-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HdPuHV8JVcyuyxrt1hfHkUKEstAY4beqjD1Pa27Oy4nAm6t2iYMEmomq1q16RVN1 OSPHLkEgMZftg/lUgoPiTw== 0000927016-00-001143.txt : 20000403 0000927016-00-001143.hdr.sgml : 20000403 ACCESSION NUMBER: 0000927016-00-001143 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991225 FILED AS OF DATE: 20000331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIGHT RESOURCE CORP CENTRAL INDEX KEY: 0000895651 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HEALTH SERVICES [8000] IRS NUMBER: 043181524 STATE OF INCORPORATION: DE FISCAL YEAR END: 1225 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-21068 FILM NUMBER: 591788 BUSINESS ADDRESS: STREET 1: 100 JEFFREY AVENUE CITY: HOLLISTON STATE: MA ZIP: 01746 BUSINESS PHONE: 5084296916 MAIL ADDRESS: STREET 1: 100 JEFFREY AVENUE CITY: HOLLISTON STATE: MA ZIP: 01746 FORMER COMPANY: FORMER CONFORMED NAME: NEWVISION TECHNOLOGY INC DATE OF NAME CHANGE: 19940224 10-K405 1 FORM 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 25, 1999, 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: 0-21068 SIGHT RESOURCE CORPORATION (Exact name of registrant as specified in its charter) Delaware 04-3181524 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 100 Jeffrey Avenue, Holliston, MA 01746 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (508) 429-6916 Securities registered pursuant to Section 12(b) of the Exchange Act: None. Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock, $.01 par value per share (Title of Class) Preferred Share Purchase Rights (Title of Class) 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |X| The aggregate market value of the registrant's voting stock held by non-affiliates of the registrant (without admitting that any person whose shares are not included in such calculation 1 is an affiliate) on March 20, 2000, was approximately $15,591,858, based on the last sale price as reported by NASDAQ. As of March 20, 2000, the registrant had 9,225,952 shares of common stock outstanding, which does not include 30,600 shares held as treasury stock. DOCUMENTS INCORPORATED BY REFERENCE The following documents (or parts thereof) are incorporated by reference into the following parts of this Form 10-K: Certain information required in Part III of this Annual Report on Form 10-K is incorporated from the registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on May 25, 2000. 2 PART I Item 1. Business General Sight Resource Corporation (the "Company") manufactures, distributes and sells eyewear and related products and services. As of December 25 1999, the Company's operations consisted of 130 eye care centers, with two regional optical laboratories and three distribution centers, making it one of the fifteen largest providers in the United States' primary eye care industry based upon sales. The Company's eye care centers operate primarily under the brand names Cambridge Eye Doctors, E.B. Brown Opticians, Eyeglass Emporium, Vision Plaza, Vision World, Shawnee Optical and Kent Optical. The Company also provides or, where necessary to comply with applicable law, administers the business functions of optometrists, ophthalmologists and professional corporations that provide vision related professional services. In addition, during 1999 the Company operated two laser vision correction ("LVC") centers. However, in August, 1999, the Company closed one center and in December, 1999, closed the other center. Acquisition History and Strategy Effective January 1, 1995, the Company acquired the assets of Cambridge Eye Associates, Inc. ("Cambridge Eye"), an optometric practice which, at December 25, 1999, operated 23 primary eye care centers, principally in Massachusetts. The assets and liabilities of Cambridge Eye were acquired from a Company by the same name (Cambridge Eye Associates, Inc.) owned by Elliot S. Weinstock, O.D. as the sole stockholder. Following the acquisition, Cambridge Eye entered into a management services contract with Optometric Providers, Inc. ("Optometric Providers"), a corporation established to employ the optometrists previously employed by the acquired company. Effective July 1, 1995, the Company acquired the assets of Douglas Vision World, Inc. ("Vision World"), a company which, at December 25, 1999, operated seven primary eye care centers in Rhode Island. The assets and liabilities of Vision World were acquired from a company by the same name (Douglas Vision World, Inc.) owned by Kathleen Haronian, Lynn Haronian and Shirley Santoro. Following the acquisition, Vision World entered into a management services contract with Optometric Care, Inc. ("Optometric Care"), a professional corporation established to employ the optometrists previously affiliated with the acquired company. Effective July 1, 1996, the Company acquired the assets and liabilities of three companies, the E.B. Brown Optical Company, Brown Optical Laboratories, Inc. and E.B. Brown Opticians, Inc. (collectively, "E.B. Brown"), all owned by Gordon and Evelyn Safran. At December 25, 1999, E. B. Brown operated 36 eye care centers in Ohio and western Pennsylvania. Independent optometrists are associated with all E.B. Brown eye care centers; therefore, the Company does not record revenue from the provision of vision related medical services at these locations. The Company may add optometrists to the staffs of several of its eye care centers in Ohio and Pennsylvania. To accomplish this, it may be necessary to enter into management services contracts with professional corporations established to employ these optometrists. 3 Effective July 1, 1997, the Company acquired all of the outstanding shares of stock of Vision Holdings, Ltd. (formerly known as Dr. Greenberg, An Optometry Corporation d/b/a Vision Plaza)("Vision Plaza"). At December 25, 1999, Vision Plaza operated 15 primary eye care centers and two specialty eyewear centers in Louisiana and Mississippi. Following the acquisition, Vision Plaza entered into a management services contract with Dr. John Musselman, a Professional Corporation ("Musselman"), a corporation established to employ the optometrists previously employed by the acquired company. Effective April 1, 1998, the Company acquired all of the outstanding shares of stock of Eye Glass Emporium, Inc. ("Eyeglass Emporium"). At December 25, 1999, Eyeglass Emporium operated nine primary eye care centers in northwest Indiana. Independent optometrists are associated with all Eyeglass Emporium eye care centers, therefore, the Company does not record revenue from the provision of vision related medical services at these locations. Effective January 1, 1999, the Company acquired all of the outstanding shares of stock of Shawnee Optical, Inc. ("Shawnee"). At December 25, 1999, Shawnee operated nine primary eye care centers in western Pennsylvania and central Ohio. Independent optometrists are associated with all Shawnee eye care centers, therefore, the Company does not record revenue from the provision of vision related medical services at these locations. Effective April 1, 1999, the Company acquired all of the outstanding shares of Kent Optical, Inc. and its associated companies (collectively, "Kent"). At December 25, 1999, Kent operated 29 eye care centers in Michigan. Kent leases optometrists from a subcontractor and records revenue from the provision of vision related medical services by these optometrists. The Company has an acquisition strategy to acquire and integrate the assets of multi-site eye care centers and the practices of eye care professionals and to employ or enter into management services contracts with these professionals. This strategy includes both expanding existing regional markets and entering new regional markets. The Company will also target acquisitions in strategic markets that will serve as platforms from which the Company can consolidate a given service area by making and integrating additional "in-market" acquisitions. In assessing potential acquisition candidates, the Company evaluates qualitative issues such as the reputation of the eye care professional in the local and national marketplace, the training and education of the eye care professional, licensure and experience, Medicare and Medicaid compliance, billing practices and operating history. Prior to entering any market, the Company considers such factors as the local level of eye care competition, networking and consolidation activity, the regulatory environment, customer-provider ratios and the economic condition of the local market. The Company from time to time also considers acquisitions of, or affiliations with, ambulatory surgical centers, specialty eye hospitals and other complementary practices and services that are consistent with its objective of being a leading integrated provider of eye care products and services in select, regional markets. 4 Current Operations Eye Care Centers The Company's 130 eye care centers are located in major shopping malls, strip shopping centers, urban locations and free-standing buildings and generally are clustered within discrete market areas so as to maximize the benefit of advertising strategies and to minimize the cost of supervising operations. The Company's centers in Massachusetts, Rhode Island, Ohio and Louisiana are leading providers of prescription and non-prescription eye care products and services in those markets. In addition, the Company's eye care centers in Indiana, New Hampshire, Pennsylvania, Mississippi and Michigan are leading providers in their local markets. The eye care centers are substantially similar in appearance within each region and are operated under certain uniform standards and operating procedures. Each eye care center carries a selection of eyeglass frames, ranging in price from value models to designer collections. Lens and frame selections include a variety of materials and styles. The Company continually analyzes sales of its frames to keep its eye care centers stocked with a wide selection of the latest in eyewear fashion and a proper assortment of styles, colors, and sizes. In addition to prescription eyewear, each eye care center also carries fashion sunglasses and eyewear accessories. E.B. Brown's eye care centers also offer hearing aids and audiology goods and services which are provided by audiologists who service many of E.B. Brown's centers on a rotating schedule. Each eye care center in Massachusetts, New Hampshire, Rhode Island, Indiana, Louisiana, Mississippi, Pennsylvania and Michigan is staffed by one or more licensed optometrists, a manager and a number of trained eye care technicians and/or licensed opticians. The Company intends to continue to add optometrists to several of its eye care centers in Ohio and Pennsylvania. Centralized Optical Laboratories and Distribution Centers To meet the volume needs of the eye care centers for certain prescription eyeglass lenses and the delivery needs of each center's customers, the Company operates two regional optical laboratories and three distribution centers. The regional optical laboratories provide complete laboratory services to the Company's eye care centers, including polishing, cutting and edging, tempering, tinting and coating of ophthalmic lenses. The distribution centers provide and maintain an inventory of all accessories and supplies necessary to operate the primary eye care centers in their regions, as well as "ready made" eye care products, including contact lenses and related supplies. The inventory of eyeglass lenses, frames, contact lenses, accessories and supplies is acquired through a number of sources, domestic and foreign. The Company is not dependent on any one supplier. Management believes that the regional optical laboratories and distribution centers have the capacity to accommodate additional multi-site eye care centers. Management Information and Financial Systems In 1998, the Company completed the first stage of testing and installation of software associated with a new point of sale system and perpetual inventory system for its primary eye 5 care centers, regional optical laboratories and distribution centers. The Company completed the installation of the new point of sale system in its New England eye care chains in the Fall of 1998. In 1999, the Company completed the installation of the system in all other chains except Shawnee and Kent and anticipates the installation of the system to be completed in Shawnee and Kent during 2000. The Company believes that the new system will facilitate the processing of customer sales information and replenishment of inventory by passing such information, including customer specific orders, to the Company's home office, and its regional optical laboratories and distribution centers for further processing. When the Company acquires additional eye care chains, it intends to integrate those chains into the new system or a similar compatible system. Managed Primary Eye Care The Company implemented its SightCare program to address the expanding enrollment of patients in managed primary eye care programs and the resulting customer flow to designated providers of these managed primary eye care services. SightCare is responsible for developing programs for third party payors, securing new contracts for providing managed primary eye care services, and ensuring the consistency and quality of managed primary eye care products and services delivered by the Company. As of December 25, 1999, the Company provided managed primary eye care benefits to more than 50 organizations in the markets served by its chains, including private companies, unions and leading health maintenance organizations. The Company believes that its buying power, regional laboratories, in-center optometrists, and broad outreach within its markets, enable it to deliver consistent, quality eyewear and primary eye care at competitive prices, thereby positioning the Company to achieve a leadership position in managed primary eye care in its markets. Management Agreements Many states have laws which prohibit or restrict the practice of optometry by non-licensed persons or entities. See "--Government Regulation." In states which allow the Company to employ optometrists and ophthalmologists, the Company plans on providing professional services directly. Otherwise, the Company will enter into management agreements with optometrists, ophthalmologists and/or professional corporations which will provide the professional eye care services. The Company's wholly owned subsidiaries, Cambridge Eye, Vision World, and Vision Plaza each entered into a management agreement with Optometric Providers, Optometric Care, and Musselman (collectively the "PCs"), respectively. Accordingly, Cambridge Eye operates as the management service organization ("MSO") for Optometric Providers, Vision World operates as the MSO for Optometric Care, and Vision Plaza operates as the MSO for Musselman. Cambridge Eye, Vision World, and Vision Plaza, as MSOs, have exclusive decision making authority for the ongoing major operations of the PCs, with the exception of the provision of professional eye care services. Pursuant to these management agreements, the Company, among other things, (i) acts as the exclusive financial manager, business manager and administrator of all business and administrative functions and services associated with the provision of the professional services, (ii) orders and purchases all professional and office inventory and supplies and arranges for the availability of the same, (iii) maintains files and records, (iv) provides or arranges for the provision of technical and ancillary 6 service and support personnel, (v) establishes, operates and maintains bookkeeping, payroll, accounting, billing and collection systems, (vi) renders advice concerning the marketing of services, (vii) develops and administers benefit plans for the professionals and (viii) renders such other business and financial management, consultation and advice as may reasonably be needed from time to time by the practice in connection with its provision of professional services. As a result, the Company is involved in the daily on-site financial and administrative management of these optometric practices. The Company's goals in providing such services are to (i) improve the performance of these optometric practices in these non-professional activities, (ii) allow the optometrists employed by or associated with these practices to more fully dedicate their time and efforts toward their professional practice activities, and (iii) afford the Company expanded service capabilities, and, for itself and on behalf of the optometric practices, capitalize on opportunities for contracting with third party payors and their intermediaries, including managed care providers. The management fees payable to the Company by the affiliated practices under the management agreements vary based on the cost, nature and amount of services provided, and may be adjustable or subject to renegotiation from time to time. Management fees payable under existing and future contracts are subject to the requirements of applicable laws, rules and regulations and negotiations with individual professional practices. Under the management agreements, the affiliated practices retain the responsibility for, among other things, (i) hiring and compensating professionals, (ii) ensuring that professionals have the required licenses, credentials, approvals and other certifications needed to perform their duties and (iii) complying with applicable federal and state laws, rules and regulations. In addition, the affiliated practices exclusively control all aspects of professional practice and the delivery of professional services. Stock Restrictions and Pledge Agreements The outstanding voting capital stock of each of the PCs is 100% owned by a licensed optometrist (the "nominee shareholder") who has, in turn, executed a Stock Restrictions and Pledge Agreement (a "Pledge Agreement") in favor of the respective MSO. Set forth below is a chart identifying each PC, the nominee shareholder for each PC and the total number of employees for each PC as of the end of fiscal 1999:
Name of PC Nominee Shareholder No. of Employees ---------- ------------------- ---------------- Optometric Providers, Inc. .......................... Alerino Iacobbo, O.D. 31 persons Optometric Care, Inc................................. Alerino Iacobbo, O.D. 9 persons Dr. John Musselman, a Professional Corporation....... John Musselman, O.D. 24 persons
Through each Pledge Agreement, the nominee has pledged all of the outstanding voting capital stock of his PC to the respective MSO. The Company requires that a nominee shareholder execute a Pledge Agreement in order to provide security for the prompt payment, performance and observance by the PC of all of its obligations, debts and covenants under its management agreement with the MSO. The Pledge Agreement also contains restrictions on the nominee shareholder's ability to transfer the stock of the PC, in order to provide that the stockholder will at all times be a person eligible to hold such stock pursuant to the provisions of 7 applicable law, the PC's Articles of Organization and the PC's By-Laws. The Pledge Agreement may be terminated only upon the written agreement of the parties thereto or upon the termination of the management agreement and satisfaction in full of all of the PC's obligations thereunder; a nominee shareholder may not unilaterally terminate a Pledge Agreement. In order to provide for the orderly continuation of the PC's business and affairs, each Pledge Agreement also enumerates several events or circumstances that require or permit the MSO to effect a change of the nominee shareholder. Upon the occurrence of any of the following events (each of which is enumerated in the Company's form of Pledge Agreement), an MSO may require the nominee stockholder to sell and transfer the stock of the PC to another person eligible to serve as a new nominee shareholder: (i) the death or disability of the nominee shareholder; (ii) the nominee shareholder's disqualification to practice optometry in the relevant jurisdiction or any other event or circumstance the effect of which is to cause the nominee shareholder to cease being eligible to serve as the shareholder of the PC; (iii) the transfer, by operation of law or otherwise, of the nominee shareholder's shares of stock in the PC to a person who is not eligible to serve as the shareholder of the PC; (iv) the termination of the nominee shareholder's employment by the PC or by the Company (including its subsidiaries); (v) the occurrence of any other event or the existence of any other condition which, in the reasonable opinion of the MSO (in its capacity as exclusive business manager and administrator of the professional corporation), impairs or renders less-than-optimal the Company's business management and administration of all of the business and administrative functions and services of the PC; or (vi) the occurrence of any other event or the existence of any other condition which might require or otherwise result in the sale or transfer by the nominee shareholder (or his estate or personal representative) of the nominee shareholder's shares of stock in the PC. The purchase price for a sale of the PC's stock is equal to the aggregate book value of the PC. The Company believes that such book value will always be a nominal cost because each PC operates and expects to continue to operate at an almost break-even level generating a nominal profit, if any at all, and each PC does not own or hold or plan to own or hold any significant assets of any nature. The Company believes that the events or circumstances identified in clauses items (iv) and (v) are entirely within the Company's control. For example, as there are no employment agreements between the Company and any nominee shareholder, each nominee shareholder is an "at-will" employee of the MSO, whose employment can be terminated at any time, with or without cause. Either of these events are entirely within the Company's control and, therefore, these provisions provide the Company with the ability at all times to cause a change in the nominee shareholder and for an unlimited number of times, at nominal cost. These provisions meet the criteria described in footnote 1 to EITF 97-2, so that (i) the Company can at all times establish or effect a change in the nominee shareholder, (ii) the Company can cause a change in the nominee shareholder an unlimited number of times, that is, changing the nominee shareholder one or more times does not affect the Company's ability to change the nominee shareholder again and again, (iii) the Company has the sole discretion without cause to establish or change the nominee shareholder, (iv) the Company can name any qualified optometrist as a new nominee shareholder (that is, the Company's choice of an eligible nominee is not materially limited), (v) the Company and the nominally owned entity incur no more than a nominal cost to cause a change in the nominee shareholder and (vi) neither the Company nor the nominally owned entity is subject to any significant adverse impact upon a change in the nominee shareholder. The Company effected the change of the nominee shareholder for Optometric Providers in August of 1998, without an adverse impact on the Company or the PC. The Company does not believe that any future change in any nominee 8 shareholder would have a significant adverse impact on it or any PC. To date, the Company's experience with the nominee shareholders has been satisfactory. Laser Vision Correction Services During 1999, the Company operated two laser vision correction ("LVC") centers in association with selected ophthalmic surgical providers. However, in August 1999, the Company closed one center and in September 1999, sold the excimer laser system that had been in use at that center. Then, in December 1999, the Company closed the other LVC center and in January 2000, sold the excimer laser system that had been in use at that center. In order to continue providing refractive laser services to its patients, the Company entered into a refractive laser access agreement with Laser Vision Centers, Inc. ("LVCI") in October, 1999. The agreement calls for LVCI to provide Company patients with refractive laser services in conjunction with affiliated LVCI ophthalmologists in the Company's markets. The Company will provide patient pretest screening and post procedural treatment and care. By affiliating with the Company, LVCI benefits from the Company's ability to acquire, counsel, and refer customers for laser vision correction ("LVC") services through its primary eye care centers. The Company benefits from its affiliation with LVCI by having a convenient way of participating in LVC without incurring substantial capital expenditures. The Company's obligations pursuant to the agreement includes: screening patients, pre-procedural selection and workup, post procedural treatment and diagnostic and recuperative care. LVCI's responsibilities pursuant to the agreement include furnishing the laser system to be used for the delivery of LVC, maintenance, repair and upgrade of the laser system and certain training and oversight of medical, technical, and administrative personnel involved in delivery of the services at the center. The Company and LVCI will jointly participate in the selection of qualified ophthalmologists and certain marketing activities. Marketing and Merchandising The Company's marketing and merchandising strategy focuses on the following key concepts: (i) selling quality, brand name and private-label eyewear at competitive prices, (ii) offering a wide selection of eyewear products, (iii) offering convenient locations and hours, and in-house optometric examinations by licensed optometrists, (iv) using a variety of media, such as radio, newspaper, direct mail, television and yellow pages advertising, to differentiate it from competitors and to create general consumer awareness and traffic in its eye care centers and (v) providing knowledgeable and personalized customer service. The Company makes use of various tools to market its products and services: Advertising. The Company uses newspaper, magazine, television, radio, direct mail and other advertising to reach prospective, as well as existing, customers. Advertisements emphasize the Company's benefits to the eyewear public, such as value pricing, product promotions, convenience of location, customer service and knowledgeable salespersons. In-house optometric examinations by licensed optometrists are also emphasized in advertising, subject to regulatory requirements. In-center Marketing. The Company prepares and revises point-of-purchase displays which convey promotional messages to customers upon arriving at its centers. Visual merchandising 9 techniques, educational videotapes, and take-home brochures are employed to draw attention to products displayed in the eye care centers. Quarterly Catalogs. The Company mails a quarterly catalog to customers who are in its marketing database. This database consists of individuals who have utilized the services of the Company and its affiliated professionals over the last several years. The catalog includes educational, promotional and marketing information about the Company's products and services, including LVC. The Company markets its comprehensive and competitively priced primary eye care programs to leading HMOs, insurance companies and other third party payors in the Company's regional markets. The Company's marketing strategy towards these organizations stresses its regional coverage, its complete range of eye care products and services and its commitment to quality and service. Through its SightCare programs the Company has upgraded and simplified its frame collection available to managed care organizations in order to allow it to compete more effectively for managed care contracts. Eventually, the Company intends to offer its SightCare programs in all of its markets. Competition The Company experiences competition regarding the acquisition of the assets of, and the provision of management services to, eye care centers and practices. Several companies, both publicly and privately held, that have established operating histories and greater resources than the Company are pursuing the acquisition of the assets of general and specialty practices and the management of such practices. Eye care practices affiliated with the Company will compete with other local eye care practices as well as managed care organizations. The Company believes that changes in governmental and private reimbursement policies and other factors have resulted in increased competition for consumers of eye care services. The Company believes that cost, accessibility and quality of services are the principal factors that affect competition. The optical industry is highly competitive and includes chains of retail optical stores, multi-site eye care centers, and a large number of individual opticians, optometrists, and ophthalmologists who provide professional services and/or dispense prescription eyewear. Optical retailers generally serve individual, local or regional markets, and, as a result, competition is fragmented and varies substantially among locations and geographic areas. The Company believes that the principal competitive factors affecting retailers of prescription eyewear are location and convenience, quality and consistency of product and service, price, product warranties, and a broad selection of merchandise, and that it competes favorably in each of these respects. The Company and its affiliated practices compete with other providers for managed primary eye care contracts. The Company believes that trends toward managed primary eye care have resulted in increased competition for such contracts. Competition in providing LVC comes from entities similar to the Company and from hospitals, hospital-affiliated group entities, physician group practices and private ophthalmologists that, in order to offer LVC to existing patients, purchase refractive lasers. 10 Suppliers of conventional vision correction alternatives (eyeglasses and contact lenses), such as optometric chains, may also compete with the Company by purchasing laser systems and training personnel to offer LVC to their customers. In certain markets, competition to provide LVC has reduced and may continue to reduce prices for LVC, as has happened in some countries where the treatment has been available for several years. Government Regulation The Company and its operations are subject to extensive federal, state and local laws, rules and regulations affecting the healthcare industry and the delivery of healthcare, including laws and regulations prohibiting the practice of medicine and optometry by persons not licensed to practice medicine or optometry, prohibiting control over optometrists or physicians in the practice of optometry by parties not licensed to practice optometry or medicine, prohibiting the unlawful rebate or unlawful division of fees and limiting the manner in which prospective patients may be solicited. The Company attempts to structure all of its operations so as to comply with the relevant state statutes and regulations. The Company believes that its operations and planned activities do not violate any applicable medical practice, optometry practice, fee-splitting or other laws identified above. Laws and regulations relating to the practice of medicine, the practice of optometry, fee-splitting or similar laws vary widely from state to state and seldom are interpreted by courts or regulatory agencies in a manner that provide guidance with respect to business operations such as those of the Company. There can be no assurance that courts or governmental officials with the power to interpret or enforce these laws and regulations will not assert that the Company or certain transactions in which it is involved are in violation of such laws and regulations. In addition, there can be no assurance that future interpretations of such laws and regulations will not require structural and organizational modifications of the Company's business. Services that are reimbursed by third party payors may be subject to provisions of the Social Security Act (sometimes referred to as the "anti-kickback" statute) and similar state laws that impose criminal and civil sanctions on persons who solicit, offer, receive, or pay any remuneration, whether directly or indirectly, in return for inducing the referral of a patient for treatment or the ordering or purchasing of items or services that are paid for in whole or in part by Medicare, Medicaid or other specified federal or state programs, or, in some states, private payors. The federal government has promulgated regulations that create exceptions or "safe harbors" for certain business transactions. Transactions that are structured in accordance with such safe harbors will not be subject to prosecution under federal law. In order to obtain safe harbor protection, the business arrangement must satisfy each of and every requirement of the applicable safe harbor(s). Business relationships that do not satisfy each element of a safe harbor do not necessarily violate the anti-kickback statute but may be subject to greater scrutiny by enforcement agencies. Many state anti-kickback statutes do not include safe harbors and some state anti-kickback statutes apply to all third party payors. The Company is concerned about federal and state anti-kickback statutes only to the extent that it provides healthcare services that are reimbursed by federal, state and in some states, private third party payors. The Company believes its business relationships and operations are in material compliance with applicable laws. Nevertheless, there can be no assurance that the Company will not be required to change its practices or experience a material adverse effect as a result of a challenge by federal or state enforcement authorities under the foregoing statutes. Significant prohibitions against physician referrals have been enacted by Congress. These prohibitions, commonly known as "Stark II," amended prior physician self-referral legislation known as "Stark I" by dramatically enlarging the field of physician-owned or physician-interested 11 entities to which the referral prohibitions apply. Effective December 31, 1994, Stark II prohibits a physician from referring Medicare or Medicaid patients to an entity providing "designated health services" in which the physician has an ownership or investment interest, or with which the physician has entered into a compensation arrangement. The designated health services include prosthetic devices, which under applicable regulations and interpretations include one pair of eyeglasses or contact lenses furnished after cataract surgery and intra-ocular lenses provided at ambulatory surgery centers. The penalties for violating Stark II include a prohibition on payment by these government programs and civil penalties of as much as $15,000 for each violative referral and $100,000 for participation in a "circumvention scheme." The Company's current business is not governed by Stark I or II. To the extent the Company or any affiliated practice is deemed to be subject to the prohibitions contained in Stark II for services, the Company believes its activities fall within the permissible activities defined in Stark II, including, but not limited to, the provision of in-office ancillary services. The FDA and other federal, state or local governmental agencies may amend current, or adopt new, rules and regulations that could affect the use of ophthalmic excimer lasers for LVC and therefore adversely affect the business of the Company. Environmental Regulation The Company's business activities are not significantly affected by environmental regulations and no material expenditures are anticipated in order for the Company to comply with environmental regulations. However, the Company is subject to certain regulations promulgated under the Federal Environmental Protection Act with respect to grinding, tinting, edging and disposing of ophthalmic lenses and solutions. Proprietary Property The Company has no licenses, patents or registered copyrights. The Company does have various registered trademarks in the U.S., including "Sight Resource", "Cambridge Eye Doctors", "E.B. Brown Opticians", "Eyeglass Emporium", "Kidspecs", "Shawnee Optical", "Kent Optical", "SightCare" and "Vision Plaza". Employees As of December 25, 1999, the Company had 815 employees. The Company intends to hire additional key personnel it believes will be required for advancement and expansion of the Company's activities. The success of the Company's future operations depends in large part on the Company's ability to recruit and retain qualified personnel over time. There can be no assurance, however, that the Company will be successful in retaining or recruiting key personnel. 12 Business Risks and Cautionary Statements When used in this Form 10-K and in future filings by the Company with the Securities and Exchange Commission, in the Company's press releases and in oral statements made with the approval of an authorized executive officer, the words or phrases "will likely result", "are expected to", "estimate", "project" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties, including those discussed below, that could cause actual results to differ materially from historical results and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company wishes to advise readers that the factors listed below could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. The Company will not undertake and specifically declines any obligation to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. There are a number of risks and uncertainties that could cause actual results to differ materially from historical results and those presently anticipated or projected. Such significant risks and uncertainties include but are not limited to: 1. The Company has a limited operating history, entering the LVC market in 1993 and the primary eye care market in 1995. 2. The Company has a history of operating losses, has not yet demonstrated sustained profitability and may continue to incur significant operating losses for the foreseeable future. 3. The primary eye care market and LVC market are highly competitive. The Company's current and potential competitors include many larger companies with substantially greater financial, operating, marketing and support resources than the Company. 4. There can be no assurance that attractive acquisition candidates, or the financing necessary for any such acquisitions, will be available to the Company. 5. The Company has previously breached certain loan covenants and although waivers of such breaches have been granted, there can be no assurance that the Company will be able to obtain waivers of any future breaches of loan covenants; the failure to obtain such waivers could materially and adversely affect the Company's business and financial condition. 6. There can be no assurance that the Company will be able to realize any operating efficiencies from the purchase and consolidation of primary eye care centers or optical chains. 13 7. There can be no assurance that the Company will acquire new managed primary eye care contracts or that existing contracts will be expanded in any meaningful way. 8. The Company and its operations are subject to extensive federal, state and local regulation, which could materially affect the Company's operations. Corporate Liability and Insurance The provision of professional eye care services entails an inherent risk of professional malpractice and other similar claims. The Company does not influence or control the practice of medicine or optometry by professionals or have responsibility for compliance with certain regulatory and other requirements directly applicable to individual professionals and professional groups. As a result of the relationship between the Company and its affiliated practices, the Company may become subject to some professional malpractice actions under various theories. There can be no assurance that claims, suits or complaints relating to professional services provided by affiliated practices will not be asserted against the Company in the future. The Company believes that the providers with which the Company enters into LVC center agreements or other strategic affiliation agreements are covered by such providers' professional malpractice or liability insurance. The Company may not be able to purchase professional malpractice insurance, and may not be able to purchase other insurance at reasonable rates, which would protect it against claims arising from the professional practice conducted by providers. Similarly, the use of laser systems in the Company's LVC centers may give rise to claims against the Company by persons alleging injury as a result of the use of such laser systems. The Company believes that claims alleging defects in the laser systems it purchases from its suppliers are covered by such suppliers' product liability insurance and that the Company could take advantage of such insurance by adding such suppliers to lawsuits against the Company. There can be no assurance that the Company's laser suppliers will continue to carry product liability insurance or that any such insurance will be adequate to protect the Company. The Company maintains insurance coverage that it believes will be adequate both as to risks and amounts. The Company believes that such insurance will extend to professional liability claims that may be asserted against employees of the Company that work on site at affiliated practice locations. In addition, pursuant to the management agreements, the affiliated practices are required to maintain professional liability and comprehensive general liability insurance. The availability and cost of such insurance has been affected by various factors, many of which are beyond the control of the Company and its affiliated practices. There can be no assurance that the Company will be able to retain adequate liability insurance at reasonable rates, or that the insurance will be adequate to cover claims asserted against the Company, in which event the Company's business may be materially adversely affected. Item 2. Description of Properties At December 25, 1999, the Company leased space for 128 of the Company's eye care centers (which range in size from approximately 600 to 6,200 square feet), under operating leases, which expire as follows, exclusive of renewal options. 14 At 12/25/99 ----------- Year Number of leases ---- ---------------- expiring -------- 2000 ..................................... 29 2001 ..................................... 22 2002 ..................................... 16 2003 ..................................... 16 2004 ..................................... 23 2005 and thereafter ..................... 22 In addition, the Company is currently in lease negotiations or is an at will tenant for three eye care centers. The Company's corporate headquarters, and distribution center occupy approximately 22,000 square feet of space leased in an industrial complex in Holliston, Massachusetts pursuant to a lease which expires in 2004. The Company believes that its facilities are adequate for its present needs and that suitable space will be available to the Company upon commercially reasonable terms to accommodate future needs. Item 3. Legal Proceedings From time to time the Company's subsidiaries may be defendants in certain lawsuits alleging various claims incurred in the ordinary course of business. These claims are generally covered by various insurance policies, subject to certain deductible amounts and maximum policy limits. In the opinion of management, the resolution of existing claims should not have a material adverse effect, individually or in the aggregate, upon the Company's business or financial condition. There can be no assurance that future claims against the Company or any of its subsidiaries will not have a material adverse effect on the Company, its operations or financial condition. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the quarter ended December 25, 1999. 15 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Market for Company's Common Equity The Company's Common Stock began trading on NASDAQ on March 31, 1993 under the symbol "VISN". The Company also issued Warrants which began trading on NASDAQ on August 25, 1994 under the symbol "VISNZ". The warrants expired and closed trading on August 25, 1999. The following table sets forth for the periods indicated, the high and low sales prices for the Common Stock and Warrants as reported by NASDAQ: Common Stock Warrants ------------ -------- High Low High Low ---- --- ---- --- 1999: First Quarter............$ 3 1/4 $ 2 1/4 3/32 Second Quarter........... 4 15/16 2 1/2 7/16 3/32 Third Quarter............ 4 7/8 2 1/2 1/4 1/32 Fourth Quarter........... 3 3/8 1 7/8 N/A N/A 1998: First Quarter............$ 5 1/16 $ 3 1/4 $ 1 3/8 $ 1 1/16 Second Quarter........... 4 1/2 3 5/8 1 5/32 5/8 Third Quarter............ 3 21/32 1 15/16 3/4 1/8 Fourth Quarter........... 3 11/16 1 5/8 9/16 1/16 The Common Stock and Warrants have been quoted on the NASDAQ National Market System since August 25, 1994. Prior to that time, the Common Stock was quoted on the NASDAQ SmallCap Market. The Company has not paid dividends to its common stockholders since its inception and does not plan to pay cash dividends in the foreseeable future. The Company currently intends to retain earnings, if any, to finance the growth of the Company. As of March 20, 2000, there were 216 holders of record of the Company's Common Stock. There are approximately 3,500 beneficial owners of the Company's Common Stock. 16 Item 6. Selected Financial Data
Year ended December 31 ---------------------- 1999 (1,2) 1998 (3) 1997 (4,5,6) 1996 (6,7) 1995 (8) ---------- -------- ------------ ---------- -------- (In thousands, except per share amounts) Statement of Operations Data: Net revenues ........................ $ 67,034 $ 54,971 $ 44,576 $ 29,987 $ 18,240 Net loss ............................ (2,854) (985) (2,004) (5,850) (4,888) Net loss per common share ........... (0.30) (0.11) (0.46) (0.78) (0.89) Weighted average number of common shares outstanding .................. 9,181 8,867 8,669 7,523 5,488 Balance Sheet Data: Working capital ..................... $ 1,088 $ 3,176 $ 4,243 $ 7,774 $ 5,325 Total assets ........................ 40,754 32,145 34,507 31,430 23,249 Non-current liabilities ............. 6,989 348 101 1,876 1,703 Stockholders' equity ................ 17,349 18,959 19,446 22,766 16,445
- ---------- 1. Effective April 1, 1999, the Company acquired all of the outstanding shares of stock of Kent Optical, Inc. and its associated companies (collectively, "Kent"). The purchase price paid in connection with this acquisition was $5,209 in cash, $1,000 in notes payable over three years and 160,000 shares of common stock. At December 25, 1999, Kent operated 29 eye care centers in Michigan. 2. Effective January 1, 1999, the Company acquired all of the outstanding shares of stock of Shawnee Optical, Inc. ("Shawnee"). The purchase price paid in connection with this acquisition was $1,750 in cash, $300 in notes payable over three years and 70,000 shares of common stock. At December 25, 1999, Shawnee operated nine eye care centers in Pennsylvania and Ohio. 3. Effective April 1, 1998, the Company acquired all of the outstanding shares of stock of Eye Glass Emporium, Inc. ("Eyeglass Emporium"). The purchase price paid in connection with this acquisition was $2,309 in cash, $350 in notes payable in twelve equal quarterly installments commencing June 30, 1998 and 87,940 shares of common stock. At December 25, 1999, Eyeglass Emporium operated nine eye care centers in Indiana. 4. Effective July 1, 1997, the Company acquired all of the outstanding shares of stock of Vision Holdings, Ltd. (formerly known as Dr. Greenberg, An Optometry Corporation d/b/a/ Vision Plaza) ("Vision Plaza"). At December 25, 1999, Vision Plaza operated 15 primary eye care centers and two specialty eyewear centers in Louisiana and Mississippi. Following the acquisition, Vision Plaza entered into a management services contract with Dr. John Musselman, a Professional Corporation ("Musselman"), a corporation established to employ the optometrists previously employed by the acquired company. 17 5. The net loss per share in 1997 includes a $1,953 dividend to the preferred stockholders as discussed in Note 8 of the Notes To Consolidated Financial Statements. 6. Includes a $110 provision for store closings and $400 write off of software development costs in 1997 and a $2,622 provision for impairment of ophthalmic equipment in 1996. 7. Effective July 1, 1996, the Company purchased certain assets and assumed certain liabilities of The E.B. Brown Optical Company and Brown Optical Laboratories, Inc. and acquired by merger E.B. Brown Opticians, Inc. (collectively, "E.B. Brown"). At December 25, 1999, E.B. Brown operated 36 eye care centers located throughout Ohio and western Pennsylvania which provide optometric and audiology goods and services to persons with vision and hearing disorders. 8. Effective January 1, 1995 and July 1, 1995, the Company purchased substantially all the assets of Cambridge Eye Associates, Inc. and Douglas Vision World, Inc., respectively. At December 25, 1999, these companies combined had a practice of 30 optometric offices throughout New England providing comprehensive vision care services to residents of this region. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation Overview Sight Resource Corporation (the "Company") manufactures, distributes and sells eyewear and related products and services. As of December 25, 1999, the Company's operations consisted of 130 eye care centers, two regional optical laboratories and three distribution centers, making it one of the fifteen largest providers in the United States' primary eye care industry based upon sales. The Company's eye care centers operate primarily under the brand names Cambridge Eye Doctors, E.B. Brown Opticians, Eyeglass Emporium, Vision Plaza, Vision World, Shawnee Optical, and Kent Optical. The Company also provides, or where necessary to comply with applicable law administers the business functions of optometrists, ophthalmologists and professional corporations that provide, vision related professional services. The Company operates two regional optical laboratories and three distribution centers. The regional optical laboratories provide complete laboratory services to the Company's eye care centers, including polishing, cutting and edging, tempering, tinting and coating of ophthalmic lenses. The distribution centers provide and maintain an inventory of all accessories and supplies necessary to operate the primary eye care centers in their regions, as well as "ready made" eye care products, including contact lenses and related supplies. The inventory of eyeglass lenses, frames, contact lenses, accessories and supplies is acquired through a number of sources, domestic and foreign. Management believes that the regional optical laboratories and distribution centers have the capacity to accommodate additional multi-site eye care centers. The Company's results of operation include the accounts of the Company, its wholly-owned subsidiaries and three professional corporation's ("PCs") in which the Company's subsidiaries assume the financial risks and rewards of such entities. The Company has no direct equity 18 ownership in the PCs since the outstanding voting capital stock of each of the PCs is 100% owned by a licensed optometrist (the "nominee shareholder") who has, in turn, executed a Stock Restrictions and Pledge Agreement (a "Pledge Agreement") in favor of a subsidiary of the Company. Each Pledge Agreement contains provisions that provide the Company with the ability at all times to cause a change in the nominee shareholder and for an unlimited number of times, at nominal cost. For example, if (i) the employment of the nominee shareholder is terminated by the PC or by the Company (including its subsidiaries) or (ii) the Company determines that the nominee shareholder is impairing or rendering less-than-optimal the Company's business management and administration of the PC, then the Company has the right to require the existing nominee shareholder to sell all of the outstanding stock of the PC to another person eligible to serve as a new nominee shareholder. The purchase price for a sale of the PC's stock is equal to the aggregate book value of the PC, which will always be a nominal cost because each PC operates and expects to continue to operate at an almost break-even level generating a nominal profit, if any at all. See "Business--Stock Restrictions and Pledge Agreements." Results of Operations 1999 as compared with 1998 Net Revenue. The Company generated net revenue of approximately $67.0 million during the year ended December 25, 1999 from the operation of its 130 eye care centers and two laser vision correction centers in the United States as compared to net revenue of approximately $55.0 million from the operation of its 93 eye care centers and two laser vision correction centers in the United States for the same period in 1998. Of the $12.0 million (or 21.8%) increase in net revenue for the year ended December 25, 1999 as compared to the year ended December 31, 1998, $4.2 million (or 7.6%) relates to the additional nine eye care centers acquired effective January 1, 1999. The remaining increase of $7.8 million (or 14.2%) relates primarily to the additional 29 Kent Optical Eye Care Centers acquired effective April 1, 1999. Sales in eye care centers, excluding acquisitions, were essentially flat compared to the prior year. Cost of Revenue. Cost of revenue increased to approximately $22.8 million for the year ended December 25, 1999, as compared to $19.0 million for the year ended December 31, 1998. Cost of revenue decreased as a percentage of net revenue from 34.5% for the year ended December 31, 1998, to 34% for the year ended December 25, 1999. The improvement as a percentage of net revenue primarily reflects the realization of purchase economics, less sales price discounting, and, to a lesser extent, some small retail price increases partially offset by promotional discounts. Cost of revenue for the years ended December 25, 1999 and December 31, 1998 principally consisted of (i) the cost of manufacturing, purchasing and distributing optical products to its customers and (ii) the cost of delivering LVC, including depreciation and maintenance on excimer lasers. In December 1999, the Company discontinued the operations of an optical laboratory operated by Cambridge Eye Doctors in Holliston, Massachusetts and an optical laboratory operated by Vision Plaza in Metairie, Louisiana and consolidated those operations with Cleveland, Ohio and Muskegon, Michigan in order to reduce the cost of revenue. Selling, General and Administrative Expense. Selling, general and administrative expenses were approximately $46.1 million and $37.0 million for the years ended December 25, 1999 and December 31, 1998, respectively. The increase primarily relates to payroll and facility 19 costs incurred in operating additional eye care centers acquired effective January 1, 1999 and April 1, 1999. Selling, general and administrative expense, as a percentage of net revenue, increased to 68.8% for the year ended December 25, 1999, as compared to 67.3% for the year ended December 31, 1998. This increase is primarily a result of our Vision Plaza and E.B. Brown operations, and a charge for allowance of doubtful accounts of $1.23 million primarily for older receivables taken during the year as compared to the prior year allowance for doubtful accounts of $0.458 million. Other Income and Expense. Interest income decreased to approximately $82,000 from $184,000 for the years ended December 25, 1999 and December 31, 1998, respectively. This decrease resulted from the investment of a lower average cash and cash equivalents balance during 1999 as compared to 1998. Interest expense increased to approximately $641,000 from $201,000 for the years ended December 25, 1999 and 1998, respectively. The increase is associated with a higher average balance of debt outstanding during 1999 as compared to 1998. The sale of certain ophthalmic equipment during 1998 generated a gain of approximately $158,000. Disposal of equipment during 1999 generated a gain of $16,000. The Company sold one excimer laser system in 1999 and sold two excimer laser systems in 1998. At December 25, 1999, the Company owned one laser system and no longer operated any laser vision correction centers, having closed its last two remaining centers in August and December, 1999. At December 31, 1998, the Company owned two laser systems and operated two laser vision correction centers. In 1999, the Company incurred a $323,000 non-cash write-off of deferred financing costs associated with the Company's prior credit facility. Net Loss. The Company realized a net loss of approximately $2.9 million ($0.30 per share) and $1.0 million ($0.11 per share) for the years ended December 25, 1999 and December 31, 1998, respectively. Results of Operations 1998 as compared with 1997 Net Revenue. The Company generated net revenue of approximately $55.0 million during the year ended December 31, 1998 from the operation of its 93 eye care centers and two laser vision correction centers in the United States as compared to net revenue of approximately $44.6 million from the operation of its 86 eye care centers and four laser vision correction centers in the United States for the same period in 1997. Of the $10.4 million (or 23.3%) increase in net revenue for the year ended December 31, 1998 as compared to the year ended December 31, 1997, $3.2 million (or 7.2%) relates to the additional nine eye care centers acquired effective April 1, 1998. The remaining increase of $7.2 million (or 16.1%) relates primarily to recognition of a full year revenue from the Vision Plaza acquisition. Cost of Revenue. Cost of revenue increased to approximately $19.0 million for the year ended December 31, 1998 as compared to $16.1 million for the year ended December 31, 1997. Cost of revenue decreased as a percentage of net revenue from 36.1% for the year ended December 31, 1997 to 34.5% for the year ended December 31, 1998. The improvement as a percentage of net revenue is primarily due to the improved gross profit margin resulting from sales from both the additional 17 eye care centers acquired July 1, 1997 and the nine eye care centers acquired effective April 1, 1998. Cost of revenue for the years ended December 31, 1998 and 1997 principally consisted of (i) the cost of manufacturing, purchasing, and distributing optical products to its customers and (ii) the cost of delivering LVC, including depreciation and maintenance on excimer lasers. 20 In February 1997, the Company discontinued the operations of an optical laboratory and distribution facility operated by E.B. Brown in Cleveland, Ohio, and consolidated its operations with those at its Holliston, Massachusetts facility in order to reduce the cost of revenue. In August 1997, the Company elected to re-open a smaller version of the Cleveland facility to improve the quality and timeliness of product delivery. The closing and subsequent reopening of the smaller Cleveland facility did not have a material affect on the Company's cost of revenue. Selling, General and Administrative Expense. Selling, general and administrative expenses were approximately $37.0 million and $30.7 million for the years ended December 31, 1998 and 1997, respectively. The increase primarily relates to payroll and facility costs incurred in operating the additional nine eye care centers acquired effective April 1, 1998 and costs incurred for a full year of operations of the 17 eye care centers acquired in the Vision Plaza acquisition. Selling, general and administrative expense, as a percentage of net revenue, declined from 68.9% for the year ended December 31, 1997, as compared to 67.3% for the year ended December 31, 1998. This decrease is primarily a result of (i) the nine eye care centers acquired effective April 1, 1998, which operate with a level of selling, general and administrative expenses as a percentage of net revenue that is lower than that of the Company and its other subsidiaries, and (ii) the Company's ability to better leverage its fixed expenses in connection with the acquisition of multi-site eye care centers. Provision for Store Closings. The Company had a $110,000 provision for 1997 for the estimated costs to close one store in early 1998. The provision was primarily for estimated future lease payments of $64,135 and to write-off the net book value of fixed assets of $27,137. In 1998, the Company closed two additional stores whose leases had expired and accordingly, no provisions were provided. Provision for Write Off of Software Development Costs. In 1996, the Company selected a vendor and began the testing and installation of software associated with a new point of sale system and perpetual inventory system for its primary eye care centers, regional optical laboratories and distribution centers. By late 1997 the Company, after testing the software system in selected eye care centers, elected to utilize an alternative software vendor whose product is better suited to the needs of the Company. As a result, the Company wrote off $400,000 of capitalized costs associated with the original point of sale system. The Company believes that the new system will facilitate the processing of customer sales information and replenishment of inventory by passing such information, including customer specific orders, to the Company's home office, and its regional optical laboratories and distribution centers for further processing. In 1998, the Company began operating the new point of sale system. Other Income and Expense. Interest income decreased to approximately $184,000 from $360,000 for the years ended December 31, 1998 and 1997, respectively. This decrease resulted from the investment of a lower average cash and cash equivalents balance during 1998 as compared to 1997. Interest expense decreased from approximately $344,000 to $201,000 for the years ended December 31, 1997 and 1998, respectively. The decrease is associated with a lower average balance of debt outstanding during 1998 as compared to 1997. The sale of certain ophthalmic equipment during 1998 generated a gain of approximately $158,000 compared to a gain of approximately $738,000 from similar sales in 1997. In 1998, the Company sold two of the excimer laser systems which it owned, reducing the number of operating systems in place at the end of the year to two, both of which operated in New 21 England and primarily serviced customers referred from the Company's primary eye care centers. Net Loss. The Company realized a net loss of approximately $1.0 million ($0.11 per share) and $2.0 million ($.46 per share, including the $1,953,000 dividend to the preferred stock holders as discussed in Note 8 of the Notes To Consolidated Financial Statements), for the years ended December 31, 1998 and 1997, respectively. The decrease in net loss is attributable to the increased income generated by a full year of operations of the 17 eye care centers acquired in the Vision Plaza acquisition in 1997, the additional nine eye care centers acquired effective April 1, 1998, improvements in gross profit margins, sales volume gain, and, to a lesser extent, the non-recurrence of the $110,000 provision for store closings in 1997 and the $400,000 provision for the writedown of software development costs. The reduction in net loss was partially offset by a reduction of $580,000 in gain from the sale of equipment in 1998 versus 1997. Liquidity and Capital Resources At December 25, 1999, the Company had approximately $0.2 million in cash and cash equivalents and working capital of approximately $1.0 million in comparison to approximately $1.9 million in cash and cash equivalents and working capital of approximately $3.2 million as of December 31, 1998. Effective January 1, 1999, the Company acquired one hundred percent of the outstanding shares of stock of Shawnee Optical, Inc. ("Shawnee Optical"). The purchase price paid in connection with this acquisition was $1.75 million in cash, the payment of notes payable in the aggregate amount of $0.3 million and 70,000 shares of common stock. Shawnee Optical operated nine eye care centers in Ohio and western Pennsylvania. The acquisition was accounted for using the purchase method of accounting. Effective April 1, 1999, the Company acquired one hundred percent of the outstanding shares of stock of Kent Optical, Inc. and its associate companies (collectively, "Kent"). The purchase price paid in connection with this acquisition was $5.209 million in cash, $1.0 million in notes payable over three years and 160,000 shares of common stock. Kent operated 28 eye care centers in Michigan. The acquisition was accounted for using the purchase method of accounting. As of December 25, 1999, the Company had securities outstanding which provide it with potential sources of financing as outlined below: Securities Potential ---------- Number Proceeds ------ -------- Class II Warrants.................................. 290,424 $2,032,968 Bank Austria AG, f/k/a Creditanstalt, Warrants..... 150,000 694,000 Representative Warrants............................ 170,000 1,400,000 ---------- $4,126,968 ========== The Company also has outstanding 398,097 Class I Warrants. The Class I Warrants entitle the holder to purchase an amount of shares of the Company's common stock equal to an aggregate of up to 19.9% of the shares of common stock purchasable under the Company's 22 outstanding warrants and options on the same terms and conditions of existing warrant and option holders. The purchaser is obligated to exercise these warrants at the same time the options and warrants of existing holders are exercised, subject to certain limitations. The amount of proceeds from the exercise of these warrants cannot be estimated at this time. There can be no assurance that the Company will obtain any of the proceeds from the exercise of the above securities. On February 20, 1997, the Company entered into a Credit Agreement (the "1997 Agreement") with a bank pursuant to which the Company could borrow up to $5.0 million on a term loan basis and up to $5.0 million on a revolving credit basis subject to certain performance criteria. As part of the Agreement, the Company issued to the bank warrants to purchase 150,000 shares of the Company's common stock at a purchase price of $4.625 per share. The warrants expire on December 31, 2003. As noted in the following paragraph, the Company has entered into a new credit facility and retired the 1997 Agreement. On April 15, 1999, the Company entered into a credit agreement (the "1999 Agreement") with a bank pursuant to which the Company can borrow $10.0 million on an acquisition line of credit, $7.0 million on a term loan basis and $3.0 million on a revolving line of credit basis, subject to certain performance criteria and an asset-related borrowing base for the revolver. The performance criteria include, among others, financial condition covenants such as net worth requirements, indebtedness to net worth ratios, debt service coverage ratios, funded debt coverage ratios, and pretax profit, net profit and EBITDA requirements. Amounts borrowed under the 1999 Agreement will be used to finance future acquisitions, retire existing bank debt, provide ongoing working capital and/or for other general corporate purposes. As of December 25, 1999, $6.8 million was borrowed on the term loan and $0.975 million was borrowed on the revolving credit facility. At December 25, 1999, the Company was not in compliance with the following financial covenants of the 1999 agreement: minimum net worth, minimum debt service coverage, maximum funded debt service coverage and minimum net profit. However, the Company has received an agreement from the bank dated March 31, 2000 to amend the 1999 Agreement. The amended agreement provides, among other things, a waiver of the Company's default, adjusts certain covenants to which the Company is subject and terminates the acquisition line of credit. In addition, the amended agreement limits the revolving line note to $2.5 million and the term loan to $6.75 million and establishes the maturity date for each of these credit lines as March 31, 2001. Also, the amended agreement establishes the following interest rates for both the revolving line note and term loan: 1) from closing date of the agreement through August 31, 2000 - prime rate + 1.0%; 2) from September 1, 2000 through October 31, 2000 - prime rate + 2.0%; and 3) from November 1, 2000 through March 31, 2001 - prime rate + 3.0%. The scheduled monthly principal payments for the term loan are adjusted to $83,333.33 from April, 2000 through July, 2000, $100,000.00 from August, 2000 through December, 2000 and $125,000.00 from January, 2001 through March, 2001. The Company intends to consider and pursue alternative lenders to refinance this agreement on a long-term basis. The Company has an acquisition strategy to acquire and integrate the assets of multi-site eye care centers and the practices of eye care professionals and to employ or enter into management services contracts with these professionals. This strategy includes both 23 expanding existing regional markets and entering new regional markets. The Company will also target acquisitions in strategic markets that will serve as platforms from which the Company can consolidate a given service area by making and integrating additional "in-market" acquisitions. The Company from time to time will evaluate potential acquisition candidates. Without additional funding, the Company's rate of acquisition and size of acquisition could be limited. RECENT ACCOUNTING PRONOUNCEMENTS In June, 1998, the Financial Accounting Standards Board issued SFAS 133 ("Accounting for Derivative Instruments and Hedging Activities,") which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments, embedded in other contracts (collectively referred to as derivatives), and for hedging activities, and required adoption in periods beginning after June 15, 1999. SFAS 133 was subsequently amended by Statement of Financial Accounting Standards No. 137 ("Accounting for Derivative Instruments and Hedging Activities"). SFAS 137 will now be effective for fiscal years beginning after June 15, 2000. SFAS 137, which becomes effective for the Company in its year ending December of 2001 is not expected to have a material impact on the Consolidated Financial Statements of the Company YEAR 2000 ISSUE The Company did not experience any difficulties related to the Year 2000 problem on December 31, 1999, and we are not aware of any such difficulties since that date. The Company's operations have not, to date, been adversely affected by any difficulties experienced by suppliers or customers in connection with the Year 2000 problem. The Company's Year 2000 Compliance Plan also addressed issues related to the date February 29, 2000, and management will continue to monitor systems for potential difficulties through the remainder of calendar year 2000. Item 7A. Qualitative and Quantitative Disclosures About Market Risk The Company has not entered into any transactions using derivative financial instruments or derivative commodity instruments and believes that its exposure to market risk associated with other financial instruments (such as investments) are not material. 24 Item 8. Financial Statements and supplementary Data INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Sight Resource Corporation: We have audited the consolidated balance sheets of Sight Resource Corporation and its subsidiaries as of December 25, 1999 and December 31, 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 25, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sight Resource Corporation and its subsidiaries at December 25, 1999 and December 31, 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 25, 1999 in conformity with generally accepted accounting principles. /S/ KPMG LLP KPMG LLP Boston, Massachusetts March 10, 2000, except as to Note 15, which is as of March 31, 2000 25 SIGHT RESOURCE CORPORATION CONSOLIDATED BALANCE SHEETS
1999 1998 ---- ---- (in thousands except for share amounts) ASSETS Current assets: Cash and cash equivalents ............................................................ $ 166 $ 1,860 Accounts receivable, net of allowance of $1,881 and $748, respectively ............... 3,583 2,658 Inventories .......................................................................... 6,875 4,584 Prepaid expenses and other current assets ............................................ 344 377 -------- -------- Total current assets ............................................................ 10,968 9,479 -------- -------- Property and equipment, net (note 3) ...................................................... 5,734 6,140 -------- -------- Other assets: Intangible assets (note 4) ........................................................... 23,131 15,337 Other assets ......................................................................... 921 1,189 -------- -------- Total other assets .............................................................. 24,052 16,526 -------- -------- $ 40,754 $ 32,145 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Revolver notes payable ............................................................... $ 975 $ __ Current portion of long term debt (note 6) ........................................... 1,682 146 Current portion of capital leases (note 7) ........................................... 28 34 Accounts payable ..................................................................... 4,606 2,870 Accrued expenses (note 5) ............................................................ 2,673 3,253 -------- -------- Total current liabilities ....................................................... 9,964 6,303 -------- -------- Non-current liabilities: Long term debt, less current maturities (note 6) ..................................... 6,882 184 Capital leases (note 7) .............................................................. 2 13 Other liabilities .................................................................... 22 151 -------- -------- Total non-current liabilities ................................................... 6,906 348 -------- -------- Series B redeemable convertible preferred stock 1,452,119 shares issued (note 8) ..... 6,535 6,535 -------- -------- Stockholders' equity (note 9): Preferred Stock, $.01 par value. Authorized 5,000,000 shares; no shares of Series A issued and outstanding ............................................................... -- -- Common stock, $.01 par value. Authorized 20,000,000 shares; issued 9,256,552 and 8,936,330 shares in 1999 and 1998, respectively .................................. 93 90 Additional paid-in capital ........................................................... 38,500 36,847 Common stock issuable, 71,181 shares in 1998 (note 1(b)) ............................. -- 432 Treasury stock at cost (30,600 shares in 1999 and 1998) .............................. (137) (137) Unearned compensation ................................................................ (2) (22) Accumulated deficit .................................................................. (21,105) (18,251) -------- -------- Total stockholders' equity ...................................................... 17,349 18,959 -------- -------- $ 40,754 $ 32,145 ======== ========
See accompanying notes to consolidatedfinancial statements. 26 SIGHT RESOURCE CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 1999 1998 1997 -------- -------- -------- (in thousands except for per share amounts) Net revenue ................................................... $ 67,034 $ 54,971 $ 44,576 Cost of revenue ............................................... 22,823 18,991 16,096 -------- -------- -------- Gross margin ........................................ 44,211 35,980 28,480 Selling, general and administrative expense ................... 46,122 37,036 30,703 Provision for store closings .................................. -- -- 110 Provision for write off of software development costs ......... -- -- 400 Total operating expenses ................................. 46,122 37,036 31,213 -------- -------- -------- Loss from operations ................................ (1,911) (1,056) (2,733) -------- -------- -------- Other income (expense): Interest income .......................................... 82 184 360 Interest expense ......................................... (641) (201) (344) Gain on sale of assets ................................... 16 158 738 Write-off of deferred financing cost ..................... (323) -- -- -------- -------- -------- Total other income (expense) ........................ (866) 141 754 -------- -------- -------- Loss before income tax expense ...................... (2,777) (915) (1,979) Income tax expense ............................................ 77 70 25 -------- -------- -------- Net loss ............................................ ($ 2,854) $ (985) $ (2,004) ======== ======== ======== Dividends on redeemable convertible preferred stock (note 8) .. 142 -- (1,953) -------- -------- -------- Net loss attributable to common shareholders .................. (2,712) $ (985) $ (3,957) ======== ======== ======== Basic and Diluted loss per common share (note 2) .............. $ (0.30) $ (0.11) $ (0.46) ======== ======== ======== Weighted average number of common shares outstanding .......... 9,181 8,867 8,669 ======== ======== ========
See accompanying notes to consolidated financial statements. 27 SIGHT RESOURCE CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 25, 1999 and December 31, 1998 and 1997 ------------------------------------------------------------ Common Stock ------------ Additional Common Total ---------- ------ ----- Par Paid-in Accum. Stock Treasury Unearned Stock --- ------- ------ ----- -------- -------- ----- Shares Value Capital Deficit Issuable Stock Comp. Equity ------ ----- ------- ------- -------- ----- ----- ------ (in thousands) Balance, December 31, 1996 ..... 8,649 86 $ 37,510 $(15,262) $ 432 -- -- $22,766 Exercise of stock options (notes 9 & 12) ................. 138 2 592 -- -- -- -- 594 Acquisition of treasury stock (note 9) ....................... -- -- -- -- -- (137) -- (137) Dividend to preferred shareholders (note 8) .......... -- -- (1,953) -- -- -- -- (1,953) Issuance of warrants under Credit Agreement (note 6) ...... -- -- 180 -- -- -- -- 180 Net loss ....................... -- -- -- (2,004) -- -- -- (2,004) -------- -------- -------- -------- -------- -------- -------- -------- Balance, December 31, 1997 ..... 8,787 88 36,329 (17,266) 432 (137) -- 19,446 Exercise of stock options (notes 9 & 12) ................. 20 -- 9 -- -- -- -- 9 Issuance of Common Stock for acquisitions ................... 88 1 349 -- -- -- -- 350 Issuance of Common Stock ....... 41 1 160 -- -- -- (40) 121 Amortization of unearned compensation ................... -- -- -- -- -- -- 18 18 Net loss ....................... -- -- -- (985) -- -- -- (985) -------- -------- -------- -------- -------- -------- -------- -------- Balance, December 31, 1998 ..... 8,936 90 36,847 (18,251) 432 (137) (22) 18,959 Exercise of stock options (notes 9 & 12) ................. 5 -- 2 -- -- -- -- 2 Issuance of Common Stock for acquisitions ................... 316 3 1,509 -- (432) -- -- 1,080 Adjustment to cost of preferred stock issuance ....... -- -- 142 -- -- -- -- 142 Amortization of unearned compensation ................... -- -- -- -- -- -- 20 20 Net loss ....................... -- -- -- (2,854) -- -- -- (2,854) ------------------------------------------------------------------------------------------ Balance, December 25, 1999 ..... 9,257 $93 $38,500 $(21,105) $0 $(137) $(2) $17,349 ==========================================================================================
See accompanying notes to consolidated financial statements 28 SIGHT RESOURCE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
1999 1998 1997 ------- ------- ------- Operating activities: Net loss ........................................................................ $(2,854) $ (985) $(2,004) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization .............................................. 3,828 2,596 2,183 Amortization and write off of deferred financing costs ..................... 353 -- -- Amortization of unearned compensation ...................................... 20 18 -- Gain on sale of assets ..................................................... (16) (158) (738) Provision for store closings and write off of software developments costs .. -- -- 510 Changes in operating assets and liabilities: Accounts receivable ........................................................ 448 (746) 138 Inventories ................................................................ (1,012) 289 (1,027) Prepaid expenses and other current assets .................................. 65 47 (78) Accounts payable and accrued expenses ...................................... (1,204) (829) (1,349) ------- ------- ------- Net cash provided by (used in) operating activities ................... (372) 232 (2,365) ------- ------- ------- Investing activities: Purchases of property and equipment ........................................ (1,513) (1,612) (1,948) Payments for acquisitions, net of cash acquired ............................ (6,419) (2,201) (2,075) Proceeds from sale of assets ............................................... 115 235 1,747 Other assets ............................................................... 362 88 (240) ------- ------- ------- Net cash used in investing activities ................................. (7,455) (3,490) (2,516) ------- ------- ------- Financing activities: Principal payments on debt ................................................. (2,961) (1,087) (2,754) Debt financing costs ....................................................... -- -- (320) Proceeds from issuance of stock ............................................ -- 129 -- Proceeds from exercise of warrants and stock options ....................... 2 -- -- Proceeds from bank loans ................................................... 9,234 -- -- Net proceeds from offerings ................................................ -- -- 4,582 Purchase of treasury stock ................................................. -- -- (137) Payment of other liabilities ............................................... (142) -- (338) ------- ------- ------- Net cash provided by (used in) financing activities ................... 6,133 (958) 1,033 ------- ------- ------- Net increase (decrease) in cash and cash equivalents ............................ (1,694) (4,216) (3,848) Cash and cash equivalents, beginning of period .................................. 1,860 6,076 9,924 ------- ------- ------- Cash and cash equivalents, end of period ........................................ $ 166 $ 1,860 $ 6,076 ======= ======= =======
See note 12 for supplementary cash flow information. See accompanying notes to consolidated financial statements. 29 SIGHT RESOURCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 25, 1999, December 31, 1998 and 1997 (1) The Company (a) Nature of Business Sight Resource Corporation (the "Company") manufactures, distributes and sells eyewear and related products and services. (b) Acquisitions During 1995, the Company acquired two primary eye care chains, effective January 1, 1995 and July 1, 1995, respectively. The aggregate purchase price paid in connection with the acquisitions consisted of (i) $2,660,000 in cash, (ii) 555,525 shares of common stock, (iii) the assumption of approximately $1,600,000 of net liabilities, and (iv) $660,000 paid over a 3 year period and $250,000 paid over 18 months. The transactions were accounted for using the purchase method of accounting. Effective July 1, 1996, the Company purchased certain assets and assumed certain liabilities of The E.B. Brown Optical Company and Brown Optical Laboratories, Inc. as well as entered into a merger with E.B. Brown Opticians, Inc. (collectively, "E.B. Brown") for approximately $7,733,000, consisting of: $4,000,000 in cash, 521,997 shares of common stock issued, 71,181 shares of common stock issued within 3 years and $1,400,000 in notes paid over an 18 month period. When the common stock was issued, the $432,000 of common stock issuable was reclassed into common stock and additional paid-in capital. As of July 1, 1996, E.B. Brown operated 42 eye care centers located throughout Ohio and Western Pennsylvania which provide optometric and audiology goods and services to persons with vision and hearing disorders. The transaction was accounted for using the purchase method of accounting. Effective July 1, 1997, the Company acquired all of the outstanding shares of stock of Vision Holdings, Ltd. (formerly known as Dr. Greenberg, An Optometry Corporation, d/b/a Vision Plaza ("Vision Plaza")). The purchase price paid in connection with this acquisition was $2,000,000 in cash and the assumption and payment of notes payable outstanding as of July 1, 1997 of approximately $800,000. Vision Plaza operated 17 eye care centers in Southeast Louisiana and Mississippi. The acquisition was accounted for using the purchase method of accounting. Effective April 1, 1998, the Company acquired all of the outstanding shares of stock of Eye Glass Emporium, Inc. ("Eyeglass Emporium"). The purchase price paid in connection with this acquisition was $2,309,000 in cash, the assumption and payment of notes payable outstanding as of April 1, 1998 of approximately $350,000 and 87,940 shares of common stock. Eyeglass Emporium operated nine eye care centers in northwest Indiana. The acquisition was accounted for using the purchase method of accounting. 30 SIGHT RESOURCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Effective January 1, 1999, the Company acquired all of the outstanding shares of stock of Shawnee Optical, Inc. ("Shawnee"). The purchase price paid in connection with this acquisition was $1,750,000 in cash, $300,000 in notes payable over three years and 70,000 shares of common stock. Shawnee operated nine eye care centers in Pennsylvania and Ohio. The acquisition was accounted for using the purchase method of accounting. In connection with the acquisition, the Company recorded purchase accounting adjustments to increase liabilities and establish reserves for the closing of facilities and related restructuring costs, including lease commitments and severance costs. The Company preliminarily recorded $450,000 in acquisition reserves, of which the Company provided a reserve of $400,000 for the potential closing of two stores and one laboratory, and a reserve of $50,000 for costs to sever administrative, store and laboratory personnel. During 1999, the Company further revised its plan and determined that no stores or laboratories would be closed. The Company reduced these reserves by $450,000 against goodwill as an adjustment to the cost of the acquired enterprise. No amounts have been charged against the acquisition reserves. At December 25, 1999, there were no purchase accounting reserves for this acquisition. Effective April 1, 1999, the Company acquired all of the outstanding shares of stock of Kent Optical, Inc. and its associated companies (collectively "Kent"). The purchase price paid in connection with this acquisition was $5,209,000 in cash, $1,000,000 in notes payable over three years and 160,000 shares of common stock. Kent operated 28 eye care enters in Michigan. The acquisition was accounted for using the purchase method of accounting. In connection with the acquisition, the Company recorded purchase accounting adjustments to increase liabilities and establish reserves for the closing of facilities and related restructuring costs, including lease commitments and severance costs. Total preliminary acquisition reserves at December 25, 1999 are $91,500, which provided a reserve for the potential costs to sever administrative or store personnel. At December 25, 1999, no amounts have been charged against the acquisition reserves. The Company intends to finalize its plan by March 31, 2000. The results of operations of the seven acquisitions have been included in the consolidated financial statements from their respective dates of acquisition. The excess of the purchase price and expenses associated with each acquisition over the estimated fair value of the net assets acquired has been recorded as goodwill. As a result of the acquisitions, the Company has also recorded adjustments to increase liabilities and establish reserves for the closing of stores and related restructuring costs, including lease commitments and severance costs. A summary of the activity follows: 31 SIGHT RESOURCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Store and Laboratory Closing Costs ---------------------------------- Eyeglass E.B. Brown Vision Plaza Emporium Total ---------- ------------ -------- ----- Balance, January 1, 1997 .... $ 15,557 $ 0 $ 0 $ 15,557 Additions (1997) ............ 518,281 781,000 0 1,229,281 Charges (1997) .............. (89,595) (10,604) 0 (100,199) --------- --------- -------- ----------- Balance, December 31, 1997 .. $ 444,243 $ 770,396 $ 0 $ 1,214,639 Additions (1998) ............ 0 0 32,000 32,000 Charges (1998) .............. 0 0 (32,000) (32,000) Adjustments to Goodwill ..... (444,243) (770,396) 0 (1,214,639) --------- --------- -------- ----------- Balance, December 31, 1998 .. $ 0 $ 0 $ 0 $ 0 --------- --------- -------- ----------- Severance Costs --------------- Eyeglass E.B. Brown Vision Plaza Emporium Total ---------- ------------ -------- ----- Balance, January 1, 1997 .... $ 24,912 $ 0 $ 0 $ 24,912 Additions (1997) ............ 67,588 156,410 0 233,998 Charges (1997) .............. (42,500) 0 0 (42,500) --------- --------- -------- ----------- Balance, December 31, 1997 .. $ 50,000 $ 156,410 $ 0 $ 206,410 Additions (1998) ............ 0 0 21,087 21,087 Charges (1998) .............. 0 37,584 (21,087) (58,671) Adjustments to Goodwill ..... 50,000) (118,826) 0 (168,826) --------- --------- -------- ----------- Balance, December 31, 1998 .. $ 0 $ 0 $ 0 $ 0 --------- --------- -------- ----------- Store and Laboratory Closings ----------------------------- Shawnee Kent Total ------- ---- ----- Balance, December 31, 1998 ..................................... $ 0 $ 0 $ 0 Additions (1999) ............................................... 400,000 30,000 430,000 Charges (1999) ................................................. 0 0 0 Adjustment to Goodwill ......................................... (400,000) (30,000) (430,000) --------- -------- --------- Balance December 25, 1999 ...................................... $ 0 $ 0 $ 0 --------- -------- --------- Severance Costs --------------- Shawnee Kent Total ------- ---- ----- Balance, December 31, 1998 ..................................... $ 0 $ 0 $ 0 Additions (1999) ............................................... 50,000 91,500 141,500 Charges (1999) ................................................. 0 0 0 Adjustment to Goodwill ......................................... (50,000) 0 (50,000) --------- ------- --------- Balance December 25, 1999 ...................................... $ 0 $91,500 $ 91,500 ========= ======= =========
32 SIGHT RESOURCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In 1997, the Company provided a reserve of $518,281 to close 7 stores in the Cleveland area and 4 mini labs and the Cleveland central lab for E.B. Brown and a reserve of $781,000 to close one store in the Boston area and a kiosk for Vision Plaza. The reserve was established for the estimated future rental payments of stores and to write-off furniture and equipment and lease components that the Company intended to close. The Company charged $89,595 and $10,604 in 1997 for E.B. Brown and Vision Plaza, respectively. These charges were for the closing of 4 stores at E.B. Brown and a kiosk at Vision Plaza. Nothing was charged in 1998 against these reserves. In addition, in 1997, the Company provided costs of $67,588 and $156,410, respectively to sever 22 and 10 people at E.B. Brown and Vision Plaza, respectively. During 1997, the Company charged $42,500 against the E.B. Brown reserves for costs to sever an administrative person and nothing against Vision Plaza reserves. In 1998, the Company charged $37,584 against the Vision Plaza reserves for severance costs of 5 accounting and administrative employees. In 1998, the Company acquired Eyeglass Emporium and established a $32,000 reserve for lease payments associated with vacating the Eyeglass Emporium home office and a reserve of $21,087 for costs to sever an administrative person at Eyeglass Emporium. These reserves were fully utilized in 1998 as the Company executed its plan. Delays were experienced in finalizing the plans for E.B. Brown and Vision Plaza principally due to the failure of the plan to consolidate the E.B. Brown laboratories with the Company's main facility in Holliston, Massachusetts, the inability to negotiate reasonable economic lease terminations, and delays in automating administrative, distribution and accounting functions. In late 1997 and early 1998, the Company experienced considerable change in its management. Under new management, all operations were evaluated and priorities assigned. The plans to exit stores at E.B. Brown and Vision Plaza were not given high priority by the new leadership. Accordingly, the Company reversed its accrued liabilities against goodwill and no reserves exist at December 25, 1999 as the Company believes its plan is completed. In early 1999, the Company provided a purchase accounting reserve of $400,000 for the closing of two stores and one laboratory in Erie for Shawnee and a reserve of $50,000 to sever administrative, store laboratory personnel. During 1999, the Company revised the plan and determined no stores or laboratories would be closed. At December 25, 1999, the Company finalized its plan and also determined that no employees would be severed. The entire $450,000 acquisition reserve was reversed against goodwill and no reserves for Shawnee exist at December 25, 1999. No amounts were charged against acquisition reserves. In 1999, the Company recorded a purchase accounting reserve of $91,500 to sever administrative or store personnel the Company intends to finalize its plan by March 31, 2000 closing of two stores in Michigan for Kent. 33 SIGHT RESOURCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) At December 25, 1999, no amounts have been charged against the acquisition reserves. The Company intends to finalize its plan by March 25, 2000. The following unaudited pro forma financial information gives effect to the acquisitions as if: i) the acquisition of Vision Plaza was effective January 1, 1996 ii) the acquisition of Eyeglass Emporium was effective January 1, 1997 iii) the acquisition of Shawnee was effective January 1, 1998 iv) the acquisition of Kent was effective January 1, 1998 These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which actually would have resulted had the acquisitions occurred on the date indicated, or which may result in the future.
1999 1998 1997 ------------ ---------- -------- (in thousands except for per share data) Revenue ........................................................ $ 69,589 $ 70,350 $ 54,741 ============ ========== ======== Net loss ....................................................... $ (3,227) $ (1,718) $ (4,073) ============ ========== ======== Basic and Diluted loss per share ............................... $ (0.37) $ (0.19) $ (0.47) ============ ========== ======== Weighted average number of common shares outstanding ........... 9,341 9,119 8,757 ============ ========== ========
The above unaudited pro forma financial information reflects certain adjustments, including amortization of goodwill, and an increase in the weighted average shares outstanding. This pro forma information does not necessarily reflect the results of operations that would have occurred had the acquisitions taken place at the beginning of 1997, 1998 and 1999 and is not necessarily indicative of results that may be obtained in the future. (2) Summary of Significant Accounting Policies (a) Principles of Consolidation The Company's results of operation include the accounts of the Company, its wholly-owned subsidiaries and three professional corporation's ("PCs") in which the Company's subsidiaries assume the financial risks and rewards of such entities. The Company has no direct equity ownership in the PCs since the outstanding voting capital stock of each of the PCs is 100% owned by a licensed optometrist (the "nominee shareholder") who has, in turn, executed a Stock Restrictions and Pledge Agreement (a "Pledge Agreement") in favor of a subsidiary of the Company. Each Pledge Agreement contains provisions that provide the Company with the 34 SIGHT RESOURCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) ability at all times to cause a change in the nominee shareholder and for an unlimited number of times, at nominal cost. The purchase price for a sale of the PC's stock is equal to the aggregate book value of the PC, which will always be a nominal cost because each PC operates at an almost break-even level generating a nominal profit, if any at all. All significant intercompany balances and transactions have been eliminated. In preparation of these consolidated financial statements in conformity with generally accepted accounting principles, management of the Company has made estimates and assumptions that affect the reported amounts of assets and liabilities, such as accounts receivable, inventory, impairment of property and equipment and intangibles. Actual results could differ from those estimates. (b) Statement of Cash Flows Cash and cash equivalents consist of cash in banks and short-term investments with original maturities of three months or less. (c) Financial Instruments The carrying amount of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value because of the short maturity of these items. The carrying amount of other long-term maturities approximates fair value. The carrying amount of the Company's revolving line of credit and bank term loan approximates fair value because the borrowing rate changes with market interest rates. (d) Revenue Recognition Revenue and the related costs from the sale of eyewear are recognized at the time an order is complete. Revenue from eye care services is recognized when the service is performed. The Company has fee for service arrangements with most of its third party payors. Revenue is reported net of contractual allowances. Under revenue sharing arrangements for refractive surgery where the Company is not responsible for patient billing, the Company receives a specified payment from the hospital or center for each refractive surgical procedure performed. Accordingly, the Company recognizes revenue on a per procedure basis at the time procedures are performed. Under revenue-sharing arrangements for refractive surgery where the Company is responsible for the collection from the patient and payment to the ophthalmologist and other operating costs, the total patient charge is recorded as revenue with the corresponding expenses recorded in cost of revenue. 35 SIGHT RESOURCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (e) Inventories Inventories primarily consist of the costs of eyeglass frames, contact lenses, ophthalmic lenses, sunglasses and other optical products and are valued at the lower of cost (using the first-in, first-out method) or market. (f) Property, Equipment and Long-Lived Assets Property, equipment and long-lived assets are stated at cost. The Company provides for depreciation at the time the property, equipment and long-lived assets are placed in service. The straight-line method is used over the estimated useful life of the assets. In accordance with SFAS 121, the Company assesses the recoverability of the undepreciated property, equipment and long-lived assets on an ongoing basis by comparing anticipated operating profits and future, undiscounted cash flows to net book value. In performing this analysis, management considers such factors as current results, trends, and future prospects, in addition to other economic factors. (g) Advertising Advertising costs are expensed when incurred. (h) Intangible Assets Intangible assets resulting from the business acquisitions consist of customer lists, trademarks, non-compete agreements, workforce in place, database/records and the excess cost of the acquisition over the fair value of the net assets acquired (goodwill). Certain values assigned are based upon independent appraisals and are amortized on a straight line basis over a period of 5 to 25 years. The Company assesses the recoverability of unamortized intangible assets on an ongoing basis by comparing anticipated operating profits and future, undiscounted cash flows to net book value. In performing this analysis, management considers such factors as current results, trends, and future prospects, in addition to other economic factors. (i) Income Taxes The Company follows the asset and liability method of accounting for income taxes and records deferred tax assets and liabilities based on temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial statement purposes. (j) Deferred Revenue The Company offers a contact lens purchasing program in which, for a set fee, customers may purchase contacts at discounted rates for a 12 month period. The Company recognizes 36 SIGHT RESOURCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) revenue from the sales of its contact lens purchasing program on a monthly basis over the life of the program. (k) Net Loss Per Share Earnings per share are computed based on Statement of Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS 128"). SFAS 128 requires presentation of basic earnings per share ("Basic EPS") and diluted earnings per share ("Diluted EPS") by all entities that have publicly traded common stock or potential common stock (options, warrants, convertible securities or contingent stock arrangements). Basic EPS is computed by dividing income attributable to common stockholders by the weighted average number of common shares outstanding during the period. The computation of Diluted EPS does not assume conversion, exercise or contingent exercise of securities that would have an antidilutive effect on earnings. The following table provides a reconciliation of the numerators and denominators of the basic and diluted earnings (loss) per share computations for the years ended December:
Years Ended December -------------------- 1999 1998 1997 ------- ------- ------- (in thousands except for per share amounts) Basic and Diluted Loss Per Share Net loss .................................................... $(2,854) $ (985) $(2,004) Less: dividends on redeemable convertible preferred stock ... 142 -- (1,953) ------- ------- ------- Net loss attributable to common stockholders ................ $(2,712) $ (985) $(3,957) ======= ======= ======= Weighted average common shares outstanding .................. 9,181 8,867 8,669 Net loss per share .......................................... $ (0.30) $ (0.11) $ (0.46) ======= ======= =======
The options, warrants and convertible preferred stock discussed in Notes 8 and 9 were not included in the computation of diluted Earnings Per Share because the effect would be antidilutive. 37 SIGHT RESOURCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (3) Property and Equipment Property and equipment consists of the following: Years Ended December -------------------- 1999 1998 Estimated ---- ---- --------- Useful Life ----------- (in thousands) Land and building................. $ 118 $ 87 40 years Equipment......................... 4,016 5,195 3-5 years Computer equipment................ 1,082 1,143 3 years Furniture and fixtures............ 1,889 1,751 3 years Leasehold improvements............ 4,967 4,731 Life of lease Construction-in-progress.......... 324 310 ------ ------- 12,396 13,217 Less accumulated depreciation..... 6,662 7,077 ------ ------- Property and equipment, net....... $5,734 $ 6,140 ====== ======= (4) Intangible Assets Intangible assets consists of the following: Years Ended December -------------------- 1999 1998 Estimated ---- ---- --------- Useful Life ----------- (in thousands) Goodwill...................... $ 16,537 $ 14,331 20-25 Customer lists................ 5,932 2,662 11-15 Workforce in place............ 1,970 -- 6-8 Trademarks.................... 1,773 713 15-20 Non-compete................... 380 120 5-10 Database/records............. 310 -- 12 -------- -------- 26,902 17,826 Accumulated amortization...... 3,771 2,489 -------- -------- Total.................... $ 23,131 $ 15,337 ======== ======== 38 SIGHT RESOURCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The useful lives of the above intangible assets are estimated based upon, among other things, independent appraisals, history of operations acquired, terms of agreements and industry standards. (5) Accrued Expenses Accrued expenses consists of the following: Years Ended December ---------------------- (in thousands) 1999 1998 -------- ------- Payroll and related cost............. $ 1,393 $ 1,505 Other................................ 1,280 1,748 -------- ------- $ 2,673 $ 3,253 ======== ======= (6) Debt
Years Ended December ---------------------- (in thousands) 1999 1998 ------ ----- Short-term borrowings consist of the following: Bank revolver loan payable, variable interest rate (8.455 % at 12/25/99), interest due monthly (see Note 15) $ 975 $ 0 ====== ===== Long-term debt consists of the following: Bank term loan payment, variable interest rate (8.42% at 12/25/99), principal and interest due monthly beginning October, 1999 (see Note 15) 6,833 $ 0 Unsecured notes payable, 7.5% interest rate, principal due annually and interest due quarterly until April, 2002 1,000 0 Unsecured notes payable, 7.5% interest rate, principal due annually and interest due quarterly until January, 2002 300 0 Unsecured notes payable, with interest rates of between 8 and 9%, principal and interest due monthly until June, 2010 219 0 Unsecured note payable, 7% interest rate, principal and interest due quarterly until March 31, 2001 175 263 Unsecured note payable, 12% interest rate, principal and interest due monthly until January, 2001 36 67 ------ ----- $8,563 $ 330 Less current maturities 1,682 146 ------ ----- Long term debt, less current maturities $6,881 $ 184 ====== =====
39 SIGHT RESOURCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) On April 15, 1999, the Company entered into a Credit Agreement (the "1999 Agreement") with a bank pursuant to which the Company can borrow $10,000 on an acquisition line of credit, $7,000 on a term loan basis and $3,000 on a revolving line of credit basis, subject to certain performance criteria and an asset-related borrowing base for the revolver. The performance criteria include, among others, financial condition covenants such as net worth requirements, indebtedness to net work ratios, debt service coverage ratios, funded debt coverage ratios, and pretax profit, net profit and EBITDA requirements. The acquisition line facility bears interest at either the bank's prime rate, or LIBOR plus 2.25%, or at a comparable interest swap rate at the Company's election. The term loan facility bears interest at LIBOR plus 2.25% or at a comparable interest swap rate at the Company's election. The revolving credit facility bears interest at the bank's prime rate or LIBOR plus 2.0% at the Company's election. Amounts borrowed under the 1999 Agreement was used to finance acquisitions, retire existing bank debt, provide ongoing working capital and/or for other general corporate purposes. As of December 25, 1999, $6,833 was borrowed on the term loan and $975 was borrowed on the revolving credit facility. At December 25, 1999, the Company was not in compliance with certain covenants. The Company received a waiver of these covenants and has agreed to a revised credit agreement with its lender (see Note 15). (7) Lease Obligations The Company has operating leases primarily for its primary eye care centers, distribution center, corporate offices and certain equipment. The leases are generally for periods of up to 10 years with renewal options at fixed rentals. Certain of the leases provide for additional rentals based on sales exceeding specified amounts. Capitalized leases consists of various office and optometric equipment at multiple locations. Future minimum annual lease commitments for facilities and equipment for the five years subsequent to December 25, 1999 and in the aggregate are as follows:
Capital Operating ------- --------- Leases Leases ------ ------ (in thousands) 2000........................................................ $ 31 $ 5,806 2001........................................................ 2 4,689 2002........................................................ -- 3,691 2003........................................................ -- 2,959 2004........................................................ -- 2,038 Thereafter.................................................. -- 4,535 ---- ------- Total minimum lease obligations............................. 33 $23,718 ======= Less amount representing interest........................... 3 ---- Present value of net minimum capital lease obligations...... 30 Less current maturities..................................... 28 ---- $ 2 ====
40 SIGHT RESOURCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Rental expenses charged to operations, including real estate taxes, common area maintenance and other expenses related to the leased facilities and equipment, were $6,296,000, $5,335,000 and $4,500,000 for fiscal years 1999, 1998 and 1997, respectively. (8) Redeemable Convertible Preferred Stock On November 25, 1997, the Company issued 1,452,119 shares of Series B Convertible Preferred Stock (the "Series B"), Class I and Class II Warrants to an outside investor (the"Purchaser") for a net purchase price of $4,582,000. The Series B was purchased with a conversion price into common stock that was lower than market value of the common stock, and as a result, the difference of $1,953,000 was reflected as a dividend to the preferred stockholders to reflect the preferred stock at its fair value. Each share of Series B is convertible into one share of Common Stock at $3.50 per share, subject to adjustment, at the Purchaser's option at any time and at the Company's option if the price per share of Common Stock during any period of thirty consecutive trading days equals or exceeds $7.00 at any time during the first three years or $9.00 at any time thereafter. The holders of the Series B have the right to appoint two directors to the Company's Board of Directors. The Class I (Mirror) Warrants entitle the Purchaser to purchase an amount of shares of the Company's Common Stock equal to an aggregate of up to 19.9% of the shares of Common Stock purchasable under the Company's outstanding warrants and options on the same terms and conditions of existing warrant and option holders. The Purchaser is obligated to exercise these warrants at the same time the options and warrants of existing holders are exercised, subject to certain limitations. The Class II Warrants entitle the Purchaser to purchase an aggregate of 290,424 shares of the Company's Common Stock at an exercise price of $7.00 for a term of five years. The Purchaser is entitled to "shelf" registration rights and "piggyback" registration rights with respect to the shares of Common Stock underlying the Series B, the Class I Warrants and the Class II Warrants. Upon a change of control of the Company, defined as (i) a change in any person or group obtaining a majority of the securities ordinarily having the right to vote in an election of Directors; (ii) during any two year period, the individuals who at the beginning of the period constituted the Company's Board of Directors no longer constitute a majority of the Board of Directors; (iii) any merger, consolidation, recapitalization, reorganization, dissolution or liquidation of the Company which results in the current stockholders no longer owning more than 50% of the voting securities or the Company; (iv) any sale, lease, exchange or other transfer of all, or substantially all, of the assets of the Company; or (v) the adoption of a plan leading to the liquidation or dissolution of the Company, at the option of the Purchaser, the Company would have to redeem the Series B at a price of 105% of the offering price, subject to certain adjustments, plus accrued and unpaid dividends. The redemption value at December 25, 1999 and December 26, 1998 was $5,337,000. 41 SIGHT RESOURCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (9) Stockholders' Equity Preferred Stock As of December 25, 1999 and December 31, 1998, the Company has authorized 5,000,000 shares of preferred stock at $.01 par value of which 1,452,119 shares of Series B are issued and outstanding (see Note 8), and 200,000 shares have been designated Series A Junior Participating Preferred Stock pursuant to a certificate of designation filed with the State of Delaware on May 12, 1997, of which no shares are issued and outstanding. The terms and conditions of any other series of preferred stock, including any preferences and dividends, will not be established until such time, if ever, as such shares are in fact issued by the Company. Common Stock As of December 25, 1999 and December 31, 1998, the Company has authorized 20,000,000 shares of common stock at $.01 par value. Common stock is entitled to dividends if declared by the Board of Directors, and each share carries one vote. Warrants In connection with the Company's private placement of Bridge Notes, the Company issued 110,000 Class A Warrants. Each Class A Warrant entitles the holder to purchase one share of common stock at a price of $6.00 and is exercisable at any time through March 25, 1999. During 1995, 25,000 Class A Warrants were exercised providing the Company with net proceeds of $150,000. In connection with the Company's second public offering, the Company issued 2,472,500 redeemable common stock purchase warrants ("Z Warrant"). Each Z Warrant entitles the holder to purchase one share of common stock at a price of $6.00 and terminated on August 25, 1999, unless previously redeemed. The Z Warrants are redeemable at the option of the Company at a price of $.05 per warrant, upon 30 days written notice, provided that the closing price of the common stock exceeds $9.50 for a period of 20 consecutive business days. During fiscal 1995, 300 Z Warrants were exercised providing the Company with $1,800 in proceeds. During the year ended December 31, 1996, 100 Z Warrants were exercised providing the Company with $600 in proceeds. In connection with the Company's second public offering, the Company sold to its underwriter and a finder, 215,000 Unit Purchase Options ("UPOs") at a price of $.001 per UPO. Each UPO consists of one share of common stock and one redeemable common stock purchase warrant, which entitles the holder to purchase one share of common stock at a price of $7.20. The UPOs are exercisable for a period of four years commencing August 25, 1995, at a price of $9.90. No UPOs have been exercised. In connection with its third public offering in 1996, the Company sold to its underwriter warrants to purchase an aggregate of 170,000 shares of the Company's common stock at $8.45. No underwriter warrants have been exercised. 42 SIGHT RESOURCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In connection with the Company issuing 1,452,119 shares of Series B Convertible Preferred Stock , Class I and Class II Warrants were issued to an outside investor (the "Purchaser"). The Class I (Mirror) Warrants entitle the Purchaser to purchase an amount of shares of the Company's Common Stock equal to an aggregate of up to 19.9% of the shares of Common Stock purchasable under the Company's outstanding warrants and options on the same terms and conditions of existing warrant and option holders. The Purchaser is obligated to exercise these warrants at the same time the options and warrants of existing holders are exercised, subject to certain limitations. The Class II Warrants entitle the Purchaser to purchase an aggregate of 290,424 shares of the Company's Common Stock at an exercise price of $7.00 for a term of five years. No Class I or Class II Warrants have been exercised. Treasury Stock From time to time, the Company's Board of Directors has authorized the repurchase of shares of the Company's common stock in the open market. During the year ended December 31, 1997, the Company repurchased 30,600 shares of common stock at a cost of $137,000. There were no repurchases of shares of common stock during the years ended December 25, 1999, and December 31, 1998. Stock Option Plan On November 30, 1992, the Company's Board of Directors and the stockholders approved the Company's 1992 Employee, Director and Consultant Stock Option Plan (the "Plan"). On April 26, 1994, the Board of Directors and the stockholders approved an increase in shares of common stock reserved for issuance under the Plan to an aggregate of 1,000,000 shares. In March, 1996, the Board recommended and the stockholders subsequently approved, that an additional 500,000 shares of common stock be reserved for issuance under the Plan. In December, 1998, the Board recommended, and the stockholders subsequently approved, that an additional 350,000 shares of common stock be reserved for issuance under the Plan. Under the Plan, incentive stock options may be granted to employees of the Company. Non-qualified stock options may be granted to consultants, directors, employees or officers of the Company. Most options vest after two or three years from date of grant with a maximum term of ten years. The Company applies APB Opinion No. 25 and related interpretations in accounting for the Plan and as a result no compensation expense has been recorded for granted options. Had compensation costs been determined consistent with FASB Statement No. 123, the Company's net loss and loss per share would have been as follows: 43 SIGHT RESOURCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 1999 1998 1997 ---------- ---------- ---------- (in thousands except for per share data) Net loss.............. as reported $ (2,854) $ (985) $ (2,004) ========== ========== ========== pro forma $ (3,370) $ (1,863) $ (2,370) ========== ========== ========== Net loss per share.... as reported $ (0.30) $ (0.11) $ (0.46) ========== ========== ========== pro forma $ (0.36) $ (0.21) $ (0.50) ========== ========== ========== The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants as follows: 1999 1998 1997 ---------- ---------- ---------- Dividend Yield ...................... 0.00% 0.00% 0.00% Volatility .......................... 90.4% 91.1% 93.9% Interest Rate ....................... 6.60% 5.50% 5.73% Expected Life ....................... 6.49 years 8.12 years 7.97 years A summary of the stock option transactions follows: Number of Weighted --------- -------- Shares Shares Average ------ ------ ------- Available Under Price per --------- ----- --------- Option Share ------ ----- Balance, December 31, 1996 .......... 653,967 823,233 $ 5.25 Canceled ............................ 154,600 (154,600) 4.67 Granted ............................. (298,395) 298,395 4.13 Exercised ........................... -- (138,332) 4.29 ---------- ---------- ---------- Balance, December 31, 1997 .......... 510,172 828,696 5.11 Canceled ............................ 218,966 (218,966) 5.08 Granted ............................. (613,999) 613,999 3.43 Exercised ........................... -- (20,000) 0.43 ---------- ---------- ---------- Balance, December 25, 1998 ......... 115,139 1,203,729 4.16 Increase to the plan ................ 350,000 -- -- Canceled ............................ 97,667 (97,667) 5.04 Granted ............................. (289,000) 289,000 2.25 Exercised ........................... -- (5,000) 0.43 ---------- ---------- ---------- Balance, December 25, 1999 .......... 273,806 1,390,062 $ 3.71 ========== ========== ========== There were 737,371 and 557,200 shares exercisable under the Plan at December 25, 1999 and December 31, 1998, respectively. The weighted average fair value of options granted under the Plan was $1.79 and $2.90 for the years ended December 25, 1999 and December 31, 1998, respectively. 44 SIGHT RESOURCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following table summarizes information about options outstanding as of December 25, 1999:
Options Outstanding Options exercisable ------------------- ------------------- Weighted -------- average Weighted Number ------- -------- ------ Range of Number remaining average exercisable Weighted -------- ------ --------- ------- ----------- -------- Exercise outstanding contractual exercise at Average -------- ----------- ----------- -------- -- ------- Prices at 12/25/99 life price 12/25/99 Exercise price ------ ----------- ---- ----- -------- -------------- $0.00-$0.95 ... 10,000 2.9 $ 0.43 10,000 $ 0.43 $1.90-$2.85 ... 358,500 9.6 $ 2.04 35,172 $ 2.00 $2.85-$3.80 ... 235,999 8.4 $ 3.25 83,333 $ 3.31 $3.80-$4.75 ... 575,563 7.3 $ 4.10 398,866 $ 4.13 $4.75-$5.70 ... 48,900 5.2 $ 5.00 48,900 $ 5.00 $5.70-$6.65 ... 121,100 6.2 $ 6.44 121,100 $ 6.44 $6.65-$7.60 ... 37,000 5.6 $ 6.82 37,000 $ 6.82 $7.60-$8.55 ... 3,000 5.9 $ 7.81 3,000 $ 7.81 ------------- ------------- 1,390,062 737,371 ============= =============
(10) Employee Benefit Plans The Company maintains a 401(k) Retirement Savings Plan. The Company matches 50% of every dollar contributed by employees, limited to the first 5% of salary. Contributions made by the Company in 1999, 1998, and 1997 were $247,000, $191,000 and $171,000, respectively. (11) Income Taxes Income tax benefit attributable to loss from operations differed from the amounts computed by applying the U.S. federal income tax rate of 34 percent as a result of the following: 45 SIGHT RESOURCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December ------------------------- 1999 1998 1997 ------- ----- ----- (in thousands) Computed "expected" tax benefit ................................................ $ 954 $ 305 $ 680 Increase in tax benefit resulting from: State net operating loss and State tax deductions ......................... 142 137 111 Decrease in tax benefit resulting from: Other ..................................................................... (158) (104) (78) Increase in valuation allowance for deferred tax assets allocated to income tax expense ........................................................ (1,015) (408) (738) ------- ----- ----- $ (77) $ (70) $ (25) ======= ===== =====
The tax effects of temporary differences that give rise to significant portions of the net deferred tax asset are presented below: Years Ended ----------- December -------- 1999 1998 ------- ------- (in thousands) Deferred tax assets: Net operating loss carryforwards .................... $ 8,110 $ 7,513 Plant and equipment ................................. 639 720 Vacation accrual .................................... 41 201 Bad debt reserve .................................... 680 259 Other reserves ...................................... 184 117 ------- ------- Gross deferred tax assets ...................... 9,654 8,810 Valuation allowance under SFAS 109 .................. (7,115) (8,810) ------- ------- Deferred tax assets ............................ 2,539 -- ------- ------- Deferred tax liabilities: Intangible assets ................................... (2,539) -- ------- ------- Net deferred tax assets ........................ $ -- $ -- ================== A valuation allowance in the amount of $7,115,000 and $8,810,000 was established at December 25, 1999 and December 31, 1998, respectively. The valuation allowance was reduced in 1999 due to acquisitions that resulted in the recognition of net deferred tax liabilities of approximately $2,800,000. This allowance has been established due to the uncertainty of the Company to benefit from the federal and state operating loss carryforwards. 46 SIGHT RESOURCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Subsequently recognized tax benefit relating to the valuation allowance for deferred tax assets will be allocated as follows:
Years Ended ----------- December -------- 1999 1998 ------- ------- (in thousands) Income tax benefit that would be reported in the statement of operations ... $ 6,644 $ 8,171 Charge to goodwill for recognition of acquired tax assets................... 471 639 ------- ------- $ 7,115 $ 8,810 ======= =======
The net operating loss carryforwards ("NOLs") for federal and state tax purposes at December 25, 1999 are approximately $20,455,000 and $18,901,000, respectively and expire through 2019 and 2004, respectively. (12) Supplementary Cash Flow Information The following represents supplementary cash flow information:
Years Ended December -------------------- 1999 1998 1997 -------- ------- ------- (in thousands) Interest paid ................................... $ 538 $ 222 $ 343 Non-cash financing activities: Equity issued associated with Credit Agreement .. -- -- 180 Acquisitions: Assets acquired ................................. 12,632 3,949 5,623 Net liabilities assumed ......................... (4,371) (1,247) (3,548) Notes payable ................................... (1,300) (350) -- Common stock issued ............................. (2) (1) -- -------- ------- ------- Cash paid ....................................... 6,959 2,351 2,075 Less cash acquired .............................. (540) (150) -- -------- ------- ------- Net cash paid for acquisition ................... $ 6,419 $ 2,201 $ 2,075 ======== ======= =======
(13) Related Party Transactions In connection with the exercise of stock options during 1997, the Company's former Executive Vice President and Director (the "Borrower") issued a promissory note (the "Promissory Note") to the Company for $594,000. The Promissory Note is due the earlier of September 2, 2007 or the date upon which the Borrower receives the proceeds of the sale of not less than 20,000 shares of the shares acquired by the exercise of the stock options. Interest 47 SIGHT RESOURCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) accrues at the rate of 6.55%, compounding annually, and is payable on the earlier of the maturity date of the Promissory Note or upon certain defined Events of Default. The Borrower may prepay all or any part of the Note without penalty or premium. (14) Operating Segment and Related Information The following table presents certain operating segment information.
1999 (in thousands) Laser Vision Consolidated ------------ ------------ Eye Care Centers Correction All Other Totals ---------------- ---------- --------- ------ Revenues: External customers .............. $ 64,964 $ 2,070 $ -- $ 67,034 Interest: Interest revenue ................ 1 -- 81 82 Interest expense ................ (39) (5) (597) (641) -------- ------- -------- -------- Net interest revenue (expense) .... (38) (5) (516) (559) Depreciation and amortization ..... 3,549 125 154 3,828 Profit (loss) from operations ..... 2,021 773 (4,705) (1,911) Identifiable assets ............... 29,875 231 10,648 40,754 Capital expenditures .............. 1,282 2 229 1,513 1998 (in thousands) Laser Vision Consolidated ------------ ------------ Eye Care Centers Correction All Other Totals ---------------- ---------- --------- ------ Revenues: External customers .............. $ 53,100 $ 1,871 $ -- $ 54,971 Interest: Interest revenue ................ 1 -- 183 184 Interest expense ................ (98) (34) (69) (201) -------- ------- -------- -------- Net interest revenue (expense) .... (97) (34) 114 (17) Depreciation and amortization ..... 2,426 113 57 2,596 Profit (loss) from operations ..... 1,423 253 (2,732) (1,056) Identifiable assets ............... 28,644 587 2,914 32,145 Capital expenditures .............. 1,316 296 -- 1,612
48 SIGHT RESOURCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1997 (in thousands) Laser Vision Consolidated ------------ ------------ Eye Care Centers Correction All Other Totals ---------------- ---------- --------- ------ Revenues: External customers ................. $ 42,510 $ 2,066 $ -- $ 44,576 Interest: Interest revenue ................... 20 -- 340 360 Interest expense ................... (54) -- (290) (344) -------- ------- ------- -------- Net interest revenue (expense) ....... (34) -- 50 16 Depreciation and amortization ........ 1,971 164 48 2,183 Profit (loss) from operations ........ (122) (97) (2,514) (2,733) Identifiable assets .................. 26,700 624 7,183 34,507 Capital expenditures ................. 1,808 140 -- 1,948
Each operating segment is individually managed and has separate financial results that are reviewed by the Company's chief operating decision-makers. Each segment contains closely related products that are unique to the particular segment. The principal products of the Company's eye care centers are eyeglasses, frames, ophthalmic lenses and contact lenses. Profit from operations is net sales less cost of sales and selling, general and administrative expenses, but is not affected by non-operating charges/income or by income taxes. Non-operating charges/income consists principally of net interest expense. In calculating profit from operations for individual operating segments, certain administrative expenses incurred at the operating level that are common to more than one segment are not allocated on a net sales basis. All intercompany transactions have been eliminated, and intersegment revenues are not significant. (15) Subsequent Event On March 31, 2000, the Company and its primary lender agreed to enter into a revised financing agreement. This agreement includes provisions and financial covenants which supercede the provisions in the 1999 agreement (see Note 6), including the following: 49 SIGHT RESOURCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) a) Limits the credit facility amounts to the following maximums: i. revolving line note - $2.5 million, ii. term loan - $6.75 million. b) Terminates the Company's acquisition line of credit of $10.0 million. c) The maturity date of the revolving line note and term loan becomes March 31, 2001. d) Interest rates on the revolving line note and term loan are as follows: Closing date through August 31, 2000 Prime rate + 1.0% From September 1, 2000 through October 31, 2000 Prime rate + 2.0% From November 1, 2000 through March 31, 2001 Prime rate + 3.0% e) Monthly scheduled principal payments amended as follows: April, 2000 through July, 2000 $83,333.33 August, 2000 through December, 2000 $100,000.00 January, 2001 through March, 2001 $125,000.00 f) The Company must pay the following amendment fees, unless in the event that a full refinance of the existing obligations occurs on or before August 31, 2000, then the Company shall receive a $30,000.00 repayment of the $80,000.00 amendment fee: Closing date $80,000.00 September 1, 2000 $50,000.00 November 1, 2000 $30,000.00 g) Unless all obligations of the Company to its primary lender are satisfied in full prior to the dates noted below, the Company shall grant its primary lender stand alone warrants exercisable for equivalent shares of the Company's common stock as follows: 50,000 shares on August 31, 2000 50,000 shares on December 31, 2000 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 50 PART III Item 10. Directors and Officers of the Registrant The response to this item is incorporated by reference from the discussion responsive thereto under the captions "Management" and "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the Company's Proxy Statement for the 1999 Annual Meeting of Stockholders. Item 11. Executive Compensation The response to this item is incorporated by reference from the discussion responsive thereto under the caption "Executive Compensation" in the Company's Proxy Statement for the 1999 Annual Meeting of Stockholders. Item 12. Security Ownership of Certain Beneficial Owners and Management The response to this item is incorporated by reference from the discussion responsive thereto under the caption "Share Ownership" in the Company's Proxy Statement for the 1999 Annual Meeting of Stockholders. Item 13. Certain Relationships and Related Transactions The response to this item is incorporated by reference from the discussion responsive thereto under the caption "Certain Transactions" in the Company's Proxy Statement for the 1999 Annual Meeting of Shareholders. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K Item 14(a)(1). Index to Consolidated Financial Statements Covered by Report of Independent Auditors The Consolidated Financial Statements of Sight Resource Corporation are included in Item 8: -- Independent Auditors' Report -- Consolidated Balance Sheets as of December 25, 1999 and December 26, 1998 -- Consolidated Statements of Operations for the Years Ended December 25, 1999, 1998 and 1997 -- Consolidated Statements of Stockholders' Equity for the Years Ended December 25, 1999, 1998 and 1997 51 -- Consolidated Statements of Cash Flows for the Years Ended December 25, 1999, 1998 and 1997 -- Notes to Consolidated Financial Statements Item 14(a)(2). Index to Consolidated Financial Statement Schedules 52 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Sight Resource Corporation: Under dates of March 10, 2000 and March 31, 2000, we reported on the consolidated balance sheets of Sight Resource Corporation and its subsidiaries as of December 25, 1999 and December 31, 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 25, 1999, which are included in the annual report on Form 10-K for the year 1999. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule in the annual report on Form 10-K. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG LLP KPMG LLP Boston, Massachusetts March 31, 2000 53 SIGHT RESOURCE CORPORATION Schedule II--Valuation and Qualifying Accounts (dollars in thousands) FOR THE TWELVE MONTHS ENDED DECEMBER 25,1999
Additions --------- (Deductions) ------------ Charged ------- Balance at (Credited) to Balance at ---------- ------------ ---------- Beginning Costs and End of --------- ---------- ------ Description of Year Expenses Other Net Period ----------- ------- -------- --------- ------ Valuation and qualifying accounts deducted from assets: Allowances for accounts receivable.......................... $ 748 $ 1,233 $ (100) $1,881 Valuation allowance for deferred tax assets................. 8,810 1,015 (2,710) 7,115
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998
Additions (Deductions) --------------------- Charged ------- Balance at (Credited) to Balance at ---------- ------------ ---------- Beginning Costs and End of --------- ---------- ------ Description of Year Expenses Other Net Period ----------- ------- -------- --------- ------ Valuation and qualifying accounts deducted from assets: Allowances for accounts receivable.......................... $ 478 $ 215 $ 55 $ 748 Valuation allowance for deferred tax assets................. 8,869 408 (467) 8,810
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997
Additions (Deductions) --------------------- Charged ------- Balance at (Credited) to Balance at ---------- ------------ ---------- Beginning Costs and End of --------- ---------- ------ Description of Year Expenses Other Net Period ----------- ------- -------- --------- ------ Valuation and qualifying accounts deducted from assets: Allowances for accounts receivable.......................... $ 353 $ 97 $ 28 $ 478 Valuation allowance for deferred tax assets................. 7,600 738 (531) 8,869
54 Item 14(a)(3) Exhibits The exhibits listed on the Exhibit Index below are filed or incorporated by reference as part of this report and such Exhibit Index is hereby incorporated herein by reference. EXHIBIT INDEX Exhibit ------- Number Description ------ ----------- (2.1) Stock Purchase and Sale Agreement by and among Kent Optical Company, Custom Optics, Inc., Kent-N.W. Grand Rapids, Inc., Kent-Hackley, Inc., Source Optical Supply, Inc., the stockholders of such companies, Kent Acquisition Corporation and Sight Resource Corporation, dated as of April 1, 1999 (incorporated herein by reference to Exhibit 2.1 of the Company's Report on Form 8-K filed with the Securities Exchange Commission on May 6, 1999) (3.1) Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit 3.1 of the Company's Registration Statement filed with the Securities and Exchange Commission on Form SB-2 File No. 33-56668) (3.2) By-Laws of the Company, as amended (incorporated herein by reference to Exhibit 3.2 of the Company's Registration Statement filed with the Securities Exchange Commission on Form SB-2 File No. 33-56668) (3.3) Certificate of Designation for Series A Junior Participating Preferred Stock (incorporated herein by reference to Exhibit 1 of the Company's Report on Form 8-K filed with the Securities and Exchange Commission on May 13, 1997) (3.4) Certificate of Designation, Preferences and Rights of Series B Convertible Preferred Stock (incorporated herein by reference to Exhibit 4.1 of the Company's Report on Form 8-K filed with the Securities and Exchange Commission on December 9, 1997) (4.1) Article 4 of the Certificate of Incorporation (incorporated herein by reference to Exhibit 3.1 of the Company's Registration Statement filed with the Securities and Exchange Commission on Form SB-2 File No. 33-56668) (4.2) Form of Common Stock Certificate (incorporated herein by reference to Exhibit 4.2 of the Company's Registration Statement filed with the Securities and Exchange Commission on Form SB-2 File No. 33-56668) 55 (4.3) Warrant Agreement dated August 24, 1994 between the Registrant and American Stock Transfer and Trust Company (incorporated herein by reference to Exhibit 4.5 of the Company's Registration Statement filed with the Securities and Exchange Commission on Form S-1 File No. 33-77030) (4.4) Form of Redeemable Warrant Certificate (included in 4.3 above) (4.5) Form of Class A Warrant (incorporated herein by reference to the Company's Form 10-K for the year ended December 31, 1994 filed with the Securities and Exchange Commission as Exhibit 4.7) (4.6) Form of Class 1 (Mirror) Warrants (incorporated herein by reference to Exhibit 4.2 of the Company's Report on Form 8-K filed with the Securities and Exchange Commission on December 9, 1997) (4.7) Form of Class II Warrants (incorporated herein by reference to Exhibit 4.3 of the Company's Report on Form 8-K filed with the Securities and Exchange Commission on December 9, 1997) (10.1)* Employment Agreement, dated as of December 1, 1992, between the Registrant and William G. McLendon, as amended (incorporated by reference herein to Exhibit 10.5 of the Company's Registration Statement filed with the Securities and Exchange Commission on Form S-1 File No. 33-77030) (10.2)* 1992 Employee, Director and Consultant Stock Option Plan, as amended (10.3)* Employment Agreement for Stephen M. Blinn, as amended (incorporated by reference herein to Exhibit 10.18 of the Company's Registration Statement filed with the Securities and Exchange Commission on Form S-1 File No. 33-77030) (10.4)* Employment Agreement, dated as of February 24, 1995, between the Registrant and Elliot S. Weinstock, O.D. (incorporated herein by reference to the Company's Form 10-K for the year ended December 31, 1994 filed with the Securities and Exchange Commission as Exhibit 10.9) (10.5)* Amendment Number 1 to Employment Agreement, dated as of January 2, 1997, between the Registrant and Elliot S. Weinstock, O.D. (incorporated herein by reference to Exhibit 10.1 of the Company's Form 10-Q filed with the Securities and Exchange Commission on May 6, 1997) 56 (10.6)* Employment Agreement, dated as of January 26, 1998, between the Registrant and William T. Sullivan (incorporated herein by reference to Exhibit 10.6 of the Company's Form 10-K for the year ended December 31, 1998 filed with the Securities Exchange Commission) (10.7)* Amendment No. 1 to Employment Agreement, dated as of December 4, 1998, between the Registrant and William T. Sullivan (incorporated herein by reference to Exhibit 10.7 of the Company's Form 10-K for the year ended December 31, 1998 filed with the Securities Exchange Commission) (10.8)* Letter Agreement, dated as of July 27, 1998, between the Registrant and William G. McLendon (incorporated herein by reference to Exhibit 10b of the Company's Report on Form 10-Q filed with the Securities and Exchange Commission on November 12, 1998) (10.9)* Letter Agreement, dated as of August 3, 1998, between the Registrant and Stephen M. Blinn (incorporated herein by reference to Exhibit 10c of the Company's Report on Form 10-Q filed with the Securities and Exchange Commission on November 12, 1998) (10.10)* Employment Agreement, dated as of August 17, 1998, between the Registrant and James W. Norton (incorporated herein by reference to Exhibit 10a of the Company's Report on Form 10-Q filed with the Securities and Exchange Commission on November 12, 1998) (10.11) Form of Management Agreement between certain of the Registrant's subsidiaries and their related optometric professional corporations (incorporated herein by reference to Exhibit 10.11 of the Company's Form 10-K for the year ended December 31, 1998 filed with the Securities Exchange Commission) (10.12) Form of Stock Restrictions and Pledge Agreement between certain of the Registrant's subsidiaries, their related optometric professional corporations and the nominee shareholders (incorporated herein by reference to Exhibit 10.12 of the Company's Form 10-K for the year ended December 31, 1998 filed with the Securities Exchange Commission) (10.13) Asset Purchase Agreement dated February 24, 1995 between the Registrant, CEA Acquisition Corporation, Cambridge Eye Associates, Inc. and Elliot S. Weinstock, O.D. (incorporated herein by reference to Exhibit 2.1 of the Company's Form 8-K filed with the Securities and Exchange Commission on March 8, 1995) 57 (10.14) Credit Agreement, dated February 20, 1997, between the Company and Creditanstalt Corporate Finance Corporation, Inc. (incorporated herein by reference to Exhibit 10.1 of the Company's Form 8-K filed with the Securities Exchange Commission on March 7, 1997) (10.15) Asset Purchase Agreement dated August 24, 1995 between the Registrant, Douglas Vision World, Inc., S.J. Haronian, Kathleen Haronian, Lynn Haronian, Shirley Santoro and Tri-State Leasing Company (incorporated herein by reference to Exhibit 2.1 of the Company's Form 8-K filed with the Securities and Exchange Commission on September 8, 1995) (10.16) Asset Transfer and Merger Agreement dated as of July 1, 1996 by and among Sight Resource Corporation, E.B. Acquisition Corp., The E.B. Brown Optical Company, Brown Optical Laboratories, Inc., E.B. Brown Opticians, Inc., Gordon Safran and Evelyn Safran (incorporated herein by reference to Exhibit 2.1 of the Company's Form 8-K filed with the Securities and Exchange Commission on October 3, 1996.) (10.17) Form of Rights Agreement dated as of May 15, 1997 between the Company and American Stock Transfer & Trust Company (incorporated herein by reference to Exhibit 1 of the Company's Form 8-K filed with the Securities and Exchange Commission on May 13, 1997) (10.18) Stock Purchase Agreement dated as of July 1, 1997 by and among Marjory O. Greenberg, As Testamentary Executrix of the Succession of Tom I. Greenberg, Peter Brown, and Vision Plaza Corp. (incorporated herein by reference to Exhibit 10.1 of the Company's Form 10-Q filed with the Securities and Exchange Commission on November 12, 1997) (10.19) Promissory Note dated as of September 2, 1997 between Sight Resource Corporation and Mr. Stephen Blinn (incorporated herein by reference to Exhibit 10.2 of the Company's Form 10-Q filed with the Securities and Exchange Commission on November 12, 1997) (10.20) Series B Convertible Preferred Stock Agreement (incorporated herein by reference to Exhibit 10.1 of the Company's Form 8-K filed with the Securities and Exchange Commission on December 9, 1997) (21) Subsidiaries of the Company (27) Financial Data Schedule 58 (99.1) Loan Agreement by and between Sight Resource Corporation and Fleet National Bank, dated as of April 1, 1999 (incorporated herein by reference to Exhibit 99.1 of the Company's Report on Form 8-K filed with Securities Exchange Commission on May 6, 1999) (99.2) $7,000,000 Term Loan Note between Sight Resource Corporation and Fleet National Bank, dated as of April 1, 1999 (incorporated herein by reference to Exhibit 99.2 of the Company's Report on Form 8-K filed with Securities Exchange Commission on May 6, 1999) (99.3) $3,000,000 Secured Revolving Line Note between Sight Resource Corporation and Fleet National Bank, dated as of April 1, 1999 (incorporated herein by reference to Exhibit 99.3 of the Company's Report on Form 8-K filed with Securities Exchange Commission on May 6, 1999) (99.4) $10,000,000 Secured Acquisition Term Note between Sight Resource Corporation and Fleet National Bank, dated as of April 1, 1999 (incorporated herein by reference to Exhibit 99.4 of the Company's Report on Form 8-K filed with Securities Exchange Commission on May 6, 1999) (99.5) Borrower Security Agreement by and between Sight Resource Corporation and Fleet National Bank, dated as of April 1, 1999 (incorporated herein by reference to Exhibit 99.5 of the Company's Report on Form 8-K filed with Securities Exchange Commission on May 6, 1999) (99.6) Borrower Stock Pledge Agreement by and between Sight Resource Corporation and Fleet National Bank, dated as of April 1, 1999 (incorporated herein by reference to Exhibit 99.6 of the Company's Report on Form 8-K filed with Securities Exchange Commission on May 6, 1999) (99.7) Trademark Security Agreement by and between Sight Resource Corporation and Fleet National Bank, dated as of April 1, 1999 (incorporated herein by reference to Exhibit 99.7 of the Company's Report on Form 8-K filed with Securities Exchange Commission on May 6, 1999) - ---------- * Management contract or compensatory plan, contract or arrangement. Item 14(b) Reports on Form 8-K 59 No reports on Form 8-K were filed during the quarter ended December 25, 1999. 60 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in Holliston, Massachusetts on March 24, 2000. SIGHT RESOURCE CORPORATION By: /s/ WILLIAM T. SULLIVAN ------------------------------------- William T. Sullivan President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities on the dates indicated.
Signature Title Date --------- ----- ---- President (principal executive officer), Chief Executive /s/ WILLIAM T. SULLIVAN Officer and Director March 31, 2000 ---------------------------- William T. Sullivan /s/ WILLIAM T. MCLENDON Chairman March 31, 2000 ---------------------------- William G. McLendon /s/ STEPHEN M. BLINN Director March 31, 2000 ---------------------------- Stephen M. Blinn /s/ RICHARD G. DARMAN Director March 31, 2000 ---------------------------- Richard G. Darman
61
Signature Title Date --------- ----- ---- /s/ GARY JACOBSON, M.D. Director March 31, 2000 ---------------------------- Gary Jacobson, M.D. /s/ CHRISTIAN E. CALLSEN Director March 31, 2000 ---------------------------- Christian E. Callsen /s/ J. MITCHELL REESE Director March 31, 2000 ---------------------------- J. Mitchell Reese /s/ RUSSELL E. TASKEY Director March 31, 2000 ---------------------------- Russell E. Taskey /s/ GEORGE CLAIRMONT Director March 31, 2000 ---------------------------- George Clairmont Chief Financial Officer (principal financial and /s/ JAMES W. NORTON accounting officer) March 31, 2000 ---------------------------- James W. Norton
62 EX-10.2 2 1992 EMPLOYEE, DIRECTOR & CONSULTANT STOCK PLAN EXHIBIT 10.2 SIGHT RESOURCE CORPORATION 1992 EMPLOYEE, DIRECTOR AND CONSULTANT STOCK OPTION PLAN (As Amended December 1999) 1. DEFINITIONS AND PURPOSES. ------------------------ A. Definitions Unless otherwise specified or unless the context otherwise requires, the following terms, as used in this Sight Resource Corporation 1992 Employee, Director and Consultant Stock Option Plan, have the following meanings: 1. Administrator means the Board of Directors, unless it has delegated ------------- power to act on its behalf to a committee. (See Article 3) 2. Affiliate means a corporation which, for purposes of Section 424 of --------- the Code, is a parent or subsidiary of the Company, direct or indirect. 3. Board of Directors means the Board of Directors of the Company. ------------------ 4. Code means the United States Internal Revenue Code of 1986, as ---- amended. 5. Committee means the Committee to which the Board of Directors has --------- delegated power to act under or pursuant to the provisions of the Plan. 6. Company means Sight Resource Corporation, a Delaware corporation. ------- 7. Disability or Disabled means permanent and total disability as defined ---------- -------- in Section 22(e)(3) of the Code. 8. Fair Market Value of a Share of Common Stock means: ----------------- (a) If such Shares are then listed on any national securities exchange, the fair market value shall be the last sale price, if any, on the largest such exchange on the date of the grant of the Option, or, if none, on the most recent trade date thirty (30) days or less prior to the date of the grant of the Option; (b) If the Shares are not then listed on any such exchange, the fair market value of such Shares shall be the last sale price, if any, as reported in the National Association of Securities Dealers Automated Quotation System (NASDAQ) for the date of the grant of the Options, or if none, for the most recent trade date thirty (30) days or less prior to the date of the grant of the Option; (c) If the Shares are not then either listed on any such exchange or quoted in NASDAQ, the fair market value shall be the mean between the average of the "Bid" and the average of the "Ask" prices, if any, as reported in the National Daily Quotation Service for the date of the grant of the option, or, if none, for the most recent trade date thirty (30) days or less prior to the date of the grant of the Option for which such quotations are reported; and (d) If the market value cannot be determined under the preceding three paragraphs, it shall be determined in good faith by the Board of Directors. 9. ISO means an option meant to qualify as an incentive stock option --- under Code Section 422. 10. Key Employee means an employee of the Company or of an Affiliate ------------ (including, without limitation, an employee who is also serving as an officer or director of the Company or of an Affiliate), designated by the Administrator to be eligible to be granted one or more Options under the Plan. 11. Non-Qualified Option means an option which is not intended to qualify -------------------- as an ISO. 12. Option means an ISO or Non-Qualified Option granted under the Plan. ------ 13. Option Agreement means an agreement between the Company and a ---------------- Participant executed and delivered pursuant to the Plan, in such form as the Administrator shall approve. 14. Participant means a Key Employee, director or consultant to whom one ----------- or more Options are granted under the Plan. 15. Participant's Survivors means a deceased Participant's legal ----------------------- representatives and/or any person or persons who acquired the Participant's rights to an Option by will or by the laws of descent and distribution. 16. Plan means this Restated Stock Option Plan. ---- -2- 17. Shares means shares of the common stock, $.01 par value, of the ------ Company ("Common Stock") as to which Options have been or may be granted under the Plan or any shares of capital stock into which the Shares are changed or for which they are exchanged within the provisions of Article 2 of the Plan. The shares issued upon exercise of Options granted under the Plan may be authorized and unissued shares or shares held by the Company in its treasury, or both. B. Purposes of the Plan The Plan is intended to encourage ownership of Shares by Key Employees, non-employee directors and certain consultants of the Company in order to attract such people, to induce them to work for the benefit of the Company or of an Affiliate and to provide additional incentive for them to promote the success of the Company or of an Affiliate. The Plan provides for the issuance of ISOs and Non-Qualified Options. 2. SHARES SUBJECT TO THE PLAN. -------------------------- The number of Shares subject to this Plan as to which Options may be granted from time to time shall be 1,850,000, or the equivalent of such number of Shares after the Administrator, in its sole discretion, has interpreted the effect of any stock split, stock dividend, combination, recapitalization or similar transaction effected after such date in accordance with Paragraph 16 of the Plan. If an Option ceases to be "outstanding", in whole or in part, the Shares which were subject to such Option shall be available for the granting of other Options under the Plan. Any Option shall be treated as "outstanding" until such Option is exercised in full, or terminates or expires under the provisions of the Plan, or by agreement of the parties to the pertinent Option Agreement. -3- 3. ADMINISTRATION OF THE PLAN. -------------------------- The Administrator of the Plan will be the Board of Directors, except to the extent the Board of Directors delegates its authority to a Committee of the Board of Directors. The Plan is intended to comply with Rule 16b-3 or its successors, promulgated pursuant to Section 16 of the Securities Exchange Act of 1934, as amended (the "1934 Act") with respect to Participants who are subject to Section 16 of the 1934 Act, and any provision in this Plan with respect to such persons contrary to Rule 16b-3 shall be deemed null and void to the extent permissible by law and deemed appropriate by the Administrator. Subject to the provisions of the Plan, the Administrator is authorized to: a. Interpret the provisions of the Plan or of any Option or Option Agreement and to make all rules and determinations which it deems necessary or advisable for the administration of the Plan; b. Determine which employees of the Company or of an Affiliate shall be designated as Key Employees and which of the Key Employees, directors and consultants shall be granted Options; c. Determine the number of Shares for which an Option or Options shall be granted; and d. Specify the terms and conditions upon which an Option or Options may be granted; provided, however, that all such interpretations, rules, determinations, terms and conditions shall be made and prescribed in the context of preserving the tax status under Code Section 422 of those Options which are designated as ISOs. Subject to the foregoing, the interpretation and construction by the Administrator of any provisions of the Plan or of any Option granted under it shall be final, unless otherwise determined by the Board of Directors, if the Administrator is other than the Board of Directors. 4. ELIGIBILITY FOR PARTICIPATION. ----------------------------- The Administrator will, in its sole discretion, name the Participants in the Plan, provided, however, that each Participant must be a Key Employee, director or consultant of the Company or of an Affiliate at the time an Option is granted. Notwithstanding any of the foregoing provisions, the Administrator may authorize the grant of an Option to a person not then an employee, director or consultant of the Company or of -4- an Affiliate. The actual grant of such Option, however, shall be conditioned upon such person becoming eligible to become a Participant at or prior to the time of the execution of the Option Agreement evidencing such Option. ISOs may be granted only to Key Employees. Non-Qualified Options may be granted to any Key Employee, director or consultant of the Company or an Affiliate. Granting of any Option to any individual shall neither entitle that individual to, nor disqualify him or her from, participation in any other grant of Options. In no event shall any Participant be granted, in any consecutive three year period, options to purchase more than 400,000 shares pursuant to the Plan. 5. TERMS AND CONDITIONS OF OPTIONS. ------------------------------- Each Option shall be set forth in an Option Agreement, duly executed by the Company and by the Participant. The Option Agreements, which may be changed in the Administrator's discretion for any particular Participant (provided that any change in the Incentive Stock Option Agreement is not inconsistent with Code Section 422), shall be subject to the following terms and conditions: Non-Qualified Options: Each Option intended to be a Non- Qualified Option --------------------- shall be subject to the terms and conditions which the Administrator determines to be appropriate and in the best interest of the Company, subject to the following minimum standards for any such Non-Qualified Option: a. The Option Agreement shall be in writing in the form approved by the Administrator, with such modifications to such form as the Administrator shall approve; b. Option Price: The option price (per share) of the Shares covered by each Option shall be determined by the Administrator but shall not be less than the par value per share of the Shares on the date of the grant of the Option. c. Each Option Agreement shall state the number of Shares to which it pertains; and d. Each Option Agreement shall state the date on which it first is exercisable and the date after which it may no longer be exercised. Except as otherwise determined by the Administrator, each Option granted hereunder shall become cumulatively exercisable in four (4) equal annual installments of twenty-five percent (25%) each, commencing on the first anniversary date of the Option -5- Agreement executed by the Company and the Participant with respect to such Option, and continuing on each of the next three (3) anniversary dates. e. Each Option shall terminate not more than 10 (ten) years from the date of grant thereof or at such earlier time as the Option Agreement may provide. f. Directors' Options: Each director of the Company who is not an ------------------ employee of the Company or any Affiliate, immediately after each Annual Meeting of Stockholders of the Company, provided that on such dates such director has been in the continued and uninterrupted service of the Company as a director for a period of at least one year prior to the date of such annual meeting and is and was a director and was and is not an employee of the Company at such times, shall be granted a Non-Qualified Option to purchase 5,000 Shares. Each such Option shall (i) have an exercise price equal to the Fair Market Value (per share) of the Shares on the date of grant of the Option, (ii) have a term of ten (10) years, and (iii) shall become cumulatively exercisable in two (2) equal annual installments of fifty percent (50%) each, upon the first and second anniversary of the date of grant, provided that on such dates such director has been in the continued and uninterrupted service of the Company as a director and not an employee since the date of grant. Any director entitled to receive an Option grant under this subparagraph (f) may elect to decline the Option. Notwithstanding the provisions of Paragraph 23 concerning amendment of the Plan, the provisions of this subparagraph (f) shall not be amended more than once every six months, other than to comport with changes in the Code, the Employee Retirement Income Security Act, or the rules thereunder. The provisions of Articles 9, 10, 11 and 12 below shall not apply to Options granted pursuant to this subparagraph (f). ISOs: Each Option intended to be an ISO shall be issued only to a Key ---- Employee and be subject to at least the following terms and conditions, with such additional restrictions or changes as the Administrator determines are appropriate but not in conflict with Code Section 422 and relevant regulations and rulings of the Internal Revenue Service: a. Minimum standards: The ISO shall meet the minimum standards for Non- Qualified Options, as described above, except clauses (a), (b) and (e) thereunder. -6- b. Option Agreement: The Option Agreement for an ISO shall be in writing in substantially the form as approved by the Administrator, with such changes to such form as the Administrator shall approve, provided any changes are not inconsistent with Code Section 422. c. Option Price: Immediately before the Option is granted, if the Participant owns, directly or by reason of the applicable attribution rules in Code Section 424(d): i. Ten percent (10%) or less of the total combined voting power of ------- all classes of share capital of the Company or an Affiliate, the Option price per share of the Shares covered by each Option shall not be less than one hundred percent (100%) of the Fair Market Value per share of the Shares on the date of the grant of the Option. ii. More than ten percent (10%) of the total combined voting power of all classes of share capital of the Company or an Affiliate, the Option price per share of the Shares covered by each Option shall be not less than one hundred ten percent (110%) of the said Fair Market Value on the date of grant. d. Term of Option: For Participants who own i. Ten percent (10%) or less of the total combined voting power of ------- all classes of share capital of the Company or an Affiliate, each Option shall terminate not more than ten (10) years from the date of the grant or at such earlier time as the Option Agreement may provide; ii. More than ten percent (10%) of the total combined voting power of all classes of share capital of the Company or an Affiliate, each Option shall terminate not more than five (5) years from the date of the grant or at such earlier time as the Option Agreement may provide. e. Limitation on Yearly Exercise: The Option Agreements shall restrict the amount of Options which may be exercisable in any calendar year (under this or any other ISO plan of the Company or an Affiliate) so that the aggregate Fair Market Value (determined at the time each ISO is granted) of the stock with respect to which ISOs are exercisable for the first time by the Participant in any calendar year does not exceed one hundred thousand dollars ($100,000), provided that this -7- subparagraph (e) shall have no force or effect if its inclusion in the Plan is not necessary for Options issued as ISOs to qualify as ISOs pursuant to Section 422(d) of the Code. f. Limitation on Grant of ISOs: No ISOs shall be granted after the expiration of the earlier of ten (10) years from the date of the ------- adoption of the Plan by the Company or the approval of the Plan by the shareholders of the Company. 6. EXERCISE OF OPTION AND ISSUE OF SHARES. -------------------------------------- An Option (or any part or installment thereof) shall be exercised by giving written notice to the Company at its principal office address, together with provision for payment of the full purchase price in accordance with this paragraph for the shares as to which such Option is being exercised, and upon compliance with any other condition(s) set forth in the Option Agreement. Such written notice shall be signed by the person exercising the Option, shall state the number of Shares with respect to which the Option is being exercised and shall contain any representation required by the Plan or the Option Agreement. Payment of the purchase price for the shares as to which such Option is being exercised shall be made (a) in United States dollars in cash or by check, or (b) at the discretion of the Administrator, through delivery of shares of Common Stock having a Fair Market Value equal as of the date of the exercise to the cash exercise price of the Option, (c) at the discretion of the Administrator, by delivery of the grantee's personal recourse note bearing interest payable not less than annually at no less than 100% of the applicable Federal rate, as defined in Section 1274(d) of the Code, (d) at the discretion of the Administrator, in accordance with a cashless exercise program established with a securities brokerage firm, and approved by the Administrator, or (e) at the discretion of the Administrator, by any combination of (a), (b), (c) and (d) above. Notwithstanding the foregoing, the Administrator shall accept only such payment on exercise of an ISO as is permitted by Section 422 of the Code. The Company shall then reasonably promptly deliver the Shares as to which such Option was exercised to the Participant (or to the Participant's Survivors, as the case may be). In determining what constitutes "reasonably promptly," it is expressly understood that the delivery of the Shares may be delayed by the Company in order to comply with any law or regulation which requires the Company to take any action with respect to the Shares prior to their issuance. The Shares shall, upon delivery, be evidenced by an appropriate certificate or certificates for paid-up non-assessable Shares. -8- The Administrator shall have the right to accelerate the date of exercise of any installment of any Option; provided that the Administrator shall not accelerate the exercise date of any installment of any Option granted to any Key Employee as an ISO (and not previously converted into a Non-Qualified Option pursuant to Article 18) if such acceleration would violate the annual vesting limitation contained in Section 422(d) of the Code, as described in paragraph 5(e). 7. RIGHTS AS A SHAREHOLDER. ----------------------- No Participant to whom an Option has been granted shall have rights as a shareholder with respect to any Shares covered by such Option, except after due exercise of the Option and provision for payment of the full purchase price for the Shares being purchased pursuant to such exercise. 8. ASSIGNABILITY AND TRANSFERABILITY OF OPTIONS. -------------------------------------------- By its terms, an Option granted to a Participant shall not be transferable by the Participant other than by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act or the rules thereunder, and shall be exercisable, during the Participant's lifetime, only by such Participant (or by his or her legal representative). Such Option shall not be assigned, pledged or hypothecated in any way (whether by operation of law or otherwise) and shall not be subject to execution, attachment or similar process. Any attempted transfer, assignment, pledge, hypothecation or other disposition of any Option or of any rights granted thereunder contrary to the provisions of this Plan, or the levy of any attachment or similar process upon an Option, shall be null and void. 9. EFFECT OF TERMINATION OF SERVICE OTHER THAN "FOR CAUSE". ------------------------------------------------------- Except as otherwise provided in the pertinent Option Agreement, in the event of a termination of service (whether as an employee or consultant) before the Participant has exercised all Options, the following rules apply: a. A Participant who ceases to be an employee or consultant of the Company or of an Affiliate (for any reason other than termination "for cause", Disability, or death for which events there are special rules in Articles 10, 11, and 12, respectively), may exercise -9- any Option granted to him or her to the extent that the right to purchase Shares has accrued on the date of such termination of service, but only within such term as the Administrator has designated in the pertinent Option Agreement. b. In no event may an Option Agreement provide, if the Option is intended to be an ISO, that the time for exercise be later than three (3) months after the Participant's termination of employment. c. The provisions of this paragraph, and not the provisions of Article 11 or 12, shall apply to a Participant who subsequently becomes disabled or dies after the termination of employment, or consultancy, provided, however, in the case of a Participant's death, the Participant's survivors may exercise the Option within six (6) months after the date of the Participant's death, but in no event after the date of expiration of the term of the Option. d. Notwithstanding anything herein to the contrary, if subsequent to a Participant's termination of employment or consultancy, but prior to the exercise of an Option, the Board of Directors determines that, either prior or subsequent to the Participant's termination, the Participant engaged in conduct which would constitute "cause", then such Participant shall forthwith cease to have any right to exercise any Option. e. A Participant to whom an Option has been granted under the Plan who is absent from work with the Company or with an Affiliate because of temporary disability (any disability other than a permanent and total Disability as defined in Article 1 hereof), or who is on leave of absence for any purpose, shall not, during the period of any such absence, be deemed, by virtue of such absence alone, to have terminated such Participant's employment or consultancy with the Company or with an Affiliate, except as the Administrator may otherwise expressly provide. f. Options granted under the Plan shall not be affected by any change of employment or other service within or among the Company and any Affiliates, so long as the Participant continues to be an employee or consultant of the Company or any Affiliate, provided, however, if a Participant's employment by either the Company or an Affiliate should cease (other than to become an employee of an Affiliate or the Company), such termination shall affect the Participant's rights under -10- any Option granted to such Participant in accordance with the terms of the Plan and the pertinent Option Agreement. 10. EFFECT OF TERMINATION OF SERVICE "FOR CAUSE". -------------------------------------------- Except as otherwise provided in the pertinent Option Agreement, the following rules apply if the Participant's service (whether as an employee or consultant) is terminated "for cause" prior to the time that all of his or her outstanding Options have been exercised: a. All outstanding and unexercised Options as of the date the Participant is notified his or her service is terminated "for cause" will immediately be forfeited, unless the Option Agreement provides otherwise. b. For purposes of this Article, "cause" shall include (and is not limited to) dishonesty with respect to the employer, insubordination, substantial malfeasance or non-feasance of duty, unauthorized disclosure of confidential information, and conduct substantially prejudicial to the business of the Company or any Affiliate. The determination of the Administrator as to the existence of cause will be conclusive on the Participant and the Company. c. "Cause" is not limited to events which have occurred prior to a Participant's termination of service, nor is it necessary that the Administrator's finding of "cause" occur prior to termination. If the Administrator determines, subsequent to a Participant's termination of service but prior to the exercise of an Option, that either prior or subsequent to the Participant's termination the Participant engaged in conduct which would constitute "cause", then the right to exercise any Option is forfeited. d. Any definition in an agreement between the Participant and the Company or an Affiliate, which contains a conflicting definition of "cause" for termination and which is in effect at the time of such termination, shall supersede the definition in this Plan with respect to such Participant. 11. EFFECT OF TERMINATION OF SERVICE FOR DISABILITY. ----------------------------------------------- Except as otherwise provided in the pertinent Option Agreement, a Participant who ceases to be an employee of or -11- consultant to the Company or of an Affiliate by reason of Disability may exercise any Option granted to such Participant: a. To the extent that the right to purchase Shares has accrued on the date of his Disability; and b. In the event rights to exercise the Option accrue periodically, to the extent of a pro rata portion of such rights based upon the number of days prior to such Participant's Disability and during the accrual period which next ends following the date of Disability. A Disabled Participant may exercise such rights only within a period of not more than one (1) year after the date that the Participant became Disabled or, if earlier, within the originally prescribed term of the Option. The Administrator shall make the determination both of whether Disability has occurred and the date of its occurrence (unless a procedure for such determination is set forth in another agreement between the Company and such Participant, in which case such procedure shall be used for such determination). If requested, the Participant shall be examined by a physician selected or approved by the Administrator, the cost of which examination shall be paid for by the Company. 12. EFFECT OF DEATH WHILE AN EMPLOYEE OR CONSULTANT. ----------------------------------------------- Except as otherwise provided in the pertinent Option Agreement, in the event of the death of a Participant to whom an Option has been granted while the Participant is an employee or consultant of the Company or of an Affiliate, such Option may be exercised by the Participant's Survivors: a. To the extent exercisable but not exercised on the date of death; and b. In the event rights to exercise the Option accrue periodically, to the extent of a pro rata portion of such rights based upon the number of days prior to the Participant's death and during the accrual period which next ends following the date of death; If the Participant's Survivors wish to exercise the Option, they must take all necessary steps to exercise the Option within one (1) year after the date of death of such Participant, notwithstanding that the decedent might have been able to exercise the Option as to some or all of the Shares on a later date if he or she had not died and had continued to be an employee or consultant or, if earlier, within the originally prescribed term of the Option. -12- 13. TERMINATION OF DIRECTORS' OPTION RIGHTS. --------------------------------------- Except as otherwise provided in the pertinent Non-Qualified Option Agreement, if a director who receives Options pursuant to Article 5, subparagraph (f): a. ceases to be a member of the Board of Directors of the Company for any reason other than death or disability, any then unexercised Options granted to such Director may be exercised by the director within a period of ninety (90) days after the date the director ceases to be a member of the Board of Directors, but only to the extent of the number of shares with respect to which the Options are exercisable on the date the director ceases to be a member of the Board of Directors, and in no event later than the expiration date of the Option; or, b. ceases to be a member of the Board of Directors of the Company by reason of his or her death or Disability, any then unexercised Options granted to such Director may be exercised by the director (or by the director's personal representative, heir or legatee, in the event of death) within a period of one hundred eighty (180) days after the date the director ceases to be a member of the Board of Directors, but only to the extent of the number of Shares with respect to which the Options are exercisable on the date the director ceases to be a member of the Board of Directors, and in no event later than the expiration date of the Option. 14. PURCHASE FOR INVESTMENT. ----------------------- Unless the offering and sale of the Shares to be issued upon the particular exercise of an Option shall have been effectively registered under the Securities Act of 1933, as now in force or hereafter amended (the "Act"), the Company shall be under no obligation to issue the Shares covered by such exercise unless and until the following conditions have been fulfilled: a. The person(s) who exercise such Option shall warrant to the Company, prior to receipt of the Shares, that such person(s) are acquiring such Shares for their own respective accounts, for investment, and not with a view to, or for sale in connection with, the distribution of any such Shares, in which event the person(s) acquiring such Shares shall be bound by the -13- provisions of the following legend which shall be endorsed upon the certificate(s) evidencing their Shares issued pursuant to such exercise or such grant: "The shares represented by this certificate have been taken for investment and they may not be sold or otherwise transferred by any person, including a pledgee, in the absence of an effective registration statement of the shares under the Securities Act of 1933 or an opinion of counsel satisfactory to the Company that an exemption from registration is then available." b. The Company shall have received an opinion of its counsel that the Shares may be issued upon such particular exercise in compliance with the Act without registration thereunder. The Company may delay issuance of the Shares until completion of any action or obtaining of any consent which the Company deems necessary under any applicable law (including, without limitation, state securities or "blue sky" laws). 15. DISSOLUTION OR LIQUIDATION OF THE COMPANY. ----------------------------------------- Upon the dissolution or liquidation of the Company, all Options granted under this Plan which as of such date shall not have been exercised will terminate and become null and void; provided, however, that if the rights of a Participant or a Participant's Survivors have not otherwise terminated and expired, the Participant or the Participant's Survivors will have the right immediately prior to such dissolution or liquidation to exercise any Option to the extent that the right to purchase Shares has accrued under the Plan as of the date immediately prior to such dissolution or liquidation. 16. ADJUSTMENTS. ----------- Upon the occurrence of any of the following events, a Participant's rights with respect to any Option granted to him or her hereunder which have not previously been exercised in full shall be adjusted as hereinafter provided, unless otherwise specifically provided in the written agreement between the optionee and the Company relating to such Option: A. Stock Dividends and Stock Splits. If the shares of Common Stock shall -------------------------------- be subdivided or combined into a greater or smaller number of shares or if the Company shall issue any shares of Common Stock as a stock dividend on its outstanding Common Stock, the number of shares of Common Stock deliverable upon the -14- exercise of such Option shall be appropriately increased or decreased proportionately, and appropriate adjustments shall be made in the purchase price per share to reflect such subdivision, combination or stock dividend. B. Consolidations or Mergers. If the Company is to be consolidated with ------------------------- or acquired by another entity in a merger, sale of all or substantially all of the Company's assets or otherwise (an "Acquisition"), the Administrator or the board of directors of any entity assuming the obligations of the Company hereunder (the "Successor Board"), shall, as to outstanding Options, either (i) make appropriate provision for the continuation of such Options by substituting on an equitable basis for the shares then subject to such Options the consideration payable with respect to the outstanding shares of Common Stock in connection with the Acquisition or securities of any successor or acquiring entity; or (ii) upon written notice to the optionees, provide that all Options must be exercised, to the extent then exercisable, within a specified number of days of the date of such notice, at the end of which period the Options shall terminate; or (iii) terminate all Options in exchange for a cash payment equal to the excess of the fair market value of the shares subject to such Options (to the extent then exercisable) over the exercise price thereof. C. Recapitalization or Reorganization. In the event of a recapitalization ---------------------------------- or reorganization of the Company (other than a transaction described in subparagraph B above) pursuant to which securities of the Company or of another corporation are issued with respect to the outstanding shares of Common Stock, an optionee upon exercising an Option shall be entitled to receive for the purchase price paid upon such exercise the securities he or she would have received if he or she had exercised such Option prior to such recapitalization or reorganization. D. Modification of ISOs. Notwithstanding the foregoing, any adjustments -------------------- made pursuant to subparagraphs A, B or C with respect to ISOs shall be made only after the Administrator, after consulting with counsel for the Company, determines whether such adjustments would constitute a "modification" of such ISOs (as that term is defined in Section 424(h) of the Code) or would cause any adverse tax consequences for the holders of such ISOs. If the Administrator determines that such adjustments made with respect to ISOs would constitute a modification of such ISOs, it may refrain from making such adjustments, unless the holder of an ISO specifically requests in writing that such adjustment be made and such writing indicates that the holder has full knowledge of the consequences of such "modification" on his or her income tax treatment with respect to the ISO. -15- 17. ISSUANCES OF SECURITIES. ----------------------- Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares subject to Options. Except as expressly provided herein, no adjustments shall be made for dividends paid in cash or in property (including without limitation, securities) of the Company. 18. FRACTIONAL SHARES. ----------------- No fractional share shall be issued under the Plan and the person exercising such right shall receive from the Company cash in lieu of such fractional share equal to the Fair Market Value thereof. 19. CONVERSION OF ISOs INTO NON-QUALIFIED OPTIONS: TERMINATION OF ISOs. ------------------------------------------------------------------ The Administrator, at the written request of any optionee, may in its discretion take such actions as may be necessary to convert such optionee's ISOs (or any installments or portions of installments thereof) that have not been exercised on the date of conversion into Non-Qualified Options at any time prior to the expiration of such ISOs, regardless of whether the optionee is an employee of the Company or an Affiliate at the time of such conversion. Such actions may include, but not be limited to, extending the exercise period or reducing the exercise price of the appropriate installments of such Options. At the time of such conversion, the Administrator (with the consent of the optionee) may impose such conditions on the exercise of the resulting Non- Qualified Options as the Administrator in its discretion may determine, provided that such conditions shall not be inconsistent with this Plan. Nothing in the Plan shall be deemed to give any optionee the right to have such optionee's ISO's converted into Non-Qualified Options, and no such conversion shall occur until and unless the Administrator takes appropriate action. The Administrator, with the consent of the optionee, may also terminate any portion of any ISO that has not been exercised at the time of such termination. 20. WITHHOLDING. ----------- Upon the exercise of a Non-Qualified Option for less than its fair market value, the making of a Disqualifying Disposition (as defined in paragraph 21) or the vesting of restricted Common Stock acquired on the exercise of an Option hereunder, the -16- Company may withhold from the optionee's wages, if any, or other remuneration, or may require the optionee to pay additional federal, state, and local income tax withholding and employee contributions to employment taxes in respect of the amount that is considered compensation includible in such person's gross income. Such amounts may be payable in Common Stock at the discretion of the Committee (if permitted by law), provided that with respect to persons subject to Section 16 of the 1934 Act, any such withholding arrangement shall be in compliance with any applicable provisions of Rule 16b-3 promulgated under Section 16 of the 1934 Act. The Administrator in its discretion may condition the exercise of an Option for less than its fair market value or the vesting of restricted Common Stock acquired by exercising an Option on the grantee's payment of such additional income tax withholding and employee contributions to employment taxes. 21. NOTICE TO COMPANY OF DISQUALIFYING DISPOSITION. ---------------------------------------------- Each Key Employee who receives an ISO must agree to notify the Company in writing immediately after the Key Employee makes a Disqualifying Disposition of any shares acquired pursuant to the exercise of an ISO. A Disqualifying Disposition is any disposition (including any sale) of such shares before the later of (a) two years after the date the Key Employee was granted the ISO, or (b) one year after the date the Key Employee acquired shares by exercising the ISO. If the Key Employee has died before such stock is sold, these holding period requirements do not apply and no Disqualifying Disposition can occur thereafter. 22. TERMINATION OF THE PLAN. ----------------------- Except as provided in the following sentence, the Plan will terminate on November 30, 2002. The Plan may be terminated at an earlier date by vote of the stockholders of the Company; provided, however, that any such earlier termination will not affect any Options granted or Option Agreements executed prior to the effective date of such termination. 23. AMENDMENT OF THE PLAN. --------------------- The Plan may be amended by the stockholders of the Company. The Plan may also be amended by the Administrator, including, without limitation, to the extent necessary to qualify any or all outstanding ISOs granted under the Plan or ISOs to be granted under the Plan for favorable federal income tax treatment (including deferral of taxation upon exercise) as may be afforded incentive stock options under Section 422 of the Code, to the -17- extent necessary to ensure the compliance of the Plan with Rule 16b-3 under the 1934 Act, and to the extent necessary to qualify the shares issuable upon exercise of any outstanding options granted, or options to be granted, under the Plan for listing on any national securities exchange or quotation in any national automated quotation system of securities dealers. Any amendment approved by the Administrator which is of a scope that requires stockholder approval in order to ensure favorable federal income tax treatment for any incentive stock options or requires stockholder approval in order to ensure the qualification of the Plan under Rule 16b-3 shall be subject to obtaining such stockholder approval. Any modification or amendment of the Plan shall not, without the consent of an optionee, adversely affect his or her rights under an option previously granted to him or her. With the consent of the optionee affected, the Administrator may amend outstanding option agreements in a manner not inconsistent with the Plan. 24. EMPLOYMENT OR OTHER RELATIONSHIP. -------------------------------- Nothing in this Plan or any Option Agreement shall be deemed to prevent the Company or an Affiliate from terminating the employment, consultancy or director status of a Participant, nor to prevent a Participant from terminating his or her own employment, consultancy or director status or to give any Participant a right to be retained in employment or other service by the Company or any Affiliate for any period of time. 25. GOVERNING LAW. ------------- This Agreement shall be construed and enforced in accordance with the law of the State of Delaware. -18- EX-21 3 SUBSIDIARIES OF THE COMPANY EXHIBIT 21 SUBSIDIARIES Cambridge Eye Associates Douglas Vision World Inc. E. B. Brown Opticals Inc. Vision Plaza Corp. Shawnee Optical, Inc. Kent Optical, Inc. Eyeglass Emporium, Inc. EX-27 4 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS 12-MOS DEC-25-1999 DEC-25-1999 SEP-26-1999 DEC-26-1998 DEC-25-1999 DEC-25-1999 166 166 0 0 5464 5464 1881 1881 6875 6875 10968 10968 12396 12396 6662 6662 40754 40754 9963 9963 0 0 0 0 0 0 0 0 17349 17349 40754 40754 15528 67034 15528 67034 6112 22823 6112 22823 0 0 0 0 194 641 (3307) (2,777) 11 77 0 0 0 0 0 0 0 0 (3318) (2854) (0.35) (0.30) (0.35) (0.30)
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