Attached files
file | filename |
---|---|
EX-32.1 - EXHIBIT 32.1 - EMERGING VISION INC | ex32_1.htm |
EX-10.2 - EXHIBIT 10.2 - EMERGING VISION INC | ex10_2.htm |
EX-10.4 - EXHIBIT 10.4 - EMERGING VISION INC | ex10_4.htm |
EX-10.5 - EXHIBIT 10.5 - EMERGING VISION INC | ex10_5.htm |
EX-10.3 - EXHIBIT 10.3 - EMERGING VISION INC | ex10_3.htm |
EX-31.1 - EXHIBIT 31.1 - EMERGING VISION INC | ex31_1.htm |
EX-31.2 - EXHIBIT 31.2 - EMERGING VISION INC | ex31_2.htm |
EX-10.1 - EXHIBIT 10.1 - EMERGING VISION INC | ex10_1.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,
2009
|
OR
[ ]
|
Transition
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for the transition period from _____________ to
_____________
|
Commission
file number: 1-14128
EMERGING
VISION, INC.
(Exact
name of Registrant as specified in its charter)
NEW
YORK
(State or
other jurisdiction of incorporation or organization)
11-3096941
(I.R.S.
Employer Identification No.)
100
Quentin Roosevelt Boulevard
Garden
City, NY 11530
(Address
and zip code of principal executive offices)
Telephone
Number: (516) 390-2100
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days:
Yes X
|
No__
|
Indicate
by check mark whether the Registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes
__
|
No__
|
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act (Check One):
Large
accelerated filer __
|
Accelerated
filer __
|
|
Non
accelerated filer __
|
Smaller
reporting company X
|
(Do not check if a smaller reporting
company)
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act):
Yes
__
|
No X
|
As of
November 13, 2009, there were 129,157,103 outstanding shares of the Issuer’s
Common Stock, par value $0.01 per share.
TABLE
OF CONTENTS
|
|
PAGE
|
|
Item
1. Item 1. Financial Statements
CONSOLIDATED
CONDENSED BALANCE SHEETS
(In
Thousands, Except Share Data)
|
||||||||
ASSETS
|
September
30,
|
December
31,
|
||||||
2009
|
2008
|
|||||||
(unaudited)
|
(audited)
|
|||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 1,763 | $ | 2,090 | ||||
Franchise
receivables, net of allowance of $148 and $140,
respectively
|
1,963 | 1,744 | ||||||
Optical
purchasing group receivables, net of allowance of $100 and $172,
respectively
|
5,638 | 4,221 | ||||||
Other
receivables, net of allowance of $10 and $7, respectively
|
212 | 322 | ||||||
Current
portion of franchise notes receivable, net of allowance of
$29
|
203 | 107 | ||||||
Inventories
|
323 | 322 | ||||||
Prepaid
expenses and other current assets
|
592 | 543 | ||||||
Deferred
tax assets
|
351 | 351 | ||||||
Total
current assets
|
11,045 | 9,700 | ||||||
Property
and equipment, net
|
885 | 1,191 | ||||||
Franchise
notes receivable
|
288 | 302 | ||||||
Deferred
tax asset, net of current portion
|
803 | 803 | ||||||
Goodwill
|
4,127 | 4,127 | ||||||
Intangible
assets, net
|
3,069 | 3,218 | ||||||
Other
assets
|
247 | 296 | ||||||
Total
assets
|
$ | 20,464 | $ | 19,637 |
LIABILITIES AND SHAREHOLDERS’
EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable and accrued liabilities
|
$ | 4,284 | $ | 4,362 | ||||
Optical
purchasing group payables
|
5,134 | 3,709 | ||||||
Accrual
for store closings
|
- | 146 | ||||||
Put
option liability
|
700 | - | ||||||
Short-term
debt
|
4,971 | 14 | ||||||
Related
party obligations
|
108 | 353 | ||||||
Total
current liabilities
|
15,197 | 8,584 | ||||||
Long-term
debt
|
39 | 5,358 | ||||||
Related
party borrowings, net of current portion
|
336 | 417 | ||||||
Franchise
deposits and other liabilities
|
267 | 310 | ||||||
Total
liabilities
|
15,839 | 14,669 | ||||||
Commitments
and contingencies
|
||||||||
Shareholders'
equity:
|
||||||||
Preferred
stock, $0.01 par value per share; 5,000,000 shares
authorized: Senior Convertible Preferred Stock, $100,000
liquidation preference per share; 0.74 shares issued and
outstanding
|
74 | 74 | ||||||
Common
stock, $0.01 par value per share; 150,000,000 shares authorized;
129,339,440 and 125,475,143 shares issued,respectively, and 129,157,103
and 125,292,806 shares outstanding, respectively
|
1,293 | 1,254 | ||||||
Treasury
stock, at cost, 182,337 shares
|
(204 | ) | (204 | ) | ||||
Additional
paid-in capital
|
128,020 | 128,059 | ||||||
Accumulated
comprehensive loss
|
(140 | ) | (267 | ) | ||||
Accumulated
deficit
|
(124,418 | ) | (123,948 | ) | ||||
Total
shareholders' equity
|
4,625 | 4,968 | ||||||
Total
liabilities and shareholders' equity
|
$ | 20,464 | $ | 19,637 |
The
accompanying notes are an integral part of these consolidated condensed
financial statements.
CONSOLIDATED
CONDENSED STATEMENTS OF OPERATIONS
AND
COMPREHENSIVE (LOSS) INCOME (UNAUDITED)
(In
Thousands, Except Per Share Data)
|
||||||||||||||||
For
the Three Months Ended September 30,
|
For
the Nine Months Ended
September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Revenues:
|
||||||||||||||||
Optical
purchasing group sales
|
$ | 13,728 | $ | 15,707 | $ | 39,252 | $ | 47,252 | ||||||||
Franchise
royalties
|
1,350 | 1,481 | 4,250 | 4,727 | ||||||||||||
Membership
fees – VisionCare of California
|
893 | 928 | 2,640 | 2,648 | ||||||||||||
Retail
sales – Company-owned stores
|
551 | 966 | 1,581 | 3,062 | ||||||||||||
Franchise
related fees and other revenues
|
67 | 31 | 210 | 279 | ||||||||||||
Total
revenue
|
16,589 | 19,113 | 47,933 | 57,968 | ||||||||||||
Costs
and operating expenses:
|
||||||||||||||||
Cost
of optical purchasing group sales
|
13,104 | 14,955 | 37,358 | 44,997 | ||||||||||||
Cost
of retail sales – Company-owned stores
|
162 | 240 | 421 | 737 | ||||||||||||
Selling,
general and administrative expenses
|
3,876 | 3,668 | 10,403 | 11,126 | ||||||||||||
Total
costs and operating expenses
|
17,142 | 18,863 | 48,182 | 56,860 | ||||||||||||
Operating
(loss) income
|
(553 | ) | 250 | (249 | ) | 1,108 | ||||||||||
Other
income (expense):
|
||||||||||||||||
Interest
on franchise notes receivable
|
7 | 5 | 19 | 19 | ||||||||||||
Other
(expense) income, net
|
(25 | ) | 10 | (48 | ) | 60 | ||||||||||
Interest
expense, net
|
(55 | ) | (70 | ) | (170 | ) | (233 | ) | ||||||||
Total
other income (expense)
|
(73 | ) | (55 | ) | (199 | ) | (154 | ) | ||||||||
(Loss)
income before income tax benefit (provision)
|
(626 | ) | 195 | (448 | ) | 954 | ||||||||||
Income
tax benefit (provision)
|
(11 | ) | 24 | (22 | ) | 289 | ||||||||||
Net
(loss) income
|
(637 | ) | 219 | (470 | ) | 1,243 | ||||||||||
Comprehensive
(loss) income:
|
||||||||||||||||
Foreign
currency translation adjustments
|
74 | (302 | ) | 127 | (269 | ) | ||||||||||
Comprehensive
(loss) income
|
$ | (563 | ) | $ | (83 | ) | $ | (343 | ) | $ | 974 | |||||
Net
(loss) income per share:
|
||||||||||||||||
Basic
and diluted
|
$ | (0.00 | ) | $ | 0.00 | $ | (0.00 | ) | $ | 0.01 | ||||||
Weighted-average
number of common shares outstanding:
|
||||||||||||||||
Basic
|
128,816 | 125,293 | 126,480 | 125,293 | ||||||||||||
Diluted
|
128,816 | 129,998 | 126,480 | 130,822 |
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,
|
||||||||
2009
|
2008
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
(loss) income
|
$ | (470 | ) | $ | 1,243 | |||
Adjustments
to reconcile net income to net cash provided by (used in) operating
activities:
|
||||||||
Depreciation
and amortization
|
483 | 483 | ||||||
Provision
for bad debts
|
216 | 58 | ||||||
Deferred
tax assets
|
- | (289 | ) | |||||
Loss
(gain) on the sale of property and equipment
|
68 | (59 | ) | |||||
Loss
on disposal of property and equipment
|
14 | - | ||||||
Non-cash
compensation charges related to put option liability
|
700 | - | ||||||
Non-cash
compensation charges related to options and warrants
|
- | 46 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Franchise
and other receivables
|
(290 | ) | (246 | ) | ||||
Optical
purchasing group receivables
|
(1,532 | ) | (1,609 | ) | ||||
Inventories
|
(1 | ) | 89 | |||||
Prepaid
expenses and other current assets
|
(49 | ) | (266 | ) | ||||
Other
assets
|
(35 | ) | 70 | |||||
Accounts
payable and accrued liabilities
|
(78 | ) | (812 | ) | ||||
Optical
purchasing group payables
|
1,425 | 1,225 | ||||||
Franchise
deposits and other liabilities
|
(189 | ) | (180 | ) | ||||
Net
cash provided by (used in) operating activities
|
262 | (247 | ) | |||||
Cash
flows from investing activities:
|
||||||||
Proceeds
from franchise and other notes receivable
|
134 | 173 | ||||||
Settlement
on accounts payable related to enhancing trademark value
|
102 | - | ||||||
Costs
associated with enhancing trademark value
|
(101 | ) | (371 | ) | ||||
Franchise
notes receivable issued
|
(136 | ) | (20 | ) | ||||
Purchases
of property and equipment
|
(27 | ) | (22 | ) | ||||
Net
cash used in investing activities
|
(28 | ) | (240 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Borrowings
under credit facility
|
150 | - | ||||||
Payments
under credit facility
|
(500 | ) | - | |||||
Payments
on related party obligations and other debt
|
(338 | ) | (406 | ) | ||||
Net
cash used in financing activities
|
(688 | ) | (406 | ) | ||||
Net
decrease in cash before effect of foreign exchange rate
changes
|
(454 | ) | (893 | ) | ||||
Effect
of foreign exchange rate changes
|
127 | (38 | ) | |||||
Net
decrease in cash and cash equivalents
|
(327 | ) | (931 | ) | ||||
Cash
and cash equivalents – beginning of period
|
2,090 | 2,846 | ||||||
Cash
and cash equivalents – end of period
|
$ | 1,763 | $ | 1,915 |
Supplemental
disclosures of cash flow information:
|
||||||||
Cash
paid during the period for:
|
||||||||
Interest
|
$ | 150 | $ | 224 | ||||
Taxes
|
$ | 27 | $ | 33 | ||||
Non-cash
investing and financing activities:
|
||||||||
Notes
receivable in connection with the sale of Company-owned stores (inclusive
of all inventory and property and equipment)
|
$ | 44 | $ | 74 | ||||
Notes
receivable in connection with franchisee settlement (inclusive of all
franchise related receivables)
|
$ | 95 | $ | - | ||||
The
accompanying notes are an integral part of these consolidated condensed
financial statements.
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
1 – ORGANIZATION:
|
Business
|
Emerging
Vision, Inc. and subsidiaries (collectively, the “Company”) operates one of the
largest chains of retail optical stores and one of the largest franchise optical
chains in the United States, based upon management’s beliefs, domestic sales and
the number of locations of Company-owned and franchised stores (collectively
“Sterling Stores”). The Company also targets retail optical stores
within the United States and within Canada to become members of its two optical
purchasing groups, Combine Buying Group, Inc. (“Combine”) and The Optical Group
(“TOG”). Additionally, the Company operates VisionCare of California,
Inc. (“VCC”), a wholly owned subsidiary that is a specialized health care
maintenance organization licensed by the State of California, Department of
Managed Health Care, which employs licensed optometrists who render services in
offices located immediately adjacent to, or within, most Sterling Stores located
in California. The Company was incorporated under the laws of the
State of New York in January 1992 and, in July 1992, purchased substantially all
of the assets of Sterling Optical Corp., a New York corporation, then a
debtor-in-possession under Chapter 11 of the U.S. Bankruptcy Code.
As of
September 30, 2009, there were 136 Sterling Stores in operation, consisting of 5
Company-owned stores and 131 franchised stores, 824 active members of Combine,
and 539 active members of TOG.
|
Principles
of Consolidation
|
The
Consolidated Condensed Financial Statements include the accounts of Emerging
Vision, Inc. and its operating and non-operating subsidiaries, all of which are
wholly owned. All intercompany balances and transactions have been
eliminated in consolidation.
|
Basis
of Presentation
|
The
accompanying Consolidated Condensed Financial Statements of the Company have
been prepared in accordance with accounting principles generally accepted for
interim financial statement presentation and in accordance with the instructions
to Form 10-Q and Articles 8 and 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by accounting
principles generally accepted for complete financial statement
presentation. In the opinion of management, all adjustments for a
fair statement of the results of operations and financial position for the
interim periods presented have been included. All such adjustments
are of a normal recurring nature. This financial information should
be read in conjunction with the Consolidated Financial Statements and Notes
thereto included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2008.
NOTE
2 – SIGNIFICANT ACCOUNTING POLICIES:
Share-Based
Compensation
The
Company follows the provisions of Financial Accounting Standards Board’s
(“FASB”) Accounting Standards Codification (“ASC”) 718 “Compensation – Stock
Compensation” to require all share-based payments to employees, including grants
of employee stock options, to be recognized based on their fair values.
Share-based
compensation cost of approximately $700,000 and $0 for the three months ended
September 30, 2009 and 2008, respectively, and $700,000 and $46,000 for the nine
months ended September 30, 2009 and 2008, respectively, is reflected in selling,
general and administrative expenses on the accompanying Consolidated Condensed
Statements of Operations and Comprehensive (Loss) Income. The Company
determined the fair value of options and warrants issued during 2008 using the
Black-Scholes option pricing model.
Commencing
on September 29, 2010, and expiring September 28, 2016, Combine's President may
put back to the Company 2,187,500 options at a put price per share of $0.32,
which would result in a charge to share-based compensation expense of
$700,000. During the three and nine months ended September 30, 2009,
the Company recognized such charge.
Revenue
Recognition
The
Company recognizes revenues in accordance with the Securities and Exchange
Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 104, “Revenue
Recognition.” Accordingly, revenues are recorded when persuasive
evidence of an arrangement exists, delivery has occurred or services have been
rendered, the Company’s prices to buyers are fixed or determinable, and
collectability is reasonably assured.
The
Company derives its revenues from the following five principal
sources:
Optical purchasing group
sales – Represents revenues generated by the sale of products and
services, at discounted pricing, to such members;
Franchise royalties –
Represents continuing franchise royalty fees based upon a percentage of the
gross revenues generated by each franchised location. To the extent
that collectability of royalties is not reasonably assured, the Company
recognizes such revenue when the cash is received;
Retail sales – Company-owned stores
– Represents sales from eye care products and related services generated
at a Company-owned store;
Membership fees – VisionCare of
California – Represents membership fees generated by VisionCare of
California, Inc. (“VCC”), a wholly owned subsidiary of the Company, for
optometric services provided to individual patients (members). A
portion of membership fee revenues is deferred when billed and recognized
ratably over the one-year term of the membership agreement;
Franchise related fees and other revenues –
Represents certain franchise fees collected by the Company under the terms of
franchise agreements (including, but not limited to, initial franchise,
transfer, renewal and conversion fees). Initial franchise fees, which
are non-refundable, are recognized when the related franchise agreement is
signed. The Company recognized franchise related fees of $55,000 and
$1,000 for the three months ended September 30, 2009 and 2008, respectively, and
$195,000 and $161,000 for the nine months ended September 30, 2009 and 2008,
respectively. Other revenues are revenues that are not generated by
one of the other five principal sources including commission income and employee
optical sales.
The
Company also follows the provisions of ASC 605-50 “Customer Payments and
Incentives,” and accordingly, accounts for discounts, coupons and promotions
(that are offered to its customers) as a direct reduction of
revenue.
Comprehensive
Income
The
Company follows the provisions of ASC 220-10, “Comprehensive Income,” which
establishes standards for the reporting of comprehensive income and its
components. Comprehensive income is defined as the change in equity
from transactions and other events and circumstances other than those resulting
from investments by owners and distributions to owners. The Company’s
comprehensive (loss) income is comprised solely of the cumulative translation
adjustment arising from the translation of TOG’s financial statements, the
Company’s foreign subsidiary.
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
$74,000 translation gain and $302,000 translation loss from the conversion of
foreign currency to U.S. Dollars is included as a component of comprehensive
income for the three months ended September 30, 2009 and 2008, respectively, and
the resulting $127,000 translation gain and $269,000 translation loss from the
conversion of foreign currency to U.S. Dollars is included as a component of
comprehensive income for the nine months ended September 30, 2009 and 2008,
respectively. Each of the translation adjustments are recorded
directly to accumulated comprehensive loss within the Consolidated Condensed
Balance Sheets.
Income
Taxes
The
Company follows the provisions of ASC 740-10 which 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. ASC 740-10
requires that the financial statements reflect expected future tax consequences
of such positions presuming the taxing authorities’ full knowledge of the
position and all relevant facts, but without considering time
values. There were no adjustments related to uncertain tax positions
recognized during the three and nine months ended September 30, 2009 and 2008,
respectively.
The
Company recognizes interest and penalties related to uncertain tax positions as
a reduction of the income tax benefit. No interest and penalties
related to uncertain tax positions were accrued as of September 30, 2009 and
December 31, 2008, respectively.
The
Company operates in multiple tax jurisdictions within the United States of
America and Canada. Although the Company does not believe that the
Company is currently under examination in any major tax jurisdiction in which it
operates, the Company remains subject to examination in all of those tax
jurisdictions until the applicable statutes of limitation expire. As
of September 30, 2009, a summary of the tax years that remains subject to
examination in the Company’s major tax jurisdictions are: United
States – Federal and State – 2005 and forward; and Canada – Federal and
Provincial – 2005 and forward. The Company does not expect to have a
material change to unrecognized tax positions within the next twelve
months.
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and the disclosure of
contingent assets and liabilities as of the dates of such financial statements,
and the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates. Significant
estimates made by management include, but are not limited to, allowances on
franchise, notes and other receivables, allowances on optical purchasing group
receivables, costs of current and potential litigation, and the allowance on
deferred tax assets
Reclassification
Certain
reclassifications have been made to prior year’s consolidated condensed
financial statements to conform to the current year presentation.
NOTE
3 – RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENT:
In June
2009, FASB issued guidance which is included in the Codification in FASB ASC
105, “Generally Accepted Accounting Principles.” This guidance
modifies the Generally Accepted Accounting Principles (“GAAP”) hierarchy by
establishing only two levels of GAAP, authoritative and nonauthoritative
accounting literature. Effective July 1, 2009, the FASB ASC is
considered the single source of authoritative U.S. accounting and reporting
standards, except for additional authoritative rules and interpretive releases
issued by the SEC. This guidance is effective for financial
statements issued for reporting periods that end after September 15,
2009. Where possible, FASB references have been replaced with ASC
references.
NOTE
4 – PER SHARE INFORMATION:
In
accordance with ASC 260, “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. ASC 260 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
10,993,377 and 3,410,187 were excluded from the computation of Diluted EPS for
the three and nine months ended September 30, 2009 and 2008, respectively, as
their effect on the computation of Diluted EPS would have been
anti-dilutive.
The
following table sets forth the computation of basic and diluted per share
information:
For
the Three Months Ended September 30,
|
For
the Nine Months Ended September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Numerator:
|
||||||||||||||||
Net
(loss) income (in thousands):
|
$ | (637 | ) | $ | 219 | $ | (470 | ) | $ | 1,243 | ||||||
Denominator:
|
||||||||||||||||
Weighted-average
shares of common stock outstanding
|
128,816 | 125,293 | 126,480 | 125,293 | ||||||||||||
Dilutive
effect of stock options, warrants and restricted stock
|
- | 4,705 | - | 5,529 | ||||||||||||
Weighted-average
shares of common stock outstanding, assuming dilution
|
128,816 | 129,998 | 126,480 | 130,822 | ||||||||||||
Net
(loss) income per share:
|
||||||||||||||||
Basic
and diluted
|
$ | (0.00 | ) | $ | 0.00 | $ | (0.00 | ) | $ | 0.01 | ||||||
NOTE
5 – EQUITY TRANSACTIONS:
In July
2009, certain executives of the Company exercised their outstanding common stock
options totaling 8,128,810 on a cash-less basis in exchange for 3,059,618 shares
of common stock. Additionally, a former executive of the Company
exercised 3,100,000 common stock options on a cash-less basis in exchange for
804,679 shares of common stock. These two transactions increased the
Company’s total outstanding shares of common stock to 129,157,103 as of
September 30, 2009.
As of
November 16, 2009, those executives and the Company’s Board of Directors are in
negotiations to rescind such transactions, provided, however, that there can be
no assurances such negotiations will result in a rescission or, if a rescission
occurs it will be on terms favorable to the Company.
NOTE
6 – CREDIT FACILITY:
On August
8, 2007, the Company entered into a Revolving Line of Credit Note and Credit
Agreement, as amended (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, and subsequently
amended on November 11, 2009 to $5,750,000, to be used for general working
capital needs and certain permitted acquisitions, which is secured by
substantially all of the assets of the Company, other than the assets of
Combine, which assets are used to secure the repayment of Combine’s
debt. The Credit Facility is set to mature on April 1,
2010. All sums drawn by the Company under the Credit Facility
are repayable, interest only, on a monthly basis, commencing on the first
day of each month during the term of the Credit Facility, calculated at the
variable rate of three hundred (300) basis points in excess of LIBOR, and all
principal drawn by the Company is payable on April 1, 2010. The
Company is currently exploring certain options available to it to
extend or refinance, prior to April 2010, provided, however, that the Company
does not know if it will be able to extend or refinance the debt and cannot
guarantee that extending or refinancing the debt will be on terms favorable to
the Company.
As of
September 30, 2009, the Company had outstanding borrowings of $4,956,854 under
the Credit Facility, which amount was included in Short-term debt on the
accompanying Consolidated Condensed Balance Sheet and was utilizing
$750,000 of the Credit Facility to hold letters of credit as security for
two key vendors of Combine to ensure payment of any outstanding invoices not
paid by Combine. Additionally, as of November 16, 2009, the Company
had $43,146 available under the Credit Facility for future
borrowings.
The
Credit Facility includes various financial covenants including minimum net
worth, maximum funded debt and debt service ratio requirements. As of
September 30, 2009, the Company was not in compliance with one of the financial
covenants. However, M&T granted the Company a waiver of the
covenant as of November 11, 2009.
NOTE
7 – SEGMENT REPORTING
Business
Segments
Operating
segments are organized internally primarily by the type of services provided,
and in accordance with ASC 280-10, “Segment Reporting.” The
Company has aggregated similar operating characteristics into six
reportable segments: (1) Optical Purchasing Group Business, (2) Franchise, (3)
Company Store, (4) VisionCare of California, (5) Corporate Overhead and (6)
Other.
(1) The
Optical Purchasing Group Business segment consists of the operations of Combine
and TOG. Revenues generated by this segment represent the sale of
products and services, at discounted pricing, to Combine and TOG
members. The businesses in this segment are able to use their
membership count to get better discounts from vendors than a member could obtain
on its own. Expenses include direct costs for such product and
services, salaries and related benefits, depreciation and amortization, interest
expense on financing these acquisitions, and other overhead.
(2) The
Franchise segment consists of 131 franchise locations as of September 30,
2009. Revenues generated by this segment represent royalties on the
total sales of the franchise locations, other franchise related fees such as
initial franchise, transfer, renewal and conversion fees, additional royalties
in connection with franchise store audits, and interest charged on franchise
financing. Expenses include the salaries and related
benefits/expenses of the Company’s franchise field support team, corporate
office salaries and related benefits, convention and trade show expenses,
consulting fees, and other overhead.
(3) The
Company Store segment consists of five Company-owned retail optical stores as of
September 30, 2009. Revenues generated from such stores are a result
of the sales of eye care products and services such as prescription and
non-prescription eyeglasses, eyeglass frames, ophthalmic lenses, contact lenses,
sunglasses and a broad range of ancillary items. Expenses include the
direct costs for such eye care products, doctor and store staff salaries and
related benefits, rent, advertising, and other overhead.
(4) The
VisionCare of California segment consists of optometric services provided to
patients (members) of those franchise retail optical stores located in the state
of California. Revenues consist of membership fees generated for such
optometric services provided to individual patients
(members). Expenses include salaries and related benefits for the
doctors that render such optometric services, and other overhead.
(5) The
Corporate Overhead segment consists of expenses not allocated to one of the
other segments. There are no revenues generated by this
segment. Expenses include costs associated with being a publicly
traded company (including salaries and related benefits, professional fees,
Sarbanes-Oxley compliance, board of director fees, and director and officer
insurance), other salaries and related benefits, rent, other professional fees,
and depreciation and amortization.
(6) The
Other segment includes revenues and expenses from other business activities that
do not fall within one of the other segments. Revenues generated by
this segment consist of employee optical benefit sales, commission income, and
residual income on credit card processing. Expenses primarily include
the direct cost of such employee optical benefit sales, salaries and related
benefits, commission expense, and advertising.
Certain
business segment information is as follows (in thousands):
As
of
September
30,
2009
|
As
of December 31, 2008
|
|||||||
(unaudited)
|
(audited)
|
|||||||
Total
Assets:
|
||||||||
Optical
Purchasing Group Business
|
$ | 13,335 | $ | 12,246 | ||||
Franchise
|
5,432 | 5,386 | ||||||
VisionCare
of California
|
717 | 632 | ||||||
Company
Store
|
536 | 547 | ||||||
Corporate
Overhead
|
426 | 814 | ||||||
Other
|
18 | 12 | ||||||
Total
assets
|
$ | 20,464 | $ | 19,637 |
Capital
Expenditures:
|
||||||||
Optical
Purchasing Group Business
|
$ | - | $ | 42 | ||||
Franchise
|
13 | 40 | ||||||
VisionCare
of California
|
- | 2 | ||||||
Company
Store
|
3 | 139 | ||||||
Corporate
Overhead
|
11 | 121 | ||||||
Other
|
- | - | ||||||
Total
capital expenditures
|
$ | 27 | $ | 344 |
Total
Goodwill:
|
||||||||
Optical
Purchasing Group Business
|
$ | 2,861 | $ | 2,861 | ||||
Franchise
|
1,266 | 1,266 | ||||||
VisionCare
of California
|
- | - | ||||||
Company
Store
|
- | - | ||||||
Corporate
Overhead
|
- | - | ||||||
Other
|
- | - | ||||||
Total
goodwill
|
$ | 4,127 | $ | 4,127 |
Total
Intangible Assets, net:
|
||||||||
Optical
Purchasing Group Business
|
$ | 2,160 | $ | 2,307 | ||||
Franchise
|
909 | 911 | ||||||
VisionCare
of California
|
- | - | ||||||
Company
Store
|
- | - | ||||||
Corporate
Overhead
|
- | - | ||||||
Other
|
- | - | ||||||
Total
intangible assets, net
|
$ | 3,069 | $ | 3,218 |
Total
Intangible Assets, net, Additions:
|
||||||||
Optical
Purchasing Group Business
|
$ | - | $ | - | ||||
Franchise
|
(1 | ) | 601 | |||||
VisionCare
of California
|
- | - | ||||||
Company
Store
|
- | - | ||||||
Corporate
Overhead
|
- | - | ||||||
Other
|
- | - | ||||||
Total
intangible assets, net, additions
|
$ | (1 | ) | $ | 601 |
For
the Three Months
Ended
September 30,
|
For
the Nine Months
Ended
September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Net
Revenues:
|
||||||||||||||||
Optical
Purchasing Group Business
|
$ | 13,728 | $ | 15,707 | $ | 39,252 | $ | 47,252 | ||||||||
Franchise
|
1,405 | 1,482 | 4,445 | 4,888 | ||||||||||||
VisionCare
of California
|
893 | 928 | 2,640 | 2,648 | ||||||||||||
Company
Store
|
551 | 966 | 1,581 | 3,062 | ||||||||||||
Corporate
Overhead
|
- | - | - | - | ||||||||||||
Other
|
12 | 30 | 15 | 118 | ||||||||||||
Net
revenues
|
$ | 16,589 | $ | 19,113 | $ | 47,933 | $ | 57,968 | ||||||||
(Loss)
income before Income Tax Benefit (Provision):
|
||||||||||||||||
Optical
Purchasing Group Business
|
$ | (535 | ) | $ | 341 | $ | (154 | ) | $ | 981 | ||||||
Franchise
|
623 | 603 | 1,811 | 2,499 | ||||||||||||
VisionCare
of California
|
12 | 43 | 41 | 48 | ||||||||||||
Company
Store
|
(273 | ) | (128 | ) | (505 | ) | (268 | ) | ||||||||
Corporate
Overhead
|
(451 | ) | (673 | ) | (1,640 | ) | (2,257 | ) | ||||||||
Other
|
(2 | ) | 9 | (1 | ) | (49 | ) | |||||||||
(Loss)
income before income tax benefit (provision)
|
$ | (626 | ) | $ | 195 | $ | (448 | ) | $ | 954 | ||||||
Depreciation
and Amortization:
|
||||||||||||||||
Optical
Purchasing Group Business
|
$ | 77 | $ | 73 | $ | 230 | $ | 226 | ||||||||
Franchise
|
67 | 71 | 191 | 180 | ||||||||||||
VisionCare
of California
|
5 | 5 | 16 | 16 | ||||||||||||
Company
Store
|
13 | 19 | 46 | 55 | ||||||||||||
Corporate
Overhead
|
- | - | - | - | ||||||||||||
Other
|
- | 2 | - | 6 | ||||||||||||
Total
depreciation and amortization
|
$ | 162 | $ | 170 | $ | 483 | $ | 483 | ||||||||
Interest
Expense, Net:
|
||||||||||||||||
Optical
Purchasing Group Business
|
$ | 44 | $ | 59 | $ | 133 | $ | 199 | ||||||||
Franchise
|
11 | 11 | 37 | 34 | ||||||||||||
VisionCare
of California
|
- | - | - | - | ||||||||||||
Company
Store
|
- | - | - | - | ||||||||||||
Corporate
Overhead
|
- | - | - | - | ||||||||||||
Other
|
- | - | - | - | ||||||||||||
Total
interest expense, net
|
$ | 55 | $ | 70 | $ | 170 | $ | 233 |
Geographic
Information
The
business of the Company is concentrated into two separate geographic areas; the
United States and Canada. Certain geographic information for
continuing operations is as follows:
For
the Three Months
Ended
September 30,
|
For
the Nine Months
Ended
September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Net
Revenues:
|
||||||||||||||||
United
States
|
$ | 6,282 | $ | 7,644 | $ | 19,407 | $ | 23,676 | ||||||||
Canada
|
10,307 | 11,469 | 28,526 | 34,292 | ||||||||||||
Net
revenues
|
$ | 16,589 | $ | 19,113 | $ | 47,933 | $ | 57,968 | ||||||||
(Loss)
income before Income Tax Benefit (Provision):
|
||||||||||||||||
United
States
|
$ | (843 | ) | $ | (181 | ) | $ | (1,147 | ) | $ | (84 | ) | ||||
Canada
|
217 | 376 | 699 | 1,038 | ||||||||||||
(Loss)
income before income tax benefit (provision)
|
$ | (626 | ) | $ | 195 | $ | (448 | ) | $ | 954 | ||||||
The
geographic information on Canada includes TOG’s business
activities. Canadian revenue is generated from the Company’s optical
purchasing group members located in Canada. TOG provides customer
management services on behalf of the Company, to such members.
Additional
geographic information is summarized as follows for the nine months ended
September 30, 2009 (in thousands):
United
States
|
Canada
|
Total
|
||||||||||
Total
Assets
|
$ | 16,021 | $ | 4,443 | $ | 20,464 | ||||||
Property
and Equipment
|
854 | 31 | 885 | |||||||||
Depreciation
and Amortization
|
475 | 8 | 483 | |||||||||
Capital
Expenditures
|
27 | - | 27 | |||||||||
Goodwill
|
4,127 | - | 4,127 | |||||||||
Intangible
Assets, net
|
3,069 | - | 3,069 | |||||||||
Intangible
Assets, net, Additions
|
(1 | ) | - | (1 | ) | |||||||
Interest
Expense, net
|
170 | - | 170 |
Geographic
information is summarized as follows for the year ended December 31, 2008 (in
thousands) (audited):
United
States
|
Canada
|
Total
|
||||||||||
Total
Assets
|
$ | 16,678 | $ | 2,959 | $ | 19,637 | ||||||
Property
and Equipment
|
1,156 | 35 | 1,191 | |||||||||
Depreciation
and Amortization
|
645 | 9 | 654 | |||||||||
Capital
Expenditures
|
344 | - | 344 | |||||||||
Goodwill
|
4,127 | - | 4,127 | |||||||||
Intangible
Assets, net
|
3,218 | - | 3,218 | |||||||||
Intangible
Assets, net, Additions
|
601 | - | 601 | |||||||||
Interest
Expense, net
|
319 | - | 319 |
NOTE
8 – COMMITMENTS AND CONTINGENCIES:
Litigation
In August
2006, the Company and its subsidiary, Sterling Vision of California, Inc.
(“SVC”) (collectively referred to as the “Company” or the “Plaintiff”) filed an
action against For Eyes Optical Company (“For Eyes” or “Defendant”) in the
District Court of the State of California, San Jose County in response to
allegations by For Eyes of trademark infringement for Plaintiff’s use of the
trademark “Site For Sore Eyes”. The Company claims, among other
things, that (i) there is no likelihood of confusion between the Company’s and
Defendant’s mark, and that the Company has not infringed, and is not infringing,
Defendant’s mark; (ii) the Company is not bound by that certain settlement
agreement, executed in 1981 by a prior owner of the Site For Sore Eyes
trademark; and (iii) Defendant’s mark is generic and must be
cancelled. For Eyes, in its Answer, asserted defenses to the
Company’s claims, and asserted counterclaims against the Company, including,
among others, that (i) the Company has infringed For Eyes’ mark; (ii) the
Company wrongfully obtained a trademark registration for its mark and that said
registration should be cancelled; and (iii) the acts of the Company constitute a
breach of the aforementioned settlement agreement. For Eyes seeks
injunctive relief, cancellation of the Company’s trademark registration, trebled
monetary damages, payment of any profits made by the Company in respect of the
use of such trade name, and costs and attorney fees. The Company has
not recorded an accrual for a loss in this action, as the Company does not
believe it is probable that the Company will be held liable in respect of
Defendant’s counterclaims. As of November 16, 2009, the parties are
in settlement discussions, provided, however, that there can be no assurance
that the litigation will be settled, or, if it is settled, that the terms of
such settlement will be favorable to the Company.
In
September 2008, Pyramid Mall of Glen Falls Newco, LLC commenced an action
against the Company and its subsidiary Sterling Vision of Aviation Mall, Inc.,
in the Supreme Court of the State of New York, Onondaga County, alleging, among
other things, that the Company had breached its obligations under its lease for
the former Sterling Optical store located at Aviation Mall, New York. In
September 2009, this action was settled together with the action brought against
Sterling Optical of Crossgates Mall, Inc. (discussed in the paragraph
below). The terms of the settlement included the payment, by the
Company to Pyramid Management Group, Inc., of an aggregate sum of $135,000, of
which $15,000 was paid in both September and October 2009, with the remaining
$105,000 to be paid in 7 equal, successive monthly installments of
$15,000. The parties also exchanged mutual general
releases.
In
October 2008, Crossgates Mall Company Newco, LLC commenced an action against the
Company’s subsidiary, Sterling Optical of Crossgates Mall, Inc., in the Supreme
Court of the State of New York, Onondaga County, alleging, among other things,
that the Company had breached its obligations under its lease for the former
Sterling Optical store located at Crossgates Mall, New York. In
September 2009, this action was settled, the details of which are described in
the paragraph above.
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, 2009, the Company was a guarantor of certain leases of retail
optical stores franchised and subleased to its franchisees. Such
guarantees generally expire one year from the month the rent was last
paid. In the event that all of such franchisees defaulted on their
respective subleases, the Company would be obligated for aggregate lease
obligations of approximately $2,483,000. The Company continually
evaluates the credit-worthiness of its franchisees in order to determine their
ability to continue to perform under their respective
subleases. Additionally, in the event that a franchisee defaults
under its sublease, the Company has the right to take over operation of the
respective location.
Employment
Agreements
The
Company has an Employment Agreement (“Agreement 1”) with its Chief Executive
Officer (“CEO”), which extends through November 2009. Agreement 1
provides for an annual salary of $275,000 and certain other
benefits. Additionally, as per Agreement 1, the CEO may be eligible
for bonus compensation as determined by the Company’s Board of
Directors.
In
September 2009, the Company and CEO announced that Agreement 1 will not be
extended beyond November 30, 2009. As of November 16, 2009, the
Company is interviewing candidates for the CEO position.
The
Company has an Employment Agreement (“Agreement 2”) with the President of
Combine, which extends through September 2011. Agreement 2 provides
for an annual salary of $210,000, certain other benefits, and an annual bonus
based upon certain financial targets of Combine.
NOTE
9 – SUBSEQUENT EVENTS:
The
Company has evaluated subsequent events from the balance sheet date through
November 16, 2009, the date the accompanying financial statements were
issued. The following are material subsequent events.
Director
Resignation:
On
November 4, 2009, one of the members of the Company’s Board of Directors
resigned. As of November 16, 2009, the Company is searching for
candidates to fill the vacant board seat.
In
addition, material subsequent events have been disclosed in Notes 5, 6, and
8.
Item
2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
This
Quarterly Report, as of and for the three and nine months ended September 30,
2009, (the “Report”) contains certain forward-looking statements and information
relating to the Company that is based on the beliefs of the Company’s
management, as well as assumptions made by, and information currently available
to, the Company’s management. When used in this Report, the words
“anticipate”, “believe”, “estimate”, “expect”, “there can be no assurance”,
“may”, “could”, “would”, “might”, “intends” and similar expressions and their
negatives, as they relate to the Company or the Company’s management, are
intended to identify forward-looking statements. Such statements
reflect the view of the Company at the date they are made with respect to future
events, are not guarantees of future performance and are subject to various
risks and uncertainties as identified in the Company’s Annual Report on Form
10-K for the year ended December 31, 2008 and those described from time to time
in previous and future reports filed with the Securities and Exchange
Commission. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those described herein with the forward-looking
statements referred to above and as set forth in this Report. The
Company does not intend to update these forward-looking statements for new
information, or otherwise, for the occurrence of future events.
Segment
results for the three and nine months ended September 30, 2009, as compared to
the three and nine months ended September 30, 2008
Consolidated
Segment Results
Total
revenues for the Company decreased approximately $2,524,000, or 13.2%, to
$16,589,000 for the three months ended September 30, 2009, as compared to
$19,113,000 for the three months ended September 30, 2008, and decreased
approximately $10,035,000, or 17.3%, to $47,933,000 for the nine months ended
September 30, 2009, as compared to $57,968,000 for the nine months ended
September 30, 2008. These decreases were mainly a result of the
decrease in Optical Purchasing Group revenues during the comparable periods due
to current economic trends in the US and Canadian economies as well as currency
fluctuations between the US and Canadian dollars. Additionally, the
Company experienced a decrease in the average number of Company-owned stores in
operation from 9.5 for the nine months ended September 30, 2008 compared to 5.5
for the nine months ended September 30, 2009, and a decrease in the average
number of franchise locations in operation from 138 for the nine months ended
September 30, 2008 compared to 131 for the nine months ended September 30, 2009,
which resulted in decreased revenues for the Company-store and franchise
segments.
Total
costs and operating expenses for the Company decreased approximately $1,721,000,
or 9.1%, to $17,142,000 for the three months ended September 30, 2009, as
compared to $18,863,000 for the three months ended September 30, 2008, and
decreased approximately $8,678,000, or 15.3%, to $48,182,000 for the nine months
ended September 30, 2009, as compared to $56,860,000 for the nine months ended
September 30, 2008. The decreases in Optical Purchasing Group cost of
sales were a direct result of the currency fluctuations described
above. Additionally, the Company made an effort to streamline certain
corporate office administrative functions and expenses during 2009, including
the elimination of in-house counsel and moving franchise business development to
a commission based structure. Selling, general and administrative
expenses also decreased due to the reduction of certain administrative job
functions and the decrease in the number of Company stores in operations during
2009. These decreases were offset, in part, by a charge to
share-based compensation expense of $700,000 due to the recognition of 2,187,500
options that the President of Combine can put back to the Company at a price per
share of $0.32.
Optical
Purchasing Group Business Segment
For
the Three Months Ended September 30 (in thousands):
|
||||||||||||||||
2009
|
2008
|
$
Change
|
%
Change
|
|||||||||||||
Net
Revenues:
|
||||||||||||||||
Optical
purchasing group sales
|
$ | 13,728 | $ | 15,707 | $ | (1,979 | ) | (12.6 | %) | |||||||
Cost
of optical purchasing group sales
|
13,104 | 14,955 | (1,851 | ) | (12.4 | %) | ||||||||||
Gross
margin
|
624 | 752 | (128 | ) | (17.0 | %) | ||||||||||
Selling,
General and Administrative Expenses:
|
||||||||||||||||
Compensation
expense
|
700 | - | 700 | n/a | ||||||||||||
Salaries
and related benefits
|
109 | 133 | (24 | ) | (18.0 | %) | ||||||||||
Bad
debt
|
24 | - | 24 | n/a | ||||||||||||
Depreciation
and amortization
|
77 | 73 | 4 | 5.5 | % | |||||||||||
Rent
and related overhead
|
57 | 33 | 24 | 72.7 | % | |||||||||||
Credit
card and bank fees
|
76 | 79 | (3 | ) | (3.8 | %) | ||||||||||
Professional
fees
|
64 | 31 | 33 | 106.5 | % | |||||||||||
Other
general and administrative costs
|
8 | 3 | 5 | 166.7 | % | |||||||||||
Total
selling, general and administrative expenses
|
1,115 | 352 | 763 | 216.8 | % | |||||||||||
Operating
(Loss) Income
|
(491 | ) | 400 | (891 | ) | (222.8 | %) |
Other
Income (Expense):
|
||||||||||||||||
Interest
expense, net
|
(44 | ) | (59 | ) | 15 | 25.4 | % | |||||||||
Total
other expense
|
(44 | ) | (59 | ) | 15 | 25.4 | % | |||||||||
(Loss)
income before income tax benefit
|
$ | (535 | ) | $ | 341 | $ | (876 | ) | (256.9 | %) |
For
the Nine Months Ended September 30 (in thousands):
|
||||||||||||||||
2009
|
2008
|
$
Change
|
%
Change
|
|||||||||||||
Net
Revenues:
|
||||||||||||||||
Optical
purchasing group sales
|
$ | 39,252 | $ | 47,252 | $ | (8,000 | ) | (16.9 | %) | |||||||
Cost
of optical purchasing group sales
|
37,358 | 44,997 | (7,639 | ) | (17.0 | %) | ||||||||||
Gross
margin
|
1,894 | 2,255 | (361 | ) | (16.0 | %) | ||||||||||
Selling,
General and Administrative Expenses:
|
||||||||||||||||
Compensation
expense
|
700 | - | 700 | n/a | ||||||||||||
Salaries
and related benefits
|
340 | 346 | (6 | ) | (1.7 | %) | ||||||||||
Depreciation
and amortization
|
230 | 226 | 4 | 1.8 | % | |||||||||||
Credit
card and bank fees
|
195 | 214 | (19 | ) | (8.9 | %) | ||||||||||
Rent
and related overhead
|
186 | 194 | (8 | ) | (4.1 | %) | ||||||||||
Bad
debt
|
115 | - | 115 | n/a | ||||||||||||
Professional
fees
|
119 | 48 | 71 | 147.9 | % | |||||||||||
Other
general and administrative costs
|
30 | 47 | (17 | ) | (36.2 | %) | ||||||||||
Total
selling, general and administrative expenses
|
1,915 | 1,075 | 840 | 78.1 | % | |||||||||||
Operating
(Loss) Income
|
(21 | ) | 1,180 | (1,201 | ) | (101.7 | %) |
Other
Income (Expense):
|
||||||||||||||||
Interest
expense
|
(133 | ) | (199 | ) | 66 | 33.2 | % | |||||||||
Total
other expense
|
(133 | ) | (199 | ) | 66 | 33.2 | % | |||||||||
(Loss)
income before income tax benefit
|
$ | (154 | ) | $ | 981 | $ | (1,135 | ) | (115.7 | %) |
Optical
purchasing group revenues decreased approximately $1,979,000, or 12.6%, to
$13,728,000 for the three months ended September 30, 2009, as compared to
$15,707,000 for the three months ended September 30, 2008, and decreased
approximately $8,000,000 or 16.9%, to $39,252,000 for the nine months ended
September 30, 2009, as compared to $47,252,000 for the nine months ended
September 30, 2008. Individually, Combine’s revenues decreased
approximately $904,000, or 21.3%, to $3,335,000 for the three months ended
September 30, 2009, as compared to $4,239,000 for the three months ended
September 30, 2008, and decreased approximately $2,390,000, or 18.4%, to
$10,571,000 for the nine months ended September 30, 2009, as compared to
$12,961,000 for the nine months ended September 30, 2008. These
decreases were due to a generally weaker economy that began to affect Combine in
the 2nd half of
2008 and carried through the first nine months of 2009. As of
September 30, 2009, there were 824 active members, as compared to 859 active
members as of September 30, 2008. Individually, TOG revenues
decreased approximately $1,161,000, or 10.1%, to $10,307,000 for the three
months ended September 30, 2009, as compared to $11,468,000 for the three months
ended September 30, 2008, and decreased approximately $5,765,000, or 16.8%, to
$28,526,000 for the nine months ended September 30, 2009, as compared to
$34,291,000 for the nine months ended September 30, 2008. These
decreases were mainly due to the fluctuation of the foreign currency exchange
rate between the Canadian and US Dollar. The rate averaged $0.98 for
every Canadian Dollar during the first nine months of 2008, as compared to $0.85
for every Canadian Dollar during the first nine months of
2009. Additionally, similar to the U.S. economy, the Canadian economy
experienced a downturn beginning in the 2nd half of
2008.
Costs of
optical purchasing group sales decreased approximately $1,851,000, or 12.4%, to
$13,104,000 for the three months ended September 30, 2009, as compared to
$14,955,000 for the three months ended September 30, 2008, and decreased
approximately $7,639,000, or 17.0%, to $37,358,000 for the nine months ended
September 30, 2009, as compared to $44,997,000 for the nine months ended
September 30, 2008. Individually, Combine’s cost of sales decreased
approximately $884,000, or 22.1%, to $3,113,000 for the three months ended
September 30, 2009, as compared to $3,997,000 for the three months ended
September 30, 2008, and decreased approximately $2,269,000, or 18.7%, to
$9,876,000 for the nine months ended September 30, 2009, as compared to
$12,145,000 for the nine months ended September 30,
2008. Individually, TOG’s cost of sales decreased approximately
$967,000, or 8.8%, to $9,991,000 for the three months ended September 30, 2009,
as compared to $10,958,000 for the three months ended September 30, 2008, and
decreased approximately $5,489,000, or 16.7%, to $27,363,000 for the nine months
ended September 30, 2009, as compared to $32,852,000 for the nine months ended
September 30, 2008. Both of these decreases were a direct result of,
and proportionate to, the revenue fluctuations described above.
Operating
expenses of the optical purchasing group segment increased approximately
$763,000, or 216.8%, to $1,115,000 for the three months ended September 30,
2009, as compared to $352,000 for the three months ended September 30, 2008, and
increased approximately $840,000, or 78.1%, to $1,915,000 for the nine months
ended September 30, 2009, as compared to $1,075,000 for the nine months ended
September 30, 2008. The increases for the three and nine months ended
September 30, 2009 were mainly a result of a $700,000 non-cash compensation
charge incurred in September 2009. Combine's President may put back to the
Company 2,187,500 options at a put price per share of
$0.32. Additionally, Combine incurred bad debt on certain member
receivables during the three and nine months ended September 30, 2009 of
approximately $24,000 and $115,000, respectively, as certain members went out of
business due to the current economic conditions. Additionally,
Combine and TOG engaged the services of consultants ($10,000 per month) in May
2009 to enhance vendor programs designed to encourage greater spending by the
members while achieving greater profit margins. These increases were
offset, in part, by a decrease in certain of TOG’s operating expenses due to the
fluctuation of the foreign currency exchange rate as described
above.
Interest
expense related to the optical purchasing group segment decreased approximately
$15,000, or 25.4%, to $44,000 for the three months ended September 30, 2009, as
compared to $59,000 for the three months ended September 30, 2008, and decreased
approximately $66,000, or 33.2%, to $133,000 for the nine months ended September
30, 2009, as compared to $199,000 for the nine months ended September 30,
2008. These decreases were related to a decrease in the interest
rates on the borrowings under the Company’s Credit Facility with Manufacturers
and Traders Trust Corporation (“M&T”). Additionally, as Combine
continues to pay down its related party debt (the debt associated with the
purchase financing with the previous owner and current President of Combine),
the Company continues to incur less interest.
Franchise
Segment
For
the Three Months Ended September 30 (in thousands):
|
||||||||||||||||
2009
|
2008
|
$
Change
|
%
Change
|
|||||||||||||
Net
Revenues:
|
||||||||||||||||
Royalties
|
$ | 1,350 | $ | 1,481 | $ | (131 | ) | (8.8 | %) | |||||||
Franchise
and other related fees
|
55 | 1 | 54 | 5400.0 | % | |||||||||||
Net
revenues
|
1,405 | 1,482 | (77 | ) | (5.2 | %) | ||||||||||
Selling,
General and Administrative Expenses:
|
||||||||||||||||
Salaries
and related benefits
|
343 | 362 | (19 | ) | (5.2 | %) | ||||||||||
Professional
fees
|
127 | 165 | (38 | ) | (23.0 | %) | ||||||||||
Rent
and related overhead
|
92 | 77 | 15 | 19.5 | % | |||||||||||
Convention
and trade show expenses
|
36 | 123 | (87 | ) | (70.7 | %) | ||||||||||
Depreciation
|
67 | 71 | (4 | ) | (5.6 | %) | ||||||||||
Bad
debt
|
- | 39 | (39 | ) | n/a | |||||||||||
Other
general and administrative costs
|
83 | 48 | 35 | 72.9 | % | |||||||||||
Total
selling, general and administrative expenses
|
748 | 885 | (137 | ) | (15.5 | %) | ||||||||||
Operating
Income
|
657 | 597 | 60 | 10.1 | % |
Other
Income (Expense):
|
||||||||||||||||
Interest
on franchise notes receivable
|
7 | 5 | 2 | 40.0 | % | |||||||||||
Other
(expense) income, net
|
(30 | ) | 12 | (42 | ) | (350.0 | %) | |||||||||
Interest
expense, net
|
(11 | ) | (11 | ) | - | 0.0 | % | |||||||||
Total
other (expense) income
|
(34 | ) | 6 | (40 | ) | (666.7 | %) | |||||||||
Income
before income tax benefit
|
$ | 623 | $ | 603 | $ | 20 | 0.3 | % |
For
the Nine Months Ended September 30 (in thousands):
|
||||||||||||||||
2009
|
2008
|
$
Change
|
%
Change
|
|||||||||||||
Net
Revenues:
|
||||||||||||||||
Royalties
|
$ | 4,250 | $ | 4,727 | $ | (477 | ) | (10.1 | %) | |||||||
Franchise
and other related fees
|
195 | 161 | 34 | 21.1 | % | |||||||||||
Net
revenues
|
4,445 | 4,888 | (443 | ) | (9.1 | %) | ||||||||||
Selling,
General and Administrative Expenses:
|
||||||||||||||||
Salaries
and related benefits
|
1,055 | 1,154 | (99 | ) | (8.6 | %) | ||||||||||
Professional
fees
|
408 | 386 | 22 | 5.7 | % | |||||||||||
Rent
and related overhead
|
366 | 231 | 135 | 58.4 | % | |||||||||||
Convention
and trade show expenses
|
211 | 289 | (78 | ) | (27.0 | %) | ||||||||||
Depreciation
|
191 | 180 | 11 | 6.1 | % | |||||||||||
Other
general and administrative costs
|
320 | 188 | 132 | 70.2 | % | |||||||||||
Total
selling, general and administrative expenses
|
2,551 | 2,428 | 123 | 5.1 | % | |||||||||||
Operating
Income
|
1,894 | 2,460 | (566 | ) | (23.0 | %) |
Other
Income (Expense):
|
||||||||||||||||
Interest
on franchise notes receivable
|
19 | 19 | - | 0.0 | % | |||||||||||
Other
(expense) income, net
|
(65 | ) | 54 | (119 | ) | (220.4 | %) | |||||||||
Interest
expense, net
|
(37 | ) | (34 | ) | (3 | ) | (8.8 | %) | ||||||||
Total
other (expense) income
|
(83 | ) | 39 | (122 | ) | (312.8 | %) | |||||||||
Income
before income tax benefit
|
$ | 1,811 | $ | 2,499 | $ | (688 | ) | (27.5 | %) |
Franchise
royalties decreased approximately $131,000, or 8.8%, to $1,350,000 for the three
months ended September 30, 2009, as compared to $1,481,000 for the three months
ended September 30, 2008, and decreased approximately $477,000, or 10.1%, to
$4,250,000 for the nine months ended September 30, 2009, as compared to
$4,727,000 for the nine months ended September 30, 2008. Franchise
sales decreased approximately $1,354,000, or 6.7%, for the three months ended
September 30, 2009, as compared to the three months ended September 30, 2008,
and decreased approximately $3,842,000, or 6.2%, for the nine months ended
September 30, 2009, as compared to the nine months ended September 30,
2008. This led to decreased royalty income of approximately $108,000
and $307,000 for the three and nine months ended September 30, 2009,
respectively, mainly due to 7 fewer stores in operations during
2009. As of September 30, 2009 and 2008, there were 131 and 138
franchised stores in operation, respectively.
Franchise
and other related fees (which includes initial franchise fees, renewal fees,
conversion fees and store transfer fees) increased approximately $54,000, or
5400.0%, to $55,000 for the three months ended September 30, 2009, as compared
to $1,000 for the three months ended September 30, 2008, and increased
approximately $34,000, or 21.1%, to $195,000 for the nine months ended September
30, 2009, as compared to $161,000 for the nine months ended September 30,
2008. These fluctuations were primarily attributable to 9 franchise
agreement renewals ($91,000), 1 independent store conversion ($10,000), and 5
new franchise agreements ($90,000) in 2009, as compared to 4 franchise agreement
renewals ($40,000), 3 independent store conversions ($21,000), and 5 new
franchise agreements ($100,000) in 2008. In the future, franchise
fees are likely to fluctuate depending on the timing of franchise agreement
expirations, new store openings, franchise store transfers, and the approval of
the Franchise Disclosure Document, which is renewed annually in
April.
Operating
expenses of the franchise segment decreased approximately $137,000, or 15.5%, to
$748,000 for the three months ended September 30, 2009, as compared to $885,000
for the three months ended September 30, 2008, and increased approximately
$123,000, or 5.1%, to $2,551,000 for the nine months ended September 30, 2009,
as compared to $2,428,000 for the nine months ended September 30,
2008. The nine month increase was partially a result of increases in;
professional fees as the Company began utilizing outside counsel to administer
franchise agreement transactions (during fiscal 2008 the Company employed
in-house counsel to handle such work), rent and related overhead as the Company
reallocated certain expenses from the corporate segment to the franchise segment
as well as $60,000 due to a rent subsidy the Company is provided on certain
franchise locations during the first nine months of 2009, which was not provided
in the first nine months of 2008. Additionally, the franchise segment
incurred travel, training, and related costs associated with the installation of
the Company’s new Point-of-Sale computer system (initiated March
2008). These increases were offset, in part, by a decrease, for the
three months ended September 30, 2009, compared to the three month ended
September, 30, 2008, in certain salaries and related expenses as the Company
continued to stream-line certain operations, including franchise business
development to commission-based compensation, as well as a decrease in the costs
associated with the Company’s trade shows. In 2008, the Company
exhibited at both Vision Expo East and West, at a significant
cost. In 2009, the Company did not exhibit at either of those trade
shows.
Company
Store Segment
For
the Three Months Ended September 30 (in thousands):
|
||||||||||||||||
2009
|
2008
|
$
Change
|
%
Change
|
|||||||||||||
Net
Revenues:
|
||||||||||||||||
Retail
sales
|
$ | 551 | $ | 966 | $ | (415 | ) | (43.0 | %) | |||||||
Cost
of retail sales
|
162 | 240 | (78 | ) | (32.5 | %) | ||||||||||
Gross
margin
|
389 | 726 | (337 | ) | (46.4 | %) | ||||||||||
Selling,
General and Administrative Expenses:
|
||||||||||||||||
Salaries
and related benefits
|
332 | 422 | (90 | ) | (21.3 | %) | ||||||||||
Rent
and related overhead
|
261 | 308 | (47 | ) | (15.3 | %) | ||||||||||
Advertising
|
40 | 78 | (38 | ) | (48.7 | %) | ||||||||||
Other
general and administrative costs
|
29 | 46 | (17 | ) | (37.0 | %) | ||||||||||
Total
selling, general and administrative expenses
|
662 | 854 | (192 | ) | (22.5 | %) | ||||||||||
Operating
Loss
|
$ | (273 | ) | $ | (128 | ) | $ | (145 | ) | (113.3 | %) |
For
the Nine Months Ended September 30 (in thousands):
|
||||||||||||||||
2009
|
2008
|
$
Change
|
%
Change
|
|||||||||||||
Net
Revenues:
|
||||||||||||||||
Retail
sales
|
$ | 1,581 | $ | 3,062 | $ | (1,481 | ) | (48.4 | %) | |||||||
Cost
of retail sales
|
421 | 737 | (316 | ) | (42.9 | %) | ||||||||||
Gross
margin
|
1,160 | 2,325 | (1,165 | ) | (50.1 | %) | ||||||||||
Selling,
General and Administrative Expenses:
|
||||||||||||||||
Salaries
and related benefits
|
810 | 1,333 | (523 | ) | (39.2 | %) | ||||||||||
Rent
and related overhead
|
654 | 882 | (228 | ) | (25.9 | %) | ||||||||||
Advertising
|
100 | 211 | (111 | ) | (52.6 | %) | ||||||||||
Other
general and administrative costs
|
101 | 167 | (66 | ) | (39.5 | %) | ||||||||||
Total
selling, general and administrative expenses
|
1,665 | 2,593 | (928 | ) | (35.8 | %) | ||||||||||
Operating
Loss
|
$ | (505 | ) | $ | (268 | ) | $ | (237 | ) | (88.4 | %) |
Retail
sales for the Company store segment decreased approximately $415,000, or 43.0%,
to $551,000 for the three months ended September 30, 2009, as compared to
$966,000 for the three months ended September 30, 2008, and decreased
approximately $1,481,000, or 48.4%, to $1,581,000 for the nine months ended
September 30, 2009, as compared to $3,062,000 for the nine months ended
September 30, 2008. This decrease was mainly attributable to fewer
Company-owned store locations open during the comparable periods. As
of September 30, 2009, there were 5 Company-owned stores, as compared to 8
Company-owned stores (inclusive of one store operated by a franchisee under the
terms of a management agreement) as of September 30, 2008. Over the last 12 months,
the Company has closed one Company-owned location and franchised one other that
were part of the store count as of September 30, 2008. The two stores
generated retail sales of $900,000 for the nine months ended September 30, 2008,
as compared to $157,000 for the nine months ended September 30, 2009. On a same
store basis (for stores that operated as a Company-owned store during the
entirety of all of the periods ended September 30, 2009 and 2008), comparative
net sales decreased approximately $168,000, or 23.1%, to $559,000 for the three
months ended September 30, 2009, as compared to $727,000 for the three months
ended September 30, 2008, and decreased approximately $302,000, or 16.0%, to
$1,589,000 for the nine months ended September 30, 2009, as compared to
$1,891,000 for the nine months ended September 30, 2008. The decrease
in overall revenues for both periods were partially a result of the Company
reserving, beginning in January 2009, the total amount of managed care
receivables generated by such stores and recognizing the income on such
receivables when cash receipts are recovered. Additionally,
management believes that the decreases were a direct result of current economic
conditions, as well as the loss of a key optometrist in the 2nd quarter
of 2009, which led to reduced exam fee revenues in one of the comparable
locations.
The
Company-owned store’s gross profit margin, which calculation does not include
the exam fee revenues of $77,000 and $138,000 for the three months ended
September 30, 2009 and 2008, respectively, and $251,000 and $396,000 for the
nine months ended September 30, 2009 and 2008, respectively, generated by such
Company-owned stores, decreased by 4.4%, to 65.9%, for the three months ended
September 30, 2009, as compared to 70.3% for the three months ended September
30, 2008, and decreased by 3.5%, to 68.4% for the nine months ended September
30, 2009, as compared to 71.9% for the nine months ended September 30,
2008. The nine month decrease was due, in part, to the decrease in
managed care revenues as described above, as well as the effects of the current
economy, which has caused the Company to offer stronger discounts to customers,
thus, decreasing overall margins. These factors were, offset, in
part, by an improvement on gross profit margins is attributable to certain
vendor programs initiated during the 4th quarter
of 2008 that has helped improve the Company’s lab/lens
costs. Management continues to work to improve the profit margin
through increased training at the Company-store level and improved vendor
partnerships, among other things, and anticipates these changes will result in
improvements in the Company’s gross profit margin in the future. The
Company’s gross margin may, however, fluctuate in the future depending upon the
extent and timing of changes in the product mix in such stores, competitive
pricing, and certain one-time sales promotions.
Operating
expenses of the Company store segment decreased approximately $192,000, or
22.5%, to $662,000 for the three months ended September 30, 2009, as compared to
$854,000 for the three months ended September 30, 2008, and decreased
approximately $928,000, or 35.8%, to $1,665,000 for the nine months ended
September 30, 2009, as compared to $2,593,000 for the nine months ended
September 30, 2008. These decreases were mainly a result of having
fewer Company-owned stores in operation during the three and nine months ended
September 30, 2009. Additionally, the Company streamlined certain
store payroll coverage in its stores to reduced salaries and related benefits,
the loss of the optometrist as noted above, and enhanced the media plans for
each store, which reduced advertising costs on a by-store basis.
VisionCare
of California Segment
For
the Three Months Ended September 30 (in thousands):
|
||||||||||||||||
2009
|
2008
|
$
Change
|
%
Change
|
|||||||||||||
Net
Revenues:
|
||||||||||||||||
Membership
fees
|
$ | 893 | $ | 928 | $ | (35 | ) | (3.8 | %) | |||||||
Selling,
General and Administrative Expenses:
|
||||||||||||||||
Salaries
and related benefits
|
793 | 804 | (11 | ) | (1.4 | %) | ||||||||||
Rent
and related overhead
|
42 | 36 | 6 | 16.7 | % | |||||||||||
Other
general and administrative costs
|
51 | 43 | 8 | 18.6 | % | |||||||||||
Total
selling, general and administrative expenses
|
886 | 883 | 3 | 0.3 | % | |||||||||||
Operating
Income (Loss)
|
7 | 45 | (38 | ) | (84.4 | %) |
Other
Income (Expense):
|
||||||||||||||||
Other
income
|
5 | (2 | ) | 7 | 350.0 | % | ||||||||||
Total
other income
|
5 | (2 | ) | 7 | 350.0 | % | ||||||||||
Income
before income tax benefit
|
$ | 12 | $ | 43 | $ | (31 | ) | (72.1 | %) |
For
the Nine Months Ended September 30 (in thousands):
|
||||||||||||||||
2009
|
2008
|
$
Change
|
%
Change
|
|||||||||||||
Net
Revenues:
|
||||||||||||||||
Membership
fees
|
$ | 2,640 | $ | 2,648 | $ | (8 | ) | (0.3 | %) | |||||||
Selling,
General and Administrative Expenses:
|
||||||||||||||||
Salaries
and related benefits
|
2,344 | 2,387 | (43 | ) | (1.8 | %) | ||||||||||
Rent
and related overhead
|
122 | 109 | 13 | 11.9 | % | |||||||||||
Other
general and administrative costs
|
150 | 110 | 40 | 36.4 | % | |||||||||||
Total
selling, general and administrative expenses
|
2,616 | 2,606 | 10 | 0.4 | % | |||||||||||
Operating
Income (Loss)
|
24 | 42 | (18 | ) | (42.9 | %) |
Other
Income (Expense):
|
||||||||||||||||
Other
income
|
17 | 6 | 11 | 183.3 | % | |||||||||||
Total
other income
|
17 | 6 | 11 | 183.3 | % | |||||||||||
Income
before income tax benefit
|
$ | 41 | $ | 48 | $ | (7 | ) | (14.6 | %) |
Revenues
generated by the Company’s wholly-owned subsidiary, VisionCare of California,
Inc. (“VCC”), a specialized health care maintenance organization licensed by the
State of California Department of Managed Health Care, decreased approximately
$35,000, or 3.8%, to $893,000 for the three months ended September 30, 2009, as
compared to $928,000 for the three months ended September 30, 2008, and
decreased approximately $8,000, or 0.3%, to $2,640,000 for the nine months ended
September 30, 2009, as compared to $2,648,000 for the nine months ended
September 30, 2008. The decrease for the nine months ended September
30, 2009 is related to SFSE franchise sales being down for the comparable
period.
Operating
expenses of the VCC segment remained consistent with last year’s expenses,
increasing only $3,000, or 0.3%, to $886,000 for the three months ended
September 30, 2009, as compared to $883,000 for the three months ended September
30, 2008, and increased approximately $10,000, or 0.4%, to $2,616,000 for the
nine months ended September 30, 2009, as compared to $2,606,000 for the nine
months ended September 30, 2008. The increase for the nine months
ended September 30, 2009 related to increased doctor salaries and related
benefits paid by VCC.
Corporate
Overhead Segment
For
the Three Months Ended September 30 (in thousands):
|
||||||||||||||||
2009
|
2008
|
$
Change
|
%
Change
|
|||||||||||||
Selling,
General and Administrative Expenses:
|
||||||||||||||||
Salaries
and related benefits
|
$ | 202 | $ | 436 | $ | (234 | ) | (53.7 | %) | |||||||
Professional
fees
|
195 | 134 | 61 | 45.5 | % | |||||||||||
Insurance
|
28 | 66 | (38 | ) | (57.6 | %) | ||||||||||
Rent
and related overhead
|
26 | (29 | ) | 55 | 189.7 | % | ||||||||||
Other
general and administrative costs
|
- | 66 | (66 | ) | 100.0 | % | ||||||||||
Total
selling, general and administrative expenses
|
451 | 673 | (222 | ) | (33.0 | %) | ||||||||||
Operating
Loss
|
$ | (451 | ) | $ | (673 | ) | $ | 222 | 33.0 | % |
For
the Nine Months Ended September 30 (in thousands):
|
||||||||||||||||
2009
|
2008
|
$
Change
|
%
Change
|
|||||||||||||
Selling,
General and Administrative Expenses:
|
||||||||||||||||
Salaries
and related benefits
|
$ | 922 | $ | 1,323 | $ | (401 | ) | (30.3 | %) | |||||||
Professional
fees
|
481 | 436 | 45 | 10.3 | % | |||||||||||
Insurance
|
148 | 193 | (45 | ) | (23.3 | %) | ||||||||||
Rent
and related overhead
|
77 | 92 | (15 | ) | (16.3 | %) | ||||||||||
Compensation
expense
|
- | 46 | (46 | ) | (100.0 | %) | ||||||||||
Other
general and administrative costs
|
12 | 167 | (155 | ) | (92.8 | %) | ||||||||||
Total
selling, general and administrative expenses
|
1,640 | 2,257 | (617 | ) | (27.3 | %) | ||||||||||
Operating
Loss
|
$ | (1,640 | ) | $ | (2,257 | ) | $ | 617 | 27.3 | % |
There
were no revenues generated by the corporate overhead segment.
Operating
expenses decreased approximately $222,000, or 33.0%, to $451,000 for the three
months ended September 30, 2009, as compared to $673,000 for the three months
ended September 30, 2008, and decreased approximately $617,000, or 27.3%, to
$1,640,000 for the nine months ended September 30, 2009, as compared to
$2,257,000 for the nine months ended September 30, 2008. These
decreases were due in part to decreases to salaries and related benefits of
$234,000 and $401,000, respectively, due, in part, to decreases, in May 2008, in
the Company’s medical and dental insurance premiums and the utilization, in
January 2009, of an outside attorney to handle all franchise agreement
transactions (included in professional fees). During fiscal 2008, the
Company utilized an “in-house” counsel, which expenses were included in salaries
and related benefits. Additionally, the Company reallocated certain
rent and related overhead expenses to the franchise segment due to certain
overhead reductions that occurred in the first quarter of 2009, the Company
incurred compensation expense of approximately $41,000 in May 2008 due to the
granting of stock options to the directors of the Company (there were no such
grants during the first nine months of 2009), and the Company absorbed the
entire increase in medical and dental benefits of VCC in the first quarter of
2008.
Other
Segment
For
the Three Months Ended September 30 (in thousands):
|
||||||||||||||||
2009
|
2008
|
$
Change
|
%
Change
|
|||||||||||||
Net
Revenues:
|
||||||||||||||||
Commissions
|
$ | 6 | $ | 20 | $ | (14 | ) | (70.0 | %) | |||||||
Other
|
6 | 10 | (4 | ) | (40.0 | %) | ||||||||||
Net
revenues
|
12 | 30 | (18 | ) | (60.0 | %) | ||||||||||
Selling,
General and Administrative Expenses:
|
||||||||||||||||
Salaries
and related benefits
|
12 | 12 | - | n/a | ||||||||||||
Advertising
|
- | 4 | (4 | ) | (100.0 | %) | ||||||||||
Other
general and administrative costs
|
2 | 5 | (3 | ) | (60.0 | %) | ||||||||||
Total
selling, general and administrative expenses
|
14 | 21 | (7 | ) | (33.3 | %) | ||||||||||
Operating
(Loss) Income
|
$ | (2 | ) | $ | 9 | $ | (11 | ) | (122.2 | %) |
For
the Nine Months Ended September 30 (in thousands):
|
||||||||||||||||
2009
|
2008
|
$
Change
|
%
Change
|
|||||||||||||
Net
Revenues:
|
||||||||||||||||
Commissions
|
$ | 9 | $ | 89 | $ | (80 | ) | (90.0 | %) | |||||||
Other
|
6 | 29 | (23 | ) | (79.3 | %) | ||||||||||
Net
revenues
|
15 | 118 | (103 | ) | (87.3 | %) | ||||||||||
Selling,
General and Administrative Expenses:
|
||||||||||||||||
Salaries
and related benefits
|
13 | 30 | (17 | ) | (56.7 | %) | ||||||||||
Advertising
|
- | 95 | (95 | ) | (100.0 | %) | ||||||||||
Other
general and administrative costs
|
3 | 42 | (39 | ) | (92.9 | %) | ||||||||||
Total
selling, general and administrative expenses
|
16 | 167 | (151 | ) | (90.4 | %) | ||||||||||
Operating
Loss
|
$ | (1 | ) | $ | (49 | ) | $ | 48 | 98.0 | % |
Revenues
generated by the other segment decreased approximately $103,000, or 87.3%, to
$15,000 for the nine months ended September 30, 2009, as compared to $118,000
for the nine months ended September 30, 2008. The Company began
generating commission revenues in January 2008 under operations of the Company
that do not fall within one of the other operating segments. Those
operations ceased during the 2nd half of
fiscal 2008.
Operating
expenses of the other segment decreased approximately $151,000, or 90.4%, to
$16,000 for the nine months ended September 30, 2009, as compared to $167,000
for the nine months ended September 30, 2008. The decrease was due to
the cease in operations as described above.
Use
of Non-GAAP Performance Indicators
The
following section expands on the financial performance of the Company detailing
the Company’s EBITDA. EBITDA is calculated as net earnings before
interest, taxes, depreciation and amortization. The Company refers to
EBITDA because it is a widely accepted financial indicator of a company’s
ability to service or incur indebtedness.
EBITDA
does not represent cash flow from operations as defined by generally accepted
accounting principles, is not necessarily indicative of cash available to fund
all cash flow needs, should not be considered an alternative to net income or to
cash flow from operations (as determined in accordance with GAAP) and should not
be considered an indication of our operating performance or as a measure of
liquidity. EBITDA is not necessarily comparable to similarly titled
measures for other companies.
EBITDA
Reconciliation
For
the Three Months Ended September 30 (in thousands):
|
||||||||||||||||
2009
|
2008
|
$
Change
|
%
Change
|
|||||||||||||
EBITDA
Reconciliation:
|
||||||||||||||||
Net
(loss) income
|
$ | (637 | ) | $ | 219 | $ | (856 | ) | (390.9 | %) | ||||||
Interest,
net
|
55 | 70 | (15 | ) | (21.4 | %) | ||||||||||
Taxes
|
11 | (24 | ) | 35 | 145.8 | % | ||||||||||
Depreciation
and amortization
|
162 | 170 | (8 | ) | (4.7 | %) | ||||||||||
EBITDA
|
$ | (409 | ) | $ | 435 | $ | (844 | ) | (194.0 | %) |
For
the Nine Months Ended September 30 (in thousands):
|
||||||||||||||||
2009
|
2008
|
$
Change
|
%
Change
|
|||||||||||||
EBITDA
Reconciliation:
|
||||||||||||||||
Net
(loss) income
|
$ | (470 | ) | $ | 1,243 | $ | (1,713 | ) | (137.8 | %) | ||||||
Interest,
net
|
170 | 233 | (63 | ) | (27.0 | %) | ||||||||||
Taxes
|
22 | (289 | ) | 311 | 107.6 | % | ||||||||||
Depreciation
and amortization
|
483 | 483 | - | 0.0 | % | |||||||||||
EBITDA
|
$ | 205 | $ | 1,670 | $ | (1,465 | ) | (87.7 | %) |
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 approximately $700,000 and $0 for the three months ended September 30, 2009
and 2008, respectively, and $700,000 and $46,000 for the nine months ended
September 30, 2009 and 2008, respectively.
Commencing
on September 29, 2010, and expiring September 28, 2016, Combine’s President may
put back to the Company 2,187,500 options at a put price per share of $0.32,
which would result in a charge to share-based compensation expense of
$700,000. During the three and nine months ended September 30, 2009,
the Company recognized such charge.
Management
has provided an EBITDA calculation to provide a greater level of understanding
of the Company’s performance had it not been for certain significant non-cash
charges, many of which were incurred as a result of the acquisitions of Combine
and TOG. These charges, such as depreciation and amortization, and
interest expense, are included in selling, general and administrative expenses
on the Consolidated Condensed Statements of Operations.
Liquidity
and Capital Resources
As of
September 30, 2009, the Company had a working capital deficit of $4,152,000 due,
in part, to the classification of the Company’s outstanding principal on the
M&T line as short-term debt (approximately $4,957,000). The
Company had cash on hand of $1,763,000. The outstanding principal
under the Credit Facility is due on April 1, 2010. The Company’s
ability to meet its obligations will be dependent upon its ability to generate
future profitability and/or its ability to obtain additional financing or obtain
an extension of the expiration of the Credit Facility from M&T, however, the
Company does not know if it will be able to extend or refinance the debt and
cannot guarantee that extending or refinancing the debt will be on terms
favorable to the Company.
During
the nine months ended September 30, 2009, cash flows provided by operating
activities were $262,000. This was principally due to net income and
other non-cash expenses of $1,011,000 and an increase in optical purchasing
group payables of $1,425,000 due to increased optical purchasing group
sales. This was offset, in part, by an increase in optical purchasing
group receivables of $1,532,000, also due to increased optical purchasing group
sales, as well as an increase in franchise receivables of $290,000 and a
decrease in accounts payable and accrued expenses of $189,000, partially due to
the decrease in the number of Company-owned stores in operation leading to a
reduction in product purchased, and the payment of approximately $501,000 of
legal invoices outstanding as of December 31, 2008 related to the For Eyes
litigation. The Company hopes to continue to improve its operating
cash flows through the continued implementation of the Company’s Point-of-Sales
(“POS”) system to improve the franchise sales reporting process, the addition of
new franchise locations, its current and future acquisitions, new vendor
programs, and continued efficiencies as it relates to corporate overhead
expenses.
For the
nine months ended September 30, 2009, cash flows used in investing activities
were $28,000 mainly due to the issuance of new promissory notes (including
approximately $67,000 to finance the sale of a franchise location) and capital
expenditures related to improvements to the Company’s IT infrastructure and the
implementation of the POS system. Management does anticipate certain
capital expenditures over the next 12 months, including expenditures to continue
to implement the POS system within the Franchise community, and enhance the
Company’s technology infrastructure and related internal
controls. Such improvements to the IT infrastructure could include
the relocation of Combine’s operations from Florida to New York, which could
result in capital expenditures of approximately
$100,000. Additionally, management does not know the extent of the
legal costs associated with the continuance of litigation in defending one of
the Company’s trademarks; however, the Company is in settlement discussions with
its adversary, which settlement could reduce future litigation costs, provided,
however, that there can be no assurance that the litigation will be settled, or,
if it is settled, that the terms of such settlement will be favorable to the
Company.
For the
nine months ended September 30, 2009, cash used in financing activities was
$688,000 due to additional borrowings under the Company’s Credit Facility of
$150,000, offset by the repayment of the Company’s related party borrowings and
repayment on the Credit Facility of $838,000. In April 2010, the
Company’s Credit Facility will expire and all outstanding borrowings will be
due. The Company is currently exploring certain options available to
it to extend or refinance, prior to April 2010, provided, however, that the
Company does not know if it will be able to extend or refinance the debt and
cannot guarantee that extending or refinancing the debt will be on terms
favorable to the Company.
The
Company has been able to utilize the earnings from the operations of Combine to
support the repayment of its related party debt with the previous owner and
current President of Combine (“COM President”). Management believes
it will continue to be able to utilize the earnings of Combine to repay the
remaining amounts due, however, commencing on September 29, 2010, and expiring
September 28, 2016; COM President may put back to the Company 2,187,500 options
at a put price per share of $0.32 ($700,000). The Company believes it
will need additional financing should COM President decide to put back such
options and is currently exploring certain options available to make such
payment. However, there can be no assurance that the Company will
find financing or that such financing will be on terms favorable to the
Company.
Credit
Facility
On August
8, 2007, the Company entered into a Revolving Line of Credit Note and Credit
Agreement, as amended (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, and subsequently
amended on November 11, 2009 to $5,750,000, to be used for general working
capital needs and certain permitted acquisitions, which is secured by
substantially all of the assets of the Company, other than the assets of
Combine, which assets are used to secure the repayment of Combine’s
debt. The Credit Facility is set to mature on April 1,
2010. All sums drawn by the Company under the Credit Facility are
repayable, interest only, on a monthly basis, commencing on the first day of
each month during the term of the Credit Facility, calculated at the variable
rate of three hundred (300) basis points in excess of LIBOR, and all principal
drawn by the Company is payable on April 1, 2010. The Company is
currently exploring certain options available to it to extend or refinance,
prior to April 2010, provided, however, that the Company does not know if it
will be able to extend or refinance the debt and cannot guarantee that extending
or refinancing the debt will be on terms favorable to the Company.
As of
September 30, 2009, the Company had outstanding borrowings of $4,956,854 under
the Credit Facility, which amount was included in Short-term Debt on the
accompanying Consolidated Condensed Balance Sheet and was utilizing $750,000 of
the Credit Facility to hold letters of credit in favor of two key vendors of
Combine to ensure payment of any outstanding invoices not paid by
Combine. Additionally, as of November 16, 2009, the Company had
$43,146 available under the Credit Facility for future borrowings.
The
Credit Facility includes various financial covenants including minimum net
worth, maximum funded debt and debt service ratio requirements. As of
September 30, 2009, the Company was not in compliance with one of the financial
covenants. However, M&T granted the Company a waiver of the
covenant as of November 11, 2009.
Off-Balance
Sheet Arrangements
An
off-balance sheet arrangement is any contractual arrangement involving an
unconsolidated entity under which a company has (a) made guarantees,
(b) a retained or a contingent interest in transferred assets, (c) any
obligation under certain derivative instruments or (d) any obligation under
a material variable interest in an unconsolidated entity that provides
financing, liquidity, market risk, or credit risk support to the company, or
engages in leasing, hedging, or research and development services within the
company.
The
Company does not have any off-balance sheet financing or unconsolidated variable
interest entities, with the exception of certain guarantees on
leases. The Company refers the reader to the Notes to the
Consolidated Condensed Financial Statements included in Item 1 of this Quarterly
Report for information regarding the Company’s lease guarantees.
Management’s
Discussion of Critical Accounting Policies and Estimates
High-quality
financial statements require rigorous application of high-quality accounting
policies. Management believes that its policies related to revenue
recognition, deferred tax assets, legal contingencies, impairment on goodwill
and intangible assets, and allowances on franchise, notes and other receivables
are critical to an understanding of the Company’s Consolidated Condensed
Financial Statements because their application places the most significant
demands on management’s judgment, with financial reporting results relying on
estimation about the effect of matters that are inherently
uncertain.
Management’s
estimate of the allowances on receivables is based on historical sales,
historical loss levels, and an analysis of the collectability of individual
accounts. To the extent that actual bad debts differed from management's
estimates by 10 percent, consolidated net income would be an estimated $22,000
and $6,000 higher/lower for the nine months ended September 30, 2009 and 2008,
respectively, depending upon whether the actual write-offs are greater or
less than estimated.
Management’s
estimate of the valuation allowance on deferred tax assets is based on whether
it is more likely than not that the Company’s net operating loss carry-forwards
will be utilized. Factors that could impact estimated utilization of the
Company's net operating loss carry-forwards are the success of its stores and
franchisees, and the optical purchasing groups, the Company's operating
efficiencies and the effects of Section 382 of the Internal Revenue Code of
1986, as amended, based on certain changes in ownership that have occurred, or
could occur in the future. To the extent that management lowered its
valuation allowance on deferred tax assets by 10 percent, consolidated net
income would be an estimated $1,463,000 and $1,534,000 higher/lower for the nine
months ended September 30, 2009 and 2008, respectively.
The
Company recognizes revenues in accordance with SEC Staff Accounting Bulletin
(“SAB”) No. 104, “Revenue Recognition.” Accordingly, revenues are
recorded when persuasive evidence of an arrangement exists, delivery has
occurred or services have been rendered, the Company’s price to the buyer is
fixed or determinable, and collectability is reasonably assured. To
the extent that collectability of royalties and/or interest on franchise notes
is not reasonably assured, the Company recognizes such revenues when the cash is
received. To the extent that revenues that were recognized on a cash
basis were recognized on an accrual basis, consolidated net income would be an
estimated $206,000 and $196,000 higher for the nine months ended September 30,
2009 and 2008, respectively.
Management’s
performs an annual impairment analysis to determine the fair value of goodwill
and certain intangible assets. In determining the fair value of such
assets, management uses a variety of methods and assumptions including a
discounted cash flow analysis along with various qualitative
tests. To the extent that management needed to impair its goodwill or
certain intangible assets by 10 percent, consolidated net income would be an
estimated $720,000 and $723,000 lower for the nine months ended September 30,
2009 and 2008, respectively.
The
quarterly report does not include information for Item 3 pursuant to the rules
of the Securities and Exchange Commission that permit “smaller reporting
companies” to omit such information.
Disclosure
Controls and Procedures
We
maintain disclosure controls and procedures (as defined in Exchange Act Rule
13a-15(e)) that are designed to ensure that information required to be disclosed
in our Exchange Act of reports is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission’s
rules and forms, and that such information is accumulated and communicated to
management, including our principal executive officer and principal financial
officer, as appropriate, to allow timely decisions regarding required
disclosure.
As
required by Exchange Act Rule 13a-15(b), as of the end of the period covered by
this Quarterly Report, with the participation of our principal executive officer
and principal financial officer, we evaluated the effectiveness of our
disclosure controls and procedures. Based on this evaluation, our
principal executive officer and principal financial officer concluded that our
disclosure controls and procedures were effective as of September 30,
2009.
Changes
in Internal Control over Financial Reporting
There was
no change in our internal control over financial reporting, identified in
connection with the evaluation required by paragraph (d) of Rule 13a-15 of the
Exchange Act, that occurred during our most recently completed fiscal quarter
that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
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. In
September 2009, this action was settled together with the action brought against
Sterling Optical of Crossgates Mall, Inc. (discussed in the paragraph
below). The terms of the settlement included the payment, by the
Company to Pyramid Management Group, Inc., of an aggregate sum of $135,000, of
which $15,000 was paid in both September and October 2009, with the remaining
$105,000 to be paid in 7 equal, successive monthly installments of
$15,000. The parties also exchanged mutual general
releases.
In
October 2008, Crossgates Mall Company Newco, LLC commenced an action against the
Company’s subsidiary, Sterling Optical of Crossgates Mall, Inc., in the Supreme
Court of the State of New York, Onondaga County, alleging, among other things,
that the Company had breached its obligations under its lease for the former
Sterling Optical store located at Crossgates Mall, New York. In
September 2009, this action was settled, the details of which are described in
the paragraph above.
There
have been no material changes to the disclosure related to risk factors made in
the Company Annual Report on Form 10-K for the year ended December 31,
2008.
None.
None.
None.
The
Company entered into an agreement, dated as of November 11, 2009 (the
“Amendment”) with Manufacturers and Traders Trust Corporation (“M&T”) to
amend the terms of its Revolving Line of Credit Note and Credit Agreement (the
“Credit Agreement”), originally dated as of August 7, 2007, as amended as of
November 14, 2008 and further amended as of April 1, 2009. Pursuant
to the Amendment, M&T granted a waiver of one of the Company’s financial
covenants contained in the Credit Agreement with respect to required debt ratios
for the third quarter of 2009. In exchange for such waiver, the
Company paid a waiver fee of $5,000 to M&T.
In
addition, the parties executed an Allonge, dated as of November 11, 2009, to the
Note referenced in the Credit Agreement, pursuant to which the original
principal amount due under the Credit Agreement was reduced from $6,000,000 to
$5,750,000. All other terms of the Credit Agreement remain in full
force and effect.
The
Company and certain of its subsidiaries, Combine Buying Group, Inc., OG
Acquisition, Inc. and 1725758 Ontario Inc. d/b/a The Optical Group
(collectively, the “Subsidiaries”) (i) reaffirmed their respective Security
Agreements and Assignment Agreements with M&T, pursuant to which the Company
and the Subsidiaries granted M&T a security interest in substantially all of
their respective assets and (ii) reaffirmed their Guarantees, pursuant to which
the Subsidiaries guaranteed the performance of the Company’s obligations to
M&T with respect to the Credit Agreement.
The
foregoing descriptions do not purport to be complete and are qualified in their
entirety by reference to the full text of the documents filed as Exhibits 10.1
through 10.5 to this Quarterly Report on Form 10-Q which are incorporated by
reference herein.
3.1
|
Restated
Certificate of Incorporation of Sterling Vision, Inc., filed on December
20, 1995 (incorporated by reference to Exhibit 3.1 to Sterling Vision,
Inc.’s Annual Report on Form 10-K/A for the year ended December 31,
1995).
|
3.2
|
Certificate
of Amendment of the Certificate of Incorporation of Sterling Vision, Inc.,
filed on January 26, 2000 (incorporated by reference to Exhibit 3.3 to
Sterling Vision, Inc.’s Annual Report on Form 10-K for the fiscal year
ended December 31, 2002, Securities and Exchange Commission (“SEC”) File
Number 001-14128, Film Number
03630359).
|
3.3
|
Certificate
of Amendment of the Certificate of Incorporation of Sterling Vision, Inc.,
filed on February 8, 2000 (incorporated by reference to Exhibit 10.94 to
Sterling Vision, Inc.’s Current Report on Form 8-K, dated February 8,
2000, SEC File Number 001-14128, Film Number
549404).
|
3.4
|
Certificate
of Amendment of the Certificate of Incorporation of Sterling Vision, Inc.,
filed on February 10, 2000 (incorporated by reference to Exhibit 10.96 to
Sterling Vision, Inc.’s Current Report on Form 8-K, dated February 8,
2000, SEC File Number 001-14128, Film Number
549404).
|
3.5
|
Certificate
of Amendment of the Certificate of Incorporation of Sterling Vision, Inc.,
filed on April 17, 2000 (incorporated by reference to Exhibit 3.6 to
Sterling Vision, Inc.’s Annual Report on Form 10-K for the fiscal year
ended December 31, 2002, SEC File Number 001-14128, Film Number
03630359).
|
3.6
|
Certificate
of Amendment of the Certificate of Incorporation of Emerging Vision, Inc.,
filed on July 15, 2002 (incorporated by reference to Exhibit 3.7 to
Emerging Vision, Inc.’s Annual Report on Form 10-K for the fiscal year
ended December 31, 2002, SEC File Number 001-14128, Film Number
03630359).
|
3.7
|
Amended
and Restated By-Laws of Sterling Vision, Inc., dated December 18, 1995
(incorporated by reference to Exhibit 3.2 to Sterling Vision, Inc.’s
Annual Report on Form 10-K/A for the fiscal year ended December 31,
1995).
|
3.8
|
First
Amendment to Amended and Restated By-Laws of Emerging Vision, Inc.
(incorporated by reference to Exhibit 3.8 to the Company’s Current Report
in Form 8-K, dated December 31, 2003, SEC File Number 001-14128, Film
Number 04610079).
|
32.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned hereunto duly authorized.
EMERGING VISION, INC.
(Registrant)
BY:
/s/ 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 16, 2009