-----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, TW57f7/zG4QSNRYLVSkhttjHS4eo4ytXkwV5bfnWKQ4TpoxL27gIITWzZXhtPVSn KXvmDD7u9eL+k3H4CrDCPg== 0000927016-02-002852.txt : 20020514 0000927016-02-002852.hdr.sgml : 20020514 ACCESSION NUMBER: 0000927016-02-002852 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020330 FILED AS OF DATE: 20020514 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: 02647636 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 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarterly Period Ended March 30, 2002 Commission File Number 0-21068 -------------- ------- Sight Resource Corporation - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 04-3181524 - -------------------------------------------------------------------------------- (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 6725 Miami Avenue, Suite 102, Cincinnati, OH 45243 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (513) 527-9700 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) N/A - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since the last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No______ ------ APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: On May 10, 2002, 30,667,709 shares (does not include 30,600 shares held as treasury stock) of common stock, par value $0.01 per share, were outstanding. SIGHT RESOURCE CORPORATION INDEX
PART I. FINANCIAL INFORMATION Page ---- Item 1. Financial Statements Consolidated Balance Sheets as of March 30, 2002 and December 29, 2001 1 Consolidated Statements of Operations for the Three Months Ended March 30, 2002 and March 31, 2001 2 Consolidated Statements of Cash Flows for the Three Months Ended March 30, 2002 and March 31, 2001 3 Notes to Consolidated Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Item 3. Quantitative and Qualitative Disclosures about Market Risk 17 PART II. OTHER INFORMATION Item 1. Legal Proceedings 17 Item 2. Changes in Securities and Use of Proceeds 17 Signatures 18
PART I. FINANCIAL INFORMATION Item 1. Financial Statements SIGHT RESOURCE CORPORATION Consolidated Balance Sheets (In thousands, except share and per share data)
As of As of March 30, 2002 December 29, 2001 ----------------------- -------------------- Assets (unaudited) Current assets: Cash and cash equivalents $ 1,065 $ 1,356 Accounts receivable, net of allowance of $1,758 and $1,915, respectively 3,036 2,613 Inventories 4,907 4,666 Prepaid expenses and other current assets 420 395 ----------------------- -------------------- Total current assets 9,428 9,030 ----------------------- -------------------- Property and equipment, net 2,539 2,729 Other assets: Intangible assets, net 19,605 19,770 Web site development 2,288 2,288 Other assets 120 127 ----------------------- -------------------- Total assets $ 33,980 $ 33,944 ======================= ==================== Liabilities and Stockholders' Equity Current liabilities: Revolver notes payable $ 2,500 $ 2,500 Current portion of long term debt 5,659 5,979 Current portion of capital leases 10 10 Accounts payable 5,741 5,789 Accrued expenses 1,792 1,813 Dividends payable 127 - ---------------------- -------------------- Total current liabilities 15,829 16,091 ---------------------- -------------------- Non-current liabilities: Long term debt, less current maturities 929 928 Capital leases 15 17 ----------------------- -------------------- Total non-current liabilities 944 945 ----------------------- -------------------- Series B redeemable convertible preferred stock 1,452,119 shares issued and outstanding 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 50,000,000 shares; 30,698,309 at March 30, 2002 and 29,597,703 at December 29, 2001 shares issued and outstanding 307 296 Additional paid-in capital 41,672 41,810 Treasury stock at cost, 30,600 shares at March 30, 2002 and December 29, 2001 (137) (137) Accumulated deficit (31,170) (31,596) ----------------------- ------------------- Total stockholders' equity 10,672 10,373 ----------------------- ------------------- $33,980 $33,944 ======================== ====================
See accompanying notes to consolidated financial statements. 1 SIGHT RESOURCE CORPORATION Consolidated Statements of Operations (In thousands, except share and per share data)
Three Months Ended ------------------------------------------------- March 30, 2002 March 31, 2001 -------------- -------------- (unaudited) (unaudited) Net revenue $ 15,276 $ 16,059 Cost of revenue 4,367 4,918 ------------ ----------- Gross profit 10,909 11,141 Selling, general and administrative expenses 10,290 11,189 ------------ ----------- Income (loss) from operations 619 (48) Interest expense, net (189) (236) ------------ ----------- Income (loss) before taxes 430 (284) Income tax expense 4 21 ------------ ----------- Net income (loss) 426 (305) ------------ ----------- Dividends on redeemable convertible preferred stock 127 - ------------ ----------- Net income (loss) attributable to common stockholders $ 299 $ (305) ------------ ----------- Basic and diluted income (loss) per common share $ 0.01 $ (0.03) ------------ ----------- Weighted average number of common shares outstanding: Basic 29,961,000 9,260,000 ------------ ----------- Diluted 31,952,000 9,260,000 ------------ -----------
See accompanying notes to consolidated financial statements. 2 SIGHT RESOURCE CORPORATION Consolidated Statements of Cash Flows (In thousands)
Three Months Ended ----------------------------------------- March 30, 2002 March 31, 2001 -------------------- -------------------- (unaudited) Operating activities: Net income (loss) $ 426 $ (305) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 466 915 Amortization and write-off of deferred financing costs -- 57 Changes in operating assets and liabilities: Accounts receivable (423) (210) Inventories (241) 669 Prepaid expenses and other current assets (25) (296) Accounts payable and accrued expenses (71) (317) -------------- -------------- Net cash provided by operating activities 132 513 -------------- -------------- Investing activities: Purchases of property and equipment (111) (124) Other assets (liabilities) 7 (117) -------------- -------------- Net cash used in investing activities (104) (241) -------------- -------------- Financing activities: Principal payments (319) (12) -------------- -------------- Net cash used in financing activities (319) (12) -------------- -------------- Net increase (decrease) in cash and cash equivalents (291) 260 Cash and cash equivalents, beginning of period 1,356 532 -------------- -------------- Cash and cash equivalents, end of period $ 1,065 $ 792 ============== ============== Supplementary cash flow information: Interest paid $ 231 $ 241 Income taxes paid $ 21 $ 49
See accompanying notes to consolidated financial statements. 3 SIGHT RESOURCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) THE COMPANY (a) Nature of Business Sight Resource Corporation (the "Company") manufactures, distributes and sells eyewear and related products and services. (b) Eyeshop Merger In July 2001, the Company merged with eyeshop.com, inc. ("Eyeshop"), an early-stage optical development company established by E. Dean Butler in late 1999. Concurrent with the merger, there were two Common Stock Purchase Agreements whereby the former shareholders of Eyeshop purchased additional shares of the Company. It was anticipated that, following the merger, available cash resources of the combined companies would be devoted to continuation and improvement of the business of the Company, with a decision to be made at a future date as to when the Eyeshop development activities should be resumed. As of March 30, 2002, no decision had been made to resume Eyeshop development activities. Pursuant to a merger agreement, former Eyeshop stockholders are also entitled to receive additional shares of the Company's common stock if and when certain options, warrants and other rights to receive the Company's common stock that were held by the Company's security holders as of May 23, 2001 are exercised. The Company issued a total of 7,306,662 shares of common stock to former Eyeshop stockholders and assumed 1,757,096 stock options in connection with the merger. 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 common stock financings, or approximately 64% of the Company's issued and outstanding common stock and approximately 61% of the Company's issued and outstanding voting securities. The Company has completed its accounting for the merger. The treatment, for accounting purposes, was considered to be a purchase of Eyeshop's assets and assumption of Eyeshop's liabilities by the Company. The aggregate purchase price was $2,054,000 and the costs of the assets acquired and liabilities assumed have been allocated on the basis of the estimated fair value of the net assets required. There was no goodwill provided in the transaction. 4 SIGHT RESOURCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (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 United States Securities and Exchange Commission the ("SEC"). In the opinion of the Company, these consolidated financial statements contain all adjustments (consisting of only normal, recurring adjustments) necessary to present fairly the Company's financial position as of March 30, 2002 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 13-week period, except during a 53-week year in which case one quarter represents a 14-week period. The quarters ended March 30, 2002 and March 31, 2001 were 13-week periods. Fiscal years 2002 and 2001 are 52-week fiscal years. 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 29, 2001. (3) GOODWILL AND INTANGIBLE ASSETS The Company adopted the provisions of Statement of Financial Accounting Standards No. 141, Business Combinations ("Statement 141") effective July 1, 2001 and Statement No. 142, Goodwill and Other Intangible Assets ("Statement 142"), effective December 30, 2001. Statement 141 addresses financial accounting and reporting for business combinations requiring the use of the purchase method of accounting and reporting for goodwill and other intangible assets requiring 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. The Company has up to six months from the adoption of Statement 142 to determine the fair value of each reporting unit and compare it to the reporting unit's carrying amount. Statement 142 also requires intangible assets with estimated useful lives be amortized over their respective useful life to their estimated residual values, and reviewed for impairment. As of March 30, goodwill had a value of $14,305,000 and other intangibles with a definite useful life value of $5,300,000. Based on preliminary independent third party enterprise valuations of each of the Company's reporting units, the Company does not expect to recognize any impairment of its goodwill and intangible assets upon adoption of Statement 142. The Company will have its initial review of Statement 142 complete during the second quarter 2002. In the first three months of 2001, $261,000 of goodwill amortization was included in selling, general and administrative expenses. The net loss for the first three months of 2001 without goodwill amortization would have been $44,000. No goodwill amortization was incurred during the first quarter of 2002. For the year ended December 29, 2001, goodwill amortization of $1,046,000 was included in selling, general and administrative expenses. The net loss for the year ended December 29, 2001 without goodwill amortization would have been $4,441,000. In accordance with Statement 142, the Company will test each reporting unit's goodwill for impairment as of end of the fiscal year. 5 SIGHT RESOURCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (4) EARNINGS PER SHARE The following table provides a reconciliation of the numerators and denominators of the basic and diluted income (loss) per share computations for the three months ended March 30, 2002 and March 31, 2001:
Three Months Ended --------------------------------------- March 30, 2002 March 31, 2001 --------------- --------------- (In thousands, except share and per share data) Basic Income (Loss) Per Share Net income (loss) $ 426 $ (305) ------------------- ------------------ Net income (loss) available to common stockholders 299 (305) =================== ================== Weighted average common shares outstanding 29,961,000 9,260,000 Net income (loss) per share $ 0.01 $(0.03) =================== ================== Diluted Income (Loss) Per Share Net income (loss) $ 426 $ (305) ------------------- ------------------ Net income (loss) available to common stockholders 299 (305) =================== ================== Weighted average common shares outstanding 29,961,000 9,260,000 Convertible preferred stock 0 0 Pro Rata Portion of Kent Common Stock 738,000 0 Options and warrants 1,253,000 0 ------------------- ------------------ Weighted average common shares outstanding and potential shares 31,952,000 9,260,000 =================== ================== Net income (loss) per share $ 0.01 $(0.03) =================== ==================
Outstanding options, warrants and convertible preferred stock were not included in the computation of diluted loss per share for the three months ended March 30, 2002 and March 31, 2001, because they would have been antidilutive. The following table presents the number of shares of common stock underlying outstanding options, warrants and convertible preferred stock, which shares were not included in such computation of diluted loss per share.
Three Months Ended --------------------------------------- March 30, 2002 March 31, 2001 ----------------- ----------------- Options 4,449,500 0 Warrants 942,568 0 Convertible preferred stock 3,243,900 1,452,119 ------------------ ------------------ Total 8,635,968 1,452,119 ================== ==================
6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company manufactures, distributes and sells eyewear and related products and services. As of March 30, 2002, the Company's operations consisted of 116 eye care centers, and one optical laboratory and distribution center, and was one of the fifteen largest providers in the United States based upon annual sales. 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 one optical laboratory and distribution center. The regional optical laboratory provides complete services to the Company's eye care centers, including polishing, cutting and edging, tempering, tinting and coating of ophthalmic lenses. The distribution center provides and maintains an inventory of all accessories and supplies necessary to operate an eye care center, 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 optical laboratory and distribution center has the capacity to accommodate additional multi-site eye care centers. In early 2001, the Company operated two regional optical laboratories and three distribution centers. During 2001, one laboratory and two distribution centers were closed and their operations were consolidated into the remaining laboratory and distribution center. The laboratory and distribution centers were closed in an effort for the Company to realize greater operating efficiencies from lower inventories and lower payroll costs. The Company's results of operations include the accounts of the Company, its wholly-owned subsidiaries and four professional corporations ("PCs") in which the Company's subsidiaries assume the financial risks and rewards of such entities. The Company has no direct equity ownership in the PCs since the outstanding voting capital stock of each of the PCs is 100% owned by a licensed optometrist (the "nominee shareholder") who has, in turn, executed a Stock Restrictions and Pledge Agreement (a "Pledge Agreement") in favor of a subsidiary of the Company. Each Pledge Agreement contains provisions that provide the Company with the ability at all times to cause a change in the nominee shareholder for an unlimited number of times, at nominal cost. For example, if (i) the employment of the nominee shareholder is terminated by the PC or by the Company (including its subsidiaries) or (ii) the Company determines that the nominee shareholder is impairing or rendering less-than-optimal the Company's business management and administration of the PC, then the Company has the right to require the existing nominee shareholder to sell all of the outstanding stock of the PC to another person eligible to serve as a new nominee shareholder. The purchase price for a sale of the PC's stock is equal to the 7 aggregate book value of the PC, which will always be a nominal cost because each PC operates and expects to continue to operate at an almost break-even level generating a nominal profit, if any at all. RESULTS OF OPERATIONS Three Months Ended March 30, 2002 and March 31, 2001 Net Revenue. During the three months ended March 30, 2002, the Company generated net revenue of $15,276,000, as compared to net revenue of $16,059,000 for the three months ended March 30, 2001. The decrease of $783,000, or 4.9%, in net revenue primarily relates to six less eye care centers operating during the three months ended March 30, 2002 as compared to the corresponding period in 2001. Cost of Revenue. Cost of revenue decreased from $4,918,000 for the operation of the Company's 122 eye care centers during the three months ended March 31, 2001 to $4,367,000 for the operation of the Company's 116 eye care centers during the three months ended March 30, 2002. Cost of revenue as a percentage of net revenue decreased from 30.6% for the three months ended March 31, 2001 to 28.6% for the three months ended March 30, 2002. The improvement as a percentage of net revenue primarily reflects the consolidation of optical laboratory operations, improved margins on frames and slightly higher eye exam revenue. Cost of revenue principally consisted of the cost of manufacturing, purchasing and distributing optical products to customers of the Company. Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased to $10,290,000 for the three months ended March 30, 2002 from $11,189,000 for the three months ended March 31, 2001. The decrease of $899,000 primarily relates to reduced staffing levels and lower amortization expenses of $261,000 resulting from the Company's adoption of Statement 142. Selling, general and administrative expenses, as a percentage of net revenue, decreased from 69.7% for the three months ended March 31, 2001 to 67.4% for the three months ended March 30, 2002. The Company adopted Statement 142 as of December 30, 2001 and has up to six months from the date of adoption to complete its determination of the fair value of each of the Company's reporting units. Based on preliminary independent third party enterprise valuations of each of the Company's reporting units, the Company does not expect to recognize any impairment of its goodwill and intangible assets upon completion of such determinations. Further, under the new guidelines set forth in Statement 142, the Company ceased amortization of its goodwill, which reduced selling, general and administrative expenses for the three months ended March 30, 2002 by $261,000 compared to the three months ended March 31, 2001. Interest Expense, Net. Interest expense, net decreased to $189,000 for the three months ended March 30, 2002 from $236,000 for the three months ended March 31, 2001. The decrease of $47,000 is primarily associated with a lower average balance of debt outstanding during the three months ended March 30, 2002 as compared to the corresponding period in 2001. Income Tax Expense. The Company has a significant net operating loss carryforward and as such provides for income taxes only to the extent that it expects to pay cash taxes (primarily state taxes) for current income. Net Income (Loss). The Company realized a net income of $426,000 for the three months ended March 30, 2002 as compared to a net loss of $305,000 for the three months ended March 31, 2001. Dividends on Redeemable Convertible Preferred Stock. During the three months ended March 30, 2002 the Company accrued $127,000 for cash dividends payable to the redeemable convertible preferred stockholders. The dividends are accruing pursuant to an agreement dated May 21, 2001 and are scheduled to be paid at the earlier of the Company's following conditions, as outlined in the letter with the redeemable convertible preferred stockholder: 8 (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 $10,000,000; (iv) the end of the first twelve month period in which earnings before income taxes, depreciation and amortization are equal to or greater than $5,000,000; or (v) or the refinancing of the Company's outstanding indebtedness to Fleet Bank. The Company is presently unable to predict when the cash dividend will be paid. Net Income (Loss) Attributable to Common Stockholders. The Company realized a net income attributable to common stockholders of $299,000, or $0.01 per share, for the three month period ended March 30, 2002 as compared to a net loss of $305,000, or $0.03 per share, for the three month period ended March 31, 2001. The per share net income for the three months ended March 30, 2002 and the per share loss for the three months ended March 31, 2001, were affected by an increase in the number of outstanding shares of common stock primarily due to the closing of the merger with Eyeshop and related stock purchase transactions that occurred between May 23, 2001 and July 20, 2001. LIQUIDITY AND CAPITAL RESOURCES At March 30, 2002, the Company had $1,065,000 in cash and cash equivalents and a working capital deficit of $6,401,000 in comparison to $1,356,000 in cash and cash equivalents and working capital deficit of approximately $7,061,000 million as of December 29, 2001. The reduction in working capital deficit of $660,000 is primarily due to the increase of accounts receivables and inventories and a decrease in outstanding indebtedness. The largest portion of the net working capital deficit at March 30, 2002 was debt of $7,870,000 that matures on December 31, 2002. The Company may need to raise additional funds during 2002 to replace maturing bank debt and may seek to raise those funds through additional financings, including public or private equity offerings. There can be no assurance that such funds will be available 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. In addition, in its report on the Company's consolidated financial statements as of and for the periods ended December 29, 2001, the Company's independent auditors have expressed substantial doubt about the Company's ability to continue as a going concern due to the Company's recurring losses and its potential inability to pay its outstanding debts. On March 26, 2001, the Company entered into a Third Modification Agreement (as defined below) with Fleet Bank that, among other things, extended the maturity date of the loans to December 31, 2002. The Third Modification Agreement required that the Company obtain equity financing in the amount of $1,000,000 by May 2001. On May 14, 2001, the Company entered into the Amended and Restated Third Modification Agreement which extended the date for an equity infusion from May 2001 to July 2001. In July 2001, the Company obtained equity proceeds of $1,750,000. 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 $5,209,000 in cash, $1,000,000 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, which the market price of the common stock did not achieve. The amount of additional consideration due to the Kent stockholders for each 9 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 common stock on April 23, 2001 or (b) $2.73. 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 acquisition, the Company included the value of this additional consideration in its determination of the purchase price. As a result of the Company's obligation to issue additional consideration to the former Kent stockholders, on February 7, 2002, the Company entered into a settlement agreement in which it agreed to pay such additional consideration by issuing 1,100,636 shares of its common stock to the former Kent stockholders. The shares were issued on February 27, 2002. Also, as part of this settlement, the Company renegotiated the terms of the remaining amounts owed under the notes payable. As of March 30, 2002, the Company had warrants outstanding which provide it with potential sources of financing as outlined below. However, because the current market value of the Company's common stock is significantly less than the exercise prices for most of the warrants with the greatest potential for proceeds, it is unlikely that any significant proceeds will be realized by the Company.
Exercise Potential Price Expiration Securities Number Proceeds Per Share Date ---------- --------- ---------- --------- ---- Carlyle Warrants....................................... 1,000,000 $200,000 $ 0.20 January 2009 Class II Warrants...................................... 679,684 2,100,224 3.09 November 2002 Bank Austria AG, f/k/a Creditanstalt, Warrants......... 150,000 693,750 4.63 December 2003 Fleet Warrants......................................... 50,000 25,500 0.51 August 2010 Fleet Warrants......................................... 50,000 7,810 0.16 December 2010 --------- ---------- 1,929,684 $3,027,284 ========= ==========
The Company also has outstanding 62,884 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 warrants and options outstanding as of October 9, 1997, which have not subsequently terminated or expired, 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 Class I Warrants cannot be estimated at this time. However, for the same reasons stated above, it is unlikely that any proceeds would be realized by the Company. 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 $10,000,000 on an acquisition line of credit, of which $7,000,000 is on a term loan basis and $3,000,000 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. 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 $2,500,000 and the term loan to $6,750,000 and established the maturity date for each of these credit lines as March 31, 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 Bank of New England ("Sovereign") became the successor party to Fleet in the 1999 Agreement and 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. 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. 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 $1,000,000 with third party investors on or before May 31, 2001. The Third Modification Agreement established the following annual interest rates for both the revolving line and term loans: (i) from February 1, 2001 through September 30, 2001 - six (6%) percent, (ii) from October 1, 2001 through December 31, 2001 - seven (7%) percent, (iii) from January 1, 2002 through December 31, 2002 - prime rate subject to a minimum rate of eight (8%) percent and a maximum rate of eleven (11%) percent. The scheduled monthly 10 principal payments did not begin until July 1, 2001 and were set as $30,000 from July 1, 2001 through December 31, 2001, and $100,000 from January 1, 2002 through December 31, 2002. On May 14, 2001, the Company entered into the Amended and Restated Third Modification Agreement which restated the terms described above and extended the date for which the Company was required to close an equity financing to July 2001. In August 2001, Sovereign sold the loan back to Fleet. As of March 30, 2002, the Company's outstanding indebtedness under the 1999 Agreement was $2,500,000 under the revolving line of credit and $5,370,000 under the term loan. The Company was in compliance with the covenants contained in the Amended and Restated Third Modification Agreement for the three months ended March 30, 2002. The Company has obtained waivers from the bank for all breaches of loan covenants to date, but the Company may not receive waivers for any future breaches that may occur. Any breach that is not waived may result in the bank declaring the breach to be a default under the 1999 Agreement, which would require immediate repayment of all outstanding principal and accrued interest at a time when the Company may not be able to repay the bank. 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.com, inc. ("Eyeshop"), EAC merged with and into Eyeshop (the "Merger") and Eyeshop became a wholly-owned subsidiary of the Company. 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 security holders 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. Concurrently with the Eyeshop merger, the Company assumed outstanding options under the Eyeshop stock option plan to purchase up to an aggregate of 1,757,096 shares of the Company's common stock. RECENT ACCOUNTING PRONOUNCEMENTS The Company adopted the provisions of Statement 141, effective July 1, 2001 and Statement 142, effective December 30, 2001. Statement 141 addresses financial accounting and reporting for business combinations requiring the use of the purchase method of accounting and reporting for goodwill and other intangible assets requiring that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually in accordance with the provisions of Statement 142. Under Statement 142, the Company was 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. 11 In connection with the transitional goodwill impairment evaluation, Statement 142 requires the Company to perform an assessment of whether there is an indication that goodwill (and equity-method goodwill), which totaled $14,305,000 million at December 30, 2001, is impaired as of December 30, 2001, the date of adoption. To accomplish this, the Company has identified its reporting units and determined 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 has 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, which is July 1, 2001 for the Company. 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 operations. Based on preliminary independent third party enterprise valuations of each of the Company's operating units, the Company does not expect to recognize any impairment of its goodwill and intangible assets upon adoption of Statement 142. During the second quarter 2002, the Company expects to finalize the enterprise evaluations. Further, under the Statement 142's new guidelines, the Company ceased amortization of its goodwill, which favorably impacts the first quarter of 2002 by $261,000 compared to the prior year first quarter. During the three months ended June 2002, the Company expects to finalize the enterprise evaluations. MANAGEMENT'S DISCUSSION OF CRITICAL ACCOUNTING POLICIES In December 2001, the SEC requested that all registrants identify and describe their most "critical accounting policies" in Management's Discussion and Analysis. The SEC indicated that a "critical accounting policy" is one which is both important to the portrayal of the company's financial condition and results and requires management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company believes that the following of the Company's accounting policies fit this definition. Revenue Recognition and Allowance for Bad Debts The Company recognizes revenue from the sale of eyewear at the time an order is complete and revenue from eyecare services when the service is performed. The Company has fee for service arrangements with most of its third party payers. The Company recognizes revenue with third party payers net of contractual allowances. The level of management judgment used to determine revenue is small. Because of various circumstances, such as changes in third party plan contractual allowances, changes in patient co-pays, and goods or services denied by third party payers, the Company reviews the agings of receivables from third party payers and patients on at least a monthly basis. Sometimes claims have incomplete or inaccurate information, and the Company re-submits those claims to the third party payer. If amounts are denied by the third party payer and the Company has recourse to the patient, the Company pursues payment from the patient. Based on the Company's history of collectibility of older third party payer and patient receivables, the Company provides a reserve for uncollectibility. 12 At March 30, 2002 and December 29, 2001, the Company had reserved for 37% and 42% respectively of the gross amount of the outstanding third party payer and patient receivables. If actual collectibility of these receivables is significantly different from management's estimate, it could have a material (favorable or unfavorable) result on the operating results and liquidity of the Company. Impairment of Long Lived Assets The Company records impairment losses on long-lived assets when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the book value of those items. The Company's cash flow estimates are based on historical results adjusted to reflect the Company's best estimate of future market and operating conditions. In performing this analysis, the Company considers such factors as current results, trends and future prospects, in addition to other economic factors. Based on those analyses during the years 1999 through 2001, the Company did not record any charges for the impairment of long-lived assets. At March 30, 2002, the Company had long-lived assets, including goodwill and other intangibles of $19,605,000, property and equipment of $2,539,000, and web site development costs of $2,288,000. Conditions that could cause future impairment are deterioration of on-going or forecasted operating results resulting from increased competition, a recession in the United States or lack of liquidity causing the Company to limit its operations. If one or more of these conditions occur, the future analyses may indicate that certain long-lived assets are impaired, at which time the Company would recognize an impairment charge. That impairment charge may be material and have a significant impact on the Company's results of operations. Further, the Company's software development relates to software acquired in the Eyeshop merger. It was anticipated that, following the merger, available cash resources of the combined companies would be devoted to continuation and improvement of the business of the Company, with a decision to be made at a future date as to when the Eyeshop development activities should be resumed. As of March 30, 2002, no decision had been made to the timing of resuming Eyeshop web site development activities. If the Company were to make a future decision to not resume development of this web site, then it is possible that the Company may have to recognize an impairment charge up to the entire amount of $2,288,000 and that charge may have a material impact on the Company's results of operations. Income Taxes The Company has a history of unprofitable operations and these losses have generated a sizeable federal tax net operating loss, or NOL, carryforward of approximately $28,074,000 million as of December 29, 2001. Generally accepted accounting principles require that the Company records a valuation allowance against the deferred tax asset associated with this NOL if it is "more likely than not" that the Company will not be able to utilize it to offset future taxes. Due to the size of the NOL carryforward in relation to the Company's history of unprofitable operations, the Company has not recognized any of this net deferred tax asset. The Company currently provides for income taxes only to the extent that it expects to pay cash taxes (primarily state taxes) for current income. It is possible, however, that the Company could be profitable in the future at levels which cause management to conclude that it is more likely than not that the Company will realize all or a portion of the NOL carryforward. Upon reaching such a conclusion, the Company would immediately record the estimated net realizable value of the deferred tax asset at that time and would then provide for income taxes at a rate equal to the Company's combined federal and state effective rates, which would 13 approximate 40% under current tax rates. Subsequent revisions to the estimated net realizable value of the deferred tax asset could cause the Company's provision for income taxes to vary significantly from period to period, although the Company's cash tax payments would remain unaffected until the benefit of the NOL is utilized. BUSINESS RISKS AND CAUTIONARY STATEMENTS Statements in this Quarterly Report on Form 10-Q under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as oral statements that may be made by the Company or by officers, directors or employees of the Company acting on the Company's behalf, that are not historical fact constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that could cause the actual results of the Company to be materially different from the historical results or from any results expressed or implied by such forward-looking statements. Such factors include, but are not limited to, the risk factors set forth below. The Company does not intend to update any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. RISKS RELATED TO THE COMPANY'S BUSINESS The Company had an accumulated deficit of $31,600,000 as of December 29, 2001, and may never achieve or maintain profitability. The Company has experienced losses in each year of operation since inception in November 1992. For the fiscal year ended December 29, 2001, the Company incurred a net loss of $5,500,000 bringing its accumulated deficit to $31.6 million at December 29, 2001. The Company may never achieve profitability and, if it achieves profitability, it may not be able to maintain profitability. The Company's primary loan facilities expire at December 31, 2002 and the Company may not be able to obtain financing or refinancing at terms acceptable to the Company. As of March 30, 2002, the Company owed Fleet Bank $2,500,000 under a revolving loan and $5,700,000 under a term loan. Interest rates on the loans during 2002 are at prime rate with a minimum of 8% and a maximum of 11% The principal payments during 2002 on the term loan are $100,000 per month. Given the Company's history, including substantial historical losses, the Company may not be able to obtain financing or refinancing at terms acceptable to the Company. The Company is making every effort to refinance these loans on terms that are acceptable to the Company. The failure to obtain additional financing would result in the declaration of a default with such loan facilities and could materially and adversely affect the Company's business and financial condition. Any additional equity financing, if available, may be dilutive to the Company's stockholders and any debt financing, if available, may involve restrictions on the Company's financing and operating activities. The Company has previously breached certain loan covenants for which waivers of such breaches have been granted, but the Company may not be able to obtain waivers of any future breaches of loan covenants that may occur, which could result in a default under existing or future loan agreements. The Company has previously defaulted on a credit line agreement due to non-compliance with negative covenants relating to minimum net worth, minimum debt service coverage, maximum funded 14 debt service coverage and minimum net profit. The Company has obtained waivers from the bank for all breaches of loan covenants to date, but future breaches may occur for which the Company may not be able to obtain waivers. Any breach that is not waived may result in the bank declaring the breach to be a default under the loan agreement, which would require immediate repayment of all outstanding principal and accrued interest at a time when the Company may not be able to repay the bank. Accordingly, the declaration of a default under the loan agreement could materially and adversely affect the Company's business and financial condition. The Company is dependent upon certain key management personnel and may not be able to attract and retain additional personnel. The Company's future success is dependent in part on the Company's ability to retain certain key personnel, particularly E. Dean Butler, the Company's Chairman and Carene S. Kunkler, the Company's President and Chief Executive Officer, and the Company's ability to recruit and retain qualified personnel over time. The Company may not be able to retain its existing personnel or attract additional qualified employees in the future. The primary eye care market is highly competitive. The Company's current and potential competitors include many larger companies with substantially greater financial, operating, marketing and support resources. The optical industry is highly competitive and includes chains of retail optical stores, multi-site eye care centers, and a large number of individual opticians, optometrists and ophthalmologists who provide professional services and/or dispense prescription eyewear. Because retailers of prescription eyewear generally service local markets, competition varies substantially from one location or geographic area to another. The Company believes that the principal competitive factors affecting retailers of prescription eyewear are location and convenience, quality and consistency of product and service, price, product warranties, and a broad selection of merchandise. In the Company's current regional markets, the Company faces competition from national and regional retail optical chains which, in many cases, have greater financial resources than the Company. The Company may not be able to acquire new managed primary eye care contracts and existing contracts may not be expanded in any meaningful way. As an increasing percentage of optometric and ophthalmologic patients are coming under the control of managed care entities, the Company believes that its success will, in part, be dependent upon the Company's ability to negotiate, on behalf of existing and prospective affiliated practices, contracts with HMOs, employer groups and other private third party payors pursuant to which services will be provided on a risk-sharing or capitated basis by some or all affiliated practices. The proliferation of contracts that pass much of the risk of providing care from the payor to the provider in markets the Company serves may result in greater predictability of revenues, but greater unpredictability of expenses. The Company may not be able to negotiate, on behalf of the affiliated practices, satisfactory arrangements on a risk-sharing or capitated basis. In addition, to the extent that patients or enrollees covered by such contracts require more frequent or extensive care than anticipated, operating margins may be reduced or, in the worst case, the revenues derived from such contracts may be insufficient to cover the costs of the services provided. As a result, affiliated practices may incur additional costs, which would reduce or eliminate anticipated earnings under such contracts. Any such reduction or elimination of earnings would have a material adverse affect on the Company's business and results of operations. 15 The Company may be exposed to significant risk from liability claims if the Company is unable to obtain insurance at acceptable costs or is otherwise unable to protect itself against potential product liability claims. The provision of professional eye care services entails an inherent risk of professional malpractice and other similar claims. The Company does not influence or control the practice of medicine or optometry by professionals or have responsibility for compliance with certain regulatory and other requirements directly applicable to individual professionals and professional groups. As a result of the relationship between the Company's affiliated practices and itself, the Company may become subject to some professional malpractice actions under various theories. Claims, suits or complaints relating to professional services provided by affiliated practices may be asserted against the Company in the future. The Company may not be able to retain adequate liability insurance at reasonable rates and the Company's insurance may not be adequate to cover claims asserted against it, in which event its business and results of operations may be materially adversely affected. The Company's operations and success are dependent upon its ability to enter into agreements with health care providers. Certain states prohibit the Company from practicing medicine, employing physicians to practice medicine on the Company's behalf or employing optometrists to render optometric services on the Company's behalf. Accordingly, the success of the Company's operations as a full-service eye care provider depends upon its ability to enter into agreements with health care providers, including institutions, independent physicians and optometrists, to render surgical and other professional services at facilities owned or managed by the Company. The Company may not be able to enter into agreements with other health care providers on satisfactory terms or such agreements may not be profitable to the Company. The Company is subject to extensive federal, state and local regulation, which could materially affect the Company's operations. The health care industry is highly regulated by federal, state and local law. The regulatory environment in which the Company operates may change significantly in the future. The Company expects to modify agreements and operations from time to time as the business and regulatory environment changes. Although the Company believes that its operations comply with applicable law, the Company may not be able to address changes in the regulatory environment successfully. The Company's common stock was delisted from the Nasdaq Stock Market, which makes it more difficult for stockholders to sell shares of the Company's common stock. On September 11, 2000, the Nasdaq National Market ("Nasdaq") terminated the Company's listing on Nasdaq and the Company's common stock began trading on the Over-the-Counter Bulletin Board (the "OTC"). Stockholders are likely to find it more difficult to trade the Company's common stock on the OTC than on Nasdaq. In order for the Company's common stock to resume trading on Nasdaq, the Company must satisfy all of Nasdaq's requirements for initial listing, apply for listing and be accepted for listing by Nasdaq. The Company does not currently satisfy Nasdaq's initial listing requirements and may never satisfy Nasdaq's listing requirements or, if the Company does satisfy such requirements in the future, the Company's securities may not be accepted for listing by Nasdaq. If the Company's securities are not accepted for listing on Nasdaq or another stock exchange, it will also likely be more difficult for the Company to raise equity capital. 16 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) is not material. As of March 30, 2002, approximately $7,870,000 of the Company's debt is subject to a floating interest rate and every 1% increase in the relevant interest rate would adversely affect the Company on an annual basis by $79,000. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS ON February 7, 2002, the Company, Kent Acquisition Corp., Timothy D. Westra and John C. Cress entered into a Settlement Agreement in which each of Messrs. Westra and Cress agreed to dismiss a complaint filed by them in Muskegon County Circuit Court in Michigan on July 6, 2001 and removed to the United States District Court for the Western District of Michigan (the "Lawsuit"). In exchange for the dismissal of the Lawsuit and the release by each of Messrs. Westra and Cress of any claims against the Company in connection with the Lawsuit or their employment by the Company and in satisfaction of the Company's obligations to Messrs. Westra and Cress in connection with the Company's acquisition of all of the capital stock of Kent Optical Company and its associated companies, the Company agreed to issue an aggregate of 1,100,606 shares of its Common Stock to them and to modify the terms of an aggregate amount of $767,000 owed to Messrs. Westra and Cress to provide for, among other things, an annual interest rate of 5.1% with monthly payments commencing retroactively to January 2002 and ending December 2005. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On February 27, 2002, the Company issued an aggregate of 1,100,606 shares of its Common Stock, par value $.01 per share to John C. Cress and Timothy D. Westra pursuant to a Settlement Agreement, dated February 7, 2002, among the Company, each of Messrs. Westra and Cress and Kent Acquisition Corp. No underwriters were involved in the transaction listed above. The shares were issued as additional consideration in connection with the Company's acquisition of all of the capital stock of Kent Optical Company and its associated companies, effective April 1, 1999. The Company agreed to pay additional consideration to each of Messrs. Westra and Cress if the market price of the Company's Common Stock did not equal or exceed $5.00 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 during such period. Because the shares were issued as additional consideration in connection with an acquisition, the Company did not receive any cash proceeds. The Company relied upon Section 4(2) of the Securities Act of 1933, as amended, because the above transactions did not involve any public offering by the Company. 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Sight Resource Corporation Date: May 14, 2002 By: /S/ CARENE S. KUNKLER ------------ -------------------------- Carene S. Kunkler President and Chief Executive Officer (duly authorized officer) Date: May 14, 2002 By: /S/ DUANE D. KIMBLE, JR. ------------ ----------------------------- Duane D. Kimble, Jr. Chief Financial Officer (principal financial officer) 18 -----END PRIVACY-ENHANCED MESSAGE-----