| REFAC OPTICAL GROUP Item 1A Risk Factors Successful Integration will be Complex and Time-Consuming |
| Successful integration of the Company, OptiCare and US Vision will require, among other things, implementing a strategic plan for the combined companies |
| We may not accomplish this integration successfully and any diversion of management’s attention to the integration effort and any difficulty encountered in combining or coordinating operations could cause the interruption of, or a loss of momentum in, the activities of any or all of the companies’ businesses |
| Furthermore, employee morale may suffer, and we may have difficulty retaining key personnel |
| There is no assurance that we will be able to maintain or renew all of OptiCare’s and US Vision’s current contracts and relationships |
| We May not be able to Compete Effectively with Other Eye Care Distributors and Other Eye Care Services Companies which Have More Resources and Experience than us |
| On October 4, 2004, Luxottica, the parent of LensCrafters and the world leader in the design, manufacture and distribution of prescription frames and sunglasses in the mid- and premium-price categories, acquired Cole National, a leading optical retailer which also operates CMV, a major national vision program |
| Prior to this acquisition, Luxottica was already the dominant optical retailer in the United States with more sales and resources than its competitors |
| Its acquisition of Cole National substantially lessens the ability of retail optical companies, including us as a result of the mergers, to successfully compete with it |
| In addition, some companies in the retail optical business have substantially greater financial, technical, managerial, marketing and other resources and experience than we do |
| As a result, these other companies may compete more effectively than us and our subsidiaries |
| We compete with other businesses, including other eye care services companies, hospitals, individual ophthalmology and optometry practices, other ambulatory surgery and laser vision correction centers, managed care companies, eye care clinics and providers of retail optical products |
| Companies in other health care industry segments, including managers of hospital-based medical specialties or large group medical practices, may become competitors in providing surgery and laser centers, as well as competitive eye care-related services |
| The failure to compete effectively with these and other competitors could have a material adverse effect on our business, financial condition and results of operations |
| The retail optical industry engages in price-related promotions as a standard marketing practice |
| Several competitors have greater financial and other resources than we do, which may enable such competitors to pursue more aggressive pricing and promotional strategies at the expense of profits for longer periods of time than we can |
| We also face the possibility of a decreased demand for eyeglasses and contact lenses as advances in, and the acceptability of, vision correction technologies, including laser surgery and other surgical vision correction procedures, continue to grow |
| US Vision’s Business is Materially Dependent Upon the Revenues that it Derives as a Participating Provider under its Agreement with CMV US Vision’s business is materially dependent upon the revenues that it derives as a participating provider through CMV This business accounted for approximately 22prca of US Vision’s revenue for the fiscal year ended January 31, 2006 |
| Luxottica, which owns CMV and also owns EyeMed Vision Care, a leading managed vision care organization, recently announced that it was integrating the operations of EyeMed Vision Care and CMV US Vision’s participating provider agreement with CMV expires on December 31, 2008 |
| As a result of this integration, it appears unlikely that US Vision will be able to renew or extend its agreement with CMV or enter into a comparable agreement with EyeMed Vision Care |
| We are seeking various agreements and studying various alternatives to minimize the effect of such termination on our business |
| However no assurance can be given that we will be able to enter into other agreements or find suitable alternatives |
| If we are not able to do so and the CMV agreement is terminated, there will likely be a material adverse impact on our business, operations and/or financial condition |
| The businesses is currently subject to extensive federal and state governmental regulation and supervision |
| These regulations include, but are not limited to: • anti-kickback statutes; • self-referral laws; • insurance and licensor requirements associated with the managed care business; • civil false claims acts; • corporate practice of medicine restrictions; • fee-splitting laws; • facility license requirements and certificates of need; • regulation of medical devices, including laser vision correction and other refractive surgery procedures; • FDA and FTC guidelines for marketing laser vision correction; and • regulation of personally identifiable health information |
| We have no assurance that these laws and regulations will not change or be interpreted in the future either to restrict or adversely affect its business activities |
| The health care industry has experienced a trend toward cost containment as government and private third-party payers seek to impose lower reimbursement and utilization rates and negotiate reduced payment schedules with service providers |
| Our revenues will be subject to pre-determined Medicare reimbursement rates for certain products and services, and decreases in Medicare reimbursement rates could have an adverse effect on our results of operations if we cannot offset these reductions through increases in revenues or decreases in operating costs |
| To some degree, prices for health care services and products are driven by Medicare reimbursement rates, so that non-Medicare business is also affected by changes in Medicare reimbursement rates |
| In addition, federal and state governments are currently considering various types of health care initiatives and comprehensive revisions to the health care and health insurance systems |
| Some of the proposals under consideration, or others that may be introduced, could, if adopted, have a material adverse effect on our business, financial condition and results of operations following the mergers |
| Risks Related to the Eye Care Industry, Including the Cost and Availability of Medical Malpractice Insurance, and Possible Adverse Long-Term Experience With Laser and Other Surgical Vision Correction Could Have a Material Adverse Effect on Our Business, Financial Condition and Results of Operations The provision of eye care services entails the potentially significant risk of physical injury to patients and an inherent risk of potential malpractice, product liability and other similar claims |
| Insurance may not be adequate to satisfy claims or protect the combined company and its affiliated eye care providers, and this coverage may not continue to be available at acceptable costs |
| A partially or completely uninsured claim against us or our subsidiaries following the mergers could have a material adverse effect on the business, financial condition and results of operations |
| Several large national managed care companies have been the target of class action lawsuits alleging fraudulent practices in the determination of health care coverage policies for their beneficiaries |
| Such lawsuits have, thus far, been aimed solely at full service managed care plans and not companies that specialize in specific segments, such as eye care |
| We cannot assure you that private party litigation, including class action suits, will not target eye care in the future, or that the combined company will not otherwise be affected by such litigation following the mergers |
| Loss of the Services of Key Management Personnel Could Adversely Affect the Company’s Business |
| The successful completion of the mergers and integration of OptiCare and US Vision depends upon the continued services of certain executive officers of the Company, OptiCare and US Vision |
| We believe that the loss of certain of such executive officers during this period could have a material adverse effect on our business, financial condition and results of operations |
| Palisade currently owns approximately 88prca of our common stock and therefore will determine the outcome of all corporate matters requiring stockholder approval, including the election of all of our directors and material transactions |
| Conflicts of interest may arise between us and Palisade and its affiliates in areas relating to past, ongoing and future relationships and other matters |
| These potential conflicts of interest include corporate opportunities, potential acquisitions or financing transactions, sales or other dispositions by Palisade of the shares of our stock held by it, and the exercise by Palisade of its ability to control our management and affairs |
| In addition one of our directors is an officer of PCM and a member of Holdings, both of which are affiliates of Palisade |
| There can be no assurance that any conflicts that may arise between Palisade and us that will not have a material adverse effect on our business, financial condition and results of operations or our other stockholders |
| In connection with the formation of a new private equity partnership, PCM intends to consult with a group of senior experienced operating executives to assist it in the screening and selection of investment opportunities as well as ongoing monitoring and management of portfolio companies |
| Included in this group are Eugene K Bolton, a director; Clark A Johnson, a director and an owner of a 5prca preferred, non-voting equity interest in PCM; Melvin Meskin, a director; Mark S Newman, a director; and Jeffrey D Serkes, a director |
| In most instances, it is expected that these persons would be compensated directly by the portfolio companies |
| Pursuant to employment agreements entered into on April 1, 2005, each of Robert L Tuchman, the Company’s Senior Vice President and General Counsel, and Raymond A Cardonne, Jr, the Company’s Chief Financial Officer, may enter into separate arrangements for his own account with PCM and/or any of its affiliated companies that are engaged in private equity or investment management pursuant to which he may become a member, partner, officer, director or stockholder of such entity or may provide consulting or professional services thereto provided that such activities do not materially interfere with the regular performance of his duties and responsibilities under his respective employment agreement |
| Tuchman and Cardonne also have interests in the general partner of a private equity partnership recently formed by PCM 17 _________________________________________________________________ [64]Table of Contents OptiCare and US Vision Have Not Had Profitable Operations in Recent Years, and We Cannot Assure that the Company will be Profitable |
| In recent years, OptiCare’s and US Vision’s operations have not been profitable |
| OptiCare had net losses of dlra12dtta3 million and dlra8dtta3 million for the years ended December 31, 2003 and December 31, 2004, respectively |
| We cannot assure that efforts to improve profitability through, among other things, economies of scale and cost-efficiencies, will be successful or that the combined company will be profitable following the mergers |
| We intend to expand our operations through organic growth, strategic acquisitions and/or other business combination transactions in the eye care industry |
| We believe that OptiCare can become the largest optical retailer in the State of Connecticut by acquiring additional locations in existing markets to fill in excess capacity as well as in new markets within the State of Connecticut |
| US Vision is already one of the leading store-within-a-store optical retailers in the United States |
| Refac believes that there is opportunity for US Vision to increase the number of stores within the existing host stores in which it operates as well as open new host store relationships |
| We also intend to explore the possibility of acquiring one or more free standing optical chains that might become available for sale |
| There can be no assurance that any or all of these growth initiatives will prove to be profitable |
| Additionally, the growth strategy of the combined company depends in part on its ability to expand and successfully implement an integrated business model |
| We expect that this growth strategy will result in increased responsibilities for management and additional demands on management, operating and financial systems and resources |
| The combined company’s ability to expand will also depend upon its ability to hire and train additional staff and managerial personnel, and adapt, as necessary, its structure to comply with present or future legal requirements affecting arrangements with ophthalmologists and optometrists |
| If we are unable to make strategic acquisitions in the eye care industry and implement its internal growth strategy following the mergers, its business, financial condition, results of operations and ability to achieve and sustain profitability could be materially adversely affected |
| OptiCare’s Business is Substantially Dependent on a Professional Services and Support Agreement with a Professional Affiliate |
| The laws of the State of Connecticut (in which OptiCare conducts all of its operations) as well as some other states prohibit corporations that are not owned entirely by eye care professionals from (i) employing eye care professionals, (ii) receiving for their own account reimbursements from third-party payers for health care services rendered by licensed professionals; (iii) controlling clinical decision-making; or (iv) engaging in other activities that constitute the practice of ophthalmology or optometry |
| To comply with Connecticut law, OptiCare’s wholly-owned subsidiary, OptiCare Eye Health Centers, Inc, is party to a Professional Services and Support Agreement with OptiCare, PC, a Connecticut professional corporation, of which Dr |
| Yimoyines, the current Chairman and Interim Chief Executive Officer of OptiCare, is the sole stockholder |
| Under this agreement, OptiCare, PC employs medical personnel and performs all ophthalmology and optometry services at OptiCare’s facilities in Connecticut |
| Conflicts of interests may also arise in connection with the Professional Services and Support Agreement, because Dean J Yimoyines, the Chairman and Interim Chief Executive Officer of OptiCare, is the sole stockholder of OptiCare, PC, the counterparty to such agreement |
| 18 _________________________________________________________________ [65]Table of Contents If OptiCare’s Managed Vision Care Division Fails to Negotiate Profitable Capitated Fee Arrangements, it Could Have A Material Adverse Effect on the Results of Operations and Financial Condition of the Combined Company |
| Under some managed care contracts, known as “capitation” contracts, health care providers accept a fixed payment per member per month, whether or not a person covered by a managed care plan receives any services, and the health care provider is obligated to provide all necessary covered services to the patients covered under the agreement |
| Many of these contracts pass part of the financial risk of providing care from the payer, ie, an HMO, health insurer, employee welfare plan or self-insured employer, to the provider |
| The growth of capitation contracts in markets which OptiCare serves could result in less certainty with respect to profitability and require a higher level of actuarial acumen than OptiCare currently uses to evaluate such contracts |
| We do not know whether OptiCare will be able to continue to negotiate arrangements on a capitated or other risk-sharing basis that prove to be profitable, or to pass the financial risks of providing care to other parties, or to accurately predict utilization or the costs of rendering services |
| In addition, changes in federal or state regulations of these contracts may limit OptiCare’s ability to transfer financial risks away from itself |
| Any such developments could have a material adverse effect on the business, financial condition and results of operations of the combined company following the mergers |
| US Vision’s Revenues Depend Largely Upon its Lease Arrangement with JC Penney Company, Inc |
| For the fiscal year ended January 31, 2005, 96dtta2prca of US Vision’s net sales were derived from sales in optical centers located within department stores |
| For the same period, net sales attributable to optical centers located within JC Penney stores represented approximately 69dtta3prca of US Vision’s sales |
| US Vision is indirectly dependent on the operations and financial success of its host department stores |
| A decline in the sales, customer traffic or overall financial performance of JC Penney and its other host department stores, could have a material adverse effect on US Vision’s business |
| It is anticipated that US Vision will continue to rely upon several host stores for a majority of its revenues following the mergers |
| However, we cannot assure you that US Vision will be able to maintain its relationships with Sears or its other host stores on favorable terms, if at all, following the mergers |
| US Vision’s optical centers within JC Penney stores are subject to a master lease that expires in December 2007, but either party has the option to extend the term of the lease until December 2010 |
| The master lease may be terminated early, but no more than 40 of US Vision’s JC Penney optical centers may be closed by JC Penney in any calendar year for any reason, excluding any US Vision stores closed by JC Penney as a result of a temporary or permanent closing of a JC Penney department store |
| The lease requires US Vision to pay additional license fees to JC Penney should it enter into a licensed department agreement or similar arrangement with a national chain of department stores or large chain of discount stores that provides for more favorable terms and conditions relating to the amount and payment of license fees |
| A substantial change in US Vision’s relationship with JC Penney resulting in the termination or change of optical center leases would have a material adverse effect on US Vision’s business, financial condition and/or results of operations |
| US Vision’s Revenues Also Depend Upon its Lease Arrangements with Other Department Stores |
| Many of US Vision’s retail optical departments located within other department stores are subject to lease arrangements that permit lease termination on short notice |
| There can be no assurance that any lease between US Vision and a host store will not be terminated or its terms adversely changed |
| A substantial change in US Vision’s relationship with one or more of its host department stores resulting in the termination or change of optical center leases could have a material adverse effect on its business, prospects, financial condition or results of operations |
| 19 _________________________________________________________________ [66]Table of Contents US Vision’s Business is Materially Dependent upon a Single Laboratory |
| US Vision finishes all of its merchandise at its optical laboratory, distribution and lens grinding facility |
| An interruption in production at the facility is likely to have a material adverse effect on the combined company’s business, financial condition or results of operations |
| Failure to Have Vision Care Professionals Available in or Near US Vision’s Vision Centers Would Adversely Affect its Ability to Win Managed Care and Host Store Contracts, and Could Prevent US Vision From Operating in Some States |
| US Vision’s business and marketing strategies emphasize the availability of independent optometrists in close proximity to its vision centers |
| Accordingly, US Vision has made arrangements with licensed optometrists to provide eye examination services at or adjacent to its retail locations in those states where it is permitted |
| These independent optometrists sublease space and equipment from US Vision or from the host store |
| While US Vision and the optometrists do not share in each other’s revenues, US Vision believes the presence of the optometrists offering eye exams at its stores helps to generate sales, leads to repeat customers and reinforces the quality and professionalism of each store |
| Any difficulties or delays in securing the services of these professionals could adversely affect its business |
| Compliance with Section 404 of the Sarbanes-Oxley Act of 2002 is Likely to be Costly |
| Absent an additional extension from the Securities and Exchange Commission or change in its regulations, over the next year, the Company will need to document and test its internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 |
| This law requires annual management assessments of the effectiveness of our internal controls over financial reporting and, commencing with fiscal year 2007, a report by our independent auditors addressing these assessments |
| Our efforts to comply with this law will result in significant added expense and a diversion of management time from strategic activities to compliance activities |