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Optical
Purchasing Group Business
|
|
$ |
68 |
|
|
$ |
61 |
|
|
$ |
227 |
|
|
$ |
267 |
|
Franchise
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Company
Store
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
VisionCare
of California
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Corporate
Overhead
|
|
|
12 |
|
|
|
18 |
|
|
|
39 |
|
|
|
40 |
|
Other
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
interest expense
|
|
$ |
80 |
|
|
$ |
79 |
|
|
$ |
266 |
|
|
$ |
307 |
|
Geographic
Information
The
Company also does business in two separate geographic areas; the United States
and Canada. Certain geographic information for continuing operations
is as follows:
|
|
For
the Three Months
Ended
September 30,
|
|
|
For
the Nine Months
Ended
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
18,816 |
|
|
$ |
15,464 |
|
|
$ |
56,194 |
|
|
$ |
32,352 |
|
Canada
|
|
|
297 |
|
|
|
198 |
|
|
|
891 |
|
|
|
198 |
|
Net
revenues
|
|
$ |
19,113 |
|
|
$ |
15,662 |
|
|
$ |
57,085 |
|
|
$ |
32,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(Loss) before Income Tax Benefit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
203 |
|
|
$ |
929 |
|
|
$ |
864 |
|
|
$ |
1,345 |
|
Canada
|
|
|
(8 |
) |
|
|
23 |
|
|
|
90 |
|
|
|
23 |
|
Income
before income tax benefit
|
|
$ |
195 |
|
|
$ |
952 |
|
|
$ |
954 |
|
|
$ |
1,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
geographic information on Canada includes TOG’s business activity from August 1,
2007, the effective date of the acquisition of TOG. Canadian revenue
is generated from customer management services provided by TOG on behalf of the
Company’s optical purchasing group members in Canada.
Additional
geographic information is summarized as follows for the nine months ended
September 30, 2008 (in thousands):
|
|
United
States
|
|
|
Canada
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
22,484 |
|
|
$ |
202 |
|
|
$ |
22,686 |
|
Depreciation
and Amortization
|
|
|
476 |
|
|
|
7 |
|
|
|
483 |
|
Goodwill
|
|
|
4,115 |
|
|
|
- |
|
|
|
4,115 |
|
Intangible
Assets
|
|
|
3,110 |
|
|
|
- |
|
|
|
3,110 |
|
Interest
Expense
|
|
|
266 |
|
|
|
- |
|
|
|
266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE
6 – COMMITMENTS AND CONTINGENCIES:
Litigation
In 1999,
Berenter Greenhouse and Webster, an advertising agency previously utilized by
the Company, commenced an action, against the Company, in the New York State
Supreme Court, New York County, for amounts alleged to be due for advertising
and related fees. The amounts claimed by the plaintiff are in excess
of $200,000. In response to this action, the Company filed
counterclaims of approximately $500,000, based upon estimated overpayments
allegedly made by the Company pursuant to the agreement previously entered into
between the parties. As of the date hereof, these proceedings were
still in the discovery stage. The Company has not recorded an accrual
for a loss in this action, as the Company does not believe it is probable that
the Company will be held liable in respect of plaintiff’s claims.
In July
2001, the Company commenced an arbitration proceeding, in the Ontario Superior
Court of Justice, against Eye-Site, Inc. and Eye Site (Ontario), Ltd., as the
makers of two promissory notes (in the aggregate original principal amount of
$600,000) made by one or more of the makers in favor of the Company, as well as
against Mohammed Ali, as the guarantor of the obligations of each maker under
each note. The notes were issued, by the makers, in connection with
the makers’ acquisition of a Master Franchise Agreement for the Province of
Ontario, Canada, as well as their purchase of the assets of, and a Sterling
Optical Center Franchise for, four of the Company’s retail optical stores then
located in Ontario, Canada. In response, the defendants
counterclaimed for damages, in the amount of $1,500,000, based upon, among other
items, alleged misrepresentations made by representatives of the Company in
connection with these transactions. The Company believes that it has
a meritorious defense to each counterclaim. As of the date hereof,
these proceedings were in the discovery stage. The Company has not
recorded an accrual for a loss and does not believe it is probable that the
Company shall be held liable in respect of defendant’s
counterclaims.
In
February 2002, Kaye Scholer, LLP, the law firm previously retained by the
Company as its outside counsel, commenced an action in the New York State
Supreme Court seeking unpaid legal fees of approximately
$122,000. The Company answered the complaint in such action, and has
heard nothing since. The Company believes that it has a meritorious
defense to such action. The Company has not recorded an accrual for a
loss in this action, as the Company does not believe it is probable that the
Company will be held liable in respect of plaintiff’s claims.
On May
20, 2003, Irondequoit Mall, LLC commenced an action against the Company and
Sterling Vision of Irondequoit, Inc. (“SVI”) alleging, among other things, that
the Company had breached its obligations under its guaranty of the lease for the
former Sterling Optical store located in Rochester, New York. The
Company and SVI believe that they have a meritorious defense to such
action. As of the date hereof, these proceedings were in the
discovery stage. Although the Company has recorded an accrual for
probable losses in the event that the Company shall be held liable in respect of
plaintiff’s claims, the Company does not believe that any such loss is
reasonably possible, or, if there is a loss, the Company does not believe that
it is reasonably possible that such loss would exceed the amount
recorded.
In August
2006, the Company and its subsidiary, Sterling Vision of California, Inc.
(“SVC”) filed an action against For Eyes Optical Company (“For Eyes” or
“Defendant”) in response to allegations by For Eyes of trademark infringement
for Plaintiff’s use of the trademark “Site For Sore Eyes”. The
Company claims, among other things, that (i) there is no likelihood of confusion
between the Company’s and Defendant’s mark, and that the Company has not
infringed, and is not infringing, Defendant’s mark; (ii) the Company is not
bound by that certain settlement agreement, executed in 1981 by a prior owner of
the Site For Sore Eyes trademark; and (iii) Defendant’s mark is generic and must
be cancelled. For Eyes, in its Answer, asserted defenses to the
Company’s claims, and asserted counterclaims against the Company, including,
among others, that (i) the Company has infringed For Eyes’ mark; (ii) the
Company wrongfully obtained a trademark registration for its mark and that said
registration should be cancelled; and (iii) the acts of the Company constitute a
breach of the aforementioned settlement agreement. For Eyes seeks
injunctive relief, cancellation of the Company’s trademark registration, treble
monetary damages, payment of any profits made by the Company in respect of the
use of such trade name, and costs and attorney fees. The case is
currently in the discovery phase. The Company has not recorded an
accrual for a loss in this action, as the Company does not believe it is
probable that the Company will be held liable in respect of Defendant’s
counterclaims.
In
February 2008, Sangertown Square, LLC commenced an action against the Company,
in the Supreme Court of the State of New York, Onondaga County, alleging, among
other things, that the Company had breached its obligations under its lease for
the former Sterling Optical store located at Sangertown Square Mall, New
York. In October 2008, this action was settled. The terms
of the settlement included the payment, by the Company to Sangertown Square,
LLC, of an aggregate sum of $150,000, and the exchange of mutual general
releases.
In July
2008, Ontario Mills Limited Partnership commenced an action against, among
others, the Company, in the Supreme Court of the State of California, San
Bernardino County, alleging, among other things, that the Company had breached
its obligations under its guaranty of the lease for the former Sterling Optical
store located in the Ontario Mills Mall, California. In or about
October 2008, Ontario Mills Limited Partnership made a motion with the court to
dismiss the case against the Company. This motion is currently
pending.
In
September 2008, Pyramid Mall of Glen Falls Newco, LLC commenced an action
against the Company and its subsidiary Sterling Vision of Aviation Mall, Inc.,
in the Supreme Court of the State of New York, Onondaga County, alleging, among
other things, that the Company had breached its obligations under its lease for
the former Sterling Optical store located at Aviation Mall, New
York. The Company believes that it has a meritorious defense to such
action. As of the date hereof, these proceedings were in the
discovery stage. Although the Company has recorded an accrual for
probable losses in the event that the Company shall be held liable in respect of
plaintiff’s claims, the Company does not believe that any such loss is
reasonably possible, or, if there is a loss, the Company does not believe that
it is reasonably possible that such loss would exceed the amount
recorded.
In
October 2008, Crossgates Mall Company Newco, LLC commenced an action against the
Company, in the Supreme Court of the State of New York, Onondaga County,
alleging, among other things, that the Company had breached its obligations
under its lease for the former Sterling Optical store located at Crossgates
Mall, New York. The Company believes that it has a meritorious
defense to such action. As of the date hereof, these proceedings were
in the discovery stage. Although the Company has recorded an accrual
for probable losses in the event that the Company shall be held liable in
respect of plaintiff’s claims, the Company does not believe that any such loss
is reasonably possible, or, if there is a loss, the Company does not believe
that it is reasonably possible that such loss would exceed the amount
recorded.
Although
the Company, where indicated herein, believes that it has a meritorious defense
to the claims asserted against it (and its affiliates), given the uncertain
outcomes generally associated with litigation, there can be no assurance that
the Company’s (and its affiliates’) defense of such claims will be
successful.
In
addition to the foregoing, in the ordinary course of business, the Company is a
defendant in certain lawsuits alleging various claims incurred, certain of which
claims are covered by various insurance policies, subject to certain deductible
amounts and maximum policy limits. In the opinion of management, the
resolution of these claims should not have a material adverse effect,
individually or in the aggregate, upon the Company’s business or financial
condition. Other than as set forth above, management believes that
there are no other legal proceedings, pending or threatened, to which the
Company is, or may be, a party, or to which any of its properties are or may be
subject to, which, in the opinion of management, will have a material adverse
effect on the Company.
Guarantees
As of
September 30, 2008, 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 $2,465,000. The Company from time to
time evaluates the credit-worthiness of its franchisees in order to determine
their ability to continue to perform under their respective
subleases. Additionally, in the event that a franchisee defaults
under its sublease, the Company has the right to take over operation of the
respective location.
Employment
Agreements
The
Company has an Employment Agreement (“Agreement 1”) with its Chief Executive
Officer (“CEO”), which extends through November 2009. Agreement 1
provides for an annual salary of $275,000 and certain other
benefits. Additionally, as per Agreement 1, the CEO may be eligible
for bonus compensation to be determined by the Company’s Board of Directors
based on the Company’s previous calendar’s year performance.
Additionally,
in connection with the acquisition of Combine Optical Management Corporation
(“COMC”), the Company entered into a five-year Employment Agreement (“Agreement
2”) with the existing President of COMC. Agreement 2 provides for an
annual salary of $210,000, certain other benefits, and an annual bonus based
upon certain financial targets of Combine.
This
Quarterly Report, as of and for the three and nine months ended September 30,
2008, (the “Report”) contains certain forward-looking statements and information
relating to the Company that is based on the beliefs of the Company’s
management, as well as assumptions made by, and information currently available
to, the Company’s management. When used in this Report, the words
“anticipate”, “believe”, “estimate”, “expect”, “there can be no assurance”,
“may”, “could”, “would”, “might”, “intends” and similar expressions and their
negatives, as they relate to the Company or the Company’s management, are
intended to identify forward-looking statements. Such statements
reflect the view of the Company at the date they are made with respect to future
events, are not guarantees of future performance and are subject to various
risks and uncertainties as identified in the Company’s Annual Report on Form
10-K for the year ended December 31, 2007 and those described from time to time
in previous and future reports filed with the Securities and Exchange
Commission. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those described herein with the forward-looking
statements referred to above and as set forth in this Report. The
Company does not intend to update these forward-looking statements for new
information, or otherwise, for the occurrence of future events.
In order
to more accurately detail our financial information and performance, the Company
has made changes to the format of this Report and changed its segment
reporting. The Company has simplified its Consolidated Condensed
Statements of Income to expand the segment reporting to detail each segment’s
revenue and expense. Management’s discussion and analysis of
financial conditions and results of operations concentrates on describing
segment performance through the use of new detailed financial tables, which will
assist the reader in understanding each business segment and how it relates to
the overall performance of the Company.
Segment
results for the three and nine months ended September 30, 2008, as compared to
the three and nine months ended September 30, 2007
Consolidated
Segment Results
Total
revenues for the Company increased approximately $3,451,000, or 22.0%, to
$19,113,000 for the three months ended September 30, 2008, as compared to
$15,662,000 for the three months ended September 30, 2007, and increased
approximately $24,535,000, or 75.4%, to $57,085,000 for the nine months ended
September 30, 2008, as compared to $32,550,000 for the nine months ended
September 30, 2007. These increases were mainly a result of the
acquisition, on August 10, 2007, having an effective date of August 1, 2007, of
all of the equity ownership interests in 1725758 Ontario Inc., d/b/a The Optical
Group (“TOG”) through the Company’s wholly-owned subsidiary, OG Acquisition,
Inc. (“OG”), which was offset, in part, by a 14 store decrease in the total
number of franchise and company store locations open as of September 30, 2008 as
compared to September 30, 2007. This decrease led to reduced
franchise royalties and retail sales from Company-owned stores.
Total
costs, and selling, general and administrative expenses for the Company
increased approximately $3,009,000, or 19.0%, to $18,863,000 for the three
months ended September 30, 2008, as compared to $15,854,000 for the three months
ended September 30, 2007, and increased approximately $23,685,000, or 73.3%, to
$55,977,000 for the nine months ended September 30, 2008, as compared to
$32,292,000 for the nine months ended September 30, 2007. These
increases were mainly a result of the acquisition of TOG, as described above,
offset, in part, by a decrease in Company-owned stores in operation for the
comparable periods (an average of 8.5 in operation during the nine months ended
September 30, 2008 as compared to an average of 10.75 in operation during the
comparable period in 2007).
Optical
Purchasing Group Business Segment
|
|
For
the Three Months Ended September 30 (in thousands):
|
|
|
|
2008
|
|
|
2007
|
|
|
$
Change
|
|
|
%
Change
|
|
Net
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Optical
purchasing group sales
|
|
$ |
15,707 |
|
|
$ |
11,603 |
|
|
$ |
4,104 |
|
|
|
35.4 |
% |
Cost
of optical purchasing group sales
|
|
|
14,955 |
|
|
|
11,088 |
|
|
|
3,867 |
|
|
|
34.9 |
% |
Gross
margin
|
|
|
752 |
|
|
|
515 |
|
|
|
237 |
|
|
|
46.0 |
% |
Selling,
General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and related benefits
|
|
|
133 |
|
|
|
96 |
|
|
|
37 |
|
|
|
38.5 |
% |
Rent
and related overhead
|
|
|
33 |
|
|
|
40 |
|
|
|
(7 |
) |
|
|
(17.5 |
%) |
Depreciation
and amortization
|
|
|
73 |
|
|
|
39 |
|
|
|
34 |
|
|
|
87.2 |
% |
Credit
card and bank fees
|
|
|
79 |
|
|
|
40 |
|
|
|
39 |
|
|
|
97.5 |
% |
Other
general and administrative costs
|
|
|
34 |
|
|
|
11 |
|
|
|
23 |
|
|
|
209.1 |
% |
Total
selling, general and administrative expenses
|
|
|
352 |
|
|
|
226 |
|
|
|
126 |
|
|
|
55.8 |
% |
Operating
Income
|
|
|
400 |
|
|
|
289 |
|
|
|
111 |
|
|
|
38.4 |
% |
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
9 |
|
|
|
4 |
|
|
|
5 |
|
|
|
125.0 |
% |
Interest
expense
|
|
|
(68 |
) |
|
|
(50 |
) |
|
|
(18 |
) |
|
|
(36.0 |
%) |
Total
other expense
|
|
|
(59 |
) |
|
|
(46 |
) |
|
|
(13 |
) |
|
|
(28.3 |
%) |
Income
before income tax benefit
|
|
$ |
341 |
|
|
$ |
243 |
|
|
$ |
98 |
|
|
|
40.3 |
% |
|
|
For
the Nine Months Ended September 30 (in thousands):
|
|
|
|
2008
|
|
|
2007
|
|
|
$
Change
|
|
|
%
Change
|
|
Net
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Optical
purchasing group sales
|
|
$ |
46,369 |
|
|
$ |
20,525 |
|
|
$ |
25,844 |
|
|
|
125.9 |
% |
Cost
of optical purchasing group sales
|
|
|
44,114 |
|
|
|
19,390 |
|
|
|
24,724 |
|
|
|
127.5 |
% |
Gross
margin
|
|
|
2,255 |
|
|
|
1,135 |
|
|
|
1,120 |
|
|
|
98.7 |
% |
Selling,
General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and related benefits
|
|
|
390 |
|
|
|
256 |
|
|
|
134 |
|
|
|
52.3 |
% |
Rent
and related overhead
|
|
|
194 |
|
|
|
95 |
|
|
|
99 |
|
|
|
104.2 |
% |
Depreciation
and amortization
|
|
|
226 |
|
|
|
116 |
|
|
|
110 |
|
|
|
94.8 |
% |
Credit
card and bank fees
|
|
|
214 |
|
|
|
84 |
|
|
|
130 |
|
|
|
154.8 |
% |
Other
general and administrative costs
|
|
|
51 |
|
|
|
27 |
|
|
|
24 |
|
|
|
88.9 |
% |
Total
selling, general and administrative expenses
|
|
|
1,075 |
|
|
|
578 |
|
|
|
497 |
|
|
|
86.0 |
% |
Operating
Income
|
|
|
1,180 |
|
|
|
557 |
|
|
|
623 |
|
|
|
111.8 |
% |
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
28 |
|
|
|
10 |
|
|
|
18 |
|
|
|
180.0 |
% |
Interest
expense
|
|
|
(227 |
) |
|
|
(137 |
) |
|
|
(90 |
) |
|
|
(65.7 |
%) |
Total
other expense
|
|
|
(199 |
) |
|
|
(127 |
) |
|
|
(72 |
) |
|
|
(56.7 |
%) |
Income
before income tax benefit
|
|
$ |
981 |
|
|
$ |
430 |
|
|
$ |
551 |
|
|
|
128.1 |
% |
This
segment consists of the operations of Combine and TOG. TOG’s activity
for the period August 1, 2007 through September 30, 2007 has been included in
the Company’s results of operations as of and for the three and nine months
ended September 30, 2007.
Optical
purchasing group revenues increased approximately $4,104,000, or 35.4%, to
$15,707,000 for the three months ended September 30, 2008, as compared to
$11,603,000 for the three months ended September 30, 2007, and increased
approximately $25,844,000 or 125.9%, to $46,369,000 for the nine months ended
September 30, 2008, as compared to $20,525,000 for the nine months ended
September 30, 2007. These increases were a direct result of the
acquisition of TOG. Only two months of the operations of TOG were
including in the three and nine months ended September 30,
2007. Individually, Combine’s revenues decreased approximately
$1,000, or 0.0%, to $4,239,000 for the three months ended September 30, 2008, as
compared to $4,240,000 for the three months ended September 30, 2007, and
decreased approximately $201,000, or 1.5%, to $12,961,000 for the nine months
ended September 30, 2008, as compared to $13,162,000 for the nine months ended
September 30, 2007. These decreases were due to a generally weaker
economy during 2008, offset by a slight increase in the total number of active
members of Combine. As of September 30, 2008, there were 859 active
members, as compared to 857 active members as of September 30,
2007.
Costs of
optical purchasing group sales increased approximately $3,867,000, or 34.9%, to
$14,955,000 for the three months ended September 30, 2008, as compared to
$11,088,000 for the three months ended September 30, 2007, and increased
approximately $24,724,000, or 127.5%, to $44,114,000 for the nine months ended
September 30, 2008, as compared to $19,390,000 for the nine months ended
September 30, 2007. These increases were also a direct result of the
TOG acquisition. Individually, Combine’s cost of sales increased
approximately $10,000, or 0.3%, to $3,997,000 for the three months ended
September 30, 2008, as compared to $3,987,000 for the three months ended
September 30, 2007, and decreased approximately $145,000, or 1.2%, to
$12,145,000 for the nine months ended September 30, 2008, as compared to
$12,290,000 for the nine months ended September 30, 2007. These
fluctuations were a direct result of, and proportionate to, the revenue
fluctuations described above.
Operating
expenses of the optical purchasing group segment increased approximately
$126,000, or 55.8%, to $352,000 for the three months ended September 30, 2008,
as compared to $226,000 for the three months ended September 30, 2007, and
increased approximately $497,000, or 86.0%, to $1,075,000 for the nine months
ended September 30, 2008, as compared to $578,000 for the nine months ended
September 30, 2007. These increases were also a direct result of the
TOG acquisition. Individually, Combine’s operating expenses increased
approximately $18,000, or 10.7%, to $186,000 for the three months ended
September 30, 2008, as compared to $168,000 for the three months ended September
30, 2007, and increased approximately $49,000, or 9.4%, to $569,000 for the nine
months ended September 30, 2008, as compared to $520,000 for the nine months
ended September 30, 2007.
Interest
expense related to the optical purchasing group segment increased approximately
$18,000, or 36.0%, to $68,000 for the three months ended September 30, 2008, as
compared to $50,000 for the three months ended September 30, 2007, and increased
approximately $90,000, or 65.7%, to $227,000 for the nine months ended September
30, 2008, as compared to $137,000 for the nine months ended September 30,
2007. These increases in interest expense were related to the
borrowings under the Company’s Credit Facility with Manufacturers and Traders
Trust Corporation (“M&T”) to fund the acquisition of TOG.
Franchise
Segment
|
|
For
the Three Months Ended September 30 (in thousands):
|
|
|
|
2008
|
|
|
2007
|
|
|
$
Change
|
|
|
%
Change
|
|
Net
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalties
|
|
$ |
1,481 |
|
|
$ |
1,632 |
|
|
$ |
(151 |
) |
|
|
(9.3 |
%) |
Franchise
fees
|
|
|
1 |
|
|
|
103 |
|
|
|
(102 |
) |
|
|
(99.0 |
%) |
Net
revenues
|
|
|
1,482 |
|
|
|
1,735 |
|
|
|
(253 |
) |
|
|
(14.6 |
%) |
Selling,
General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and related benefits
|
|
|
264 |
|
|
|
305 |
|
|
|
(41 |
) |
|
|
(13.4 |
%) |
Professional
fees
|
|
|
165 |
|
|
|
147 |
|
|
|
18 |
|
|
|
12.2 |
% |
Trade
shows
|
|
|
123 |
|
|
|
103 |
|
|
|
20 |
|
|
|
19.4 |
% |
Rent
and related overhead
|
|
|
77 |
|
|
|
104 |
|
|
|
(27 |
) |
|
|
(26.0 |
%) |
Bad
debt
|
|
|
39 |
|
|
|
49 |
|
|
|
(10 |
) |
|
|
(20.4 |
%) |
Other
general and administrative costs
|
|
|
88 |
|
|
|
29 |
|
|
|
59 |
|
|
|
203.4 |
% |
Total
selling, general and administrative expenses
|
|
|
756 |
|
|
|
737 |
|
|
|
19 |
|
|
|
2.6 |
% |
Operating
Income
|
|
|
726 |
|
|
|
998 |
|
|
|
(272 |
) |
|
|
(27.3 |
%) |
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on franchise notes receivable
|
|
|
5 |
|
|
|
6 |
|
|
|
(1 |
) |
|
|
(16.7 |
%) |
Other
income
|
|
|
17 |
|
|
|
15 |
|
|
|
2 |
|
|
|
13.3 |
% |
Gain
on settlement of litigation
|
|
|
- |
|
|
|
1,012 |
|
|
|
(1,012 |
) |
|
|
n/a |
|
Total
operating income
|
|
|
22 |
|
|
|
1,033 |
|
|
|
(1,011 |
) |
|
|
(97.9 |
%) |
Income
before income tax benefit
|
|
$ |
748 |
|
|
$ |
2,031 |
|
|
$ |
(1,283 |
) |
|
|
(63.2 |
%) |
|
|
For
the Nine Months Ended September 30 (in thousands):
|
|
|
|
2008
|
|
|
2007
|
|
|
$
Change
|
|
|
%
Change
|
|
Net
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalties
|
|
$ |
4,728 |
|
|
$ |
5,138 |
|
|
$ |
(410 |
) |
|
|
(8.0 |
%) |
Franchise
fees
|
|
|
161 |
|
|
|
231 |
|
|
|
(70 |
) |
|
|
(30.3 |
%) |
Net
revenues
|
|
|
4,889 |
|
|
|
5,369 |
|
|
|
(480 |
) |
|
|
(8.9 |
%) |
Selling,
General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and related benefits
|
|
|
841 |
|
|
|
902 |
|
|
|
(61 |
) |
|
|
(6.8 |
%) |
Professional
fees
|
|
|
386 |
|
|
|
402 |
|
|
|
(16 |
) |
|
|
(4.0 |
%) |
Trade
shows
|
|
|
282 |
|
|
|
290 |
|
|
|
(8 |
) |
|
|
(2.8 |
%) |
Rent
and related overhead
|
|
|
231 |
|
|
|
314 |
|
|
|
(83 |
) |
|
|
(26.4 |
%) |
Other
general and administrative costs
|
|
|
285 |
|
|
|
193 |
|
|
|
92 |
|
|
|
47.7 |
% |
Total
selling, general and administrative expenses
|
|
|
2,025 |
|
|
|
2,101 |
|
|
|
(76 |
) |
|
|
(3.6 |
%) |
Operating
Income
|
|
|
2,864 |
|
|
|
3,268 |
|
|
|
(404 |
) |
|
|
(12.4 |
%) |
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on franchise notes receivable
|
|
|
19 |
|
|
|
29 |
|
|
|
(10 |
) |
|
|
(34.5 |
%) |
Other
income
|
|
|
33 |
|
|
|
34 |
|
|
|
(1 |
) |
|
|
(2.9 |
%) |
Gain
on settlement of litigation
|
|
|
- |
|
|
|
1,012 |
|
|
|
(1,012 |
) |
|
|
n/a |
|
Total
operating income
|
|
|
52 |
|
|
|
1,075 |
|
|
|
(1,023 |
) |
|
|
(95.2 |
%) |
Income
before income tax benefit
|
|
$ |
2,916 |
|
|
$ |
4,343 |
|
|
$ |
(1,427 |
) |
|
|
(32.9 |
%) |
Franchise
royalties decreased approximately $151,000, or 9.3%, to $1,481,000 for the three
months ended September 30, 2008, as compared to $1,632,000 for the three months
ended September 30, 2007, and decreased approximately $410,000, or 8.0%, to
$4,728,000 for the nine months ended September 30, 2008, as compared to
$5,138,000 for the nine months ended September 30, 2007. Management believes
these decreases were due to current economic conditions, and a decrease in
royalties generated from franchise store audits of $140,000 for the nine months
ended September 30, 2008, which audits were conducted over an equivalent sample
size of franchise locations for each period audited. Additionally,
franchise sales during both of the comparable periods decreased $3,124,000, or
4.8%, which has led to a decrease royalty income. As of September 30,
2008 and 2007, there were 138 and 147 franchised stores in operation,
respectively.
Franchise
fees (which includes initial franchise fees, renewal fees, conversion fees and
store transfer fees) decreased approximately $102,000, or 99.0%, to $1,000 for
the three months ended September 30, 2008, as compared to $103,000 for the three
months ended September 30, 2007, and decreased approximately $70,000, or 30.3%,
to $161,000 for the nine months ended September 30, 2008, as compared to
$231,000 for the nine months ended September 30, 2007. These
fluctuations were primarily attributable to 4 franchise agreement renewals
($40,000), 3 independent store conversions ($21,000), and 5 new franchise
agreements ($100,000) in 2008, as compared to 2 franchise agreement renewals
($25,000), 5 independent store conversions ($50,000), and 8 new franchise
agreements ($161,000) in 2007. In the future, franchise fees are
likely to fluctuate depending on the timing of franchise agreement expirations,
new store openings and franchise store transfers.
Operating
expenses of the franchise segment increased approximately $19,000, or 2.6%, to
$756,000 for the three months ended September 30, 2008, as compared to $737,000
for the three months ended September 30, 2007, and decreased approximately
$76,000, or 3.6%, to $2,025,000 for the nine months ended September 30, 2008, as
compared to $2,101,000 for the nine months ended September 30,
2007. These decreases were partially a result of decreases to
franchise promotions of $67,000 related to expenses for displaying at an optical
industry trade show, rent and related overhead of $83,000 due to reductions of
back office expenses such as new phone services (the Company changed to
voice-over-IP services in the 4th quarter
of 2007), legal fees of $104,000 relating to proactive litigation to enforce
franchise agreements during the three months ended March 31, 2007,
and salaries and related benefits of $61,000 partially due to a decrease in
medical and dental insurance premiums in May 2008. These decreases
were offset, in part, by increases in bad debt due to recoveries of $100,000
relating to a litigation settlement during the three months ended March 31,
2007, and management fees of $13,000 as a result of the Site-for-Sore Eyes’
consultants having to manage, on average, 4 additional stores during the nine
months ended September 30, 2008. Additionally, the franchise segment
incurred travel, training, and related costs associated with the installation of
the Company’s new Point-of-Sale computer system (initiated March
2008).
Company
Store Segment
|
|
For
the Three Months Ended September 30 (in thousands):
|
|
|
|
2008
|
|
|
2007
|
|
|
$
Change
|
|
|
%
Change
|
|
Net
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
sales
|
|
$ |
966 |
|
|
$ |
1,435 |
|
|
$ |
(469 |
) |
|
|
(32.7 |
%) |
Cost
of retail sales
|
|
|
240 |
|
|
|
436 |
|
|
|
196 |
|
|
|
45.0 |
% |
Gross
margin
|
|
|
726 |
|
|
|
999 |
|
|
|
(273 |
) |
|
|
(27.3 |
%) |
Selling,
General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and related benefits
|
|
|
422 |
|
|
|
627 |
|
|
|
(205 |
) |
|
|
(32.7 |
%) |
Rent
and related overhead
|
|
|
308 |
|
|
|
392 |
|
|
|
(84 |
) |
|
|
(21.4 |
%) |
Advertising
|
|
|
78 |
|
|
|
234 |
|
|
|
(156 |
) |
|
|
(66.7 |
%) |
Other
general and administrative costs
|
|
|
46 |
|
|
|
68 |
|
|
|
(22 |
) |
|
|
(32.4 |
%) |
Total
selling, general and administrative expenses
|
|
|
854 |
|
|
|
1,321 |
|
|
|
(467 |
) |
|
|
(35.4 |
%) |
Operating
(Loss) Income
|
|
$ |
(128 |
) |
|
$ |
(322 |
) |
|
$ |
194 |
|
|
|
60.2 |
% |
|
|
For
the Nine Months Ended September 30 (in thousands):
|
|
|
|
2008
|
|
|
2007
|
|
|
$
Change
|
|
|
%
Change
|
|
Net
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
sales
|
|
$ |
3,062 |
|
|
$ |
4,040 |
|
|
$ |
(978 |
) |
|
|
(24.2 |
%) |
Cost
of retail sales
|
|
|
737 |
|
|
|
1,119 |
|
|
|
(382 |
) |
|
|
(34.1 |
%) |
Gross
margin
|
|
|
2,325 |
|
|
|
2,921 |
|
|
|
(596 |
) |
|
|
(20.4 |
%) |
Selling,
General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and related benefits
|
|
|
1,340 |
|
|
|
1,768 |
|
|
|
(428 |
) |
|
|
(24.2 |
%) |
Rent
and related overhead
|
|
|
882 |
|
|
|
1,095 |
|
|
|
(213 |
) |
|
|
(19.5 |
%) |
Advertising
|
|
|
211 |
|
|
|
534 |
|
|
|
(323 |
) |
|
|
(60.1 |
%) |
Other
general and administrative costs
|
|
|
160 |
|
|
|
195 |
|
|
|
(35 |
) |
|
|
(17.9 |
%) |
Total
selling, general and administrative expenses
|
|
|
2,593 |
|
|
|
3,592 |
|
|
|
(999 |
) |
|
|
(27.8 |
%) |
Operating
(Loss) Income
|
|
$ |
(268 |
) |
|
$ |
(671 |
) |
|
$ |
403 |
|
|
|
60.1 |
% |
Retail
sales for the Company store segment decreased approximately $469,000, or 32.7%,
to $966,000 for the three months ended September 30, 2008, as compared to
$1,435,000 for the three months ended September 30, 2007, and decreased
approximately $978,000, or 24.2%, to $3,062,000 for the nine months ended
September 30, 2008, as compared to $4,040,000 for the nine months ended
September 30, 2007. These decreases were mainly attributable to fewer
Company-owned store locations open during the comparable periods. As
of September 30, 2008, there were 7 Company-owned stores, as compared to 12
Company-owned stores as of September 30, 2007. Over the last 12 months,
the Company has closed 3 Company-owned locations and franchised 2 others that
were part of the store count as of September 30, 2008. Those 5 stores
generated $488,000 for the three months ended September 30, 2007, as compared to
$133,000 for the three months ended September 30, 2008, and generated $1,254,000
for the nine months ended September 30, 2007, as compared to $461,000 for the
nine months ended September 30, 2008. On a same
store basis (for stores that operated as a Company-owned store during the
entirety of both of the three and nine months ended September 30, 2008 and
2007), comparative net sales decreased approximately $114,000, or 12.0%, to
$833,000 for the three months ended September 30, 2008, as compared to $947,000
for the three months ended September 30, 2007, and decreased approximately
$185,000, or 6.6%, to $2,601,000 for the nine months ended September 30, 2008,
as compared to $2,786,000 for the nine months ended September 30,
2007. Management believes that these decreases were a direct result
of current economic conditions, and changes to key personnel, mainly
optometrists, during the second quarter of 2008, which led to reduced exam fee
revenues.
The
Company-owned store’s gross profit margin, which calculation does not include
the exam fee revenues of $138,000 and $186,000 for the three months ended
September 30, 2008 and 2007, respectively, and $396,000 and $492,000 for the
nine months ended September 30, 2008 and 2007, respectively, generated by such
Company-owned stores, increased by 5.2%, to 70.3%, for the three months ended
September 30, 2008, as compared to 65.1% for the three months ended September
30, 2007, and increased by 3.4%, to 71.9% for the nine months ended September
30, 2008, as compared to 68.5% for the nine months ended September 30,
2007. Management continues to work to improve the profit margin
through increased training at the Company-store level, among other things, and
anticipates these changes will result in improvements in the Company’s gross
profit margin in the future. The Company’s gross margin may, however,
fluctuate in the future depending upon the extent and timing of changes in the
product mix in the Company-owned stores, competitive pricing, and
promotional.
Operating
expenses of the Company store segment decreased approximately $467,000, or
35.4%, to $854,000 for the three months ended September 30, 2008, as compared to
$1,321,000 for the three months ended September 30, 2007, and decreased
approximately $999,000, or 27.8%, to $2,593,000 for the nine months ended
September 30, 2008, as compared to $3,592,000 for the nine months ended
September 30, 2007. These decreases were mainly a result of having
three fewer Company-owned stores in operation during the three and nine months
ended September 30, 2008. Additionally, the Company streamlined
certain store payroll coverage in its stores to reduced salaries and related
benefits, and enhanced the media plans for each store, which reduced advertising
costs on a by-store basis.
VisionCare
of California Segment
|
|
For
the Three Months Ended September 30 (in thousands):
|
|
|
|
2008
|
|
|
2007
|
|
|
$
Change
|
|
|
%
Change
|
|
Net
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership
fees
|
|
$ |
928 |
|
|
$ |
889 |
|
|
$ |
39 |
|
|
|
4.4 |
% |
Selling,
General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and related benefits
|
|
|
804 |
|
|
|
817 |
|
|
|
(13 |
) |
|
|
(1.6 |
%) |
Rent
and related overhead
|
|
|
36 |
|
|
|
39 |
|
|
|
(3 |
) |
|
|
(7.7 |
%) |
Other
general and administrative costs
|
|
|
43 |
|
|
|
34 |
|
|
|
9 |
|
|
|
26.5 |
% |
Total
selling, general and administrative expenses
|
|
|
883 |
|
|
|
890 |
|
|
|
(7 |
) |
|
|
(0.8 |
%) |
Operating
Income (Loss)
|
|
|
45 |
|
|
|
(1 |
) |
|
|
46 |
|
|
|
4600.0 |
% |
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
(2 |
) |
|
|
4 |
|
|
|
(6 |
) |
|
|
(150.0 |
%) |
Total
other (expense) income
|
|
|
(2 |
) |
|
|
4 |
|
|
|
(6 |
) |
|
|
(150.0 |
%) |
Income
before income tax benefit
|
|
$ |
43 |
|
|
$ |
3 |
|
|
$ |
40 |
|
|
|
1333.3 |
% |
|
|
For
the Nine Months Ended September 30 (in thousands):
|
|
|
|
2008
|
|
|
2007
|
|
|
$
Change
|
|
|
%
Change
|
|
Net
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership
fees
|
|
$ |
2,648 |
|
|
$ |
2,616 |
|
|
$ |
32 |
|
|
|
1.2 |
% |
Selling,
General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and related benefits
|
|
|
2,387 |
|
|
|
2,375 |
|
|
|
12 |
|
|
|
0.5 |
% |
Rent
and related overhead
|
|
|
109 |
|
|
|
114 |
|
|
|
(5 |
) |
|
|
(4.4 |
%) |
Other
general and administrative costs
|
|
|
110 |
|
|
|
116 |
|
|
|
(6 |
) |
|
|
(5.1 |
%) |
Total
selling, general and administrative expenses
|
|
|
2,606 |
|
|
|
2,605 |
|
|
|
1 |
|
|
|
0.0 |
% |
Operating
Income
|
|
|
42 |
|
|
|
11 |
|
|
|
31 |
|
|
|
281.8 |
% |
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
6 |
|
|
|
17 |
|
|
|
(11 |
) |
|
|
(64.7 |
%) |
Total
other income
|
|
|
6 |
|
|
|
17 |
|
|
|
(11 |
) |
|
|
(64.7 |
%) |
Income
before income tax benefit
|
|
$ |
48 |
|
|
$ |
28 |
|
|
$ |
20 |
|
|
|
71.4 |
% |
Revenues
generated by the Company’s wholly-owned subsidiary, VisionCare of California,
Inc. (“VCC”), a specialized health care maintenance organization licensed by the
State of California Department of Managed Health Care, increased approximately
$39,000, or 4.4%, to $928,000 for the three months ended September 30, 2008, as
compared to $889,000 for the three months ended September 30, 2007, and
increased approximately $32,000, or 1.2%, to $2,648,000 for the nine months
ended September 30, 2008, as compared to $2,616,000 for the nine months ended
September 30, 2007. These increases were related to an increase in
the daily membership fee charged by VCC effective June 2008.
Operating
expenses of the VCC segment remained consistent with last year’s expenses,
decreasing only $7,000, or 0.8%, to $883,000 for the three months ended
September 30, 2008, as compared to $890,000 for the three months ended September
30, 2007, and increased approximately $1,000, or 0.0%, to $2,606,000 for the
nine months ended September 30, 2008, as compared to $2,605,000 for the nine
months ended September 30, 2007. These increases related to increased
doctor salaries and related benefits paid by VCC, which will be offset in future
quarters due to the increase in the daily membership fees as discussed
above.
Corporate
Overhead Segment
|
|
For
the Three Months Ended September 30 (in thousands):
|
|
|
|
2008
|
|
|
2007
|
|
|
$
Change
|
|
|
%
Change
|
|
Selling,
General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and related benefits
|
|
$ |
534 |
|
|
$ |
620 |
|
|
$ |
(86 |
) |
|
|
(13.8 |
%) |
Professional
fees
|
|
|
134 |
|
|
|
131 |
|
|
|
3 |
|
|
|
2.3 |
% |
Insurance
|
|
|
66 |
|
|
|
64 |
|
|
|
2 |
|
|
|
3.1 |
% |
Rent
and related overhead
|
|
|
(29 |
) |
|
|
89 |
|
|
|
(118 |
) |
|
|
(132.6 |
%) |
Other
general and administrative costs
|
|
|
97 |
|
|
|
252 |
|
|
|
(155 |
) |
|
|
(61.5 |
%) |
Total
selling, general and administrative expenses
|
|
|
802 |
|
|
|
1,156 |
|
|
|
(354 |
) |
|
|
(30.6 |
%) |
Operating
Loss
|
|
|
(802 |
) |
|
|
(1,156 |
) |
|
|
354 |
|
|
|
30.6 |
% |
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
(expense) income
|
|
|
(4 |
) |
|
|
171 |
|
|
|
(175 |
) |
|
|
(102.3 |
%) |
Interest
expense
|
|
|
(12 |
) |
|
|
(18 |
) |
|
|
6 |
|
|
|
(33.3 |
%) |
Total
other (expense) income
|
|
|
(16 |
) |
|
|
153 |
|
|
|
(169 |
) |
|
|
(110.5 |
%) |
Loss
before income tax benefit
|
|
$ |
(818 |
) |
|
$ |
(1,003 |
) |
|
$ |
185 |
|
|
|
18.4 |
% |
|
|
For
the Nine Months Ended September 30 (in thousands):
|
|
|
|
2008
|
|
|
2007
|
|
|
$
Change
|
|
|
%
Change
|
|
Selling,
General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and related benefits
|
|
$ |
1,657 |
|
|
$ |
1,637 |
|
|
$ |
20 |
|
|
|
1.2 |
% |
Professional
fees
|
|
|
436 |
|
|
|
365 |
|
|
|
71 |
|
|
|
19.5 |
% |
Insurance
|
|
|
193 |
|
|
|
185 |
|
|
|
8 |
|
|
|
4.3 |
% |
Rent
and related overhead
|
|
|
92 |
|
|
|
265 |
|
|
|
(173 |
) |
|
|
(65.3 |
%) |
Depreciation
|
|
|
90 |
|
|
|
66 |
|
|
|
24 |
|
|
|
36.4 |
% |
Compensation
expense
|
|
|
46 |
|
|
|
105 |
|
|
|
(59 |
) |
|
|
(56.2 |
%) |
Other
general and administrative costs
|
|
|
146 |
|
|
|
284 |
|
|
|
(138 |
) |
|
|
(48.6 |
%) |
Total
selling, general and administrative expenses
|
|
|
2,660 |
|
|
|
2,907 |
|
|
|
(247 |
) |
|
|
(8.5 |
%) |
Operating
Loss
|
|
|
(2,660 |
) |
|
|
(2,907 |
) |
|
|
247 |
|
|
|
8.5 |
% |
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
26 |
|
|
|
185 |
|
|
|
(159 |
) |
|
|
(85.9 |
%) |
Interest
expense
|
|
|
(39 |
) |
|
|
(40 |
) |
|
|
1 |
|
|
|
2.5 |
% |
Total
other (expense) income
|
|
|
(13 |
) |
|
|
145 |
|
|
|
(158 |
) |
|
|
(109.0 |
%) |
Loss
before income tax benefit
|
|
$ |
(2,673 |
) |
|
$ |
(2,762 |
) |
|
$ |
89 |
|
|
|
3.2 |
% |
There
were no revenues generated by the corporate overhead segment.
Operating
expenses decreased approximately $354,000, or 30.6%, to $802,000 for the three
months ended September 30, 2008, as compared to $1,156,000 for the three months
ended September 30, 2007, and decreased approximately $247,000, or 8.5%, to
$2,660,000 for the nine months ended September 30, 2008, as compared to
$2,907,000 for the nine months ended September 30, 2007. The
decreases for the three months ended September 30, 2008 was partially a result
of decreases to salaries and related benefits of $86,000 related to
decreases, in May 2008, in the Company’s medical and dental insurance
premiums, rent and related overhead expenses of $118,000 due to a favorable
litigation settlement ($87,000 less than the Company anticipated), the phone
changes described above in the Franchise segment discussion, as well as
decreases in office expenses such as office supplies and postage, and
compensation expense of $31,000 related to the vesting of options granted during
the 3rd quarter
of 2007. This decrease was offset, in part, by an increase in
professional fees due, in part, to consulting expenses ($17,000) related to the
Company’s Sarbanes-Oxley compliance (a project that was initiated in the 3rd quarter
of 2007) and an increase in outside services of $12,000 related to the hiring,
in June 2008, of a public relations firm. .
The
decrease for the nine months ended September 30, 2008 was attributable to
decreases in rent and related overhead expenses of $173,000 mainly for the
reason described above, in medical and dental premiums as described above,
and in compensation expense of $59,000 due to the vesting of certain options
granted (including the options granted to the directors in the 2nd quarter
of 2007, which had a higher stock price ($0.47) associated with the date of
grant as compared to the options granted in the 2nd quarter
of 2008 ($0.21). This decrease was offset, in part, by an increase in
salaries and related benefits of $20,000 (partially due to the absorbing the
entire increase in medical and dental benefits of VCC for the first quarter of
2008), professional fees of $71,000 due, in part, to consulting expenses as
described above, and depreciation and amortization expenses of $24,000 related
to the remodeling of the Corporate office in the 2nd quarter
of 2007.
Other
Segment
|
|
For
the Three Months Ended September 30 (in thousands):
|
|
|
|
2008
|
|
|
2007
|
|
|
$
Change
|
|
|
%
Change
|
|
Net
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions
|
|
$ |
20 |
|
|
$ |
- |
|
|
$ |
20 |
|
|
|
n/a |
|
Other
|
|
|
10 |
|
|
|
- |
|
|
|
10 |
|
|
|
n/a |
|
Net
revenues
|
|
|
30 |
|
|
|
- |
|
|
|
30 |
|
|
|
n/a |
|
Selling,
General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and related benefits
|
|
|
12 |
|
|
|
- |
|
|
|
12 |
|
|
|
n/a |
|
Advertising
|
|
|
4 |
|
|
|
- |
|
|
|
4 |
|
|
|
n/a |
|
Other
general and administrative costs
|
|
|
5 |
|
|
|
- |
|
|
|
5 |
|
|
|
n/a |
|
Total
selling, general and administrative expenses
|
|
|
21 |
|
|
|
- |
|
|
|
21 |
|
|
|
n/a |
|
Operating
Income
|
|
$ |
9 |
|
|
$ |
- |
|
|
$ |
9 |
|
|
|
n/a |
|
|
|
For
the Nine Months Ended September 30 (in thousands):
|
|
|
|
2008
|
|
|
2007
|
|
|
$
Change
|
|
|
%
Change
|
|
Net
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions
|
|
$ |
89 |
|
|
$ |
- |
|
|
$ |
89 |
|
|
|
n/a |
|
Other
|
|
|
28 |
|
|
|
- |
|
|
|
28 |
|
|
|
n/a |
|
Net
revenues
|
|
|
117 |
|
|
|
- |
|
|
|
117 |
|
|
|
n/a |
|
Selling,
General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and related benefits
|
|
|
30 |
|
|
|
- |
|
|
|
30 |
|
|
|
n/a |
|
Advertising
|
|
|
95 |
|
|
|
- |
|
|
|
95 |
|
|
|
n/a |
|
Other
general and administrative costs
|
|
|
42 |
|
|
|
- |
|
|
|
42 |
|
|
|
n/a |
|
Total
selling, general and administrative expenses
|
|
|
167 |
|
|
|
- |
|
|
|
167 |
|
|
|
n/a |
|
Operating
Loss
|
|
$ |
(50 |
) |
|
$ |
- |
|
|
$ |
(50 |
) |
|
|
n/a |
|
Revenues
generated by the other segment include approximately $20,000 and $89,000 of
commission income and credit card residuals for the three and nine months ended
September 30, 2008, respectively. Additionally, there were revenues
generated from employee purchases of optical products as defined under the
Company’s optical benefit plan. The Company began generating
commission revenues in January 2008 under operations of the Company that do not
fall within one of the other operating segments.
Operating
expenses of the other segment solely related to the operations that began in
January 2008, as described above.
Use
of Non-GAAP Performance Indicators
The
following section expands on the financial performance of the Company detailing
the Company’s EBITDA. EBITDA is calculated as net earnings before
interest, taxes, depreciation and amortization. The Company refers to
EBITDA because it is a widely accepted financial indicator of a company’s
ability to service or incur indebtedness.
EBITDA
does not represent cash flow from operations as defined by generally accepted
accounting principles, is not necessarily indicative of cash available to fund
all cash flow needs, should not be considered an alternative to net income or to
cash flow from operations (as determined in accordance with GAAP) and should not
be considered an indication of our operating performance or as a measure of
liquidity. EBITDA is not necessarily comparable to similarly titled
measures for other companies.
EBITDA
Reconciliation
|
|
For
the Three Months Ended September 30 (in thousands):
|
|
|
|
2008
|
|
|
2007
|
|
|
$
Change
|
|
|
%
Change
|
|
EBITDA
Reconciliation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
219 |
|
|
$ |
907 |
|
|
$ |
(688 |
) |
|
|
(75.9 |
%) |
Interest
|
|
|
80 |
|
|
|
68 |
|
|
|
12 |
|
|
|
17.6 |
% |
Taxes
|
|
|
(24 |
) |
|
|
45 |
|
|
|
(69 |
) |
|
|
(153.3 |
%) |
Depreciation
and amortization
|
|
|
170 |
|
|
|
125 |
|
|
|
45 |
|
|
|
36.0 |
% |
EBITDA
|
|
$ |
445 |
|
|
$ |
1,145 |
|
|
$ |
(700 |
) |
|
|
(61.1 |
%) |
|
|
For
the Nine Months Ended September 30 (in thousands):
|
|
|
|
2008
|
|
|
2007
|
|
|
$
Change
|
|
|
%
Change
|
|
EBITDA
Reconciliation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
1,243 |
|
|
$ |
1,706 |
|
|
$ |
(463 |
) |
|
|
(27.2 |
%) |
Interest
|
|
|
266 |
|
|
|
177 |
|
|
|
89 |
|
|
|
50.3 |
% |
Taxes
|
|
|
(289 |
) |
|
|
(338 |
) |
|
|
49 |
|
|
|
14.5 |
% |
Depreciation
and amortization
|
|
|
483 |
|
|
|
345 |
|
|
|
138 |
|
|
|
40.0 |
% |
EBITDA
|
|
$ |
1,703 |
|
|
$ |
1,890 |
|
|
$ |
(187 |
) |
|
|
(9.9 |
%) |
The
Company also incurred other non-cash charges that effected earnings including
compensation expenses related to the grant of common stock options and warrants
of $46,000 for the nine months ended September 30, 2008, respectively, and
$31,000 and $105,000 for the three and nine months ended September 30, 2007,
respectively. EBITDA decreased for the three and nine months ended
September 30, 2008 mainly due to the gain on settlement of ligation during the
three and nine months ended September 30, 2007 of $1,012,000.
Management
has provided an EBITDA calculation to provide a greater level of understanding
of the Company’s performance had it not been for certain significant non-cash
charges. These charges, such as depreciation and amortization, and
compensation expense, are included in selling, general and administrative
expenses on the Consolidated Condensed Statements of Income.
Liquidity
and Capital Resources
As of
September 30, 2008, the Company had a working capital deficit of $2,716,000 due,
in part, to the reclassification of the Company’s outstanding principal on the
M&T line of credit from long-term to short-term. The Company had
cash on hand of $1,915,000.
During
the nine months ended September 30, 2008, cash flows used in operating
activities were $285,000. This was principally due to an increase in
optical purchasing group receivables of $1,609,000 due to increased optical
purchasing group sales, as well as a decrease in accounts payable and accrued
expenses of $812,000, partially due to the decrease in the number of
Company-owned stores in operation leading to reduction in product purchased, and
increases in prepaid expenses of $266,000 due to insurance premiums payments and
the costs associated with the Company’s trade show and annual franchise
convention, both held in October 2008. These were offset, in part, by net income
of $1,243,000 and an increase in optical purchasing group payables of $1,225,000
for reasons described above. The Company believes it will continue to
improve its operating cash flows through the implementation of the Company’s new
Point-of-Sales system to improve the franchise sales reporting process, the
addition of new franchise locations, its current and future acquisitions, and
continued efficiencies as it relates to corporate overhead
expenses.
For the
nine months ended September 30, 2008, cash flows used in investing activities
were $240,000 mainly due to an increase in intangible assets for legal costs
associated with defending one of the Company’s trademarks offset by proceeds
received on certain franchise promissory notes. Management does not
anticipate any major capital expenditures over the next 12 months, other than
normal expenditures to continue to enhance the Company’s technology
infrastructure and the Company’s internal controls. However,
Management does not know the extent of the legal costs associated with the
continuance of litigation in defending one of the Company’s trademarks as the
litigation is still in the discovery phase.
For the
nine months ended September 30, 2008, cash used in financing activities was
$406,000 due to the repayment of the Company’s related party borrowings and the
promissory note payments made to COMC. The Company will continue to
repay such borrowings with cash flows generated by the current
operations. In August 2009, the Company’s Credit Facility will expire
and all outstanding borrowings will be due. The Company is currently
exploring all options available to ensure it will be able to make such
payment.
Credit
Facility
On August
8, 2007, the Company entered into a Revolving Line of Credit Note and Credit
Agreement (the “Credit Agreement”) with Manufacturers and Traders Trust Company
(“M&T”), establishing a revolving credit facility (the “Credit Facility”),
for aggregate borrowings of up to $6,000,000, to be used for general working
capital needs and certain permitted acquisitions. This Credit
Facility replaced the Company’s previous revolving line of credit facility with
M&T. The initial term of the Credit Facility expires in August
2009. Interest on all sums drawn by the Company under the Credit
Facility is repayable monthly, commencing on the first day of each month during
the term of the Credit Facility. Interest is calculated at the
variable rate of two hundred seventy five (275) basis points in excess of LIBOR,
and all principal drawn by the Company is payable on August 1,
2009.
On August
10, 2007, the Company borrowed $3,609,423 to fund the purchase price payable in
connection with the acquisitions of TOG, and borrowed $400,000 for general
working capital requirements. The Credit Facility includes various
financial covenants including minimum net worth, maximum funded debt and debt
service ratio requirements. As of September 30, 2008, the Company had
outstanding borrowings of $4,356,854 under the Credit Facility, which amount was
included in Short-term Debt on the accompanying Consolidated Balance
Sheet and had $1,643,146 available under the Credit Facility for future
borrowings. As of September 30, 2008, the Company was not in
compliance with one of the financial covenants, however, on November 14, 2008,
M&T granted the Company a waiver and agreed that such covenant was now in
compliance for the period ended September 30, 2008.
Off-Balance
Sheet Arrangements
An
off-balance sheet arrangement is any contractual arrangement involving an
unconsolidated entity under which a company has (a) made guarantees,
(b) a retained or a contingent interest in transferred assets, (c) any
obligation under certain derivative instruments or (d) any obligation under
a material variable interest in an unconsolidated entity that provides
financing, liquidity, market risk, or credit risk support to the company, or
engages in leasing, hedging, or research and development services within the
company.
The
Company does not have any off-balance sheet financing or unconsolidated variable
interest entities, with the exception of certain guarantees on
leases. The Company refers the reader to the Notes to the
Consolidated Condensed Financial Statements included in Item 1 of this Quarterly
Report for information regarding the Company’s lease guarantees.
Management’s
Discussion of Critical Accounting Policies and Estimates
High-quality
financial statements require rigorous application of high-quality accounting
policies. Management believes that its policies related to revenue
recognition, deferred tax assets, legal contingencies and allowances on
franchise, notes and other receivables are critical to an understanding of the
Company’s Consolidated Condensed Financial Statements because their application
places the most significant demands on management’s judgment, with financial
reporting results relying on estimation about the effect of matters that are
inherently uncertain.
Management’s
estimate of the allowances on receivables is based on historical sales,
historical loss levels, and an analysis of the collectibility of individual
accounts. To the extent that actual bad debts differed from management's
estimates by 10 percent, consolidated net income would be an estimated $6,000
and $5,000 higher/lower for the nine months ended September 30, 2008, and 2007,
respectively, depending upon whether the actual write-offs are greater or
less than estimated.
The
Company recognizes revenues in accordance with SEC Staff Accounting Bulletin
(“SAB”) No. 104, “Revenue Recognition.” Accordingly, revenues are
recorded when persuasive evidence of an arrangement exists, delivery has
occurred or services have been rendered, the Company’s price to the buyer is
fixed or determinable, and collectibility is reasonably assured. To
the extent that collectability of royalties and/or interest on franchise notes
is not reasonably assured, the Company recognizes such revenues when the cash is
received. To the extent that revenues that were recognized on a cash
basis were recognized on an accrual basis, consolidated net income would be an
estimated $196,000 and $132,000 higher for the nine months ended September 30,
2008 and 2007, respectively.
Management’s
performs an annual impairment analysis to determine the fair value of goodwill
and certain intangible assets. In determining the fair value of such
assets, management uses a variety of methods and assumptions including a
discounted cash flow analysis along with various qualitative
tests. To the extent that management needed to impair its goodwill or
certain intangible assets by 10 percent, consolidated net income would be an
estimated $723,000 and $674,000 lower for the nine months ended September 30,
2008 and 2007, respectively.
This
Quarterly Report does not include information for Item 3 pursuant to the rules
of the Securities and Exchange Commission (“SEC”) that permits “a smaller
reporting company” to omit such information.
(a) Disclosure
Controls and Procedures
|
The
Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”)
with the participation of the Company’s management (“Management”) conducted an
evaluation of the effectiveness of the Company’s disclosure controls and
procedures as of the end of the period covered by this report. These
disclosure controls and procedures are designed to provide reasonable assurance
that information required to be disclosed by the Company in the reports that it
files or submits under the Securities Exchange Act of 1934, as amended, within
the time periods specified by the SEC rules and forms, is recorded, processed,
summarized and reported, and is communicated to Management, as appropriate, to
allow for timely decisions based on the required disclosures. Based
on this evaluation, the Company’s CEO and CFO concluded that the Company’s
disclosure controls and procedures were effective as of September 30,
2008.
(b) Changes
in Internal Controls over Financial Reporting
There
has been no change in the Company’s internal control over financial
reporting identified in connection with the evaluation required by
paragraph (d) of Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act
of 1934, as amended, during the three months ended September 30, 2008
that has materially affected or is reasonably likely to materially affect
the Company’s internal control over financial reporting.
(c) Limitations
|
A control
system, no matter how well designed and operated, can only provide a reasonable
assurance level that the control system’s objectives will be
met. Additionally, the design of a control system has limitations
such as financial restraints and the cost/benefit analysis of improving such
systems. Thus, no evaluation of controls can provide absolute
assurance that all control issues within the Company have been
detected.
In
February 2008, Sangertown Square, LLC commenced an action against the Company,
in the Supreme Court of the State of New York, Onondaga County, alleging, among
other things, that the Company had breached its obligations under its lease for
the former Sterling Optical store located at Sangertown Square Mall, New
York. In October 2008, this action was settled. The terms
of the settlement included the payment, by the Company to Sangertown Square,
LLC, of an aggregate sum of $150,000, and the exchange of mutual general
releases.
In July
2008, Ontario Mills Limited Partnership commenced an action against, among
others, the Company, in the Supreme Court of the State of California, San
Bernardino County, alleging, among other things, that the Company had breached
its obligations under its guaranty of the lease for the former Sterling Optical
store located in the Ontario Mills Mall, California. In or about
October 2008, Ontario Mills Limited Partnership made a motion with the court to
dismiss the case against the Company. This motion is currently
pending.
In
September 2008, Pyramid Mall of Glen Falls Newco, LLC commenced an action
against the Company and its subsidiary Sterling Vision of Aviation Mall, Inc.,
in the Supreme Court of the State of New York, Onondaga County, alleging, among
other things, that the Company had breached its obligations under its lease for
the former Sterling Optical store located at Aviation Mall, New
York. The Company believes that it has a meritorious defense to such
action. As of the date hereof, these proceedings were in the
discovery stage. Although the Company has recorded an accrual for
probable losses in the event that the Company shall be held liable in respect of
plaintiff’s claims, the Company does not believe that any such loss is
reasonably possible, or, if there is a loss, the Company does not believe that
it is reasonably possible that such loss would exceed the amount
recorded.
In
October 2008, Crossgates Mall Company Newco, LLC commenced an action against the
Company, in the Supreme Court of the State of New York, Onondaga County,
alleging, among other things, that the Company had breached its obligations
under its lease for the former Sterling Optical store located at Crossgates
Mall, New York. The Company believes that it has a meritorious
defense to such action. As of the date hereof, these proceedings were
in the discovery stage. Although the Company has recorded an accrual
for probable losses in the event that the Company shall be held liable in
respect of plaintiff’s claims, the Company does not believe that any such loss
is reasonably possible, or, if there is a loss, the Company does not believe
that it is reasonably possible that such loss would exceed the amount
recorded.
Although
the Company, where indicated herein, believes that it has a meritorious defense
to the claims asserted against it (and its affiliates), given the uncertain
outcomes generally associated with litigation, there can be no assurance that
the Company’s (and its affiliates’) defense of such claims will be
successful.
There
have been no material changes to the disclosure related to risk factors made in
the Company Annual Report on Form 10-K for the year ended December 31,
2007.
None.
None.
None
None.
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned hereunto duly authorized.
EMERGING VISION, INC.
(Registrant)
BY:
/s/ Christopher
G. Payan
Christopher
G. Payan
Chief
Executive Officer
(Principal
Executive Officer)
BY:
/s/ Brian P.
Alessi
Brian P. Alessi
Chief Financial Officer
(Principal Financial and Accounting
Officer)
Dated: November 14, 2008