-----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, Ai4DcdTgMTC15gNG6b9dNi0H2eO/G5e5E4e5jnqjIAuD/jiYfUzN/u7fhEGFg3pm +rFEDDEEx4YD6836Ow1fhw== 0000927016-01-502507.txt : 20010816 0000927016-01-502507.hdr.sgml : 20010816 ACCESSION NUMBER: 0000927016-01-502507 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-21068 FILM NUMBER: 1714090 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-Q 1 d10q.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarterly Period Ended June 30, 2001 Commission File Number 0-21068 SIGHT RESOURCE CORPORATION - ------------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) Delaware 04-3181524 - ------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 100 Jeffrey Avenue Holliston, MA 01746 - ------------------------------------------------------------------------------- (Address of principal executive offices) 508-429-6916 - ------------------------------------------------------------------------------- (Registrant's telephone number, including area code) N/A - ------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since the last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __________ ------ APPLICABLE ONLY TO CORPORATE ISSUERS: State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: On August 3, 2001, 28,345,114 shares (does not include 30,600 shares held as treasury stock) of common stock, par value $0.01 per share, were outstanding. 1 SIGHT RESOURCE CORPORATION INDEX PART I. FINANCIAL INFORMATION PAGE ---- ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets as of June 30, 2001 and December 30, 2000 3 Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2001 and June 24, 2000 4 Consolidated Statements of Cash Flows for the Three and Six Months Ended June 30, 2001 and June 24, 2000 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and 11 Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risk 20 PART II. OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds 21 Item 5. Other Information 21 Item 6. Exhibits and Reports on Form 8-K 22 Signatures 23 Exhibit Index 24 2
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SIGHT RESOURCE CORPORATION Consolidated Balance Sheets (In thousands, except share and per share data) June 30, 2001 December 30, 2000 ------------- ------------------- ASSETS (unaudited) Current assets: Cash and cash equivalents $ 201 $ 532 Accounts receivable, net of allowance of $1,893 and $1,897, respectively 2,518 2,587 Inventories 5,416 5,977 Prepaid expenses and other current assets 659 457 ------------- ------------------- Total current assets 8,794 9,553 ------------- ------------------- Property and equipment 11,132 11,044 Less accumulated depreciation (7,891) (7,060) ------------- ------------------- Net property and equipment 3,241 3,984 ------------- ------------------- Other assets: Intangible assets, net 20,583 21,444 Other assets 87 158 ------------- ------------------- Total other assets 20,670 21,602 ------------- ------------------- $ 32,705 $ 35,139 ============= =================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Revolver notes payable $ 2,500 $ 2,500 Current portion of long term debt 6,796 6,540 Current portion of capital leases 8 10 Accounts payable 4,387 4,721 Accrued expenses 2,072 2,007 Dividends payable 308 51 ------------- ------------------- Total current liabilities 16,071 15,829 ------------- ------------------- Non-current liabilities: Long term debt, less current maturities 259 451 Capital leases 22 25 ------------- ------------------- Total non-current liabilities 281 476 ------------- ------------------- Series B redeemable convertible preferred stock 1,452,119 shares issued 6,535 6,535 Stockholders' equity: 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; 10,749,552 at June 30, 2001 and 9,261,552 at December 30, 2000 shares issued and outstanding 107 93 Additional paid-in capital 38,217 38,452 Treasury stock at cost, 30,600 shares at June 30, 2001 and December 30, 2000 (137) (137) Accumulated deficit (28,369) (26,109) ------------- ------------------- Total stockholders' equity 9,818 12,299 ------------- ------------------- $ 32,705 $ 35,139 ============= =================== See accompanying notes to consolidated financial statements.
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SIGHT RESOURCE CORPORATION Consolidated Statements of Operations (In thousands, except share and per share data) Three Months Ended Six Months Ended ---------------------------------------- ------------------------------------------- June 30, June 24, June 30, June 24, 2001 2000 2001 2000 ---------------------------------------- ------------------------------------------- (Unaudited) (Unaudited) Net revenue $ 14,505 $ 16,483 $ 30,564 $ 34,002 Cost of revenue 4,822 5,120 9,740 10,522 ---------------- ------------------ ------------------ ------------------ Gross profit 9,683 11,363 20,824 23,480 Selling, general and administrative expenses 11,399 11,697 22,588 23,845 ---------------- ------------------ ------------------ ------------------ Loss from operations (1,716) (334) (1,764) (365) ---------------- ------------------ ------------------ ------------------ Other income (expense) Interest income 4 17 11 29 Interest expense (197) (296) (440) (519) Loss on disposal of assets (22) --- (22) (20) Write off of deferred financing costs --- (60) --- (60) ---------------- ------------------ ------------------ ------------------ Total other income (expense) (215) (339) (451) (570) ---------------- ------------------ ------------------ ------------------ Loss before income tax expense (1,931) (673) (2,215) (935) Income tax expense 24 22 45 47 ---------------- ------------------ ------------------ ------------------ Net loss $ (1,955) $ (695) $ (2,260) $ (982) ================ ================== ================== ================== Dividends on redeemable convertible preferred stock 129 --- 257 --- ---------------- ------------------ ------------------ ------------------ Net loss attributable to common stock shareholders $ (2,084) $ (695) $ (2,517) $ (982) ================ ================== ================== ================== Basic and diluted loss per common share $ (0.21) $ (0.08) $ (0.26) $ (0.11) ================ ================== ================== ================== Weighted average number of common shares outstanding: 9,991,000 9,226,000 9,625,000 9,226,000 ================ ================== ================== ================== See accompanying notes to consolidated financial statements.
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SIGHT RESOURCE CORPORATION Consolidated Statements of Cash Flows (In thousands) Six Months Ended ------------------- June 30, June 24, 2001 2000 ------------- ------------- (unaudited) Operating activities: Net loss $(2,260) $ (982) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 1,820 1,980 Amortization and write-off of deferred financing costs 100 135 Amortization of unearned compensation --- 2 Loss on disposal of assets 22 20 Changes in operating assets and liabilities: Accounts receivable 69 106 Inventories 561 (287) Prepaid expenses and other current assets (202) (18) Accounts payable and accrued expenses (269) (404) ------------ ------------- Net cash provided by (used in) operating activities (159) 552 ------------ ------------- Investing activities: Purchases of property and equipment (240) (420) Proceeds from sale of assets --- 160 Other assets (5) (152) ------------ ------------- Net cash used in investing activities (245) (412) ------------ ------------- Financing activities: Principal payments (17) (1,041) Proceeds from notes 76 800 Proceeds from issuance of stock 14 --- ------------ ------------- Net cash provided by (used in) financing activities 73 (241) ------------ ------------- Net decrease in cash and cash equivalents (331) (101) Cash and cash equivalents, beginning of period 532 166 ------------ ------------- Cash and cash equivalents, end of period $ 201 $ 65 ============ ============= Supplementary cash flow information: Interest paid $ 441 $ 414 ============ ============= Income taxes paid 55 58 ============ ============= See accompanying notes to consolidated financial statements.
5 SIGHT RESOURCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (1) THE COMPANY (a) Nature of Business Sight Resource Corporation (the "Company") manufactures, distributes and sells eyewear and related products and services. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying consolidated financial statements have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of the Company, these consolidated financial statements contain all adjustments (consisting of only normal, recurring adjustments) necessary to present fairly the financial position of Sight Resource Corporation as of June 30, 2001 and the results of its operations and cash flows for the periods presented. The Company's fiscal year ends on the last Saturday in December. Each quarter represents a thirteen week period, except during a 53-week year in which case one quarter represents a fourteen week period. The quarters ended June 30, 2001 and June 24, 2000 were thirteen week periods; the six months ended June 30, 2001 and June 24, 2000 were 26-week periods. Fiscal year 2001 is a 52-week fiscal year and 2000 was a 53-week fiscal year. The accompanying consolidated financial statements and related notes should be read in conjunction with the audited consolidated financial statements which are contained in the Company's Annual Report on Form 10-K, as amended on Form 10-K/A, for the year ended December 30, 2000. (3) EARNINGS PER SHARE The following table provides a reconciliation of the numerators and denominators of the basic and diluted loss per share computations for the three months and six months ended June 30, 2001 and June 24, 2000: 6 SIGHT RESOURCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data)
Three Months Ended Six Months Ended June 30, June 24, June 30, June 24, 2001 2000 2001 2000 ----------- ----------- ----------- ----------- BASIC AND DILUTED LOSS PER SHARE Net loss $ (1,955) $ (695) $ (2,260) $ (982) ----------- ----------- ----------- ----------- Net loss attributable to common shareholders (2,084) (695) (2,517) (982) =========== =========== =========== =========== Weighted average common shares outstanding 9,991,000 9,226,000 9,625,000 9,226,000 Net loss per share $ (0.21) $ (0.08) $ (0.26) $ (0.11) =========== =========== =========== ===========
Outstanding options, warrants and convertible preferred stock were not included in the computation of diluted earnings per share for the three and six months ended June 30, 2001, because they would have been antidilutive. The following table presents the number of outstanding options, warrants and convertible preferred stock shares not included in the computation of diluted loss per share.
Three Months Ended Six Months Ended June 30, June 24, June 30, June 24, 2001 2000 2001 2000 --------------- -------------- -------------- --------------- Options 0 7,135 0 6,017 Warrants 5,463 1,420 5,108 1,197 Convertible preferred shares 1,452,119 1,452,119 1,452,119 1,452,119 --------------- -------------- -------------- --------------- Total 1,457,582 1,460,674 1,457,227 1,459,333 =============== ============== ============== ===============
7 SIGHT RESOURCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (In thousands, except share and per share data) (4) Operating Segment and Related Information The following tables represent certain operating segment information. For the three months ended June 30, 2001 and June 24, 2000.
Totals Eye Care Centers Laser Vision Correction All Other Consolidated Totals ---------------- ----------------------- --------- ------------------- 2001 2000 2001 2000 2001 2000 2001 2000 ------------------------------------------------------------------------------------------------------------ Revenues: External $14,421 $16,279 $ 84 $ 204 $ 0 $ 0 $14,505 $16,483 customers Interest: Interest income 0 0 0 0 4 17 4 17 Interest expense (5) (9) 0 0 (192) (347) (197) (356) ------- ------- ----- ----- ------- ------- ------- ------- Net interest (5) (9) 0 0 (188) 330 (193) 339 expense Depreciation and 859 974 0 1 46 50 905 1,025 amortization Income (loss) (452) 752 10 50 (1,274) (1,136) (1,716) (334) from operations Identifiable assets 31,890 29,333 26 15 787 9,840 32,703 39,188 Capital 102 143 0 0 14 30 116 173 expenditures
For the six months ended June 30, 2001 and June 24, 2000.
Totals Eye Care Centers Laser Vision Correction All Other Consolidated Totals ---------------- ----------------------- --------- ------------------- 2001 2000 2001 2000 2001 2000 2001 2000 ------------------------------------------------------------------------------------------------------------ Revenues: External $30,389 $33,628 $ 175 $ 374 $ 0 $ 0 $30,564 $34,002 customers Interest: Interest income 0 0 0 0 11 29 11 29 Interest expense (7) (14) 0 0 (433) (565) (440) (579) ------- ------- ----- ----- ------- ------- ------- ------- Net interest (7) (14) 0 0 (422) 536 (429) (550) expense Depreciation and 1,728 1,882 1 4 91 94 1,820 1980 amortization Income (loss) 467 1,865 25 50 (2,256) (2,280) (1,764) (365) from operations Identifiable assets 31,890 29,333 26 15 787 9,840 32,703 39,188 Capital 191 374 0 2 49 44 240 420 expenditures
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. 8 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. (5) SUBSEQUENT EVENT On May 23, 2001, the Company entered into a common stock purchase agreement by and among the Company, eyeshop.com inc. ("Eyeshop") and certain investors associated with Eyeshop (the "Stock Purchase Agreement"), pursuant to which the Company agreed to sell, in two tranches, an aggregate of 5,000,000 shares of its common stock at a price of $0.20 per share for an aggregate purchase price of $1,000,000, to persons associated with Eyeshop. The Company closed on the sale of the first tranche of 1,250,000 shares for $250,000 on May 23, 2001. The second tranche of 3,750,000 shares for $750,000 closed on July 20, 2001. On July 20, 2001, pursuant to an Agreement and Plan of Merger (the "Merger Agreement") dated as of May 23, 2001 by and among the Company, Eyeshop Acquisition Corporation, a Delaware corporation and wholly owned subsidiary of the Company ("EAC"), and Eyeshop, EAC merged with and into Eyeshop (the "Merger") and Eyeshop became a wholly owned subsidiary of the Company. Pursuant to the Merger Agreement, Eyeshop stockholders exchanged their Eyeshop stock for the following at the closing of the merger: . Each outstanding share of Eyeshop common stock was exchanged for 4.52 shares of the Company's common stock; . Each outstanding share of Eyeshop Series A Preferred Stock was exchanged for 9.79 shares of the Company's common stock; and . Each outstanding share of Eyeshop Series B Preferred Stock was exchanged for 33.72 shares of the Company's common stock. Pursuant to the Merger Agreement, former Eyeshop stockholders are also entitled to receive additional shares of the Company's common stock if and when the options, warrants and other rights to receive the Company's common stock that were held by the Company's securityholders as of May 23, 2001 are exercised. The Company issued a total of 7,306,662 shares of Common Stock to former Eyeshop stockholders in connection with the Merger. At the close of the Merger, former Eyeshop stockholders and purchasers of the Company's common stock pursuant to the Stock Purchase Agreement held approximately 50% of the issued and outstanding common stock of the Company. The Merger will be accounted for using the purchase method of accounting. In conjunction with the Merger, the Company has announced plans to relocate headquarters from Holliston, Massachusetts to Cincinnati, Ohio. Although plans have not been finalized, as a result of the planned relocation, the Company expects to incur costs for employee severance, costs to relocate the current headquarters, costs for new systems development or acquisition, additional lease costs and a loss on disposal of assets. 9 On May 31, 2001, the Company entered into a common stock purchase agreement by and among the Company and certain investors associated with Eyeshop (the "Second Stock Purchase Agreement"), to sell an aggregate of 6,569,500 shares of its common stock at a price of $0.20 per share for an aggregate purchase price of $1,313,900. The Company closed on the sale of the 6,569,500 shares on July 20, 2001. Collectively, the former stockholders of Eyeshop together with the common stock purchasers associated with Eyeshop held approximately 18,876,162 shares of the Company's common stock immediately after the merger and the second common stock financing. The Company is currently assessing the accounting for the merger transaction to determine the acquirer under the recently issued Statement of Financial Accounting Standards No. 141 Business Combinations. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: Statements contained in this document which are not historical fact are forward-looking statements based upon management's current expectations and are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by such forward-looking statements. These risks include, but are not limited to, the risks described under "Business Risks and Cautionary Statements" in the Company's Form 10-K, as amended on Form 10-K/A, for the fiscal year ended December 30, 2000, filed with the Securities and Exchange Commission. OVERVIEW Sight Resource Corporation (the "Company") manufactures, distributes and sells eyewear and related products and services. As of June 30, 2001, the Company's operations consisted of 119 eye care centers with two regional optical laboratories and three distribution centers. Based upon annual sales, the Company is one of the fifteen largest providers in the United States' primary eye care industry. The Company's eye care centers operate primarily under the brand names Cambridge Eye Doctors, E.B. Brown Opticians, Eyeglass Emporium, Kent Optical, Shawnee Optical, Vision Plaza, and Vision World. 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. RESULTS OF OPERATIONS THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2001 AND JUNE 24, 2000 Net Revenue. During the three months ended June 30, 2001, the Company generated net revenue of approximately $14.4 and $0.1 million from the operation of its 119 eye care centers and its affiliated laser vision correction services, respectively, as compared to net revenue of approximately $16.3 and $0.2 million from its 128 eye care centers and its affiliated laser vision correction services, respectively, for the three months ended June 24, 2000. Net revenue for the first six months of fiscal 2001 was approximately $30.4 million and $0.2 million from the operations of its eye care centers and laser vision correction affiliation, respectively, as compared to net revenue of approximately $33.6 million and $0.4 million from its eye care centers and its affiliated laser vision correction services for the first six months ended June 24, 2000. The $2.0 million, or 12.0% decrease in total net revenue for the three months ended June 30, 2001 relates to lower average net sales per store, the closing of nine stores net of store additions and the reduction of sales to the Company's largest managed care plan customer in New England. The $3.4 million or 10.1% decrease in total net revenue for the first six months ended June 30, 2001 11 relates to lower average net sales per store, the closing of nine stores net of store additions and the reduction of sales to the Company's largest managed care plan customer in New England. COST OF REVENUE. Cost of revenue decreased from approximately $4.9 million and $0.2 million from the operation of the 128 eye care centers and laser vision correction affiliation, respectively, for the three months ended June 24, 2000 to approximately $4.7 million and $0.1 million from the operation of the 119 eye care centers and the Company's laser vision correction affiliation, respectively, for the three months ended June 30, 2001. Total cost of revenue as a percentage of net revenue increased from 31.1% for the three months ended June 24, 2000 to 33.2% for the three months ended June 30, 2001. Cost of revenue decreased from approximately $10.2 million from the operation of the eye care centers for the six months ended June 24, 2000 to approximately $9.5 million for the six months ended June 30, 2001. Cost of revenue decreased from approximately $0.3 million from the operation of the Company's laser vision correction affiliation for the six months ended June 24, 2000 to approximately $0.2 million from its laser vision correction affiliation for the six months ended June 30, 2001. Cost of revenue as a percentage of net revenue increased from 30.9% for the six months ended June 24, 2000 to 31.9% for the six months ended June 30, 2001. The increase as a percentage of net revenue primarily reflects more sales price discounting, offset somewhat by the consolidation of optical laboratory operations. Cost of revenue principally consisted of (i) the cost of manufacturing, purchasing and distributing optical products to customers of the Company and (ii) the cost of delivering LVC services. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses were approximately $11.4 million and $22.6 million for the three months and six months ended June 30, 2001 as compared to approximately $11.7 million and $23.8 million for the three and six months ended June 24, 2000. The decrease primarily relates to reductions in bad debt expense, lower store operating costs due to the closure of nine stores net of store additions, offset somewhat by inflationary pressures that increased payroll costs. Selling, general and administrative expense, as a percentage of net revenue, increased from 71.0% to 78.6% for the three months ended June 30, 2001, and increased from 70.1% to 73.9% for the six months ended June 30, 2001 as compared to the three and six months ended June 24, 2000. OTHER INCOME AND EXPENSE. Interest income totaled $4,000 and $11,000 for the three months and six months ended June 30, 2001, respectively, as compared to $17,000 and $29,000 for the three and six months ended June 24, 2000, respectively. This decrease resulted primarily from the investment of a lower average cash and cash equivalents balance during the first and second quarters of 2001 as compared to the same period in 2000. Interest expense totaled $197,000 and $440,000 for the three and six months ended June 30, 2001, respectively, as compared to $296,000 and $519,000 for the three and six months ended June 24, 2000, respectively. The decrease resulted from lower interest rates offset somewhat by higher average balance of debt outstanding during the first and second quarters of 2001 as compared to the same periods in 2000. Net loss on disposition of assets totaled $22,000 for both the three and six months ended June 30, 2001, respectively, as compared to $0 and $20,000 for the three and six months ended June 24, 2000, respectively. The non-cash write-off of deferred financing costs for the three months ended June 24, 2000 of approximately $60,000, as required by generally accepted accounting principles, was related to the execution of a loan modification agreement with Fleet Bank dated March 31, 2000. 12 NET LOSS. The Company realized a net loss of $2,084,000, or $(0.21) per share on a basic and diluted weighted average basis, for the three months ended June 30, 2001 as compared to net loss of $695,000, or $(0.08) per share on a basic and diluted basis, for the three months ended June 24, 2000. The Company realized a net loss of $2,517,000 or $(0.26) per share basic and diluted for the six months ended June 30, 2001, as compared to a net loss of $982,000 or ($0.11) per share on a basic and diluted basis for the six months ended June 24, 2000. Liquidity and Capital Resources At June 30, 2001, the Company had approximately $0.2 million in cash and cash equivalents and working capital deficit of approximately $7.3 million, in comparison to approximately $0.5 million in cash and cash equivalents and working capital deficit of approximately $5.7 million as of December 30, 2000. The working capital deficit is primarily due to the bank debt of $5.9 million with Sovereign Bank of New England ("Sovereign") which was classified on June 30, 2001 and on December 30, 2000 as current. The maturity date of the bank debt has been extended to December 31, 2002. The bank debt continues to be classified as current because the Company cannot forecast with reasonable certainty that the Company will be in compliance with future bank covenants. Sovereign transferred the Company's debt back to Fleet National Bank in July 2001. The Company may need to raise additional funds in the near term and may seek to raise those funds through additional financings, including public or private equity offerings. There can be no assurance that funds will be available for the contemplated financings or otherwise on terms acceptable to the Company, if at all. If adequate funds are not available, the Company may be required to limit its operations, which would have a material and adverse affect on the Company. Effective January 1, 1999, the Company acquired all of the outstanding shares of capital stock of Shawnee Optical, Inc. ("Shawnee"). The purchase price paid in connection with this acquisition was $1.75 million in cash, $0.3 million in notes payable over three years and 70,000 shares of common stock. In addition, the Company agreed to issue additional consideration to the Shawnee stockholders if the market price of the Company's Common Stock did not equal or exceed $5.00 per share at any time during the period from January 22, 2000 to January 22, 2001. The market price of the Company's Common Stock did not equal or exceed $5.00 during such period. The amount of additional consideration due to the Shawnee stockholders for each share of common stock issued in the acquisition and held by them on January 22, 2001 is equal to the difference between $5.00 and the greater of (a) the market price on January 22, 2001 or (b) $2.45. As of January 22, 2001, the aggregate additional consideration payable to the Shawnee sellers was $178,500. As a result of the Company's obligation to issue additional consideration to the Shawnee stockholders, the Company entered into a Settlement Agreement and Mutual Release, dated March 20, 2001, with the Shawnee stockholders in which the Company agreed to issue 238,000 shares of its common stock to the Shawnee stockholders. At the time of the acquisition, the Company included the value of this additional consideration in its determination of the purchase price. In addition, the Company has failed to make required note payments to Shawnee noteholders in the amount of $100,000 that were due on January 22, 2001. Effective April 1, 1999, the Company acquired all of the outstanding shares of capital stock of Kent Optical Company and its associated 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. In addition, the Company offered to issue additional consideration to the Kent stockholders if the market price of the Company's common stock did not equal or exceed $5.00 per share at any time during the period from April 23, 2000 to April 23, 2001. The market price of the Company's common stock did not equal or exceed $5.00 per share at any time during the period from April 23, 2000 to April 23, 2001. The amount of additional consideration due to the Kent stockholders for each share of common stock issued in the acquisition and held by them on April 23, 2001 is equal to the difference between $5.00 and the greater of (a) the market price of the 13 common stock on April 23, 2001 or (b) $2.73. As of April 23, 2001, the aggregate additional consideration payable to the Kent sellers was $363,200 (the "Additional Consideration"). At the Company's option, the Additional Consideration may be paid to the Kent stockholders in cash or in additional shares of the Company's common stock valued at its market price on the date that the Additional Consideration becomes payable to the Kent stockholders. At the time of the acquisition, the Company included the value of the Additional Consideration in its determination of the purchase price. In addition, the Company has failed to make required note payments to Kent noteholders in the amount of $333,333 that were due on April 23, 2001. On July 27, 2001, the Company was served with a complaint filed by John Cress and Timothy Westra (together, the "Plaintiffs") in Muskegon County Circuit Court in Michigan on July 6, 2001 against the Company and Kent Acquisition Corporation (a subsidiary of the Company, "Kent Acquisition") alleging payment defaults under certain promissory notes (the "Kent Notes") issued to the Plaintiffs as part of consideration pursuant to a Stock Purchase Agreement, dated April 1, 1999 by and among Kent Acquisition, Kent Optical Company and its related entities (the "Kent Stock Purchase Agreement"), and the failure to make payments of the Additional Consideration. Plaintiffs seek relief in the form of payment of amounts owed pursuant to the Kent Notes and payment of the Additional Consideration owed pursuant to the Kent Stock Purchase Agreement, including all applicable interest, costs and attorney fees. The outcome of this matter is uncertain and the Company and its legal advisors are in discussions with the Plaintiffs and their legal advisors regarding the complaint. In connection with the exercise of stock options to purchase 138,322 shares (the "Option Shares") of the Company's common stock during fiscal 1997, Stephen M. Blinn, a former executive officer and former Director of the Company, executed a promissory note (the "Note") in favor of the Company for the aggregate exercise price of $594,111. The Note is due on the earlier of September 2, 2007 or the date upon which Mr. Blinn receives the proceeds of the sale of not less than 20,000 of the Option Shares (the "Maturity Date"). Interest accrues at the rate of 6.55%, compounding annually, and is payable on the earlier of the Maturity Date of the Note or upon certain Events of Default as defined in the Note. The principal balance of the Note, together with accrued and unpaid interest, was approximately $714,000 as of March 31, 2001. During the third quarter of fiscal 2000, Mr. Blinn informed the Company that he understood that the terms of the Note permitted Mr. Blinn to satisfy in full his obligations under the Note by either (a) returning the Option Shares to the Company or (b) turning over to the Company any cash proceeds received by Mr. Blinn upon a sale of the Option Shares. The Company has informed Mr. Blinn that the Note is a full recourse promissory note, and that Mr. Blinn remains personally liable for all unpaid principal and interest under the Note. Due to Mr. Blinn's position regarding the Note and his failure to provide the Company or the Company's accountants with a copy of his personal financial statements or any other evidence of his ability to pay the amounts due under the Note, the Company has established a $714,000 reserve for notes receivable and, subsequent to the establishment of the reserve, the Company no longer recognizes as interest income accrued interest related to the Note. As of June 30, 2001, the Company had warrants outstanding which provide it with potential sources of financing as outlined below. However, because of the current market value of the Company's common stock, it is unlikely that any subsequent material proceeds may be realized by the Company. Number Potential Securities Outstanding Proceeds - ---------------------------------------------------------------------------- Class II Warrants 290,424 $2,613,816 Bank Austria AG, f/k/a Creditanstalt, Warrants 150,000 693,750 Sovereign Warrants 50,000 25,500 Sovereign Warrants 50,000 7,810 ---------- $3,340,876 ========== As of June 30, 2001, the Company also has outstanding 227,125 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 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 14 warrants cannot be estimated at this time; however, for reasons stated above it is unlikely that any proceeds would be realized by the Company. 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 1997 Agreement, the Company issued to the bank warrants to purchase 150,000 shares of the common stock at a purchase price of $4.625 per share. The warrants expire December 31, 2003. As noted in the next paragraph below, 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 Fleet National Bank ("Fleet") pursuant to which the Company could borrow $10.0 million on an acquisition line of credit, of which $7.0 million is on a term loan basis and $3.0 million is 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. The acquisition line facility bore interest at either Fleet's prime rate, or LIBOR plus 2.25%, or at a comparable interest swap rate at the Company's election. The term loan facility bore interest at LIBOR plus 2.25% or at a comparable interest swap rate at the Company's election. The revolving credit facility bore interest at Fleet's prime rate or LIBOR plus 2.0% at the Company's election. 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, on March 31, 2000, the Company and Fleet entered into a modification agreement (the "Original Modification Agreement") that amended the 1999 Agreement in order to, among other things, waive the Company's default, adjust certain covenants to which the Company is subject and terminate the acquisition line of credit. In addition, the Original Modification Agreement limited the revolving line note to $2.5 million and the term loan to $6.75 million and established the maturity date for each of these credit lines as March 31, 2001. Also, the Original Modification Agreement established the following interest rates for both the revolving line note and term loan: (i) from March 31, 2000 through August 31, 2000 - prime rate plus 1.0%; (ii) from September 1, 2000 through October 31, 2000 - prime rate plus 2.0%; and (iii) from November 1, 2000 through March 31, 2001 - prime rate plus 3.0%. The scheduled monthly principal payments for the term loan were 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. As part of the Original Modification Agreement, the Company issued to Fleet warrants to purchase 50,000 shares of the Company's common stock at an exercise price of $0.51 per share which was equal to the average closing price of the common stock for the last five trading days for the month of August 2000, and warrants to purchase 50,000 shares of the Company's common stock at an exercise price of $0.156 per share which was equal to the average closing price of the Company's common stock for the last five trading days for the month of December 2000. In August 2000, as a result of a bank merger, Sovereign became the successor party to Fleet in the Original Modification Agreement. On November 30, 2000, the Company and Sovereign entered into a second modification agreement (the "Second Modification Agreement") that amended the terms of the Original Modification Agreement in order to, among other things, defer certain payments required under the term note and amend certain terms and conditions of the 1999 Agreement. Sovereign deferred the required principal payments due on December 1, 2000 in the amount of $100,000 and on January 1, 2001 in the amount of $125,000 until March 1, 2001 and March 22, 2001, respectively. At December 30, 2000, the Company was in default for non- compliance with certain negative covenants contained in the Second Modification Agreement relating to minimum net worth, minimum debt service coverage, maximum funded debt service coverage and minimum net profit. 15 On March 26, 2001, the Company and Sovereign entered into the Third Modification Agreement (the "Third Modification Agreement") that amended the terms of the Original Modification Agreement and the Second Modification Agreement in order to, among other things, waive the Company's default, adjust or delete certain covenants to which the Company was subject, change the repayment terms and extend the maturity date of the loans to December 31, 2002. In addition, the Third Modification Agreement required that the Company close an equity financing of at least $1.0 million with third party investors on or before May 31, 2001. The Third Modification Agreement establishes the following annual interest rates for both the revolving line and term loans: (i) from February 1, 2001 through September 30, 2001 - 6%; (ii) from October 1, 2001 through December 31, 2001 - 7%; (iii) from January 1, 2002 through December 31, 2002 - prime rate subject to a minimum rate of 8% and a maximum rate of 11%. The scheduled monthly principal payments do not begin until July 1, 2001 and are $30,000 from July 1, 2001 through December 31, 2001, and $100,000 from January 1, 2002 through December 31, 2002. As of June 30, 2001, $5.9 million was borrowed on the term loan and $2.5 million was borrowed on the revolving credit facility. On May 14, 2001, the Company and Sovereign amended and restated the Third Modification Agreement (the "Amended and Restated Third Modification Agreement"). The Amended and Restated Third Modification Agreement contains the same terms as the Third Modification Agreement, except that the Amended and Restated Third Modification Agreement requires the Company to close a financing or series of financings, either through the issuance of equity or debt subordinate to Sovereign, of at least $2.3 million with third party investors on or before July 15, 2001. On May 23, 2001, the Company entered into a common stock purchase agreement by and among the Company, eyeshop.com inc. ("Eyeshop") and certain investors associated with Eyeshop (the "Stock Purchase Agreement"), pursuant to which the Company agreed to sell, in two tranches, an aggregate of 5,000,000 shares of its common stock at a price of $0.20 per share for an aggregate purchase price of $1,000,000, to persons associated with Eyeshop. The Company closed on the sale of the first tranche of 1,250,000 shares for $250,000 on May 23, 2001. The second tranche of 3,750,000 shares for $750,000 closed on July 20, 2001. On July 20, 2001, pursuant to an Agreement and Plan of Merger (the "Merger Agreement") dated as of May 23, 2001 by and among the Company, Eyeshop Acquisition Corporation, a Delaware corporation and wholly owned subsidiary of the Company ("EAC"), and Eyeshop, EAC merged with and into Eyeshop (the "Merger") and Eyeshop became a wholly owned subsidiary of the Company. Pursuant to the Merger Agreement, Eyeshop stockholders exchanged their Eyeshop stock for the following at the closing of the merger: . Each outstanding share of Eyeshop common stock was exchanged for 4.52 shares of the Company's common stock; . Each outstanding share of Eyeshop Series A Preferred Stock was exchanged for 9.79 shares of the Company's common stock; and . Each outstanding share of Eyeshop Series B Preferred Stock was exchanged for 33.72 shares of the Company's common stock. Pursuant to the Merger Agreement, former Eyeshop stockholders are also entitled to receive additional shares of the Company's common stock if and when the options, warrants and other rights to receive the Company's common stock that were held by the Company's securityholders as of May 23, 2001 are exercised. The Company issued a total of 7,306,662 shares of Common Stock to former Eyeshop stockholders in connection with the Merger. The Merger will be accounted for using the purchase method of accounting. In conjunction with the Merger, the Company has announced plans to relocate headquarters from Holliston, Massachusetts to Cincinnati, Ohio. Although plans have not been finalized, as a result of the planned relocation, the 16 Company expects to incur costs for employee severance, costs to relocate the current headquarters, costs for new systems development or acquisition, additional lease costs and a loss on disposal of assets. On May 31, 2001, the Company entered into a common stock purchase agreement by and among the Company and certain investors associated with Eyeshop (the "Second Stock Purchase Agreement"), to sell an aggregate of 6,569,500 shares of its common stock at a price of $0.20 per share for an aggregate purchase price of $1,313,900. The Company closed on the sale of the 6,569,500 shares on July 20, 2001. Contemporaneously, with the closing of the Merger, the Company and Carlyle Venture Partners, L.P., c/s Venture Investors, L.P., Carlyle U.S. Venture Partners, L.P. and Carlyle Venture Coinvestment, L.L.C. (collectively, the "Purchasers") entered into an agreement which provides for, among other things, the following terms: that upon conversion of the Preferred Stock, the Purchasers will be entitled to receive 3,176,511 shares of the Company Common Stock in satisfaction of the Purchaser's rights to receive anti-dilution protection in connection with the transactions contemplated by the financing and merger; that the Purchasers (i) waive their rights to anti-dilution protection with respect to future obligations of the Company to issue securities and (ii) waive their rights to receive additional shares of Company Common Stock pursuant to the Class I Warrants with respect to future issuances of warrants and options by the Company, all in exchange for a warrant to purchase 1,000,000 shares of Company Common Stock at an exercise price of $0.20; that the Company satisfy its obligations to pay dividends on the Preferred Stock for the calendar year 2001 by issuing an aggregate of 1,221,999 shares of Company Common Stock in installments of 364,723 shares, 318,947 shares, 283,380 shares and 254,949 shares payable on the first day of February, May, August and November of 2001, respectively; that dividends accruing on the Preferred Stock after November 1, 2001 will accrue as cash dividends and be paid promptly in cash upon the earliest to occur of (i) the merger, consolidation, reorganization, recapitalization, dissolution or liquidation of the Company where the stockholders of the Company immediately following the consummation of the merger no longer own more than 50% of the voting securities of the Company, (ii) the sale, lease, exchange or other transfer of all or substantially all of the assets of the Company, (iii) the consummation of an equity financing by the Company in which proceeds to the Company, net of transaction costs, are greater than or equal to ten million dollars, (iv) the end of the first twelve month period in which earnings before income taxes, depreciation and amortization are equal to or greater than five million dollars or (v) the refinancing of the Company's outstanding indebtedness to Sovereign Bank; and that the Purchasers waive their right to more than one designee on the board of directors. 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. The Company from time to time will evaluate potential acquisition candidates. Without additional funding, the Company's rate of acquisition and size of acquisition will be limited. RECENT ACCOUNTING PRONOUNCEMENTS 17 In July, 2001, the FASB issued Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. Statement 141 also specifies the criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. Statement 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. The Company is required to adopt the provisions of Statement 141 immediately, except with regard to business combinations initiated prior to July 1, 2001, which it expects to account for using the pooling-of-interests method, and Statement 142 effective January 1, 2002. Furthermore, any goodwill and any intangible assets determined to have an indefinite useful life that are acquired in a purchase business combination completed after June 30, 2001 will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate pre-Statement 142 accounting literature. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 will continue to be amortized prior to the adoption of Statement 142. Statement 141 will require upon adoption of Statement 142, that the Company evaluate its existing intangible assets and goodwill that were acquired in a prior purchase business combination, and to make any necessary reclassifications in order to conform with the new criteria in Statement 141 for recognition apart from goodwill. Upon adoption of Statement 142, the Company will be required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of Statement 142 within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period. In connection with the transitional goodwill impairment evaluation, Statement 142 will require the Company to perform an assessment of whether there is an indication that goodwill (and equity-method goodwill) is impaired as of the date of adoption. To accomplish this the Company must identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. The Company will then have up to six months from the date of adoption to determine the fair value of each reporting unit and compare it to the reporting unit's carrying amount. To the extent a reporting unit's carrying amount exceeds its fair value, an indication exists that the reporting unit's goodwill may be impaired and the Company must perform the second step of the transitional impairment test. In the second step, the Company must compare the implied fair value of the reporting unit's goodwill, determined by allocating the reporting unit's fair value to all of its assets (recognized and unrecognized) and liabilities in a manner similar to a purchase price allocation in accordance with Statement 141, to its carrying amount, both of which would be measured as of the date of adoption. This second step is required to be completed as soon as possible, but no later than the end of the year of adoption. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in the Company's statement of earnings. 18 And finally, any unamortized negative goodwill (and negative equity-method goodwill) existing at the date Statement 142 is adopted must be written off as the cumulative effect of a change in accounting principle. As of the date of adoption, the Company expects to have unamortized goodwill in the amount of $14,325,000, unamortized identifiable intangible assets in the amount of $5,396,000, and unamortized negative goodwill in the amount of $0, all of which will be subject to the transition provisions of Statements 141 and 142. Amortization expense related to goodwill was $1,068,000 and $531,000 for the year ended December 30, 2000 and the six months ended June 30, 2001, respectively. Because of the extensive effort needed to comply with adopting Statements 141 and 142, it is not practicable to reasonably estimate the impact of adopting these Statements on the Company's financial statements at the date of this report, including whether any transitional impairment losses will be required to be recognized as the cumulative effect of a change in accounting principle. 19 ITEM 3. QUANTITATIVE AND QUALITATIVE 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. 20 PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On May 23, 2001, the Company issued an aggregate of 1,250,000 shares of its Common Stock, par value $0.01 per share, to the certain persons associated with Eyeshop (collectively the "Purchasers") who are listed on Exhibit A to the Common Stock Purchase Agreement by and among the Company, Eyeshop and the Purchasers, dated May 23, 2001 (incorporated herein by reference as Exhibit 2.1 hereto). No underwriters were involved in the transaction listed above. The shares were issued in connection with the merger with Eyeshop. The aggregate proceeds of $250,000 will be used by the Company to fund working capital requirements. The Company relied upon Section 4(2) of the Securities Act of 1933, as amended, because the above transaction did not involve any public offering by the Company. ITEM 5. OTHER INFORMATION Pursuant to the terms of the Merger Agreement, the Common Stock Purchase Agreement and the Second Stock Purchase Agreement, certain members of management of Eyeshop were appointed to management positions of the Registrant as follows: E. Dean Butler became the Chairman of the Company's Board of Directors (the "Board"); Carene Kunkler became the President and Chief Executive Officer and a Director; and William Connell and Dino Tabacchi were appointed to the Board. In connection with these appointments, Steve Blinn resigned as a Director and William T. Sullivan resigned from his positions as President and Chief Executive Officer and as a Director. As a result of the foregoing, persons associated with Eyeshop hold four of the eight seats on the Board. On July 27, 2001, the Company was served with a complaint filed by John Cress and Timothy Westra (together, the "Plaintiffs") in Muskegon County Circuit Court in Michigan on July 6, 2001 against Sight Resource Corporation (the "Company") and Kent Acquisition Corporation (a subsidiary of the Company, "Kent"). The complaint alleges two counts. In the first count, the Plaintiffs allege that Kent and the Company failed to make payments under certain promissory notes (the "Kent Notes") issued to the Plaintiffs as part of consideration pursuant to a Stock Purchase Agreement dated April 1, 1999 by and among Kent, Kent Optical Company and its related entities (the "Kent Stock Purchase Agreement") and that such nonpayment constitutes an event of default under the Kent Notes. Plaintiffs seek relief in the form of payment of amounts owed on the Kent Notes, including all applicable interest, costs and attorney fees. In the second count, the Plaintiffs allege that Kent and the Company failed to make payments of certain additional consideration under the Kent Stock Purchase Agreement when the market price of certain shares of the Company's common stock held by the Plaintiffs did not equal or exceed $5.00 per share at any time during the period from April 23, 2000 to April 23, 2001. Plaintiffs seek relief in the form of payment of the additional consideration owed under the Kent Stock Purchase Agreement, including all applicable interest, costs and attorney fees. The outcome of this matter is uncertain and the Company and its legal advisors are in discussions with the Plaintiffs and their legal advisors regarding the complaint. 21 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits
Exhibit No. Title - ----------- --------------------------------------------------------------------------- 2.1 Agreement and Plan of Merger, dated May 23, 2001, by and among Sight Resource Corporation, Eyeshop Acquisition Corporation and eyeshop.com inc. (incorporated herein by reference to Annex A to the Company's Definitive Proxy Statement, filed with the Securities and Exchange Commission (the "SEC") on June 21, 2001). 2.2 Common Stock Purchase Agreement, dated May 23, 2001, by and among Sight Resource Corporation, eyeshop.com inc. and the purchasers listed on Exhibit A attached thereto (incorporated herein by reference to Annex B to the Registrant's Definitive Proxy Statement, filed with the SEC on June 21, 2001). 2.3 Common Stock Purchase Agreement, dated May 31, 2001, by and among Sight Resource Corporation and the purchasers listed on Exhibit A attached thereto (incorporated herein by reference to Annex C to the Registrant's Definitive Proxy Statement, filed with the SEC on June 21, 2001). 4.1 Letter Agreement, dated May 21, 2001, between Sight Resource Corporation and Carlyle Venture Partners, L.P. (incorporated herein by reference to Annex B to the Registrant's Definitive Proxy Statement, filed with the SEC on June 21, 2001). 10.1 Amended and Restated Third Modification Agreement, dated May 14, 2001, between Sight Resource Corporation and Sovereign Bank. 10.2* 1992 Employee, Director and Consultant Stock Option Plan, as amended.
- ------------ * Management contract or compensatory plan, contract or arrangement. (b) The Company filed the following reports on Form 8-K during the quarter ended June 30, 2001: (1) May 25, 2001, under Item 5, relating to the merger between eyeshop.com inc. and the Company and the common stock financing. (2) June 8, 2001, under Item 5, relating to the second common stock financing. 22 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Sight Resource Corporation Date: August 14, 2001 By: /S/ CARENE S. KUNKLER --------------- ----------------------------- Carene S. Kunkler President and Chief Executive Officer (principal executive officer) Date: August 14, 2001 By: /S/ JAMES NORTON --------------- --------------------- James Norton Chief Financial Officer (principal financial officer) 23 Exhibit Index
Exhibit No. Title - ----------- --------------------------------------------------------------------------- 2.1 Agreement and Plan of Merger, dated May 23, 2001, by and among Sight Resource Corporation, Eyeshop Acquisition Corporation and eyeshop.com inc. (incorporated herein by reference to Annex A to the Company's Definitive Proxy Statement, filed with the Securities and Exchange Commission (the "SEC") on June 21, 2001). 2.2 Common Stock Purchase Agreement, dated May 23, 2001, by and among Sight Resource Corporation, eyeshop.com inc. and the purchasers listed on Exhibit A attached thereto (incorporated herein by reference to Annex B to the Registrant's Definitive Proxy Statement, filed with the SEC on June 21, 2001). 2.3 Common Stock Purchase Agreement, dated May 31, 2001, by and among Sight Resource Corporation and the purchasers listed on Exhibit A attached thereto (incorporated herein by reference to Annex C to the Registrant's Definitive Proxy Statement, filed with the SEC on June 21, 2001). 4.1 Letter Agreement, dated May 21, 2001, between Sight Resource Corporation and Carlyle Venture Partners, L.P. (incorporated herein by reference to Annex B to the Registrant's Definitive Proxy Statement, filed with the SEC on June 21, 2001). 10.1 Amended and Restated Third Modification Agreement, dated May 14, 2001, between Sight Resource Corporation and Sovereign Bank. 10.2* 1992 Employee, Director and Consultant Stock Option Plan, as amended.
- ------------ * Management contract or compensatory plan, contract or arrangement. 24 EX-10.1 3 dex101.txt AMENDED AND RESTATED THIRD MODIFICATION AGREEMENT Exhibit 10.1 AMENDED AND RESTATED THIRD MODIFICATION AGREEMENT ------------------------------------------------- THIS AMENDED AND RESTATED THIRD MODIFICATION AGREEMENT (hereinafter, this "Agreement") is made this 14th day of May, 2001 by and among: SOVEREIGN BANK as successor-in-interest to Fleet National Bank (hereinafter, the "Bank"), a federal savings bank having an office located at 100 Pearl Street, Hartford, Connecticut; SIGHT RESOURCE CORPORATION (hereinafter, "Sight Resource"), a Delaware corporation with a principal place of business at 100 Jeffrey Avenue, Holliston, Massachusetts; CAMBRIDGE EYE ASSOCIATES, INC. (hereinafter, "Cambridge Eye"), a Delaware corporation with a principal place of business at One Highland Avenue, Unit 3B, Malden, Massachusetts; DOUGLAS VISION WORLD, INC. (hereinafter, "Douglas Vision"), a Delaware corporation with a principal place of business at One Highland Avenue, Unit 3B, Malden, Massachusetts; E.B. BROWN OPTICIANS, INC. (hereinafter, "E.B. Brown"), a Delaware corporation with a principal place of business at 1549 E. 30th Street, Cleveland, Ohio; EYEGLASS EMPORIUM, INC. (hereinafter, "Eyeglass Emporium"), a Delaware corporation with a principal place of business at 100 Jeffrey Avenue, Holliston, Massachusetts; KENT OPTICAL COMPANY, f/k/a KENT ACQUISITION CORP. (hereinafter, "Kent Optical"), a Delaware corporation with a principal place of business at 100 Jeffrey Avenue, Holliston, Massachusetts; SHAWNEE OPTICAL, INC. (hereinafter, "Shawnee Optical"), a Delaware corporation with a principal place of business at 2203 W. 38th Street, Erie, Pennsylvania; and VISION PLAZA, CORP. (hereinafter, "Vision Plaza"), a Delaware corporation with a principal place of business at 3301 Veterans Memorial Boulevard, Suite 54E, Metarie, Louisiana. Hereinafter, the Sight Resource, Cambridge Eye, Douglas Vision, E.B. Brown, Eyeglass Emporium, Kent Optical, Shawnee Optical, and Vision Plaza shall be referred to collectively, jointly, and severally, as the "Obligors." WITNESSETH ---------- WHEREAS, reference is hereby made to certain loan arrangements (hereinafter, the "Loan Arrangements") entered into by and between the Bank and the Obligors, evidenced by, among other things, the following documents, instruments, and agreements (hereinafter collectively, together with this Agreement and all documents, instruments, and agreements executed incidental hereto, and contemplated hereby, the "Loan Documents"): (a) Loan Agreement (hereinafter, as amended, the "Loan Agreement") dated April 15, 1999, entered into by and between the Bank and the Obligors; (b) Secured Revolving Line Note (hereinafter, the "Revolving Note") dated April 15, 1999 in the maximum principal amount of $3,000,000.00 made by the Obligors payable to the Bank; (c) Secured Term Note (hereinafter, the "Term Note") dated April 15, 1999 in the original principal amount of $7,000,000.00 made by the Obligors payable to the Bank; (d) Eight (8) Security Agreements (All Assets) (hereinafter, collectively, the "Security Agreements") dated April 15, 1999 respectively, pursuant to which each of the Obligors granted the Bank a security interest in the Collateral (as defined in the Security Agreements); (e) Security Agreement (Pledged Collateral) dated April 15, 1999, pursuant to which Sight Resource assigned, transferred, and delivered to the Bank all of the Collateral (as defined therein); (f) Modification Agreement (hereinafter, the "Modification Agreement") dated March 31, 2000 entered into by the Bank and the Obligors; and (g) Second Modification Agreement (hereinafter, the "Second Modification Agreement") dated November 30, 2000 entered into by the Bank and the Obligors. Capitalized terms used herein and not otherwise defined shall have the meanings as set forth in the Loan Agreement, as amended by (i) the Modification Agreement and (ii) the Second Modification Agreement. WHEREAS, the Obligors have requested that the Bank amend certain terms and conditions of the Loan Documents as provided for herein; and WHEREAS, the Bank has indicated its willingness to do so, BUT ONLY on the terms and conditions contained in this Agreement; and WHEREAS, the Obligors have determined that this Agreement is in the Obligors' best interest. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Obligors and the Bank agree as follows: Acknowledgment of Indebtedness ------------------------------ 1. The Obligors each hereby acknowledge and agree that, in accordance with the terms and conditions of (i) the Loan Documents, (ii) this Agreement, and (iii) all documents, instruments, and agreements executed incidental to, and contemplated by this Agreement, the Obligors are jointly and severally liable to the Bank as of May 10, 2001, as follows: (a) Revolving Note: (i) Principal: $2,500,000.00 (ii) Interest: $3,750.00 (iii) Late Fees: $33.33 (iv) Legal Fees & Expenses (From 03/16/01 - 05/08/01): $6,247.39 (b) Term Note: (i) Principal: $5,850,002.01 (ii) Interest: $8,775.00 -2- (iii) Late Fees: $78.00 TOTAL $8,368,885.73 (c) All interest accruing from and after May 10, 2001 under the Revolving Note, and the Term Note, respectively, and all late fees, reasonable costs, expenses, and costs of collection (including reasonable attorneys' fees and the allocated costs of the Bank's in-house counsel) incurred by the Bank from and after May 8, 2001 in connection the Loan Documents, including, without limitation, all reasonable attorney's fees and expenses incurred in connection with the negotiation and preparation of this Agreement and all documents, instruments, and agreements incidental hereto. (d) Hereinafter all amounts due as set forth in this Paragraph 1, and elsewhere payable under this Agreement, shall be referred to collectively as the "Obligations." Waiver of Claims ---------------- 2. The Obligors each hereby acknowledge and agree that they have no offsets, defenses, claims, or counterclaims against the Bank or the Bank's officers, directors, employees, attorneys, representatives, predecessors, successors, and assigns with respect to the Obligations, or otherwise, and that if any of the Obligors now have, or ever did have, any offsets, defenses, claims, or counterclaims against the Bank or the Bank's officers, directors, employees, attorneys, representatives, predecessors, successors, and assigns, whether known or unknown, at law or in equity, from the beginning of the world through this date and through the time of execution of this Agreement, all of them are hereby expressly WAIVED, and the Obligors each hereby RELEASE the Bank and the Bank's officers, directors, employees, attorneys, representatives, predecessors, successors, and assigns from any liability therefor. Ratification of Loan Documents; Further Assurances -------------------------------------------------- 3. The Obligors: (a) Hereby ratify, confirm, and reaffirm all and singular the terms and conditions of the Loan Documents. The Obligors further acknowledge and agree that except as specifically modified in this Agreement, all terms and conditions of those documents, instruments, and agreements shall remain in full force and effect; and (b) Shall, from and after the execution of this Agreement, execute and deliver to the Bank whatever additional documents, instruments, and agreements that the Bank reasonably may require in order to vest or perfect the Loan Documents and the Collateral granted therein more securely in the Bank and to otherwise give effect to the terms and conditions of this Agreement, including, without limitation, such UCC Financing Statements and related documentation as may be necessary in order to perfect the security interest granted to the Bank by the Obligors in the Collateral. Waiver of Certain Existing Defaults ----------------------------------- 4. In consideration of the Obligors' compliance with the terms and conditions of this Agreement, the Bank hereby agrees to waive the following existing Defaults which have occurred under the Loan Documents: (i) Section 7.01 - - Minimum Net Worth of not less than $21,000,000 for the quarter ended 12/30/2000; (ii) Section 7.03 - Minimum Debt Service Coverage Ratio of not less than 1.1x for the quarter ended 12/30/2000; (iii) Section 7.04 - Maximum Funded Debt Coverage Ration of not more than 3.5x for the trailing twelve (12) month period ended 12/30/2000; and (iv) -3- Section 7.05 - Minimum Net Profit of not greater than a loss of $620,000 for the quarter ended 12/30/2000 and not greater than a loss of $1,950,000 for the twelve (12) month period ended 12/30/2000 (collectively, the "Existing Defaults"). In connection with the waiver of the Existing Defaults, the Obligors hereby expressly acknowledge and agree as follows: (a) The waiver of the Existing Defaults (i) shall apply only to the defaults specified herein, (ii) constitutes a one-time waiver, and (iii) shall not constitute a waiver of any Default or Events of Default whether now existing or arising after the execution of this Agreement, other than of the Existing Defaults; and (b) The waiver of the Existing Defaults shall not prejudice any rights or remedies the Bank may have after the date hereof to declare an Event of Default, or to exercise its rights and remedies with respect to such Default, with respect to any failure of the Obligors to be in compliance with any term or condition of the any of the Loan Documents. Licensing Agreements -------------------- 5. The Obligors each hereby represent and warrant to the Bank that: (a) The Obligors maintain licensing agreements with only those parties specifically identified on Exhibit "A" attached hereto; (b) The Collateral granted to the Bank under the Security Agreements is subject to the rights of only those licensors specifically listed on Exhibit "A"; and (c) Complete and accurate copies of all licensing agreements (together with any amendments or addendums thereto) maintained among the Obligors and any other parties are attached hereto as Exhibit "B". Additional Financings --------------------- 6. The Obligors have advised the Bank that they are negotiating to receive additional financings in the form of equity and/or debt subordinate to the Obligations, in the aggregate amount of not less than $2,300,000 (the "Additional Financings") from third parties (the "Investors"). In that regard, the Obligors: (a) Shall provide to the Bank, by no later than the first business day of each calendar month during the term of this Agreement, written updates as to the status of the Obligors' efforts to obtain Additional Financings from the Investors or any other parties (hereinafter, the "Financing Report"). Each Financing Report shall include, at a minimum, a statement as to the persons or entities with which the Obligors are actively seeking any Additional Financings, as well as an accounting of any amounts received by the Obligor in connection with the Additional Financings; (b) Hereby acknowledge and agree that the Additional Financings shall be on such terms and conditions as are reasonably acceptable to the Bank; (c) Shall provide to the Bank, by no later than May 31, 2001, a formal written agreement or agreements that memorialize all material terms of the Additional Financings, which have been executed by all necessary parties and constitute a binding obligation to consummate the Additional Financings; -4- (d) Hereby acknowledge and agree that any Additional Financings which are in the form of debt shall be subordinate to the Obligations, and that the Borrower shall, and the Borrower shall cause each subordinated creditor to, prior to the completion of any Additional Financings which constitute subordinated debt, execute and deliver to the Bank a subordination agreement, which subordination agreement shall be in substantially the form of the Subordination Agreement attached hereto as Exhibit "C"; and (e) Hereby acknowledge and agree that the failure to complete the Additional Financings by no later than July 16, 2001 shall constitute an Event of Default under the Loan Agreement. Interest Rate; Repayment of the Obligations ------------------------------------------- 7. From and after the execution of this Agreement, interest shall accrue upon, and the Obligors shall repay, the Obligations as follows: (a) Commencing upon the execution of this Agreement interest shall accrue on the unpaid principal balance of each of (i) the Revolving Note and (ii) the Term Note, at the following rates during the corresponding time periods as indicated in the table below: - -------------------------------------------------------------------------------- Time Period Applicable Interest Rate ----------- ------------------------ - -------------------------------------------------------------------------------- February 1, 2001 through and Six (6%) percent including September 30, 2001: - -------------------------------------------------------------------------------- October 1, 2001 through and Seven (7%) percent including December 31, 2001: - -------------------------------------------------------------------------------- January 1, 2002 through the Prime Rate (as defined in the Loan Maturity Date (as defined herein): Agreement), provided, however, that the rate of interest charged shall be no less than eight (8%) percent per annum, and no greater than eleven (11%) per annum - -------------------------------------------------------------------------------- (b) On the first Banking Day of each calendar month the Obligors shall make consecutive monthly payments in an amount equal to all accrued interest under each of (i) the Revolving Note and (ii) the Term Note; (c) In addition to all other payments required hereunder, the Obligors shall make regular scheduled payments to be applied in reduction of the principal balance of the Term Note, during the following time periods in the corresponding amounts: - -------------------------------------------------------------------------------- Time Period Amount of Principal Payment ----------- --------------------------- - -------------------------------------------------------------------------------- Commencing the first Banking Day of July, 2001 and continuing on the first Banking Day of each calendar month thereafter through and including December, 2001: $30,000.00 - -------------------------------------------------------------------------------- Commencing on the first Banking Day of January, 2002 and continuing on the first Banking Day of each calendar month thereafter until the Maturity Date: $100,000.00 - -------------------------------------------------------------------------------- -5- (d) The Obligors shall pay all Obligations under the Loan Documents in full by federal funds wire transfer on or before the earlier of (i) the occurrence of an Event of Default (as defined below) or (ii) December 31, 2002 (hereinafter, the "Maturity Date"). Modification of Negative Covenants ---------------------------------- 8. From and after the execution of this Agreement, the following Negative covenants contained in Article VII of the Loan Agreement shall be modified as follows: (a) Section 7.01 is hereby deleted in its entirety and replaced with the following: 7.01 (Minimum Net Worth). Borrower (on a consolidated basis) will not permit its Net Worth to be less than $12,500,000 as at the end of any fiscal quarter commencing with the fiscal quarter ending March 31, 2001. (b) Section 7.03 (Minimum Debt Service Coverage Ratio) and Section 7.04 (Maximum Funded Debt Coverage Ratio) are hereby deleted in their entirety. (c) Section 7.05 is hereby deleted in its entirety and replaced with the following: 7.05 (Maximum Net Loss). Borrower will not permit its consolidated net loss after taxes to be greater than the following amounts for the following quarters (and annually where appropriate): - -------------------------------------------------------------------------------- Quarter Ending Applicable Amount -------------- ----------------- - -------------------------------------------------------------------------------- March 31, 2001 ($1,700,000) - -------------------------------------------------------------------------------- June 30, 2001 ($2,000,000) - -------------------------------------------------------------------------------- September 30, 2001 ($1,000,000) - -------------------------------------------------------------------------------- December 31, 2001 ($2,300,000) - -------------------------------------------------------------------------------- Annual Fiscal Year 2001 ($7,000,000) - -------------------------------------------------------------------------------- March 31, 2002 ($800,000) - -------------------------------------------------------------------------------- June 30, 2002 ($925,000) - -------------------------------------------------------------------------------- September 30, 2002 ($475,000) - -------------------------------------------------------------------------------- December 31, 2002 ($1,325,000) - -------------------------------------------------------------------------------- Annual Fiscal Year 2002 ($3,525,000) - -------------------------------------------------------------------------------- Each of the first three quarters of each fiscal year and the annual calculation shall be separate and distinct tests. Costs of Collection ------------------- 9. The Obligors shall: (a) On or before the execution of this Agreement, the Obligors shall pay the Bank the sum of $6,247.39 in reimbursement for reasonable costs, expenses, and costs of collection (including reasonable attorneys' fees and expenses) incurred by the Bank from -6- March 16, 2001 through May 8, 2001, in connection with the protection, preservation, and enforcement by the Bank of its rights and remedies under the Loan Documents, including, without limitation, the negotiation and preparation of this Agreement. (b) On demand, reimburse the Bank for any and all reasonable costs, expenses, and costs of collection (including reasonable attorneys' fees and expenses) incurred by the Bank from and after March 16, 2001, in connection with the protection, preservation, and enforcement by the Bank of its rights and remedies under the Loan Documents. Notices ------- 10. Any communication between the Bank and the Obligors shall be forwarded via certified mail, return receipt requested, or via recognized overnight courier, addressed as follows: If to the Bank: Sovereign Bank Managed Assets Division 619 Alexander Road Princeton, New Jersey 08540 Attn.: Mr. Frank P. Leis With a copy via telecopier to: Steven T. Greene, Esquire Riemer & Braunstein LLP Three Center Plaza Boston, Massachusetts 02108 Telecopier No. (617) 880-3456 If to the Obligors: Sight Resource Corporation 100 Jeffrey Avenue Holliston, Massachusetts 01746 Attn: William T. Sullivan President and CEO With a copy via telecopier to: Lewis Geffen, Esquire Mary-Laura Greely, Esquire Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. One Financial Center Boston, Massachusetts 02111 Telecopier No. (617) 542-2241 Waivers ------- 11. Non-Interference. From and after the occurrence of any Event of Default, the Obligors agree not to interfere with the exercise by the Bank of any of its rights and remedies. The Obligors further agree that they shall not seek to distrain or otherwise hinder, delay, or impair the Bank's efforts to realize upon any of the collateral granted to the Bank under the Loan Documents, or otherwise to enforce the Bank's rights and remedies pursuant to the Loan Documents. This provision shall be specifically enforceable by the Bank. 12. Automatic Stay. The Obligors hereby expressly assent to any motion filed by the Bank seeking relief from the automatic stay in connection with any Petition for Relief filed by or against any one or more of the Obligors under the United States Bankruptcy Code. -7- 13. Jury Trial. The Obligors hereby make the following waiver knowingly, voluntarily, and intentionally, and understand that the Bank, in entering into this Agreement, or in making any financial accommodations to the Obligors, is relying on such a waiver: THE OBLIGORS HEREBY IRREVOCABLY WAIVE ANY PRESENT OR FUTURE RIGHT TO A JURY IN ANY TRIAL OF ANY CASE OR CONTROVERSY IN WHICH THE BANK BECOMES A PARTY (WHETHER SUCH CASE OR CONTROVERSY IS INITIATED BY OR AGAINST THE BANK OR IN WHICH THE BANK IS JOINED AS A PARTY LITIGANT), WHICH CASE OR CONTROVERSY ARISES OUT OF, OR IS IN RESPECT OF, ANY RELATIONSHIP BETWEEN THE OBLIGORS, OR ANY OTHER PERSON OR ENTITY, AND THE BANK. Entire Agreement ---------------- 14. This Agreement shall be binding upon the Obligors and the Obligors' respective employees, representatives, successors, and assigns, and shall inure to the benefit of the Bank and the Bank's successors and assigns. This Agreement and all documents, instruments, and agreements executed in connection herewith incorporate all of the discussions and negotiations between the Obligors and the Bank, either expressed or implied, concerning the matters included herein and in such other documents, instruments and agreements, any statute, custom, or usage to the contrary notwithstanding. No such discussions or negotiations shall limit, modify, or otherwise affect the provisions hereof. No modification, amendment, or waiver of any provision of this Agreement, or any provision of any other document, instrument, or agreement between the Obligors and the Bank shall be effective unless executed in writing by the party to be charged with such modification, amendment, or waiver, and if such party be the Bank, then by a duly authorized officer thereof. Construction of Agreement ------------------------- 15. In connection with the interpretation of this Agreement and all other documents, instruments, and agreements incidental hereto: (a) All rights and obligations hereunder and thereunder, including matters of construction, validity, and performance, shall be governed by and construed in accordance with the law of the Commonwealth of Massachusetts and are intended to take effect as sealed instruments. (b) The captions of this Agreement are for convenience purposes only, and shall not be used in construing the intent of the Bank and the Obligors under this Agreement. (c) In the event of any inconsistency between the provisions of this Agreement and any other document, instrument, or agreement entered into by and between the Bank and the Obligors, the provisions of this Agreement shall govern and control. (d) The Bank and the Obligors have prepared this Agreement and all documents, instruments, and agreements incidental hereto with the aid and assistance of their respective counsel. Accordingly, all of them shall be deemed to have been drafted by the Bank and the Obligors and shall not be construed against either the Bank or the Obligors. Illegality or Unenforceability ------------------------------ 16. Any determination that any provision or application of this Agreement is invalid, illegal, or unenforceable in any respect, or in any instance, shall not affect the validity, legality, or enforceability of any such provision in any other instance, or the validity, legality, or enforceability of any other provision of this Agreement. -8- Informed Execution ------------------ 17. The Obligors warrant and represent to the Bank that the Obligors: (a) Have read and understand all of the terms and conditions of this Agreement; (b) Intend to be bound by the terms and conditions of this Agreement; (c) Are executing this Agreement freely and voluntarily, without duress, after consultation with independent counsel of their own selection; and (d) Acknowledge and agree that the modifications provided to the Obligors by the Bank pursuant to this Agreement constitute a fair and reasonable time frame within which all Obligations are to be paid in full. [remainder of this page intentionally left blank] -9- IN WITNESS WHEREOF, this Agreement has been executed on this 14th day of May, 2001. SOVEREIGN BANK SIGHT RESOURCE CORPORATION By: /s/ Frank P. Leis By: /s/ William T. Sullivan ----------------------------- ----------------------------- Title: Vice President Title: President CAMBRIDGE EYE ASSOCIATES, INC. By: /s/ William T. Sullivan ----------------------------- Title: President DOUGLAS VISION WORLD, INC. By: /s/ William T. Sullivan ----------------------------- Title: President E.B. BROWN OPTICIANS, INC. By: /s/ William T. Sullivan ----------------------------- Title: President EYEGLASS EMPORIUM, INC. By: /s/ William T. Sullivan ----------------------------- Title: President KENT OPTICAL COMPANY, f/k/a KENT ACQUISITION CORP. By: /s/ William T. Sullivan ----------------------------- Title: President SHAWNEE OPTICAL, INC. By: /s/ William T. Sullivan ----------------------------- Title: President VISION PLAZA, CORP. By: /s/ William T. Sullivan ----------------------------- Title: President EXHIBIT "A" TO A CERTAIN AMENDED AND RESTATED THIRD MODIFICATION AGREEMENT DATED MAY 14, 2001 AMONG SIGHT RESOURCE CORPORATION, ET AL. AND SOVEREIGN BANK Licensors 1. Marchon Delta Systems, Inc.; and 2. Microsoft Corporation EXHIBIT "B" TO A CERTAIN AMENDED AND RESTATED THIRD MODIFICATION AGREEMENT DATED MAY 14, 2001 AMONG SIGHT RESOURCE CORPORATION, ET AL. AND SOVEREIGN BANK License Agreements (Attached) EXHIBIT "C" TO A CERTAIN AMENDED AND RESTATED THIRD MODIFICATION AGREEMENT DATED MAY 14, 2001 AMONG SIGHT RESOURCE CORPORATION, ET AL. AND SOVEREIGN BANK Form of Subordination Agreement (Attached) Subordination Agreement Sovereign Bank - -------------------------------------------------------------------------------- Date: _____________, 2001 This Subordination Agreement (hereinafter, this "Agreement") is made among ________________________________________________________________________________ ________________ [insert name and address of appropriate Sight Resource Corp. entity indebted to the Creditor] (hereinafter, the "Borrower"), ________________________________________________________________________________ ________________ [insert name and address of subordinated creditor] (hereinafter, the "Creditor"), and Sovereign Bank, successor in interest to Fleet National Bank, a federal savings bank having offices located at 100 Pearl Street, Hartford, Connecticut (hereinafter, the "Bank"), for good and valuable consideration and in consideration of the mutual covenants contained herein and benefits to be derived herefrom. WITNESSETH ---------- WHEREAS, the Bank and the Borrower entered into a certain Loan Agreement dated April 15, 1999, as amended by (i) a certain Modification Agreement dated March 31, 2000, (ii) a certain Second Modification Agreement dated November 30, 2000, and (iii) a certain Amended and Restated Third Modification Agreement dated May 14, 2001 (hereinafter, collectively, as amended from time to time, the Loan Agreement"), pursuant to which the Bank has made loans extensions of credit to the Borrower; and WHEREAS, the Creditor has made loans, and may in the future make additional loans, to the Borrower; WHEREAS, it is a requirement of the Loan Agreement that the Creditor and the Borrower enter into this Agreement with the Bank; and WHEREAS, the Bank's extension of financial accommodations to the Borrower as more particularly set forth in the Loan Agreement is beneficial to the Creditor; NOW THEREFORE, it is hereby agreed among the Bank, the Borrower and the Creditor as follows: 1. Unless and until this Agreement is terminated by written notice from the Bank, the Creditor and the Borrower hereby agree with the Bank that all Junior Debt (defined below) and that all Junior Collateral (defined below), and all rights, remedies, powers, privileges, and discretions of the Creditor in and to any Junior Collateral are and shall be subject and subordinate to the Obligations (defined below) of the Borrower to the Bank and to the rights, remedies, powers, privileges, and discretions of the Bank in and to the Junior Collateral. 2. Unless and until this Agreement is terminated by written notice from the Bank, the Creditor shall not: -1- (a) Demand, accept, or receive from the Borrower any payment or other value on account of the Junior Debt; or (b) Set off, contra, or otherwise apply, all or any part of the Junior Debt towards satisfaction of any obligation of the Creditor to the Borrower; or (c) Exercise any of the Creditor's rights, remedies, powers, privileges, and discretions with respect to the Junior Debt and/or the Junior Collateral, including, without limitation, the acceleration of the time for payment of the Junior Debt or foreclosure of the Junior Collateral; or (d) Demand, accept, or receive any evidence of, or collateral for, the Junior Debt. 3. Unless and until this Agreement is terminated by written notice from the Bank, the Borrower shall not: (a) Make any payment or give any value to the Creditor on account of the Junior Debt; or (b) Set off, contra, or otherwise apply, all or any part of any obligation of the Creditor to the Borrower towards satisfaction of the Junior Debt; or (c) Execute, give, or deliver any evidence of, or collateral for the Junior Debt. 4. The Creditor will cause all notes, bonds, debentures or other instruments evidencing the Junior Debt and/or the Junior Collateral or any part thereof to contain a specific statement thereon to the effect that the indebtedness evidenced thereby is subject to the provisions of this Agreement, and the Creditor will mark its books conspicuously to evidence the subordination effected hereby. The Creditor hereby represents that it is the lawful holder of the note(s) which evidence the Borrower's indebtedness to the Creditor, and has not transferred any interest therein to any other person. Without the prior written consent of the Bank, the Creditor will not assign, transfer or pledge to any other person any of the Junior Debt or agree to a discharge or forgiveness of the same so long as there remains outstanding any of the Obligations. 5. The Creditor and the Borrower shall each execute all such further instruments and do such other and further acts as the Bank may request in furtherance of the Bank's rights hereunder and/or the purposes of this Agreement, including, without limitation, the endorsement to the Bank of all promissory notes evidencing the Junior Debt. The respective obligations of the Creditor and the Borrower hereunder being unique, are specifically enforceable by the Bank. 6. a. The Creditor hereby designates the Bank as and for the attorney-in-fact of the Creditor to: i endorse in favor of, or assign to, the Bank any writing evidencing the Junior Debt and/or the Junior Collateral; and ii. exercise any and all rights, remedies, powers, privileges, and discretions of the Creditor with respect to the Junior Debt and/or the Junior Collateral. -2- Without limiting the generality of the foregoing, the Bank shall have the right and power to: (1) prosecute, defend, compromise, settle, or release any action relating to the Junior Debt or the Junior Collateral, (2) file a proof of claim or similar pleading in, participate in the place and stead of the Creditor in, and receive any dividend or distribution on account of, any bankruptcy or insolvency proceeding of the Borrower, (3) take such other action with respect to the Junior Debt and the Junior Collateral as the Bank may reasonably determine to be necessary to protect and preserve the Bank's interests therein. b. All of the powers of attorney set forth in this Agreement shall not be affected by any disability or incapacity suffered by the Creditor and shall survive same. All powers conferred on the Bank by this Agreement, being coupled with an interest, shall be irrevocable until this Agreement is terminated as provided herein. c. The Bank shall not be obligated to do any of the acts or to exercise any of the powers authorized herein, but if the Bank elects to do any such act or to exercise any of such powers, it shall not be accountable for more than it receives as a result of such exercise of power. The Bank shall not be liable for any act or omission to act pursuant to this Agreement except for the Bank's actual willful misconduct and actual bad faith. 7. The Bank shall have no duty as to the collection or protection of the Junior Debt and/or Junior Collateral or any income or distribution thereon, beyond the safe custody of such of the Junior Debt and/or Junior Collateral as may come into the possession of the Bank and shall have no duty as to the preservation of any rights pertaining thereto, including, without limitation, any rights against prior parties. 8. In the event that the Creditor receives any payments on account of the Junior Debt, or any collateral in addition to any collateral heretofore granted, the Creditor shall hold such payments or collateral in trust for the Bank and shall not commingle such payments with any other funds of the Creditor. The Creditor shall deliver all such payments or collateral to the Bank immediately upon the receipt thereof by the Creditor in the identical form received, duly endorsed to the Bank. 9. The proceeds (if any) received by the Bank on account of the Junior Debt or Junior Collateral shall be applied towards the Obligations in such order and manner as the Bank determines in its sole discretion. Any such proceeds received by the Bank in excess of the amounts necessary to satisfy the Obligations shall be paid to the Creditor. 10. The Creditor: (a) Waives notice of non-payment, presentment, demand, notice, and protest with respect to the Obligations and/or the Junior Debt; (b) Waives notice of the acceptance of this agreement by the Bank; -3- (c) Assents to any extension, renewal, indulgence or waiver, permitted the Borrower and/or any other person liable or obligated to the Bank for or on the Obligations or on the Junior Debt; (d) Authorizes the Bank to alter, amend, cancel, waive, or modify any term or condition of the Obligations or the Junior Debt and of the obligations of any other person liable or obligated to the Bank for or on the Obligations and/or the Junior Debt, without notice to, or consent from, the Creditor; (e) Agrees that no compromise, settlement, or release by the Bank of the Obligations or the Junior Debt or of the obligations of any such other person and no release of any collateral securing the Obligations, the Junior Debt, and/or securing the obligations of any such other person shall affect the obligations of the Creditor hereunder; and (f) If otherwise entitled thereto, waives the right to notice and/or hearing prior to the Bank's exercising of the Bank's rights and remedies hereunder. No action by the Bank which has been assented to herein shall affect the obligations of the Creditor to the Bank hereunder. 11. The subordination effected hereby shall not be affected by any fraudulent, illegal, or improper act by the Borrower, the Creditor, or any person liable or obligated to the Bank for or on the Obligations, nor by any release, discharge or invalidation, by operation of law or otherwise, of the Obligations or by the legal incapacity of the Borrower, the Creditor, or any other person liable or obligated to the Bank for or on the Obligations. All interest and costs of collection with respect to the Obligations for which the Borrower has agreed to be liable shall continue to accrue and shall continue to be Obligations for purposes of the subordination effected hereby notwithstanding any stay to the enforcement thereof against the Borrower or disallowance thereof against the Borrower. 12. The books and records of the Bank showing the account between the Bank and the Borrower shall be admissible in any action or proceeding to enforce this Agreement and shall constitute prima facie evidence and proof of the items contained therein. 13. In the event (a) the Bank determines that any representation made by the Borrower or the Creditor to the Bank herein was not true or accurate when given and/or (b) the Borrower or the Creditor (or both) fails to promptly, punctually, and faithfully perform or discharge any obligation hereunder or an Event of Default occurs under the Loan Agreement or any other instrument, document, or agreement between the Borrower and the Bank, all Obligations, and any and all liabilities, obligations, and indebtedness of the Creditor to the Bank, whether arising hereunder or under any other document, instrument, or agreement to the Bank (whether now existing or hereafter arising), shall become immediately due and payable, at the Bank's option and without notice or demand. 14. The Creditor will pay on demand all attorneys' fees and out-of-pocket expenses incurred by the Bank's attorneys and all costs incurred by the Bank, including, without limitation, costs associated with travel on behalf of the Bank, which costs and expenses are directly or indirectly related to the Bank's efforts to preserve, protect, collect, or enforce any of the obligations of the Creditor and/or any of the -4- Bank's Rights and Remedies hereunder (whether or not suit is instituted by or against the Bank). 15. The Borrower will pay on demand all attorneys' fees and out-of-pocket expenses incurred by the Bank's attorneys and all costs incurred by the Bank, including, without limitation, costs associated with travel on behalf of the Bank, which costs and expenses are directly or indirectly related to the Bank's efforts to preserve, protect, collect, or enforce any of the obligations of the Borrower and/or any of the Bank's Rights and Remedies hereunder (whether or not suit is instituted by or against the Bank). 16. This Agreement incorporates all discussions and negotiations among and between the Borrower, the Creditor, and the Bank concerning the subordination effected hereby. No such discussions or negotiations shall limit, modify, or otherwise affect the provisions hereof. No provisions hereof may be altered, amended, waived, canceled, or modified, except by a written instrument executed, sealed, and acknowledged by a duly authorized officer of the Bank. 17. The Bank may continue to rely upon this Agreement and the subordination effected hereby with respect to all Obligations which may arise hereafter. The repayment and satisfaction of all of such Obligations shall not terminate this Agreement and the subordination effected hereby as to Obligations which arise thereafter. 18. The rights, remedies, powers, privileges, and discretions of the Bank hereunder (hereinafter, the "Bank's Rights and Remedies") shall be cumulative and not exclusive of any rights or remedies which it would otherwise have. No delay or omission by the Bank in exercising or enforcing any of the Bank's Rights and Remedies shall operate as, or constitute, a waiver thereof. No waiver by the Bank of any of the Bank's Rights and Remedies or of any default or remedy under any other agreement with the Borrower or the Creditor shall operate as a waiver of any other default hereunder or thereunder. No exercise of the Bank's Rights and Remedies and no other agreement or transaction, of whatever nature, entered into between the Bank and the Creditor and/or between the Bank and the Borrower at any time shall preclude any other or further exercise of the Bank's Rights and Remedies. No waiver by the Bank of any of the Banks' Rights and Remedies on any one occasion shall be deemed a continuing waiver. All of the Bank's Rights and Remedies and all of the Bank's rights, remedies, powers, privileges, and discretions under any other agreement with the Creditor and/or the Borrower shall be cumulative, and not alternative or exclusive, and may be exercised by the Bank at such time or times and in such order of preference as the Bank in its sole discretion may determine. The Bank may proceed with respect to the Junior Debt and the Junior Collateral without resort or regard to other collateral or sources of satisfaction of the Obligations. 19. As used herein, the following terms have the following meanings: "Obligation" and "Obligations" include, without limitation, all and each of the following, whether now existing or hereafter arising: (a) Any and all liabilities, debts, and obligations of the Borrower to the Bank, each of every kind, nature, and description, now existing or hereafter arising, whether under this Agreement, the Loan Agreement, or any other instrument or document furnished to the Bank or any other agreement with the Bank, -5- including without limitation, all Obligations as defined in the Loan Agreement. (b) Each obligation to repay all loans, advances, indebtedness, notes, obligations, overdrafts, and amounts now or hereafter at any time owing by the Borrower to the Bank (including all future advances or the like, whether or not given pursuant to a commitment by the Bank), whether or not any of such are liquidated, unliquidated, primary, secondary, secured, unsecured, direct, indirect, absolute, contingent, or of any other type, nature, or description, or by reason of any cause of action which the Bank may hold against the Borrower. (c) All interest, fees, and other amounts which may be charged to the Borrower and/or which may be due from the Borrower to the Bank from time to time; all fees and charges in connection with any account maintained by the Borrower with the Bank or any service rendered by the Bank; and all costs and expenses incurred or paid by the Bank in respect of this Agreement, the Loan Agreement, and any other agreement (whether now existing or hereafter arising) between the Borrower and the Bank or instrument or document heretofore or hereafter furnished by the Borrower to the Bank (including, without limitation, all notes and other obligations of the Borrower now or hereafter assigned to or held by the Bank, each of every kind, nature, and description, and all costs of collection, attorneys' fees, and all court and litigation costs and expenses). (d) Any and all covenants of the Borrower to or with the Bank and any and all obligations of the Borrower to act or to refrain from acting in accordance with the terms, provisions, and covenants of this Agreement and of any other agreement between the Borrower and the Bank (whether now existing or hereafter arising) or instrument or document heretofore or hereafter furnished by the Borrower to the Bank. As used herein, the term "indirect" includes, without limitation, all obligations and liabilities which the Bank may incur or become liable for on account of, or as a result of any transactions between the Bank and the Borrower including, without limitation, any which may arise out of any Letter of Credit or banker's acceptance, or similar instrument issued or obligation incurred by the Bank for the account of the Borrower; any which may arise out of any action brought or threatened against the Bank by the Borrower, any guarantor or endorser of the Obligations of the Borrower, or by any other person in connection with the Obligations; and any obligation of the Borrower which may arise as endorser or guarantor of any third party, or as obligor to any third party which obligation has been endorsed, participated, or assigned to the Bank. The term "indirect" also refers to any direct or contingent liability of the Borrower to make payment towards any obligation held by the Bank (including, without limitation, on account of any industrial revenue bond) to the extent so held by the Bank. The Bank's books and records shall be prima facie evidence of the Borrower's Obligations. "Junior Debt" includes all liabilities, obligations, and indebtedness, whether direct or indirect, absolute or contingent, secured or unsecured, due or to become, now existing or hereafter arising, owed by the Borrower to the Creditor. "Junior Collateral" includes all collateral security now or hereafter granted by the Borrower or any guarantor to secure all or any portion of the Junior Debt. -6- 20. This Agreement shall be binding upon the Creditor, the Borrower, and their respective heirs, executors, administrators, representatives, successors, and assigns, and shall inure to the benefit of the Bank, and the Bank's successors and assigns. 21. It is intended that this Agreement take effect as a sealed instrument and be governed by the laws of The Commonwealth of Massachusetts. The Creditor and the Borrower each submit to the jurisdiction of the courts of said Commonwealth for all purposes in connection with this Agreement and their respective relationships with the Bank. 22. The Borrower and the Creditor each make the following waiver knowingly, voluntarily, and intentionally and understand that the Bank, in the establishment and maintenance of the Bank's relationship with the Borrower, is relying thereon. THE BORROWER AND THE CREDITOR RESPECTIVELY TO THE EXTENT ENTITLED THERETO, WAIVE ANY PRESENT OR FUTURE RIGHT TO A TRIAL BY JURY IN ANY CASE OR CONTROVERSY IN WHICH THE BANK IS OR BECOMES A PARTY (WHETHER SUCH CASE OR CONTROVERSY IS INITIATED BY OR AGAINST THE BANK OR IN WHICH THE BANK IS JOINED AS A PARTY LITIGANT), WHICH CASE OR CONTROVERSY ARISES OUT OF, OR IS IN RESPECT TO, ANY RELATIONSHIP AMONG OR BETWEEN THE BORROWER, THE CREDITOR, ANY SUCH PERSON, AND THE BANK. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] -7- The undersigned certify that the undersigned read this Agreement prior to its execution. ________________________________________ ("Creditor") Witness ______________________________ By:_____________________________________ Print Name:_____________________________ Title:__________________________________ Witness ________________________________________ ("Borrower") ______________________________ By:_____________________________________ Print Name:_____________________________ Title:__________________________________ Witness SOVEREIGN BANK ("Bank") ______________________________ By:_____________________________________ Print Name:_____________________________ Title:__________________________________ -8- EX-10.2 4 dex102.txt 1992 EMPLOYEE, DIRECTOR AND CONSULTANT STOCK OPTION Exhibit 10.2 As Amended May 2001 SIGHT RESOURCE CORPORATION 1992 EMPLOYEE, DIRECTOR AND CONSULTANT STOCK OPTION PLAN 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, $.0l 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 6,500,000, 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 2,250,000 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 - 12 - prescribed term of the Option. 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. 17. ISSUANCES OF SECURITIES. - 15 - 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 - -----END PRIVACY-ENHANCED MESSAGE-----