REF Refac Optical Grp

Refac Optical Group (AMEX: REF) today announced results for the fiscal second quarter and six months ended July 31, 2006. The Company reported a net loss for the three months ended July 31, 2006, of $846,000, or $0.05 per diluted share, compared with a net loss of $324,000, or $0.02 per diluted share, for the prior year period. The net loss from continuing operations was $1.06 million, or $0.06 per diluted share, for the second quarter of fiscal 2006, compared with a net loss from continuing operations of $443,000, or $0.03 per diluted share, for the prior year period. To provide a better understanding of core retail optical results and trends, the Company also reported adjusted financial results, which are non-GAAP financial measures. The adjusted operating loss from continuing operations was $773,000 for the second quarter of 2006, compared with $358,000 for the prior year period. The $415,000 increase is primarily the result of an increase in selling, general and administrative expenses due to new store openings, increased advertising to offset decreased vision care sales and higher variable costs partially offset by an increase in gross profit due to higher sales. A reconciliation of non-GAAP financial measures to results reported in accordance with GAAP is attached to this release. Total revenues for the three months ended July 31, 2006, increased to $44.5 million from $43.2 million for the prior year. This increase was principally attributable to a $1.3 million increase in retail product sales and a $539,000 increase in services offset by a $577,000 decrease in intellectual property licensing-related revenues and other non-recurring income. Commenting on the fiscal second quarter results, J. David Pierson, president and chief executive officer of Refac Optical Group, said, "We are pleased that we were able to increase revenues despite a $1.0 million decline in sales attributable to our managed vision care plans. In an effort to remedy this situation going forward, we reached an agreement in principle during the second quarter with EyeMed Vision Care, a leading managed vision care company, pursuant to which our U.S. Vision subsidiary will become a participating provider in the EyeMed Access and Select plans. We are very excited about this relationship and its considerable potential to drive sales growth and profitability for the Company and to support U.S. Vision's expansion initiatives." During the fiscal second quarter, the Company announced that it had completed its previously announced sale of its managed vision business to a wholly owned subsidiary of Centene Corporation (NYSE: CNC) for $8.9 million subject to certain additional post-closing adjustments. The Company recorded a gain on disposal of $85,000, including income tax expense of approximately $393,000. Six Months Ended July 31, 2006 The Company reported net income for the six months ended July 31, 2006, of $663,000, or $0.04 per diluted share, compared with $3.0 million, or $0.18 per diluted share, for the prior year period. Net income from continuing operations was $85,000, or $0.01 per diluted share, for the first half of fiscal 2006, compared with net income from continuing operations of $2.5 million, or $0.15 per diluted share, for the prior year period. For the six months ended July 31, 2006, adjusted operating income from continuing operations was $1.6 million for the first half of 2006, compared to $1.2 million for the prior year period. The $400,000 improvement is primarily the result of increases in optical related revenues. Total revenues for the six months ended July 31, 2006, increased to $92.3 million from $89.8 million for the prior year. This increase was principally attributable to a $3.9 million increase in retail product sales and a $1.2 million increase in services offset by a $2.6 million decrease in intellectual property licensing-related revenues and other non-recurring income and was achieved despite a $2.7 million decline in sales attributable to its managed vision care plans. Pierson continued, "After a 25 year relationship, JCPenney is not only our most important brand but also represents our most promising expansion opportunity. We are encouraged by JCPenney's recent announcement that it plans to open about 50 new stores per year beginning in 2007, primarily off-mall, and that on a long-term basis it has identified up to 400 opportunities for new stores, relocations or expansions. "We are continuing to develop and improve our new Macy's fashion optical departments and plan on opening two new locations in October. These new optical departments will relocate to higher traffic locations within Macy's and will incorporate a new modern fashion look and feel. We opened our first fashion optical department a year ago and, including these two new additions, we will now have 12 such departments, all of which are operating under the Macy's brand, thereby establishing us a leader in this emerging category." In conclusion, Pierson stated, "We are pleased with the continued progress in integrating our two core businesses, U.S. Vision and OptiCare. While we are hard at work managing costs and introducing operational enhancements, we are also actively seeking acquisitions that will complement our existing business and provide the Company with a more diversified portfolio of retail stores." After the end of the fiscal second quarter, the Company announced an extension in the expiration date for the exercise of the non-transferable payment right granted to qualifying stockholders in connection with its February 28, 2003, merger with a wholly owned subsidiary of Palisade Concentrated Equity Partnership, L.P. The expiration date has been extended for one year from September 30, 2006 to September 30, 2007. In addition, on September 8, 2006, the Company's Board of Directors appointed Carmen J. Nepa, III to serve as the Company's chief accounting officer and principal accounting officer. Mr. Nepa, age 40, has served as the Company's corporate controller since May 10, 2006. In addition, he has served as the chief financial officer of U.S. Vision since he joined U.S. Vision in October 2001 and as U.S. Vision's executive vice president since October 31, 2002. From December 1987 to October 2001, Mr. Nepa was a senior manager with Ernst & Young, LLP, U.S. Vision's independent registered accounting firm prior to March 2006 and the Company's independent registered accounting firm since May 2006. He is a Certified Public Accountant. Reconciliation of Non-GAAP Financial Measures This news release and the attached table include non-GAAP financial measures as defined in the Securities and Exchange Commission's Regulation G. Where noted, financial information is presented on an adjusted basis to exclude the effect of certain items as described herein. By presenting adjusted results, management intends to provide investors with a better understanding of the core results and underlying trends from which to consider past performance and prospects for the future. Users of this financial information should consider the types of events and transactions for which adjustments have been made. The adjusted information should not be considered in isolation or viewed as a substitute for or superior to net income or other data prepared in accordance with GAAP as measures of the Company's operating performance or liquidity. In addition, the adjusted information is not necessarily comparable to similarly titled measures provided by other companies. Pursuant to the requirements of Regulation G, a table follows that reconciles non-GAAP financial measures, including those presented in this release, to the most directly comparable GAAP measures. About Refac Optical Group Refac Optical Group, a leader in the retail optical industry and the sixth largest retail optical chain in the United States, operates 533 retail locations in 47 states and Canada, consisting of 510 licensed departments, five freestanding stores, 18 eye health centers and professional optometric practices, two surgery centers, one of which is a laser correction center, and two manufacturing laboratories. Of the 510 licensed departments, 349 are located at JCPenney stores, 63 at Sears, 29 at Macy's and Marshall Field's department stores, 26 at Boscov's department stores, and 30 at The Bay. These licensed departments are full-service retail vision care stores that offer an extensive selection of designer brands and private label prescription eyewear, contact lenses, sunglasses, ready-made readers and accessories. On March 6, 2006, the Company completed its acquisitions of U.S. Vision, Inc. and OptiCare Health Systems, Inc., and on May 10, 2006, the Company's Board of Directors approved a change in the Company's fiscal year-end from December 31 to January 31. The quarter ended April 30, 2006 was the first quarter in which Refac Optical Group, U.S. Vision and OptiCare reported as a combined company. The financial results reported herein include consolidated financial results for all three companies for all periods presented with the quarterly results for the fiscal year ended January 31, 2006, reflecting the prior 2005 fiscal periods for the Company and OptiCare. Cautionary Statement Regarding Forward-Looking Statements This news release includes certain statements of the Company that may constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and which are made pursuant to the Private Securities Litigation Reform Act of 1995. These forward-looking statements and other information relating to the Company are based upon the beliefs of management and assumptions made by and information currently available to the Company. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events, or performance, as well as underlying assumptions and statements that are other than statements of historical fact. When used in this document, the words "expects," "anticipates," "estimates," "plans," "intends," "projects," "predicts," "believes," "may" or "should," and similar expressions, are intended to identify forward-looking statements. These statements reflect the current view of the Company's management with respect to future events. Many factors could cause the actual results, performance or achievements of the Company to be materially different from any future results, performance, or achievements that may be expressed or implied by such forward-looking statements. Investors are cautioned that all forward-looking statements involve those risks and uncertainties detailed in the Company's filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the fiscal year ended December 31, 2005. Forward-looking statements speak only as of the date they are made and the Company undertakes no duty or obligation to update any forward-looking statements in light of new information or future events. -0- *T REFAC OPTICAL GROUP UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except share and per share data) For the Three Months For the Six Months Ended July 31, Ended July 31, ------------------ ------------------ 2006 2005 2006 2005 -------- ------- -------- -------- Net revenues: Product sales $38,764 $37,447 $81,182 $77,238 Services 5,630 5,091 10,945 9,771 Licensing related activities 50 173 105 1,968 Other 45 499 75 861 -------- -------- -------- -------- Total revenues 44,489 43,210 92,307 89,838 Operating expenses: Cost of product sales 12,933 12,246 25,593 24,240 Cost of services 2,179 1,957 4,181 3,703 Selling, general and administrative 28,478 27,135 57,591 54,713 Merger expense 40 249 587 251 Loss on early extinguishment of debt 157 -- 301 -- Depreciation and amortization 1,663 1,693 3,344 3,310 -------- -------- -------- -------- Total operating expenses 45,450 43,280 91,597 86,217 -------- -------- -------- -------- Operating income (loss) (961) (70) 710 3,621 Other income (expense): Dividends and interest income 369 260 679 452 Interest expense (464) (592) (945) (1,213) -------- -------- -------- -------- Income (loss) from continuing operations before income taxes and minority interest (1,056) (402) 444 2,860 Minority interest expense -- 43 245 279 Provision (benefit) for income taxes -- (2) 114 34 -------- -------- -------- -------- Income (loss) from continuing operations (1,056) (443) 85 2,547 Income from discontinued operations, net of taxes and minority interest 210 119 578 405 -------- -------- -------- -------- Net income (loss) $(846) $(324) $663 $2,952 ======== ======== ======== ======== Earnings (loss) per share: Basic: Continuing operations $(0.06) $(0.03) $0.01 $0.15 Discontinued operations 0.01 0.01 0.03 0.03 -------- -------- -------- -------- Net income (loss) $(0.05) $(0.02) $0.04 $0.18 ======== ======== ======== ======== Diluted: Continuing operations $(0.06) $(0.03) $0.01 $0.15 Discontinued operations 0.01 0.01 0.03 0.03 -------- -------- -------- -------- Net income (loss) $(0.05) $(0.02) $0.04 $0.18 ======== ======== ======== ======== Weighted average shares outstanding: Basic 18,015 16,494 17,770 16,493 Diluted 18,015 16,494 18,096 16,507 REFAC OPTICAL GROUP UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except share and per share data) July 31, Jan. 31, 2006 2006 -------- -------- ASSETS Current Assets: Cash and cash equivalents $5,210 $10,129 Accounts receivable, net of allowances for doubtful accounts of $304 and $220 at July 31, 2006 and January 31, 2006, respectively 9,553 10,676 Investments being held to maturity 30,286 24,229 Inventories 19,321 20,205 Prepaid expenses and other current assets 1,348 1,262 Assets held for sale -- 2,092 -------- -------- Total current assets 65,718 68,593 Property and equipment, net 32,407 34,544 Restricted cash and investments being held to maturity 5,158 4,849 Licensed optical department agreements 17,367 14,856 Goodwill 6,136 4,746 Other intangibles, net 280 300 Assets held for sale, non-current -- 5,384 Other assets 798 1,247 -------- -------- Total assets $127,864 $134,519 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $7,489 $8,627 Accrued expenses 6,628 8,958 Accrued salaries and related expenses 1,291 1,783 Customer deposits 3,423 3,358 Deferred revenue 3,240 3,174 Current portion of capital lease obligations 679 724 Current portion of long-term debt 1,506 4,926 Liabilities of business held for sale -- 3,991 Other current liabilities 894 940 -------- -------- Total current liabilities 25,150 36,481 Capital lease obligations, net of current portion 1,058 1,372 Long-term debt, net of current portion 2,792 3,378 Revolving line of credit 13,809 14,983 Subordinated debt 9,000 10,000 Other long-term liabilities 314 389 Minority interest -- 3,943 Temporary equity 4,158 4,849 Stockholders' equity: Common stock, $0.001 par value; 25,000,000 shares authorized; 17,848,472 and 16,484,335 shares outstanding at July 31, 2006 and January 31, 2006, respectively 18 16 Additional paid-in capital 97,526 85,002 Treasury stock, at cost; 171,525 and 88,223 shares at July 31, 2006 and January 31, 2006, respectively (1,430) (738) Unearned compensation -- (89) Accumulated deficit (24,223) (24,759) Receivable from issuance of common stock (308) (308) -------- -------- Total stockholders' equity 71,583 59,124 -------- -------- Total liabilities and stockholders' equity $127,864 $134,519 ======== ======== REFAC OPTICAL GROUP UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) For the Six Months Ended July 31, ------------------ 2006 2005 -------- -------- Cash flows from operating activities: Net income $663 $2,952 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,401 3,531 Stock-based compensation 219 9 Gain on sale of managed vision business (85) -- Loss on disposal of fixed assets 178 17 Minority interest 278 351 Amortization of debt issue costs 221 70 Amortization of discount on securities (574) (416) Other -- (71) Changes in operating assets and liabilities, net of effect of acquisitions: Accounts receivable 1,299 272 Inventories 909 (950) Prepaid expenses and other assets (353) 129 Accounts payable and accrued expenses (3,690) (2,968) Deferred revenue and customer deposits 159 870 Assets and liabilities of business held for sale -- (42) Other current liabilities (466) (185) -------- -------- Net cash provided by operating activities 2,159 3,569 Cash flows from investing activities: Purchase of investments being held to maturity, net (2,177) (353) Payments received on notes receivable 359 102 Expenditures for property and equipment (1,386) (1,824) Investments in acquisitions, net of cash acquired (20) (150) Proceeds from sale of businesses, net of cash sold 6,306 3,451 Purchase of restricted certificates of deposit -- (204) -------- -------- Net cash provided by investing activities 3,082 1,022 Cash flows from financing activities: Net payments on revolving line of credit (1,502) (5,839) Principal payments on long-term debt and capital leases (2,506) (2,358) Principal payments on subordinated debt (1,000) (171) Purchase of treasury stock (681) -- Proceeds from issuance of preferred stock -- 4,445 Proceeds from issuance of common stock -- 528 Other (29) 142 -------- -------- Net cash used in financing activities (5,718) (3,253) -------- -------- Net increase (decrease) in cash and cash equivalents (477) 1,338 Cash and cash equivalents at beginning of period 5,687 4,298 Cash and cash equivalents included in assets held for sale -- (933) -------- -------- Cash and cash equivalents at end of period $5,210 $4,703 ======== ======== Supplemental disclosures: Cash paid for interest $946 $1,196 ======== -------- Cash paid for income taxes $187 $76 ======== ======== Non-cash transactions: Property and equipment financed through capital leases and other indebtedness $63 $352 ======== ======== Issuance of common stock in exchange for minority interest $11,804 $-- ======== ======== REFAC OPTICAL GROUP RECONCILIATION OF NON-GAAP FINANCIAL MEASURES (Amounts in thousands) (Unaudited) For the Three Months For the Six Months Ended July 31, Ended July 31, ------------------ ------------------ 2006 2005 2006 2005 -------- -------- -------- -------- Operating income (loss) - GAAP basis $(961) $(70) $710 $3,621 Adjustments: Merger transaction expenses 40 249 587 251 Loss on early extinguishment of debt 157 -- 301 -- Non-recurring intellectual property licensing-related revenues -- (118) -- (1,857) Non-recurring health services settlement revenues, net of expenses (9) (455) (15) (773) Non-recurring related party consulting services -- (16) -- (60) Asset management search expenses -- 52 -- 52 -------- -------- -------- -------- Adjusted operating income $(773) $(358) $1,583 $1,234 ======== ======== ======== ======== *T