form10q.htm
 
 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark one)
[X]
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 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
   
   
 
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PART I - FINANCIAL INFORMATION

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.


 
 

 

EMERGING VISION, INC. AND SUBSIDIARIES
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