**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 March 31, 2007 |
|-------|---------------------------------------------------------------------------------------------------------------------------------------|

 

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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

| Large accelerated filer__ | Accelerated filer__ | Non accelerated filer  X |
|---------------------------|---------------------|--------------------------|

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): 

| Yes __ | No  X |
|--------|-------|

 

 

1

 

 

 

 

As of May 15, 2007, there were 70,323,698 outstanding shares of the Issuer’s Common Stock, par value $0.01 per share.

 

 

2

 

 

 

 

**PART I - FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements**

 

| **EMERGING VISION, INC. AND SUBSIDIARIES**

**CONSOLIDATED CONDENSED BALANCE SHEETS**

**(In Thousands, Except Share Data)** |
|------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                         | ASSETS |   | **March 31,****** | ** ** | **December 31,****** |
|                                                                                                                         |   |   | **2007****** | ** ** | **2006****** |
|                                                                                                                         |   | **(unaudited)****** |   | **(audited)****** |
| Current assets:                                                                                                              |   |   |   |   |
|                                                                                                                         | Cash and cash equivalents | $ | 1,038 | $ | 1,289 |
|                                                                                                                         | Franchise receivables, net of allowance of $136 and $110, respectively |   | 1,985 |   | 1,620 |
|                                                                                                                         | Optical purchasing group receivables, net of allowance of $40 and $40, respectively |   |  

2,364 |   |  

1,914 |
|                                                                                                                         | Other receivables, net of allowance of $2 and $2, respectively |   | 472 |   | 312 |
|                                                                                                                         | Current portion of franchise notes receivable, net of allowance of $44 and $44, respectively |   |  

89 |   |  

79 |
|                                                                                                                         | Inventories, net |   | 479 |   | 431 |
|                                                                                                                         | Prepaid expenses and other current assets |   | 772 |   | 648 |
|                                                                                                                         | Deferred tax assets, current portion |   | 599 |   | 600 |
|                                                                                                                         | Total current assets |   | 7,798 |   | 6,893 |
|                                                                                                                         |   |   |   |   |   |
| Property and equipment, net                                                                                                  |   | 1,031 |   | 923 |
| Franchise notes receivable, net of allowance of $6 and $5, respectively                                                      |   | 222 |   | 214 |
| Deferred tax asset, net of current portion                                                                                   |   | 891 |   | 800 |
| Goodwill, net                                                                                                                |   | 2,544 |   | 2,745 |
| Intangible assets, net                                                                                                       |   | 782 |   | 808 |
| Other assets                                                                                                                 |   | 275 |   | 214 |
|                                                                                                                         | Total assets | $ | 13,543 | $ | 12,597 |
|                                                                                                                         |   |   |   |   |   |

 

|                                             | LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                                                   |   |               |   |               |
|--------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|--------|--------------------|
|                                             |                                                                                                                                                                                        |   |               |   |
| Current liabilities:                             |                                                                                                                                                                                        |   |               |   |
|                                             | Accounts payable and accrued liabilities                                                                                                                                                    | $      | 4,750              | $      | 4,595              |
|                                             | Optical purchasing group payables                                                                                                                                                           |   | 2,154              |   | 1,760              |
|                                             | Accrual for store closings                                                                                                                                                                  |   | 37                 |   | 37                 |
|                                             | Short-term debt                                                                                                                                                                             |   | 991                |   | 991                |
|                                             | Related party obligations                                                                                                                                                                   |   | 180                |   | 183                |
|                                             | Total current liabilities                                                                                                                                                                   |   | 8,112              |   | 7,566              |
|                                             |                                                                                                                                                                                        |   |               |   |               |
| Long-term debt                                   |                                                                                                                                                                                        | 1,158  |               | 1,185  |
| Related party borrowings, net of current portion |                                                                                                                                                                                        | -      |               | 8      |
| Franchise deposits and other liabilities         |                                                                                                                                                                                        | 487    |               | 487    |
|                                             |                                                                                                                                                                                        |   |               |   |               |
| 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; 70,506,035 share issued and 70,323,698 shares outstanding                                                           |   |  

705        |   |  

705        |
|                                             | Treasury stock, at cost, 182,337 shares                                                                                                                                                     |   | (204)              |   | (204)              |
|                                             | Additional paid-in capital                                                                                                                                                                  |   | 127,066            |   | 127,062            |
|                                             | Accumulated deficit                                                                                                                                                                         |   | (123,855)          |   | (124,286)          |
|                                             | Total shareholders' equity                                                                                                                                                                  |   | 3,786              |   | 3,351              |
|                                             | Total liabilities and shareholders' equity                                                                                                                                                  | $      | 13,543             | $      | 12,597             |

 

 

The accompanying notes are an integral part of these consolidated condensed financial statements.

 

 

3

 

 

 

 

 

| **EMERGING VISION, INC. AND SUBSIDIARIES**

**CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)**

**(In Thousands, Except Per Share Data)**

  |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                       | ** ** | **For the Three Months Ended March 31,** |
|                                                                                                                                                       | ** ** | **2007** | ** ** | **2006** |
|                                                                                                                                                       |   |   |   |   |
| **Revenues**:                                                                                                                                              |   |   |   |   |
| Net sales                                                                                                                                                  | $ | 2,206 | $ | 1,898 |
| Optical purchasing group sales                                                                                                                             |   | 4,325 |   | - |
| Franchise royalties                                                                                                                                        |   | 1,741 |   | 1,753 |
| Other franchise related fees                                                                                                                               |   | 53 |   | 85 |
| **Total revenue******                                                                                                                                      |   | 8,325 |   | 3,736 |
|                                                                                                                                                       |   |   |   |   |
| **Costs and expenses:******                                                                                                                                |   |   |   |   |
| Cost of sales                                                                                                                                              |   | 4,321 |   | 248 |
| Selling, general and administrative expenses                                                                                                               |   | 3,650 |   | 2,990 |
| **Total costs and expenses******                                                                                                                           |   | 7,971 |   | 3,238 |
|                                                                                                                                                       |   |   |   |   |
| **Operating income******                                                                                                                                   |   | 354 |   | 498 |
|                                                                                                                                                       |   |   |   |   |
| **Other (expense) income:******                                                                                                                            |   |   |   |   |
| Interest on franchise notes receivable                                                                                                                     |   | 11 |   | 11 |
| Gain on sale of company-owned store to franchisee                                                                                                          |   | - |   | 218 |
| Other income                                                                                                                                               |   | 50 |   | 11 |
| Interest expense                                                                                                                                           |   | (65) |   | (10) |
| **Total other (expense) income******                                                                                                                       |   | (4) |   | 230 |
|                                                                                                                                                       |   |   |   |   |
| **Income from continuing operations before income tax benefit******                                                                                        |   | 350 |   | 728 |
| **Income tax benefit******                                                                                                                                 |   | 81 |   | 1,261 |
| **Income from continuing operations******                                                                                                                  |   | 431 |   | 1,989 |
|                                                                                                                                                       |   |   |   |   |
| **(Loss) from discontinued operations before income tax benefit******                                                                                      |   | - |   | (41) |
| **Income tax benefit******                                                                                                                                 |   | - |   | 16 |
| **(Loss) from discontinued operations******                                                                                                                |   | - |   | (25) |
| ** **                                                                                                                                                 |   |   |   |   |
| **Net Income******                                                                                                                                         | $ | 431 | $ | 1,964 |
|                                                                                                                                                       |   |   |   |   |
| **Net income per share – basic:******                                                                                                                 |   |   |   |   |
| Income from continuing operations                                                                                                                          | $ | 0.01 | $ | 0.03 |
| (Loss) from discontinued operations                                                                                                                        |   | - |   | (0.00) |
| Net income                                                                                                                                                 | $ | 0.01 | $ | 0.03 |
|                                                                                                                                                       |   |   |   |   |
| **Net income per share – diluted:******                                                                                                               |   |   |   |   |
| Income from continuing operations                                                                                                                          | $ | 0.00 | $ | 0.02 |
| (Loss) from discontinued operations                                                                                                                        |   | - |   | (0.00) |
| Net income                                                                                                                                                 | $ | 0.00 | $ | 0.02 |
|                                                                                                                                                       | ** ** | ** ** |   |   |
| **Weighted-average number of common shares outstanding:**                                                                                                  |   |   |   |   |
| Basic                                                                                                                                                      |   | 70,324 |   | 70,324 |
| Diluted                                                                                                                                                    |   | 118,974 |   | 106,927 |

 

 

The accompanying notes are an integral part of these consolidated condensed financial statements.

 

 

 

4

 

 

 

|  

**EMERGING VISION, INC. AND SUBSIDIARIES**

**CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)**

**(Dollars in Thousands)**

  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                    | ** ** | **For the Three Months Ended March 31,****** |
|                                                                                                                                                    | ** ** | **2007****** | ** ** | **2006****** |
| **Cash flows from operating activities:******                                                                                                           |   |   |   |   |
| Income from continuing operations                                                                                                                       | $ | 431 | $ | 1,989 |
| Adjustments to reconcile income from continuing operations to net cash provided by operating activities:                                                |   |   |   |   |
| Depreciation and amortization                                                                                                                           |   | 110 |   | 62 |
| Provision for doubtful accounts                                                                                                                         |   | (54) |   | 25 |
| Deferred tax assets                                                                                                                                     |   | (90) |   | (1,300) |
| Non-cash compensation charges related to options and warrants                                                                                           |   | 4 |   | 41 |
| Gain on the sale of company-owned store to franchisee                                                                                                   |   | - |   | (218) |
| Changes in operating assets and liabilities:                                                                                                            |   |   |   |   |
| Franchise and other receivables                                                                                                                         |   | (462) |   | (221) |
| Optical purchasing group receivables                                                                                                                    |   | (450) |   | - |
| Inventories                                                                                                                                             |   | (48) |   | 29 |
| Prepaid expenses and other current assets                                                                                                               |   | (124) |   | 29 |
| Intangible and other assets                                                                                                                             |   | 166 |   | 26 |
| Accounts payable and accrued liabilities                                                                                                                |   | 155 |   | (2) |
| Optical purchasing group payables                                                                                                                       |   | 394 |   | - |
| Franchise deposits and other liabilities                                                                                                                |   | - |   | (32) |
| Net cash provided by operating activities                                                                                                               |   | 32 |   | 428 |
| ** **                                                                                                                                              | ** ** | ** ** | ** ** | ** ** |
| **Cash flows from investing activities:******                                                                                                           | ** ** | ** ** | ** ** | ** ** |
| Franchise notes receivable issued                                                                                                                       |   | (56) |   | (77) |
| Proceeds from franchise and other notes receivable                                                                                                      |   | 29 |   | 50 |
| Proceeds from the sale of company-owned store to franchisee                                                                                             |   | - |   | 200 |
| Purchases of property and equipment                                                                                                                     |   | (218) |   | (104) |
| Net cash (used in) provided by investing activities                                                                                                     |   | (245) |   | 69 |
|                                                                                                                                                    |   |   |   |   |
| **Cash flows from financing activities:******                                                                                                           | ** ** | ** ** | ** ** | ** ** |
| Payments on borrowings                                                                                                                                  |   | (38) |   | (11) |
| Net cash used in financing activities                                                                                                                   |   | (38) |   | (11) |
| **Net cash (used in) provided by continuing operations******                                                                                            |   | (251) |   | 486 |
| **Net cash used in discontinued operations******                                                                                                        |   | - |   | (33) |
| **Net (decrease) increase in cash and cash equivalents******                                                                                            |   | (251) |   | 453 |
| **Cash and cash equivalents – beginning of period******                                                                                            |   | 1,289 |   | 816 |
| **Cash and cash equivalents – end of period******                                                                                                  | $ | 1,038 | $ | 1,269 |
|                                                                                                                                                    |   |   |   |   |
| **Supplemental disclosures of cash flow information:******                                                                                              |   |   |   |   |
| Cash paid during the period for:                                                                                                                        |   |   |   |   |
| Interest                                                                                                                                                | $ | 10 | $ | 2 |
| Taxes                                                                                                                                                   | $ | 29 | $ | 25 |
|                                                                                                                                                    |   | ** ** |   | ** ** |

 

 

 

 

The accompanying notes are an integral part of these consolidated condensed financial statements.

 

5

 

 

 

 

**EMERGING VISION, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

**NOTE 1 – BASIS OF PRESENTATION:**

 

The accompanying Consolidated Condensed Financial Statements of Emerging Vision, Inc. and subsidiaries (collectively, the “Company”) have been prepared in accordance with accounting principles generally accepted for interim financial statement presentation and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted for complete financial statement presentation.  In the opinion of management, all adjustments for a fair statement of the results of operations and financial position for the interim periods presented have been included.  All such adjustments are of a normal recurring nature.  This financial information should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Company’s Annual Report onForm 10-K for the year ended December 31, 2006.  There have been no changes in significant accounting policies since December 31, 2006.

 

**NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES:**

 

**Stock-Based Compensation**

 

The Company accounts for stock-based compensation in accordance with the provisions of Financial Accounting Standards Board’s (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” which provides guidance for the recognition of compensation expense as it related to the issuance of stock options and warrants.  The Company also adopted the provisions of SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of SFAS No. 123.”  SFAS No. 148 amended SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation provided by SFAS No. 123.  As permitted by SFAS No. 148, the Company has adopted the fair value method recommended by SFAS No. 123 to effect a change inaccounting for stock-based employee compensation.  In addition, the Company adopted the provisions of SFAS No. 123R, “Share-Based Payment,” which revised SFAS No. 123 to require all share-based payments to employees, including grants of employee stock options, to be recognized based on their fair values.  

 

Stock-based compensation cost of approximately $4,000 and $41,000 is reflected in selling, general and administrative expenses on the accompanying Consolidated Condensed Statements of Income for the three months ended March 31, 2007 and 2006, respectively.  The Company determined the fair value of options and warrants issued using the Black-Scholes option pricing model with the following assumptions:  1 to 2 year expected lives; 10-year expiration period; risk-free interest rate ranging from 3.00% to 4.32%; stock price volatility ranging from 80.00% to 98.22%; with no dividends over the expected life. 

 

There were no stock option grants to any of the Company’s employees or directors during the three months ended March 31, 2007.

 

**Revenue Recognition**

 

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 prices to buyers are fixed or determinable, and collectibility is reasonably assured.  

 

The Company derives its revenues from the following four principal sources:

 

*Net sales* – Represents sales from eye care products and related services;

 

*Franchise royalties* – Represents continuing franchise royalty fees based upon a percentage of the gross 

 

6

 

 

revenues generated by each franchised location;

 

*Optical purchasing group sales* – Represents product pricing extended to Combine Buying Group, Inc. (“Combine”) members associated with the sale of vendor’s eye care products to such Combine members;

 

*Other franchise related fees* – Represents certain franchise fees collected by the Company under the terms of franchise agreements (including, but not limited to, initial franchise fees, transfer fees and renewal fees). 

 

Continuing franchise royalties are based upon a percentage of the gross revenues generated by each franchised location.  To the extent that collectibility of royalties is not reasonably assured, the Company recognizes such revenue when the cash is received.  Initial franchise fees, which are non-refundable, are recognized when the related franchise agreement is signed.  Membership fees generated by VisionCare of California, Inc. (“VCC”), a wholly owned subsidiary of the Company, are 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. 

 

The Company also follows the provisions of Emerging Issue Task Force (“EITF”) Issue 01-09, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products),” and accordingly, accounts for discounts, coupons and promotions (that are offered to its customers) as a direct reduction of sales.

 

**Income Taxes**

 

Effective January 1, 2007, the Company adopted the provisions of FASB’s Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB No. 109.”  FIN 48 prescribes a recognition threshold and measurement attribute for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return.  FIN 48 requires that the financial statements reflect expected future tax consequences of such positions presuming the taxing authorities’ full knowledge of the position and all relevant facts, but without considering time values.  The Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense.  No such amounts were accrued for at January 1, 2007.  Additionally, no amounts were accrued for duringthe three months ended March 31, 2007.  Management is currently unaware of any issues under review that could result in significant payments, accruals or material deviations from its position.

 

**Discontinued Operations**

 

In February 2006, the Company discontinued all of its retail operations then being conducted in the state of Arizona and have applied the provision of FASB SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”  As a result, the Company determined that substantially all of the net assets of the Company-owned stores located in Arizona as of December 31, 2005 were impaired.  During the three months ended March 31, 2006, the Company incurred losses, net of taxes, related to the discontinued operations of approximately $25,000.  There were no such losses incurred during the three months ended March 31, 2007.  As of March 31, 2007, there were no assets remaining associated with the Company’s discontinued operations.

 

**Reclassification**

 

Certain reclassifications have been made to prior year’s consolidated condensed financial statements to conform to the current year presentation. 

 

**NOTE 3 – PER SHARE INFORMATION:**

 

In accordance with SFAS No. 128, “Earnings Per Share”, basic earnings per common share (“Basic EPS”) is computed by dividing the net income by the weighted-average number of common shares outstanding.  Diluted earnings per common share (“Diluted EPS”) is computed by dividing the net income by the weighted-average number of common shares and dilutive common share equivalents and convertible securities then outstanding.  SFAS No. 128 requires the presentation of both Basic EPS and Diluted EPS on the face of the Company’s 

 

7

 

 

Consolidated Condensed Statements of Income.  Common share equivalents totaling 1,886,020 and 17,781,019 were excluded from the computation of Diluted EPS for the three months ended March 31, 2007 and 2006, 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 March 31,** |
|---------------------------------------------------------------|--------|------------------------------------------|
|                                                          |   | **2007**                                 |   | **2006****** |
| **Numerator**:                                                |   |                                     |   |   |
| Income from continuing operations                             | $      | 431                                      | $ | 1,989 |
| (Loss) from discontinued operations                           |   | -                                        |   | (25) |
| Net income                                                    | $      | 431                                      | $ | 1,964 |
|                                                          |   |                                     |   |   |
| **Denominator**:                                              |   |                                     |   |   |
| Weighted-average common shares outstanding                    |   | 70,324                                   |   | 70,324 |
| Dilutive effect of stock options and warrants                 |   | 48,650                                   |   | 36,603 |
| Weighted-average common shares outstanding, assuming dilution |   |  

118,974                          |   |  

106,927 |
|                                                          |   |                                     |   |   |
| **Per share information – basic:******                   |   |                                     |   |   |
| Income from continuing operations                             | $      | 0.01                                     | $ | 0.03 |
| (Loss) from discontinued operations                           |   | -                                        |   | (0.00) |
| Net income                                                    | $      | 0.01                                     | $ | 0.03 |
|                                                          |   |                                     |   |   |
| **Per share information – diluted:******                 |   |                                     |   |   |
| Income from continuing operations                             | $      | 0.00                                     | $ | 0.02 |
| (Loss) from discontinued operations                           |   | -                                        |   | (0.00) |
| Net income                                                    | $      | 0.00                                     | $ | 0.02 |

 

 

**NOTE 4 – CREDIT FACILITY:**

 

On August 19, 2005, the Company entered into a Credit Agreement (the “Credit Agreement”) with Manufacturers and Traders Trust Corporation (“M&T”), establishing a revolving credit facility (the “Credit Facility”), for aggregate borrowings of up to $2,000,000, which may be used for general working capital needs and certain permitted acquisitions.  The initial term of the Credit Facility expires in August 2007, but the term may be renewed in accordance with the terms of the Credit Agreement.  Borrowing are payable in August 2007 with interest accruing at the variable rate of LIBOR plus 2.75% per annum in accordance with the terms of a Grid Note.  

 

The Credit Facility includes various financial covenants including minimum net worth, maximum funded debt and debt service ratio requirements.  As of March 31, 2007, the Company had no outstanding borrowings under the Credit Facility and was in compliance with all of the financial covenants.

 

On April 12, 2007, the Company borrowed $350,000 under the Credit Facility for general working capital needs leaving $1,650,000 remaining for additional borrowings.  

 

**NOTE 5 – SEGMENT REPORTING**

 

The Company follows the provisions of FASB Statement 131, “Disclosures about Segments of a Business Enterprise and Related Information.”  During September 2006, the Company acquired substantially all of the assets 

 

8

 

 

of Combine Optical Management Corp. (“COMC”), which created two operating segments: Retail Optical Stores and Optical Group Purchasing Business.  

 

The Retail Optical Store segment consists of Company-owned and franchise retail optical stores that offer 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.  Additionally, the segment also consists of optometric services provided by VCC to patients (members) of certain of those franchise retail optical stores.

 

The Optical Group Purchasing Business segment represents product pricing extended to Combine members associated with the sale of vendor’s eye care products to such Combine members.  

 

Certain business segment information for continuing operations is as follows:

 

|                                                      |   | **For the Three Months Ended March 31,** |
|-----------------------------------------------------------|--------|------------------------------------------|
|                                                      |   | **2007**                                 |   | **2006****** |
| **Business Segment Net Revenues**:                        |   |                                     |   |   |
| Retail Optical Stores                                     | $      | 4,000                                    | $ | 3,736 |
| Optical Group Purchasing Business                         |   | 4,325                                    |   | - |
| Net revenues                                              | $      | 8,325                                    | $ | 3,736 |
|                                                      |   |                                     |   |   |
| **Business Segment Net Income:**                          |   |                                     |   |   |
| Retail Optical Stores                                     | $      | 310                                      | $ | 1,989 |
| Optical Group Purchasing Business                         |   | 121                                      |   | - |
| Net income                                                | $      | 431                                      | $ | 1,989 |
|                                                      |   |                                     |   |   |
| **Business Segment Net Income per Share – Basic:**   |   |                                     |   |   |
| Retail Optical Stores                                     | $      | 0.01                                     | $ | 0.03 |
| Optical Group Purchasing Business                         |   | 0.00                                     |   | - |
| Net income per share - Basic                              | $      | 0.01                                     | $ | 0.03 |
|                                                      |   |                                     |   |   |
| **Business Segment Net Income per Share – Diluted:** |   |                                     |   |   |
| Retail Optical Stores                                     | $      | 0.00                                     | $ | 0.02 |
| Optical Group Purchasing Business                         |   | 0.00                                     |   | - |
| Net income per share - Diluted                            | $      | 0.00                                     | $ | 0.02 |
|                                                      |   |                                     |   |   |
| **Weighted-Average Number of Common Shares Outstanding:** |   |                                     |   |   |
| Basic                                                     |   | 70,324                                   |   | 70,324 |
| Diluted                                                   |   | 118,974                                  |   | 106,927 |

 

 

There was no activity for the Optical Group Purchasing Business segment during the three months ended March 31, 2006, as the business segment was established in connection with the acquisition of COMC in September 2006.

 

Income from continuing operations includes an income tax benefit of $81,000 and $1,261,000 for the three months ended March 31, 2007 and 2006, respectively.

 

Additional business segment information is summarized as follows for the three months ended March 31, 2007 (in 

 

9

 

 

thousands):

 

 

|                          | ** ** | **Retail Optical Stores** | ** ** | **Optical Group Purchasing Business** | ** ** | **Total** |
|-------------------------------|------------|---------------------------|------------|---------------------------------------|------------|-----------|
|                          |       |                      |       |                                  |       |      |
| Total Assets                  | $          | 8,281                     | $          | 5,262                                 | $          | 13,543    |
| Depreciation and Amortization |       | 72                        |       | 38                                    |       | 110       |
| Capital Expenditures          |       | 212                       |       | 6                                     |       | 218       |
| Interest Expense              |       | 9                         |       | 56                                    |       | 65        |

 

 

The following table shows certain unaudited pro forma results of the Company, assuming the Company had acquired COMC at the beginning of the three months ended March 31, 2006 (excluding discontinued operations):  

 

|                                                      |   | **For the Three Months Ended March 31,** |
|-----------------------------------------------------------|--------|------------------------------------------|
|                                                      |   | **2007**                                 |   | **2006****** |
| **Business Segment Net Revenues**:                        |   |                                     |   |   |
| Retail Optical Stores                                     | $      | 4,000                                    | $ | 3,736 |
| Optical Group Purchasing Business                         |   | 4,325                                    |   | 3,622 |
| Net revenues                                              | $      | 8,325                                    | $ | 7,358 |
|                                                      |   |                                     |   |   |
| **Business Segment Net Income:**                          |   |                                     |   |   |
| Retail Optical Stores                                     | $      | 310                                      | $ | 1,989 |
| Optical Group Purchasing Business                         |   | 121                                      |   | 136 |
| Net income                                                | $      | 431                                      | $ | 2,125 |
|                                                      |   |                                     |   |   |
| **Business Segment Net Income per Share – Basic:**   |   |                                     |   |   |
| Retail Optical Stores                                     | $      | 0.01                                     | $ | 0.03 |
| Optical Group Purchasing Business                         |   | 0.00                                     |   | 0.00 |
| Net income per share – Basic                         | $      | 0.01                                     | $ | 0.03 |
|                                                      |   |                                     |   |   |
| **Business Segment Net Income per Share – Diluted:** |   |                                     |   |   |
| Retail Optical Stores                                     | $      | 0.00                                     | $ | 0.02 |
| Optical Group Purchasing Business                         |   | 0.00                                     |   | 0.00 |
| Net income per share – Diluted                       | $      | 0.00                                     | $ | 0.02 |
|                                                      |   |                                     |   |   |
| **Weighted-Average Number of Common Shares Outstanding:** |   |                                     |   |   |
| Basic                                                     |   | 70,324                                   |   | 70,324 |
| Diluted                                                   |   | 118,974                                  |   | 106,927 |

 

 

10

 

 

 

**NOTE 6 – COMMITMENTS AND CONTINGENCIES:**

 

**Litigation**

 

In 1999, Berenter Greenhouse and Webster, an advertising agency previously utilized by the Company, commenced an action, against the Company, in the New York State Supreme Court, New York County, for amounts alleged to be due for advertising and related fees.  The amounts claimed by the plaintiff are in excess of $200,000.  In response to this action, the Company filed counterclaims of approximately $500,000, based upon estimated overpayments allegedly made by the Company pursuant to the agreement previously entered into between the parties.  As of the date hereof, these proceedings were still in the discovery stage.  The Company has not recorded an accrual for a loss in this action, as the Company does not believe it is probable that the Company will be held liable in respect of plaintiff’s claims.

 

In July 2001, the Company commenced an arbitration proceeding, in the Ontario Superior Court of Justice, against Eye-Site, Inc. and Eye Site (Ontario), Ltd., as the makers of two promissory notes (in the aggregate original principal amount of $600,000) made by one or more of the makers in favor of the Company, as well as against Mohammed Ali, as the guarantor of the obligations of each maker under each note.  The notes were issued, by the makers, in connection with the makers’ acquisition of a Master Franchise Agreement for the Province of Ontario, Canada, as well as their purchase of the assets of, and a Sterling Optical Center Franchise for, four of the Company’s retail optical stores then located in Ontario, Canada.  In response, the defendants counterclaimed for damages, in the amount of $1,500,000, based upon, among other items, alleged misrepresentations made by representatives of the Companyin connection with these transactions.  The Company believes that it has a meritorious defense to each counterclaim.  As of the date hereof, these proceedings were in the discovery stage.  The Company has not recorded an accrual for probable losses in the event that the Company shall be held liable in respect of defendant’s counterclaims, as the Company does not believe that any such loss is reasonably possible.

 

In February 2002, Kaye Scholer, LLP, the law firm previously retained by the Company as its outside counsel, commenced an action in the New York State Supreme Court seeking unpaid legal fees of approximately $122,000.  The Company answered the complaint in such action, and has heard nothing since.  The Company believes that it has a meritorious defense to such claim.  Although the Company has recorded an accrual for probable losses in the event that the Company shall be held liable in respect of plaintiff’s claims, the Company does not believe that any such loss is reasonably possible, or, if there is a loss, the Company does not believe that it is reasonably possible that such loss would exceed the amount recorded.

 

On May 20, 2003, Irondequoit Mall, LLC commenced an action against the Company and Sterling Vision of Irondequoit, Inc. (“SVI”) alleging, among other things, that the Company had breached its obligations under its guaranty of the lease for the former Sterling Optical store located in Rochester, New York.  The Company and SVI believe that they have a meritorious defense to such action.  As of the date hereof, these proceedings were in the discovery stage.  Although the Company has recorded an accrual for probable losses in the event that the Company shall be held liable in respect of plaintiff’s claims, the Company does not believe that any such loss is reasonably possible, or, if there is a loss, the Company does not believe that it is reasonably possible that such loss would exceed the amount recorded.

 

In May 2006, the Company commenced an action against I and A Optical, Inc., Mark Shuff and Felicia Shuff, in the Supreme Court of the State of New York, County of Nassau, seeking, among other things, monetary damages as a result of the defendants' alleged breach of the terms of the Sterling Optical Center Franchise Agreement (and related documents) with the Company to which they are parties.  The defendants then asserted counterclaims against the Company, seeking, among other things, money damages arising under the Franchise Agreement with the Company as a result of the Company's alleged violation of such Franchise Agreement.  The Company believes that is has a meritorious defense to such claims.  As of the date hereof, these proceedings were in the discovery stage.  The Company has not recorded an accrual for a loss in this action, as the Company does not believe it is probable that the Company will be heldliable in respect of defendants' counterclaims.

 

In August 2006, Amy Platt, a former employee of the Company, commenced anaction against the Company, in the United States District Court, Eastern District of New York, alleging, among other things, that theCompany violated Title VII of the Civil Rights Act of 1964, as amended, 42 U.S.C.2000e, *et seq*, the Pregnancy Discrimination Act of 1978, and the 

 

11

 

 

New York Executive Law, Human Rights Law, Section 290 *et seq*., and seeks an unspecified monetary sum as damages resulting therefrom.  The Company believes that it has a meritorious defense to plaintiff’s claims in this action.  As of the date hereof, these proceedings were in the discovery stage.  Although the Company has recorded an accrual for probable losses in the event that the Company shall be held liable in respect of plaintiff’s claims, the Company does not believe that any such loss is reasonably possible, or, if there is a loss, the Company does not believe that it is reasonably possible that such loss would exceed the amount recorded.

 

In January 2007, PR Prince Georges Plaza, LLC commenced an action against the Company, in the Circuit Court of the State of Maryland, Prince George’s County, alleging, among other things, that the Company had breached its obligations under its guaranty of the lease for the former Sterling Optical store located at The Mall at Prince Georges, 3500 East West Highway, Hyattsville, Prince George’s County, Maryland.  The Company believes that it has a meritorious defense to this action.  The action is presently in the discovery stage.  Although the Company has recorded an accrual for probable losses in the event that the Company shall be held liable in respect of the plaintiff’s claims, the Company does not believe that any such loss is reasonably possible, or, if there is a loss, the Company does not believe that it is reasonably possible that such loss would exceed the amount recorded. 

 

In January 2007, Laurelrising as Owner, LLC commenced an action against the Company, in the Circuit Court of the State of Maryland, Prince Georges County, alleging, among other things, that the Company had breached its obligations under its lease for the former Sterling Optical store located at Laurel Centre Mall, Laurel, Maryland.  The Company believes that it has a meritorious defense to this action.  The defendant’s time to answer the complaint has not expired as of the date hereof.  Although the Company has recorded an accrual for probable losses in the event that the Company shall be held liable in respect of the plaintiff’s claims, the Company does not believe that any such loss is reasonably possible, or, if there is a loss, the Company does not believe that it is reasonably possible that such loss would exceed the amount recorded. 

 

In January 2007, LeonSimon, d/b/a Simon Properties commenced an action against the Company, in the District Court of the State of North Dakota, Cass County,alleging, among other things, that the Company had breached its obligations under its lease for the former Sterling Optical store locatedat 3301 13th Avenue South, Fargo, North Dakota.  In May 2007, this action was settled, theterms of which included, among other things, the Company's payment to the plaintiff of approximately $85,000.

 

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 March 31, 2007, the Company was a guarantor of certain leases of retail optical stores franchised and subleased to its franchisees.  In the event that all of such franchisees defaulted on their respective subleases, the Company would be obligated for aggregate lease obligations of approximately $2,618,000.  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.

 

**Letter of Credit**

 

 

12

 

 

 

Combine holds a letter of credit with a financial institution in favor of one of its key vendors to ensure payment of any outstanding invoices not paid by Combine.  The letter of credit has a one-year term that expires in December 2007.  As of March 31, 2007, the letter of credit totaled $250,000, and was secured by a certificate of deposit (totaling $250,000) at the same financial institution, which was included in Prepaid Expenses and Other Current Assets on the accompanying Consolidated Condensed Balance Sheets.

 

**Employment Agreements**

 

The Company has an Employment Agreement (“Agreement No. 1”) with its Chief Executive Officer, which extends through November 2009.  Agreement No. 1 provides for an annual salary of $275,000, certain other benefits, and the potential for an annual bonus to be determined by the Company’s Board of Directors based on the Company’s previous calendar’s year performance.  

 

Additionally, in connection with the acquisition of COMC, the Company entered into a five-year Employment Agreement (“Agreement No. 2”) with the existing President of COMC.  Agreement No. 2 provides for an annual salary of $210,000, certain other benefits, and an annual bonus based upon certain financial targets for Combine.  During the year ended December 31, 2006, a bonus of approximately $21,000 was achieved, which was accrued for and reflected in accounts payable and accrued expenses on the accompanying Consolidated Condensed Balance Sheets as of March 31, 200.  Such bonus was paid in April 2007.

 

**NOTE 7 – INCOME TAX BENEFIT:**

 

The benefit from income taxes consists of the following:

 

| ** **               | **For the Three Months Ended March 31,**

**(In thousands)****** |
|--------------------------|------------------------------------------------------------------|
| ** **               |
| ** **               | ** **                                                       | **2007** | ** ** | **2006** |
|                     |                                                             |   |   |   |
| Current                  | $                                                                | (53) | $ | (23) |
| Deferred                 |                                                             | 134 |   | 1,300 |
| Total income tax benefit | $                                                                | 81 | $ | 1,277 |

 

The deferred tax benefit on the accompanying Consolidated Condensed Statements of Income for the three months ended March 31, 2007 and 2006 is a result of the reduction in the valuation allowance of $1,650,000 less deferred tax expense of $1,516,000 and $1,600,000 less deferred tax expense of $277,000, respectively.  Management, based on current operations and future projections, estimates that deferred tax benefits, arising principally from net operating loss carryforwards, will be realized through March 31, 2009.  The Company has a remaining valuation allowance of approximately $14,210,000 as of March 31, 2007.  As of December 31, 2006, the Company had federal net operating loss carryforwards of approximately $44,000,000.

 

**NOTE 8 – SUBSEQUENT EVENTS:**

 

On April 12, 2007, the Company borrowed $350,000 under the Company’s Credit Facility with M&T Bank for general working capital needs leaving $1,650,000 remaining for additional borrowings.  

 

On April 24, 2007, inconnection with certain rescission transactions consummated by the Company on December 31, 2003, the Company repaid one of its subjectshareholder's promissory notes together with principal and interest totaling $338,000.   Certain of the subject shareholders agreed toextend the terms of the promissory notes for an additional 12 months at an interest rate of 9%.

 

13

 

 

 

**Item 2.****Management's Discussion and Analysis of Financial Condition and Results of Operations******

 

This 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 AnnualReport on Form 10-K for the year ended December 31, 2006 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 the Form 10-Q.  The Company does not intend to update these forward-looking statements for new information, or otherwise, for the occurrence of future events.

 

**Results of Operations**

 

**For the Three Months Ended March 31, 2007, as Compared to the Comparable Period in 2006**

 

Total revenues for the Company increased approximately $4,589,000, or 122.8%, to $8,325,000 for the three months ended March 31, 2007, as compared to $3,736,000 for the three months ended March 31, 2006.  This increase was mainly a result of the acquisition, on September 29, 2006, having an effective date of August 1, 2006, of substantially all of the assets of Combine Optical Management Corporation (“COMC”) through the Company’s wholly-owned subsidiary, COM Acquisition, Inc. (“Combine”).

 

Total costs, and selling, general and administrative expenses for the Company increased approximately $4,733,000, or 146.2%, to $7,971,000 for the three months ended March 31, 2007, as compared to $3,238,000 for the three months ended March 31, 2006.  This increase was mainly a result of the acquisition of substantially all of the assets of COMC.

 

**Retail Optical Store Segment**

 

Net sales for Company-owned stores increased approximately $292,000, or 27.3%, to $1,361,000 for the three months ended March 31, 2007, as compared to $1,069,000 for the three months ended March 31, 2006.  This increase was mainly attributable to more Company-owned store locations open during the comparable periods.  As of March 31, 2007, there were 10 Company-owned stores, as compared to 7 Company-owned stores as of March 31, 2006.   On a same store basis (for stores that operated as a Company-owned store during the entirety of both of the three months ended March 31, 2007 and 2006), comparative net sales decreased approximately $46,000, or 4.5%, to $973,000 for the three months ended March 31, 2007, as compared to $1,019,000 for the three months ended March 31, 2006.  Management believes that this decrease was a direct result of the Company’s turnover of key personnel in certain areas relating toCompany-store operations.  Management believes that such changes to key personnel during 2007 will help improve store operations, along with continued training and the implementation of a new point-of-sale system, all of which should lead to increased Company-store sales. 

 

Revenues generated by the Company’s wholly-owned subsidiary, VisionCare of California, Inc. (“VCC”), a specialized health care maintenance organization licensed by the State of California Department of Managed Health Care, increased approximately $20,000, or 2.4%, to $849,000 for the three months ended March 31, 2007, as compared to $829,000 for the three months ended March 31, 2006.  This increase was primarily due to an increase in membership fees generated by VCC during the first quarter of 2007.  

 

Franchise royalties decreased approximately $12,000, or 0.7%, to $1,741,000 for the three months ended March 31, 2007, as compared to $1,753,000 for the three months ended March 31, 2006.****Management believes this decrease was a result of lower average number of stores in operation during the same comparable periods, offset by increased levels of field support to franchisees, the success of the Company’s audits of franchised locations, which generated additional royalties, and an increase in franchise sales for the stores that were in operation during both of the 

 

14

 

 

comparable periods.  As of March 31, 2007, there were 146 franchised stores, as compared to 148 stores in operation as of March 31, 2006.

 

Other franchise related fees (which includes initial franchise fees, renewal fees and fees related to the transfer of store ownership from one franchisee to another) decreased approximately $32,000, or 37.6%, to $53,000 for the three months ended March 31, 2007, as compared to $85,000 for the three months ended March 31, 2006.  This decrease was primarily attributable to the Company recognizing franchise fees on two new franchise agreements and one franchise agreement renewal during the three months ended March 31, 2007, as compared to three new franchise agreements and two franchise agreement renewals during the three months ended March 31, 2006.  In the future, other franchise related fees are likely to fluctuate depending on the timing of franchise agreement expirations, new store openings and franchise store transfers.

 

Including revenues and the related of cost of revenues solely generated by the Company-owned stores, the Company’s gross profit margin increased by 0.2%, to 73.3%, for the three months ended March 31, 2007, as compared to 73.1% for the three months ended March 31, 2006.  In the future, the Company’s gross profit margin may fluctuate depending upon the extent and timing of changes in the product mix in Company-owned stores, competitive pricing, and promotional incentives, amongst other things.

 

Selling, general and administrative expenses increased approximately $480,000, or 16.1%, to $3,470,000 for the three months ended March 31, 2007, as compared to $2,990,000 for the three months ended March 31, 2006.  This increase was partially a result of increases to advertising expenses of $73,000 due to the promotion of a new marketing campaign around the new product mix in our Company-owned stores, and payroll and related expenses of $345,000 due, in part, to the additions of certain key employees hired to enhance Company store operations and expand the franchise chain during the third and fourth quarters of 2006.  The Company also incurred other charges, including rent and overhead expenses, related to three additional Company-owned stores in operation during the three months ended March 31, 2007.  These expenses were offset, in part, by a decrease in equity compensation charges of $37,000 and bad debtexpense of $79,000, inclusive of bad debt recoveries of $100,000 during the three months ended March 31, 2007.

 

Gain on sale of company-owned stores to franchisees related to the sale of an existing Company-owned store in upstate New York for a purchase price of $225,000, which included the net fixed assets of such store (such assets having a net book value of $7,000).  There were no such sales of Company-owned stores during the three months ended March 31, 2007.

 

**Optical Purchasing Group Business Segment**

 

On September 29, 2006, having an effective date of August 1, 2006, the Company, through its wholly-owned subsidiary Combine, acquired substantially all of the assets of COMC.  Combine activity for the three months ended March 31, 2007 has been included in the Company’s results of operations as of and for the three months ended March 31, 2007.

 

Net revenues for Combine were $4,325,000 for the three months ended March 31, 2007, which represented 52.0% of the total revenue of the Company.

 

Costs of sales for Combine were $4,002,000 for the three months ended March 31, 2007, which represented 92.6% of the total costs of sales of the Company.

 

Selling, general and administrative expenses for Combine were $180,000 for the three months ended March 31, 2007, which represented 4.9% of the total selling, general and administrative expenses of the Company.  These expenses included payroll and related benefits of $66,000, depreciation and amortization of $38,000, and bank and credit card fees of $22,000.

 

Interest expense for Combine was $56,000 for the three months ended March 31, 2007.  Interest expense related to the debt financing with COMC in connection with the acquisition of substantially all of the assets of COMC.

 

 

15

 

 

 

There are no comparatives provided for Combine as the acquisition of COMC was consummated during the 3rd quarter of 2006.

 

**Liquidity and Capital Resources**

 

As of March 31, 2007, the Company had a working capital deficit of $314,000 and cash on hand of $1,038,000.  During the three months ended March 31, 2007, cash flows provided by its operating activities were $32,000.  This was principally due to net income of $398,000, an increase in optical purchasing group payables of $394,000 and non-cash items of $60,000, offset, in part, by an increase in franchise and other receivables of $462,000 and the increase in optical purchasing group receivables of $450,000.  The Company believes it will continue to improve its operating cash flows through franchisee audits, the addition of new franchise and company store locations, its current and future acquisitions, and new marketing strategies and increased gross margins, among other things, for its Company-owned stores.

 

For the three months ended March 31, 2007, cash flows used in investing activities were $245,000 due, in part, to capital expenditures (which included the remodeling of one of the Company-owned stores) made by the Company and the issuance of franchise promissory notes in connection with a new franchise location , offset by proceeds received on certain franchise promissory notes. 

 

For the three months ended March 31, 2007, cash flows used in financing activities were $38,000 due to the repayment of the Company’s related party borrowings and the promissory note payments made to COMC.

 

**Credit Facility**

 

On August 19, 2005, the Company entered into a Credit Agreement (the “Credit Agreement”) with Manufacturers and Traders Trust Corporation (“M&T”), establishing a revolving credit facility (the “Credit Facility”), for aggregate borrowings of up to $2,000,000, which may be used for general working capital needs and certain permitted acquisitions.  The initial term of the Credit Facility expires in August 2007, but the term may be renewed in accordance with the terms of the Credit Agreement.  Borrowing are payable in August 2007 with interest accruing at the variable rate of LIBOR plus 2.75% per annum in accordance with the terms of a Grid Note.  The Credit Facility includes various financial covenants including minimum net worth, maximum funded debt and debt service ratio requirements.  As of March 31, 2007, the Company had no outstanding borrowings under the Credit Facility andwas in compliance with all of the financial covenants.

 

On April 12, 2007, the Company borrowed $350,000 under the Company’s Credit Facility with M&T Bank for general working capital needs leaving $1,650,000 remaining for additional borrowings.  

 

**Future Contractual Obligations**

 

|                                                            | ** ** | **Total**     | ** ** | **Less than 1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than 5 years** |
|-----------------------------------------------------------------|------------|---------------|------------|----------------------|------------|---------------|------------|---------------|------------|-----------------------|
|                                                            |       |          |       |                 |       |          |       |          |       |                  |
| Long-term debt and related party borrowings (a) (b)             |  

$  |  

2,329 |  

$  |  

1,171        |  

$  |  

767   |  

$  |  

391   |  

$  |  

-             |
| Interest on long-term debt and related party borrowings (a) (b) |       |  

404   |       |  

196          |       |  

137   |       |  

71    |       |  

-             |
| Operating leases                                                |       | 14,975        |       | 3,967                |       | 4,125         |       | 2,592         |       | 4,291                 |
|                                                            | $          | 17,708        | $          | 5,334                | $          | 5,029         | $          | 3,054         | $          | 4,291                 |

Payments due under contractual obligations as of March 31, 2007 were as follows (in thousands): 

 

 

| (a) | Effective April 14, 2003, in connection with certain Rescission Transactions consummated by the Company on December 31, 2003, the Company signed numerous promissory notes with certain of its shareholders, two of whom are also directors of the Company.  The notes, which aggregate $520,000, bear interest at a |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

 

16

 

 

rate of 6% per annum, and all sums (principal and interest) under the notes are due and payable in April 2007.

 

| (b) | In connection with the acquisition of substantially all of the assets of COMC, the Company entered into two promissory notes with COMC.  The first note provides for four annual installments commencing October 1, 2007, totaling $1,273,000 (without interest).  The second note provides for sixty monthly installments commencing October 1, 2006, totaling $500,000 at 7% interest per annum. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**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.  We refer the reader to the Notes to the Consolidated Condensed Financial Statements included in Item 1 of this Quarterly Report for information regarding the Company’s lease guarantees.

 

**Management’s Discussion of Critical Accounting Policies and Estimates**

 

High-quality financial statements require rigorous application of high-quality accounting policies.  Management believes that its policies related to revenue recognition, deferred tax assets, legal contingencies and allowances on franchise, notes and other receivables are critical to an understanding of the Company’s Consolidated Condensed Financial Statements because their application places the most significant demands on management’s judgment, with financial reporting results relying on estimation about the effect of matters that are inherently uncertain.

 

Management’s estimate of the allowances on receivables is based on historical sales, historical loss levels, and an analysis of the collectibility of individual accounts.  To the extent that actual bad debts differed from management's estimates by 10 percent, consolidated net income would be an estimated $5,000 higher/lower for the three months ended March 31, 2007, 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, 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 $1,400,000 higher for the three months ended March 31, 2007.

 

The Company recognizes revenues in accordance with SEC Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition.”  Accordingly, revenues are recorded when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the Company’s price to the buyer is fixed or determinable, and collectibility is reasonably assured.  To the extent that collectibility of royalties is not reasonably assured, the Company recognizes such revenues when the cash is received.  To the extent that royalties that were recognized on a cash basis were recognized on an accrual basis, consolidated net income would be an estimated $34,000 higher for the three months ended March 31, 2007.

 

 

17

 

 

 

**Item 3.  Quantitative and Qualitative Disclosures about Market Risk**

 

The Company presently has outstanding certain equity instruments with beneficial conversion terms.  Accordingly, the Company, in the future, could incur non-cash charges to equity (as a result of the exercise of such beneficial conversion terms), which would have a negative impact on future per share calculations.

 

The Company believes that the level of risk related to its cash equivalents is not material to the Company’s financial condition or results of operations. 

 

The Company is exposed to interest rate risk under its Credit Facility with M&T Bank.  Any increase in the LIBOR rate would lead to higher interest expense, if the Company borrows against the Credit Facility.  In April 2007, the Company borrowed $350,000 under its Credit Facility and is subject to an interest rate risk on such borrowings.

 

**Item 4.  Controls and Procedures**

 

| (a)   Evaluation of Disclosure Controls and Procedures |
|-----------------------------------------------------------------------|

 

Based on their evaluation of the Company’s disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q, the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) have concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.  TheCompany’s management has not yet completed, and is not yet required to have completed, the assessment about the effectiveness of internal controls over financial reporting required by Section 404 of the Sarbanes-Oxley Act.

 

| (b)   Changes in Internal Controls |
|---------------------------------------------------|

 

There were no changes that occurred during the fiscal quarter covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

 

18

 

 

 

**PART II - OTHER INFORMATION**

 

**Item 1.****Legal Proceedings**

 

In January 2007, LeonSimon, d/b/a Simon Properties commenced an action against the Company, in the District Court of the State of North Dakota, Cass County,alleging, among other things, that the Company had breached its obligations under its lease for the former Sterling Optical store located at 3301 13th Avenue South, Fargo, North Dakota.  In May 2007, this actionwas settled, the terms of which included, among other things, the Company's payment to the plaintiff of approximately $85,000.

 

**Item 1a. Risk Factors**

 

There have been no material changes to the disclosure related to risk factors made in our Annual Report on Form 10-K for the year ended December 31, 2006.

 

**Item 2. Unregistered Sales of Equity Securities and Use of Proceeds**

 

None.

 

**Item 3. Defaults upon Senior Securities**

 

None.

 

**Item 4. Submission of Matters to a Vote of Security Holders**

 

None.

 

**Item 5. Other Information**

 

None.

 

**Item 6. Exhibits**

 

| 31.1 | Certification of Chief Executive Officer pursuant to Rules 13a-14 and 15d-14(a) of the Securities Exchange Act |
|------|----------------------------------------------------------------------------------------------------------------|

 

| 31.2 | Certification of Chief Financial Officer pursuant to Rules 13a-14 and 15d-14(a) of the Securities Exchange Act |
|------|----------------------------------------------------------------------------------------------------------------|

 

| 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 |
|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

19

 

 

 

**SIGNATURES**

 

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: May 15, 2007

 

 

 

20

 

  |