-----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, JHJFBPut7eCNUNNSNYNt5FSGG3fNVRHINlpd9l95A4pg3kBl9sXLYu2GA+hvECNu DJkaCuyeuk1a+9fv0CyG9w== 0000927016-99-001899.txt : 19990512 0000927016-99-001899.hdr.sgml : 19990512 ACCESSION NUMBER: 0000927016-99-001899 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990327 FILED AS OF DATE: 19990511 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: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21068 FILM NUMBER: 99616974 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 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 March 27, 1999 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 incorporation or organization) Identification No.) 100 Jeffrey Avenue Holliston, MA 01746 - -------------------------------------------------------------------------------- (Address of principal executive offices) 508-429-6916 - -------------------------------------------------------------------------------- (Issuer's telephone number) 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 May 1, 1999, 9,220,952 shares (does not include 30,600 shares held as treasury stock) of common stock, par value $0.01 per share, were outstanding. TOTAL PAGES 21 EXHIBIT INDEX AT PAGE 20 1 Sight Resource Corporation Index PART I. FINANCIAL INFORMATION Page ---- Item 1 Financial Statements Consolidated Balance Sheets as of March 27, 1999 and December 31, 1998 3 Consolidated Statements of Operations for the Three Months Ended March 27, 1999 and March 31, 1998 4 Consolidated Statements of Cash Flows for the Three Months Ended March 27, 1999 and March 31, 1998 5 Notes to Consolidated Financial Statements 6 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 13 PART II. OTHER INFORMATION Item 2 Changes in Securities and Use of Funds 19 Item 6 Exhibits and Reports on Form 8-K 20 Signatures 21 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements SIGHT RESOURCE CORPORATION Consolidated Balance Sheets (In thousands, except share and per share data)
March 27, December 31, 1999 1998 ----------- ------------ (unaudited) Assets Current assets: Cash and cash equivalents $ 954 $ 1,860 Accounts receivable, net of allowance of $1,138 and $748, respectively 3,386 2,658 Inventories 5,007 4,584 Prepaid expenses and other current assets 560 377 -------- -------- Total current assets 9,907 9,479 -------- -------- Property and equipment 14,748 13,217 Less accumulated depreciation (8,700) (7,077) -------- -------- Net property and equipment 6,048 6,140 -------- -------- Other assets: Intangible assets, net 17,278 15,337 Other assets 967 1,189 -------- -------- Total other assets 18,245 16,526 -------- -------- $ 34,200 $ 32,145 ======== ======== Liabilities & Stockholders' Equity Current liabilities: Revolver notes payable $ 745 $ 0 Current portion of long term debt 388 146 Current portion of capital leases 49 34 Accounts payable 2,618 2,870 Accrued expenses 3,540 3,253 -------- -------- Total current liabilities 7,340 6,303 -------- -------- Non-current liabilities: Long term debt, less current maturities 763 184 Capital leases 19 13 Other liabilities 166 151 -------- -------- Total non-current liabilities 948 348 -------- -------- 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; issued 9,091,552 at March 27, 1999 and 8,936,330 at December 31, 1998 91 90 Additional paid-in capital 37,518 36,847 Common stock issuable, 71,181 shares at December 31, 1998 0 432 Treasury stock at cost, 30,600 shares at March 27, 1999 and December 31, 1998 (137) (137) Unearned compensation (17) (22) Accumulated deficit (18,078) (18,251) -------- -------- Total stockholders' equity 19,377 18,959 -------- -------- $ 34,200 $ 32,145 ======== ========
See accompanying notes to consolidated financial statements. 3 SIGHT RESOURCE CORPORATION Consolidated Statements of Operations (In thousands, except share and per share data)
Three Months Ended ------------------------------- March 27, March 31, 1999 1998 ------------ ------------ (unaudited) Net revenue $ 15,764 $ 13,580 Cost of revenue 5,013 4,752 ------------ ------------ Gross profit 10,751 8,828 Selling, general and administrative expenses 10,194 8,895 ------------ ------------ Income (loss) from operations 557 (67) ------------ ------------ Other income (expense) Interest income 42 71 Interest expense (82) (51) Gain on sale of assets 0 69 Write off of deferred financing costs (323) 0 ------------ ------------ Total other income (expense) (363) 89 ------------ ------------ Income before income tax expense 194 22 Income tax expense 21 9 ------------ ------------ Net income $ 173 $ 13 ============ ============ Net earnings per common share: Basic $ 0.02 $ 0.00 ============ ============ Diluted $ 0.02 $ 0.00 ============ ============ Number of shares used to compute net earnings per common share: Basic 9,061,000 8,785,000 ============ ============ Diluted 10,564,000 10,266,000 ============ ============
See accompanying notes to consolidated financial statements. 4 SIGHT RESOURCE CORPORATION Consolidated Statements of Cash Flows (In thousands)
Three Months Ended March 27, March 31, 1999 1998 ------- ------- (unaudited) Operating activities: Net income $ 173 $ 13 Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 809 592 Amortization and write off of deferred financing costs 344 21 Amortization of unearned compensation 5 0 Gain on sale of assets 0 (69) Changes in operating assets and liabilities: Accounts receivable (607) (444) Inventories (94) 69 Prepaid expenses and other current assets (162) (213) Accounts payable and accrued expenses (919) (756) ------- ------- Net cash used in operating activities (451) (787) ------- ------- Investing activities: Purchases of property and equipment (193) (148) Payments for acquisitions (1,750) (12) Proceeds from sale of assets 0 99 Notes issued for acquisition 300 0 Other assets (74) 17 ------- ------- Net cash used in investing activities (1,717) (44) ------- ------- Financing activities: Principal payments (60) (1,000) Proceeds from notes 1,259 0 Proceeds from issuance of stock 0 121 Other liabilities 63 (7) ------- ------- Net cash provided by (used in) financing activities 1,262 (886) ------- ------- Net decrease in cash and cash equivalents (906) (1,717) Cash and cash equivalents, beginning of period 1,860 6,076 ------- ------- Cash and cash equivalents, end of period $ 954 $ 4,359 ======= =======
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. (b) Acquisitions Effective April 1, 1998, the Company acquired one hundred percent of the outstanding shares of stock of Eye Glass Emporium, Inc. ("Eyeglass Emporium"). The purchase price paid in connection with this acquisition was $2,309 in cash, $350 in notes payable in twelve equal quarterly installments commencing June 30, 1998, and 87,940 shares of common stock. Eyeglass Emporium operated nine eye care centers in Indiana. The acquisition was accounted for using the purchase method of accounting. Effective January 1, 1999, the Company acquired one hundred percent of the outstanding shares of stock of Shawnee Optical, Inc. ("Shawnee"). The purchase price paid in connection with this acquisition was $1,750 in cash, $300 in notes payable over three years and 70,000 shares of common stock. Shawnee operated nine eye care centers in Pennsylvania and Ohio. The acquisition was accounted for using the purchase method of accounting. In connection with the acquisition, the Company recorded purchase accounting adjustments to increase liabilities and establish reserves for the closing of facilities and related restructuring costs, including lease commitments and severance costs. Total acquisition reserves at March 27, 1999 are $450. The results of operations of the acquisitions have been included in the consolidated financial statements from their respective dates of acquisition. The excess of the purchase price and expenses associated with each acquisition over the estimated fair value of the net assets acquired has been recorded as goodwill. (2) Summary of Significant Accounting Policies (a) 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 March 27, 1999 and the results of its operations and cash flows for the periods presented. The Company's fiscal year ends on the Saturday closest to the last day of December. Each quarter represents a thirteen week period, except during a 53-week year. Fiscal years 1999 and 1998 are 52 weeks. Previously, for convenience, the Company reported the quarter and year ending dates as the month end date. Beginning with the first quarter of 1999 and henceforth, the Company will report the fiscal period end date, not the month end date. As noted above, the first quarter of 1999 ended March 27, 1999. 6 Sight Resource Corporation Notes to Consolidated Financial Statements (In thousands, except share and per share data) 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 for the year ended December 31, 1998. (b) Principles of Consolidation The Company's results of operation include the accounts of the Company, its wholly-owned subsidiaries and three 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 and for an unlimited number of times, at nominal cost. The purchase price for a sale of a PCs stock is equal to the aggregate book value of the PC, which will always be a nominal cost because each PC operates at an almost break-even level generating a nominal profit, if any at all. All significant intercompany balances and transactions have been eliminated. In preparation of these consolidated financial statements in conformity with generally accepted accounting principles, management of the Company has made estimates and assumptions that affect the reported amounts of assets and liabilities, such as accounts receivable, inventory, impairment of property and equipment, and intangibles. Actual results could differ from those estimates. (c) Statement of Cash Flows Cash and cash equivalents consist of cash in banks and short-term investments with original maturities of three months or less. (d) Financial Instruments The carrying amount of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value because of the short maturity of these items. The carrying amount of other long-term maturities approximates fair value. The carrying amount of the Company's revolving line of credit approximates fair value because the borrowing rate changes with market interest rates. (e) Revenue Recognition Revenue and the related costs from the sale of eyewear are recognized at the time an order is complete. Revenue from eye care services is recognized when the service is performed. The Company has fee for service arrangements with most of its third party payors. Revenue is reported net of contractual allowances. 7 Sight Resource Corporation Notes to Consolidated Financial Statements (In thousands, except share and per share data) Under revenue sharing arrangements for refractive surgery where the Company is not responsible for patient billing, the Company receives a specified payment from the hospital or center for each refractive surgical procedure performed. Accordingly, the Company recognizes revenue on a per procedure basis at the time procedures are performed. Under revenue sharing arrangements for refractive surgery where the Company is responsible for the collection from the patient and payment to the ophthalmologist and other operating costs, the total patient charge is recorded as revenue with the corresponding expenses recorded in cost of revenue. (f) Inventories Inventories primarily consist of the costs of eyeglass frames, contact lenses, ophthalmic lenses, sunglasses and other optical products and are valued at the lower of cost (using the first-in, first-out method) or market. (g) Property and Equipment Property and equipment is stated at cost. The Company provides for depreciation at the time the property and equipment is placed in service. The straight-line method is used over the estimated useful life of the assets. The Company assesses the recoverability of the undepreciated property and equipment when factors indicate that impairment may have occurred by comparing anticipated profits and future, undiscounted cash flows to net book value. In performing this analysis, management considers such factors as current results, trends, and future prospects, in addition to other economic factors. (h) Advertising Advertising costs are expensed as incurred. (i) Intangible Assets Intangible assets resulting from the acquisition of businesses consist of patient lists, trademarks, non-compete agreements and the excess cost of the acquisition over the fair value of the net assets acquired (goodwill). Certain values assigned are based upon independent appraisals and are amortized on a straight-line basis over a period of 5 to 25 years. The Company assesses the recoverability of unamortized intangible assets on an ongoing basis by comparing anticipated operating profits and future, undiscounted cash flows to net book value. If anticipated operating profits and future, undiscounted cash flows are less than the net book value, then an impairment charge is recorded to reduce the carrying value of the assets to fair value. In performing this analysis, management considers such factors as current results, trends, and future prospects, in addition to other economic factors. (j) Income Taxes The Company follows the asset and liability method of accounting for income taxes and records deferred tax assets and liabilities based on temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial statement purposes. 8 Sight Resource Corporation Notes to Consolidated Financial Statements (In thousands, except share and per share data) (k) Deferred Revenue The Company offers a contact lens purchasing program in which, for a set fee, customers may purchase contact lenses at discounted rates for a 12 month period. The Company recognizes revenue from the sales of its contact lens purchasing program on a monthly basis over the life of the program. Company recognizes revenue from the sales of its contact lens purchasing program on a monthly basis over the life of the program. (l) Net Earnings Per Share Earnings per share are computed based on Statement of Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS 128"). SFAS 128 requires presentation of basic earnings per share ("Basic EPS") and diluted earnings per share ("Diluted EPS") by all entities that have publicly traded common stock or potential common stock (options, warrants, convertible securities or contingent stock arrangements). Basic EPS is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period. The computation of Diluted EPS does not assume conversion, exercise or contingent exercise of securities that would have an antidilutive effect on earnings. The following table provides a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the three months ended March 27, 1999 and March 31, 1998:
Three Months Ended March 27, March 31, 1999 1998 ---------- ---------- Basic Income Per Share Net income 173 13 ---------- ---------- Net income available to common shareholders 173 13 ========== ========== Weighted average common shares outstanding 9,061,000 8,785,000 Net income per share $0.02 $0.00 ========== ========== Diluted Income Per Share Net income 173 13 ---------- ---------- Net income available to common shareholders 173 13 ========== ========== Weighted average common shares outstanding 9,061,000 8,785,000 Convertible preferred stock 1,452,000 1,452,000 Options 51,000 29,000 ---------- ---------- Weighted average common shares outstanding and potential shares 10,564,000 10,266,000 ========== ========== Net income per share $0.02 $0.00 ========== ==========
9 Sight Resource Corporation Notes to Consolidated Financial Statements (In thousands, except share and per share data) (3) Debt Debt consists of the following:
March 27, December 31, 1999 1998 --------- ------------ Bank term loan payable, 9.25% interest rate, principal and interest due quarterly until December 31, 2002 $ 559 $ 0 Unsecured notes payable, 7.5% interest rate, principal due annually and interest due quarterly until January, 2002 300 0 Unsecured note payable, 7% interest rate, principal and interest due quarterly until March 31, 2001 233 263 Unsecured note payable, 12% interest rate, principal and interest due monthly until January, 2001 59 67 ------ ---- 1,151 330 Less current maturities 388 146 ====== ==== Long term debt, less current maturities $ 763 $184 ====== ====
On January 22, 1999, as part of the acquisition of Shawnee, the Company issued three-year notes to the sellers in the aggregate amount of $300. The annual interest rate is 7.5%. Principal is due in three annual substantially equal installments beginning January, 2000 and continuing until January, 2002. Interest is due quarterly in arrears beginning March, 1999 and continuing until January, 2002. On April 8, 1998, as part of the acquisition of Eyeglass Emporium, the Company issued a three-year $350 note to the seller. The annual interest rate is 7.0%. Principal and interest are due quarterly in arrears from June 30, 1998 through March 31, 2001. On February 20, 1997, the Company entered into a Credit Agreement (the "1997 Agreement") with a bank pursuant to which the Company can borrow $5,000 on a term loan basis and $5,000 on a revolving credit basis, subject to certain performance criteria. The term loan facility bears interest at the bank's prime rate plus 1.5% (9.25% at March 27, 1999) or LIBOR plus 3% at the Company's election and the revolving credit facility bears interest at the bank's prime rate plus 1.25% (9.0% at March 27, 1999) or LIBOR plus 2.75% at the Company's election. These loans are secured by all assets of the Company and its wholly owned subsidiaries. As of March 27, 1999, $559 was borrowed on the term loan and $700 was borrowed on the revolving credit facility. In January 1996, one of the Company's subsidiaries entered into a five-year, $140 construction note payable relating to one of its mall locations. The annual interest rate is 12%. Principal and interest payments are due monthly until January 2001. 10 Sight Resource Corporation Notes to Consolidated Financial Statements (In thousands, except share and per share data) (4) Segment Reporting The following table presents certain operating segment information. For the three months ended March 27, 1999 and March 31, 1998.
Eye Care Laser Vision All Consolidated Centers Correction Other Totals 1999 1998 1999 1998 1999 1998 1999 1998 -------- -------- ----- ---- ------- ------- -------- -------- Revenues: External Customers $ 15,100 $ 13,155 $ 664 $425 $ 0 $ 0 $ 15,764 $ 13,580 Interest: Interest income 0 0 0 0 42 71 42 71 Interest expense (25) (25) (2) 0 (55) (26) (82) (51) -------- -------- ----- ---- ------- ------- -------- -------- Net interest income/(expense) (25) (25) (2) 0 (13) 45 (40) 20 Depreciation and amortization 741 559 33 24 35 9 809 592 Income/(loss) from operations 1,433 615 243 12 (1,119) (694) 557 (67) Identifiable assets 29,766 26,925 614 600 3,790 5,340 34,170 32,865 Capital expenditures 193 148 0 0 0 0 193 148
Each operating segment is individually managed and has separate financial results that are reviewed by the Company's chief operating decision-makers. Each segment contains closely related products that are unique to the particular segment. The principal products of the Company's eye care centers are eyeglasses, frames, ophthalmic lenses and contact lenses. The Company also operates two laser vision correction centers. Income from operations is net sales less cost of sales and selling, general and administrative expenses, but is not affected by nonoperating charges/income or by income taxes. Nonoperating charges/income consists principally of net interest expense. In calculating income 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. 11 Sight Resource Corporation Notes to Consolidated Financial Statements (In thousands, except share and per share data) (5) Subsequent Events Effective April 1, 1999, the Company acquired one hundred percent of the outstanding shares of stock of Kent Optical Company and its affiliates ("Kent Optical"). The purchase price of this acquisition was $5,200 in cash, $1,000 in notes payable in annual substantially equal installments commencing April, 2000 and continuing until April, 2002, and 160,000 shares of common stock. Kent Optical operates twenty-eight eye care centers in central and southwest Michigan. The acquisition will be accounted for using the purchase method of accounting. The following unaudited pro forma financial information gives effect to the acquisition as if the acquisition of Kent was effective January 1, 1998:
(in thousands except for per share data) Three Months Ended March 27, 1999 March 31, 1998 -------------- -------------- Revenue $18,329 $16,264 Income $ 219 $ 118 Basic and Diluted Earnings per Share $ 0.02 $ 0.01 Number of Shares Used to Compute Earnings per Share: Basic 9,221 8,945 Diluted 10,724 10,426
The above unaudited pro forma financial information reflects certain adjustments, including amortization of goodwill, and an increase in the weighted average shares outstanding. This pro forma information does not necessarily reflect the results of operations that would have occurred had the acquisition taken place at the beginning of 1998 and is not necessarily indicative of results that may be obtained in the future. On April 15, 1999, the Company entered into a Credit Agreement (the "1999 Agreement") with a bank pursuant to which the Company can borrow $10,000 on an acquisition line of credit, $7,000 on a term loan basis and $3,000 on a revolving line of credit basis, subject to certain performance criteria and a 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 bears interest at either the bank's prime rate, or LIBOR plus 2.25%, or at a comparable interest swap rate at the Company's election. The term loan facility bears interest at LIBOR plus 2.25% or at a comparable interest swap rate at the Company's election. The revolving credit facility bears interest at the bank's prime rate or LIBOR plus 2.0% at the Company's election. Amounts borrowed under the 1999 Agreement will be used to finance future acquisitions, retire existing bank debt, provide ongoing working capital and for other general corporate purposes. As of April 23, 1999 $7,000 was borrowed on the term loan and $975 was borrowed on the revolving credit facility. 12 PART I: 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 that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements. These risks are described in the Company's Form 10-K for the fiscal year ended December 31, 1998 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 March 27, 1999, the Company's operations consisted of 102 eye care centers, with three regional optical laboratories and distribution centers, making the Company one of the seventeen largest providers in the United States' primary eye care industry based upon sales. After giving effect of the Kent Optical acquisition of April 23, 1999, operations consisted of 130 eye care centers. The Company's eye care centers operate primarily under the brand names Cambridge Eye Doctors, E. B. Brown Opticians, Eyeglass Emporium, 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. In addition, as of March 27, 1999 the Company operated two laser vision correction ("LVC") centers. The Company operates three regional optical laboratories and 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 Ended March 27, 1999 and March 31, 1998 Net Revenue. The Company generated net revenue of approximately $15.1 and $0.7 million during the three months ended March 27, 1999 from the operation of its 102 eye care and two LVC centers, respectively, as compared to net revenue of approximately $13.2 and $0.4 million from its 84 eye care and three LVC centers, respectively, for the 13 three months ended March 31, 1998. The $2.2 million, or 16.2%, increase in total net revenue primarily relates to the additional eighteen eye care centers acquired since March, 1998. Cost of Revenue. Cost of revenue increased from approximately $4.5 and $0.3 million from the operation of the 84 eye care and three LVC centers, respectively, for the three months ended March 31, 1998 to approximately $4.7 and $0.4 million from the operation of the 102 eye care and two LVC centers, respectively, for the three months ended March 27, 1999. Total cost of revenue as a percentage of net revenue decreased from 35.0% for the three months ended March 31, 1998 to 31.8% for the three months ended March 27, 1999. The improvement as a percentage of net revenue reflects the realization of purchase economies, less sales price discounting, and, to a lesser extent, some small retail price increases. Cost of revenue principally consisted of (i) the cost of manufacturing, purchasing and distributing optical products to its customers and (ii) the cost of delivering LVC services, including depreciation and maintenance on excimer lasers. Selling, General and Administrative Expenses. Selling, general and administrative expenses were approximately $10.2 million for the three months ended March 27, 1999 as compared to approximately $8.9 million for the three months ended March 31, 1998. The increase primarily relates to payroll and facility costs incurred in operating the nine additional eye care centers acquired effective April 1, 1998 and the nine additional eye care centers acquired effective January 1, 1999. Selling, general and administrative expenses, as a percentage of net revenue, declined from 65.5% for the three months ended March 31, 1998 to 64.7% for the three months ended March 27, 1999. The decrease is primarily a result of (i) the nine eye care centers acquired effective April 1, 1998 and the nine eye care centers acquired effective January 1, 1999, which operate with a level of selling, general and administrative expenses as a percentage of net revenue that is lower than that of the Company and its other subsidiaries, and (ii) the Company's ability to better leverage its fixed expenses in connection with the acquisition of multi-site eye care centers. Other Income and Expense. Interest income totaled $42,000 for the three months ended March 27, 1999 as compared to $71,000 for the three months ended March 31, 1998. This decrease resulted from the investment of a lower average cash and cash equivalents balance during the first three months of 1999 as compared to the same period in 1998. Interest expense totaled $82,000 for the three months ended March 27, 1999 as compared to $51,000 for the three months ended March 31, 1998. The increase is associated with a higher average balance of debt outstanding during the first three months of 1999 as compared to the same period in 1998. The sale of certain ophthalmic equipment during the three months ended March 31, 1998 generated a one-time gain of approximately $69,000. The non-cash write off of deferred financing costs for the three months ended March 27, 1999 results from the costs associated with the company's prior credit facility. Net Income. The Company realized net income of $173,000, or $0.02 per share on a basic and diluted weighted average basis, for the three months ended March 27, 1999 as compared to net income of $13,000, or $0.00 per share on a basic and diluted weighted average basis, for the three months ended March 31, 1998. 14 Liquidity and Capital Resources At March 27, 1999, the Company had approximately $1.0 million in cash and cash equivalents and working capital of approximately $2.6 million, in comparison to approximately $1.9 million in cash and cash equivalents and working capital of approximately $3.2 million as of December 31, 1998. The decrease in working capital is primarily due to the purchase of the nine Shawnee Optical eye care centers effective January 1, 1999. Effective April 1, 1998, the Company acquired one hundred percent of the outstanding shares of stock of Eye Glass Emporium, Inc. ("Eyeglass Emporium"). The purchase price paid in connection with this acquisition was $2,309 in cash, $350 in notes payable in twelve equal quarterly installments commencing June 30, 1998, and 87,940 shares of common stock. Eyeglass Emporium operated nine eye care centers in Indiana. The acquisition was accounted for using the purchase method of accounting. Effective January 1, 1999, the Company acquired one hundred percent of the outstanding shares of stock of Shawnee Optical, Inc. ("Shawnee"). The purchase price paid in connection with this acquisition was $1,750 in cash, $300 in notes payable over three years and 70,000 shares of common stock. Shawnee operated nine eye care centers in Pennsylvania and Ohio. The acquisition was accounted for using the purchase method of accounting. Effective April 1, 1999, the Company acquired one hundred percent of the outstanding shares of stock of Kent Optical Company and its affiliates ("Kent Optical"). The purchase price of this acquisition was $5,200 in cash, $1,000 in notes payable in annual substantially equal installments commencing April, 2000 and continuing until April, 2002, and 160,000 shares of common stock. Kent Optical operates twenty-eight eye care centers in central and southwest Michigan. The acquisition was accounted for using the purchase method of accounting. As of March 27, 1999, the Company had securities outstanding which provide it with potential sources of financing as outlined below:
Securities Potential proceeds - ------------------------------------------------------------------------------ Warrants 2,472,100 $14,800,000 Unit Purchase Options 215,000 3,700,000 Class II Warrants 290,424 2,032,968 Bank Austria AG, f/k/a Creditanstalt, Warrants 150,000 694,000 Representative Warrants 170,000 1,400,000 ============ $22,626,968 ============
The Company also has outstanding 891,942 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 15 at the same time the options and warrants of existing holders are exercised, subject to certain limitations. The amount of proceeds from the exercise of these warrants cannot be estimated at this time. There can be no assurance that the Company will obtain any such proceeds from the exercise of the above securities. On February 20, 1997, the Company entered into a Credit Agreement (the "1997 Agreement") with a bank pursuant to which the Company could borrow up to $5.0 million on a term loan basis and up to $5.0 million on a revolving credit basis, subject to certain performance criteria. As part of the 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 a bank pursuant to which the Company can borrow $10,000 on an acquisition line of credit, $7,000 on a term loan basis and $3,000 on a revolving line of credit basis, subject to certain performance criteria and a 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 bears interest at either the bank's prime rate, or LIBOR plus 2.25%, or at a comparable interest swap rate at the Company's election. The term loan facility bears interest at LIBOR plus 2.25% or at a comparable interest swap rate at the Company's election. The revolving credit facility bears interest at the bank's prime rate or LIBOR plus 2.0% at the Company's election. Amounts borrowed under the 1999 Agreement will be used to finance future acquisitions, retire existing bank debt, provide ongoing working capital and for other general corporate purposes. As of April 23, 1999 $7,000 was borrowed on the term loan and $975 was borrowed on the revolving credit facility. 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 is currently evaluating potential acquisition candidates. The Company anticipates that its working capital and sources of capital, such as the existing credit facility, will be adequate to fund the Company's currently proposed activities for at least the next twelve months. The Company anticipates using financing vehicles such as bank debt and other sources of funding, such as additional equity offerings, to achieve its business plan, including the acquisition of eye care centers. 16 Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as "derivatives") and for hedging activities. SFAS No. 133, which becomes effective for the Company in its fiscal year ending December 30, 2000 is not expected to have a material impact on the consolidated financial statements of the Company. Year 2000 Issue When used in this section, the words or phrases "plans to", "expects to", "believes" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties, including those discussed below, that could cause actual results to differ materially from historical results and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company will not undertake and specifically declines any obligation to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. The "Year 2000" issue refers to the inability of certain computer systems, as well as certain hardware and equipment containing embedded microprocessors with date sensitive data, to recognize accurate dates commencing on or after January 1, 2000. This has the potential to affect the operation of these systems adversely and materially. The Company has identified four phases in its Year 2000 compliance efforts: discovery, assessment, remediation and applicable testing and verification. The Company has substantially completed its assessment of critical internal systems which include customer service, customer order entry, lab operations, purchasing and financial situations. The Company has surveyed, by written questionnaire, its principal vendors, customers and others on whom it relies to assure that their systems will be Year 2000 compliant, and that they will be able to continue their business with the Company without interruption. The Company has received written confirmation of Year 2000 compliance from vendors and suppliers of its (i) point of sale system, (ii) general ledger software system, (iii) laser vision correction equipment, (iv) laboratory finishing equipment, and (v) corporate headquarters telecommunications systems. The Company identified that some early versions of the software (RX calc) used in two of its regional optical laboratories is not Year 2000 compliant. However, Year 2000 compliant upgraded versions of that same software are available and the Company plans to upgrade this software by the end of the third quarter of 1999. The Company plans to complete the remediation phase of its critical internal systems by the end of the second quarter of 1999 and complete the applicable testing and verification phase by the end of the third quarter of fiscal year 1999, however no assurance can be 17 given that any or all of the Company's systems are or will be Year 2000 compliant. The Company has drafted a tentative contingency plan in the event normal operations are interrupted as a result of Year 2000 issues. Certain precautionary measures are considered in the contingency plan, including restricting vacation schedules in January, 2000, increasing inventory levels and manually processing key financial documents and other operations. The plan is expected to be completed during the second quarter of 1999. Contingency plan testing will be completed by the end of the third quarter of 1999. The Company estimates costs to become Year 2000 compliant will be approximately $75,000, however, no assurance can be given that the ultimate costs required to address the Year 2000 issue will not exceed such amount. The Company expects to convert all of its existing eye care centers to the new point of sale system, which the Company has received written confirmation is Year 2000 compliant, by the third quarter of 1999, except for the nine recently acquired Shawnee locations. The Company believes that the Shawnee centers, which currently process transactions manually, will be converted to the new point of sale system by December 31, 1999. However, the Company has not completed its assessment of the integration plan timetable for Shawnee. The Company believes that there are multiple sources of supply in the industry and the failure of some vendors to remediate Year 2000 issues would not disrupt the supply chain. The Company provides managed primary eye care benefits to more than fifty organizations. Presently, the Company manually files paper claims with these organizations. However, during 1999 the Company intends to convert to electronic filing for some of these organizations. If Year 2000 issues do not permit electronic filing, the Company believes that it can revert back to manually processing paper claims. The Company currently believes that its most reasonably likely worst case Year 2000 scenario would relate to problems with systems of third parties which could create great risks with infrastructure, including water and sewer services, electricity, transportation, telecommunications and critical supplies, or raw materials and spare parts. The Company's ability to eliminate or control these potential third party problems is limited. Therefore, contingency plans are limited to ensuring that store operations, eye examinations and optical laboratory operations can be performed manually, if necessary. No assurance can be given that the impact of any failure to achieve substantial Year 2000 compliance will not have a material adverse effect on the Company's financial condition. Qualitative and Quantitative Disclosures About Market Risk The Company has no significant fixed rate debt obligations or related interest rate swap and cap agreements. 18 PART II. OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds (a) Not applicable. (b) Not applicable. (c) (1) Securities sold. (i) On January 1, 1999 the Company issued an aggregate of 70,000 shares (the "Shawnee Shares") of its Common Stock, par value $.01 per share, and (ii) also on January 1, 1999 the Company issued an aggregate of 85,222 shares (the "E.B. Brown Shares") of its Common Stock, par value $.01 per share. (2) Underwriters and other purchasers. No underwriters were involved in either of the transactions listed above. (i) The Company issued 3,043 Shawnee Shares to Robert U. Leonardi, 3,044 Shawnee Shares to Judith R. Servis, and 63,913 Shawnee Shares to Christopher J. Wolf, O.D. (ii) The Company issued 71,171 E.B. Brown Shares to Stephen A. Schlein and 14,051 E.B. Brown Shares to James Kulway. (3) Consideration. (i) The Shawnee Shares were issued to Mr. Leonardi, Ms. Servis, and Dr. Wolf as partial payment of the consideration due in connection with the acquisition by the Company of all of the issued and outstanding capital stock of Shawnee Optical, Inc. (ii) The E.B. Brown Shares were issued to Mr. Schlein and Mr. Kulway in connection with the acquisition by the Company of assets for its subsidiary E.B. Brown Opticians, Inc. (4) Exemption from registration claimed. The Company relied upon Section 4(2) of the Securities Act of 1933, as amended, because each of the above transactions did not involve any public offering by the Company. (5) Terms of conversion or exercise. Not applicable. (6) Use of proceeds. Not applicable. (d) Not applicable. 19 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit No. Title ----------------------------------------------------------------- 10+ 1992 Employee, Director and Consultant Stock Option Plan, as amended 27 Financial Data Schedule + Management contract or compensatory plan, contract or arrangement (b) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter covered by this report. 20 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: May 11, 1999 By: /S/ WILLIAM T. SULLIVAN ------------ ---------------------------- William T. Sullivan President and Chief Executive Officer (principal executive officer) Date: May 11, 1999 By: /S/ JAMES NORTON ------------ --------------------- James Norton Chief Financial Officer (principal financial officer) 21 EX-10 2 1992 EMPLOYEE, DIRECTOR AND CONSULTANT STOCK OPTION EXHIBIT 10 SIGHT RESOURCE CORPORATION 1992 EMPLOYEE, DIRECTOR AND CONSULTANT STOCK OPTION PLAN (As Amended February 1999) 1. DEFINITIONS AND PURPOSES. ------------------------ A. Definitions Unless otherwise specified or unless the context otherwise requires, the following terms, as used in this Sight Resource Corporation 1992 Employee, Director and Consultant Stock Option Plan, have the following meanings: 1. Administrator means the Board of Directors, unless it has delegated ------------- power to act on its behalf to a committee. (See Article 3) 2. Affiliate means a corporation which, for purposes of Section 424 of --------- the Code, is a parent or subsidiary of the Company, direct or indirect. 3. Board of Directors means the Board of Directors of the Company. ------------------ 4. Code means the United States Internal Revenue Code of 1986, as ---- amended. 5. Committee means the Committee to which the Board of Directors has --------- delegated power to act under or pursuant to the provisions of the Plan. 6. Company means Sight Resource Corporation, a Delaware corporation. ------- 7. Disability or Disabled means permanent and total disability as defined ---------- -------- in Section 22(e)(3) of the Code. 8. Fair Market Value of a Share of Common Stock means: ----------------- (a) If such Shares are then listed on any national securities exchange, the fair market value shall be the last sale price, if any, on the largest such exchange on the date of the grant of the Option, or, if none, on the most recent trade date thirty (30) days or less prior to the date of the grant of the Option; (b) If the Shares are not then listed on any such exchange, the fair market value of such Shares shall be the last sale price, if any, as reported in the National Association of Securities Dealers Automated Quotation System (NASDAQ) for the date of the grant of the Options, or if none, for the most recent trade date thirty (30) days or less prior to the date of the grant of the Option; (c) If the Shares are not then either listed on any such exchange or quoted in NASDAQ, the fair market value shall be the mean between the average of the "Bid" and the average of the "Ask" prices, if any, as reported in the National Daily Quotation Service for the date of the grant of the option, or, if none, for the most recent trade date thirty (30) days or less prior to the date of the grant of the Option for which such quotations are reported; and (d) If the market value cannot be determined under the preceding three paragraphs, it shall be determined in good faith by the Board of Directors. 9. ISO means an option meant to qualify as an incentive stock option --- under Code Section 422. 10. Key Employee means an employee of the Company or of an Affiliate ------------ (including, without limitation, an employee who is also serving as an officer or director of the Company or of an Affiliate), designated by the Administrator to be eligible to be granted one or more Options under the Plan. 11. Non-Qualified Option means an option which is not intended to qualify -------------------- as an ISO. 12. Option means an ISO or Non-Qualified Option granted under the Plan. ------ 13. Option Agreement means an agreement between the Company and a ---------------- Participant executed and delivered pursuant to the Plan, in such form as the Administrator shall approve. 14. Participant means a Key Employee, director or consultant to whom one ----------- or more Options are granted under the Plan. 15. Participant's Survivors means a deceased Participant's legal ----------------------- representatives and/or any person or persons who acquired the Participant's rights to an Option by will or by the laws of descent and distribution. 16. Plan means this Restated Stock Option Plan. ---- -2- 17. Shares means shares of the common stock, $.01 par value, of the ------ Company ("Common Stock") as to which Options have been or may be granted under the Plan or any shares of capital stock into which the Shares are changed or for which they are exchanged within the provisions of Article 2 of the Plan. The shares issued upon exercise of Options granted under the Plan may be authorized and unissued shares or shares held by the Company in its treasury, or both. B. Purposes of the Plan The Plan is intended to encourage ownership of Shares by Key Employees, non-employee directors and certain consultants of the Company in order to attract such people, to induce them to work for the benefit of the Company or of an Affiliate and to provide additional incentive for them to promote the success of the Company or of an Affiliate. The Plan provides for the issuance of ISOs and Non-Qualified Options. 2. SHARES SUBJECT TO THE PLAN. -------------------------- The number of Shares subject to this Plan as to which Options may be granted from time to time shall be 1,850,000, or the equivalent of such number of Shares after the Administrator, in its sole discretion, has interpreted the effect of any stock split, stock dividend, combination, recapitalization or similar transaction effected after such date in accordance with Paragraph 16 of the Plan. If an Option ceases to be "outstanding", in whole or in part, the Shares which were subject to such Option shall be available for the granting of other Options under the Plan. Any Option shall be treated as "outstanding" until such Option is exercised in full, or terminates or expires under the provisions of the Plan, or by agreement of the parties to the pertinent Option Agreement. -3- 3. ADMINISTRATION OF THE PLAN. -------------------------- The Administrator of the Plan will be the Board of Directors, except to the extent the Board of Directors delegates its authority to a Committee of the Board of Directors. The Plan is intended to comply with Rule 16b-3 or its successors, promulgated pursuant to Section 16 of the Securities Exchange Act of 1934, as amended (the "1934 Act") with respect to Participants who are subject to Section 16 of the 1934 Act, and any provision in this Plan with respect to such persons contrary to Rule 16b-3 shall be deemed null and void to the extent permissible by law and deemed appropriate by the Administrator. Subject to the provisions of the Plan, the Administrator is authorized to: a. Interpret the provisions of the Plan or of any Option or Option Agreement and to make all rules and determinations which it deems necessary or advisable for the administration of the Plan; b. Determine which employees of the Company or of an Affiliate shall be designated as Key Employees and which of the Key Employees, directors and consultants shall be granted Options; c. Determine the number of Shares for which an Option or Options shall be granted; and d. Specify the terms and conditions upon which an Option or Options may be granted; provided, however, that all such interpretations, rules, determinations, terms and conditions shall be made and prescribed in the context of preserving the tax status under Code Section 422 of those Options which are designated as ISOs. Subject to the foregoing, the interpretation and construction by the Administrator of any provisions of the Plan or of any Option granted under it shall be final, unless otherwise determined by the Board of Directors, if the Administrator is other than the Board of Directors. 4. ELIGIBILITY FOR PARTICIPATION. ----------------------------- The Administrator will, in its sole discretion, name the Participants in the Plan, provided, however, that each Participant must be a Key Employee, director or consultant of the Company or of an Affiliate at the time an Option is granted. Notwithstanding any of the foregoing provisions, the Administrator may authorize the grant of an Option to a person not then an employee, director or consultant of the Company or of -4- an Affiliate. The actual grant of such Option, however, shall be conditioned upon such person becoming eligible to become a Participant at or prior to the time of the execution of the Option Agreement evidencing such Option. ISOs may be granted only to Key Employees. Non-Qualified Options may be granted to any Key Employee, director or consultant of the Company or an Affiliate. Granting of any Option to any individual shall neither entitle that individual to, nor disqualify him or her from, participation in any other grant of Options. In no event shall any Participant be granted, in any consecutive three year period, options to purchase more than 350,000 shares pursuant to the Plan. 5. TERMS AND CONDITIONS OF OPTIONS. ------------------------------- Each Option shall be set forth in an Option Agreement, duly executed by the Company and by the Participant. The Option Agreements, which may be changed in the Administrator's discretion for any particular Participant (provided that any change in the Incentive Stock Option Agreement is not inconsistent with Code Section 422), shall be subject to the following terms and conditions: Non-Qualified Options: Each Option intended to be a Non- Qualified Option --------------------- shall be subject to the terms and conditions which the Administrator determines to be appropriate and in the best interest of the Company, subject to the following minimum standards for any such Non-Qualified Option: a. The Option Agreement shall be in writing in the form approved by the Administrator, with such modifications to such form as the Administrator shall approve; b. Option Price: The option price (per share) of the Shares covered by each Option shall be determined by the Administrator but shall not be less than the par value per share of the Shares on the date of the grant of the Option. c. Each Option Agreement shall state the number of Shares to which it pertains; and d. Each Option Agreement shall state the date on which it first is exercisable and the date after which it may no longer be exercised. Except as otherwise determined by the Administrator, each Option granted hereunder shall become cumulatively exercisable in four (4) equal annual installments of twenty-five percent (25%) each, commencing on the first anniversary date of the Option -5- Agreement executed by the Company and the Participant with respect to such Option, and continuing on each of the next three (3) anniversary dates. e. Each Option shall terminate not more than 10 (ten) years from the date of grant thereof or at such earlier time as the Option Agreement may provide. f. Directors' Options: Each director of the Company who is not an ------------------ employee of the Company or any Affiliate, immediately after each Annual Meeting of Stockholders of the Company, provided that on such dates such director has been in the continued and uninterrupted service of the Company as a director for a period of at least one year prior to the date of such annual meeting and is and was a director and was and is not an employee of the Company at such times, shall be granted a Non-Qualified Option to purchase 5,000 Shares. Each such Option shall (i) have an exercise price equal to the Fair Market Value (per share) of the Shares on the date of grant of the Option, (ii) have a term of ten (10) years, and (iii) shall become cumulatively exercisable in two (2) equal annual installments of fifty percent (50%) each, upon the first and second anniversary of the date of grant, provided that on such dates such director has been in the continued and uninterrupted service of the Company as a director and not an employee since the date of grant. Any director entitled to receive an Option grant under this subparagraph (f) may elect to decline the Option. Notwithstanding the provisions of Paragraph 23 concerning amendment of the Plan, the provisions of this subparagraph (f) shall not be amended more than once every six months, other than to comport with changes in the Code, the Employee Retirement Income Security Act, or the rules thereunder. The provisions of Articles 9, 10, 11 and 12 below shall not apply to Options granted pursuant to this subparagraph (f). ISOs: Each Option intended to be an ISO shall be issued only to a Key ---- Employee and be subject to at least the following terms and conditions, with such additional restrictions or changes as the Administrator determines are appropriate but not in conflict with Code Section 422 and relevant regulations and rulings of the Internal Revenue Service: a. Minimum standards: The ISO shall meet the minimum standards for Non- Qualified Options, as described above, except clauses (a), (b) and (e) thereunder. -6- b. Option Agreement: The Option Agreement for an ISO shall be in writing in substantially the form as approved by the Administrator, with such changes to such form as the Administrator shall approve, provided any changes are not inconsistent with Code Section 422. c. Option Price: Immediately before the Option is granted, if the Participant owns, directly or by reason of the applicable attribution rules in Code Section 424(d): i. Ten percent (10%) or less of the total combined voting power of ------- all classes of share capital of the Company or an Affiliate, the Option price per share of the Shares covered by each Option shall not be less than one hundred percent (100%) of the Fair Market Value per share of the Shares on the date of the grant of the Option. ii. More than ten percent (10%) of the total combined voting power of all classes of share capital of the Company or an Affiliate, the Option price per share of the Shares covered by each Option shall be not less than one hundred ten percent (110%) of the said Fair Market Value on the date of grant. d. Term of Option: For Participants who own i. Ten percent (10%) or less of the total combined voting power of ------- all classes of share capital of the Company or an Affiliate, each Option shall terminate not more than ten (10) years from the date of the grant or at such earlier time as the Option Agreement may provide; ii. More than ten percent (10%) of the total combined voting power of all classes of share capital of the Company or an Affiliate, each Option shall terminate not more than five (5) years from the date of the grant or at such earlier time as the Option Agreement may provide. e. Limitation on Yearly Exercise: The Option Agreements shall restrict the amount of Options which may be exercisable in any calendar year (under this or any other ISO plan of the Company or an Affiliate) so that the aggregate Fair Market Value (determined at the time each ISO is granted) of the stock with respect to which ISOs are exercisable for the first time by the Participant in any calendar year does not exceed one hundred thousand dollars ($100,000), provided that this -7- subparagraph (e) shall have no force or effect if its inclusion in the Plan is not necessary for Options issued as ISOs to qualify as ISOs pursuant to Section 422(d) of the Code. f. Limitation on Grant of ISOs: No ISOs shall be granted after the expiration of the earlier of ten (10) years from the date of the ------- adoption of the Plan by the Company or the approval of the Plan by the shareholders of the Company. 6. EXERCISE OF OPTION AND ISSUE OF SHARES. -------------------------------------- An Option (or any part or installment thereof) shall be exercised by giving written notice to the Company at its principal office address, together with provision for payment of the full purchase price in accordance with this paragraph for the shares as to which such Option is being exercised, and upon compliance with any other condition(s) set forth in the Option Agreement. Such written notice shall be signed by the person exercising the Option, shall state the number of Shares with respect to which the Option is being exercised and shall contain any representation required by the Plan or the Option Agreement. Payment of the purchase price for the shares as to which such Option is being exercised shall be made (a) in United States dollars in cash or by check, or (b) at the discretion of the Administrator, through delivery of shares of Common Stock having a Fair Market Value equal as of the date of the exercise to the cash exercise price of the Option, (c) at the discretion of the Administrator, by delivery of the grantee's personal recourse note bearing interest payable not less than annually at no less than 100% of the applicable Federal rate, as defined in Section 1274(d) of the Code, (d) at the discretion of the Administrator, in accordance with a cashless exercise program established with a securities brokerage firm, and approved by the Administrator, or (e) at the discretion of the Administrator, by any combination of (a), (b), (c) and (d) above. Notwithstanding the foregoing, the Administrator shall accept only such payment on exercise of an ISO as is permitted by Section 422 of the Code. The Company shall then reasonably promptly deliver the Shares as to which such Option was exercised to the Participant (or to the Participant's Survivors, as the case may be). In determining what constitutes "reasonably promptly," it is expressly understood that the delivery of the Shares may be delayed by the Company in order to comply with any law or regulation which requires the Company to take any action with respect to the Shares prior to their issuance. The Shares shall, upon delivery, be evidenced by an appropriate certificate or certificates for paid-up non-assessable Shares. -8- The Administrator shall have the right to accelerate the date of exercise of any installment of any Option; provided that the Administrator shall not accelerate the exercise date of any installment of any Option granted to any Key Employee as an ISO (and not previously converted into a Non-Qualified Option pursuant to Article 18) if such acceleration would violate the annual vesting limitation contained in Section 422(d) of the Code, as described in paragraph 5(e). 7. RIGHTS AS A SHAREHOLDER. ----------------------- No Participant to whom an Option has been granted shall have rights as a shareholder with respect to any Shares covered by such Option, except after due exercise of the Option and provision for payment of the full purchase price for the Shares being purchased pursuant to such exercise. 8. ASSIGNABILITY AND TRANSFERABILITY OF OPTIONS. -------------------------------------------- By its terms, an Option granted to a Participant shall not be transferable by the Participant other than by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act or the rules thereunder, and shall be exercisable, during the Participant's lifetime, only by such Participant (or by his or her legal representative). Such Option shall not be assigned, pledged or hypothecated in any way (whether by operation of law or otherwise) and shall not be subject to execution, attachment or similar process. Any attempted transfer, assignment, pledge, hypothecation or other disposition of any Option or of any rights granted thereunder contrary to the provisions of this Plan, or the levy of any attachment or similar process upon an Option, shall be null and void. 9. EFFECT OF TERMINATION OF SERVICE OTHER THAN "FOR CAUSE". ------------------------------------------------------- Except as otherwise provided in the pertinent Option Agreement, in the event of a termination of service (whether as an employee or consultant) before the Participant has exercised all Options, the following rules apply: a. A Participant who ceases to be an employee or consultant of the Company or of an Affiliate (for any reason other than termination "for cause", Disability, or death for which events there are special rules in Articles 10, 11, and 12, respectively), may exercise -9- any Option granted to him or her to the extent that the right to purchase Shares has accrued on the date of such termination of service, but only within such term as the Administrator has designated in the pertinent Option Agreement. b. In no event may an Option Agreement provide, if the Option is intended to be an ISO, that the time for exercise be later than three (3) months after the Participant's termination of employment. c. The provisions of this paragraph, and not the provisions of Article 11 or 12, shall apply to a Participant who subsequently becomes disabled or dies after the termination of employment, or consultancy, provided, however, in the case of a Participant's death, the Participant's survivors may exercise the Option within six (6) months after the date of the Participant's death, but in no event after the date of expiration of the term of the Option. d. Notwithstanding anything herein to the contrary, if subsequent to a Participant's termination of employment or consultancy, but prior to the exercise of an Option, the Board of Directors determines that, either prior or subsequent to the Participant's termination, the Participant engaged in conduct which would constitute "cause", then such Participant shall forthwith cease to have any right to exercise any Option. e. A Participant to whom an Option has been granted under the Plan who is absent from work with the Company or with an Affiliate because of temporary disability (any disability other than a permanent and total Disability as defined in Article 1 hereof), or who is on leave of absence for any purpose, shall not, during the period of any such absence, be deemed, by virtue of such absence alone, to have terminated such Participant's employment or consultancy with the Company or with an Affiliate, except as the Administrator may otherwise expressly provide. f. Options granted under the Plan shall not be affected by any change of employment or other service within or among the Company and any Affiliates, so long as the Participant continues to be an employee or consultant of the Company or any Affiliate, provided, however, if a Participant's employment by either the Company or an Affiliate should cease (other than to become an employee of an Affiliate or the Company), such termination shall affect the Participant's rights under -10- any Option granted to such Participant in accordance with the terms of the Plan and the pertinent Option Agreement. 10. EFFECT OF TERMINATION OF SERVICE "FOR CAUSE". -------------------------------------------- Except as otherwise provided in the pertinent Option Agreement, the following rules apply if the Participant's service (whether as an employee or consultant) is terminated "for cause" prior to the time that all of his or her outstanding Options have been exercised: a. All outstanding and unexercised Options as of the date the Participant is notified his or her service is terminated "for cause" will immediately be forfeited, unless the Option Agreement provides otherwise. b. For purposes of this Article, "cause" shall include (and is not limited to) dishonesty with respect to the employer, insubordination, substantial malfeasance or non-feasance of duty, unauthorized disclosure of confidential information, and conduct substantially prejudicial to the business of the Company or any Affiliate. The determination of the Administrator as to the existence of cause will be conclusive on the Participant and the Company. c. "Cause" is not limited to events which have occurred prior to a Participant's termination of service, nor is it necessary that the Administrator's finding of "cause" occur prior to termination. If the Administrator determines, subsequent to a Participant's termination of service but prior to the exercise of an Option, that either prior or subsequent to the Participant's termination the Participant engaged in conduct which would constitute "cause", then the right to exercise any Option is forfeited. d. Any definition in an agreement between the Participant and the Company or an Affiliate, which contains a conflicting definition of "cause" for termination and which is in effect at the time of such termination, shall supersede the definition in this Plan with respect to such Participant. 11. EFFECT OF TERMINATION OF SERVICE FOR DISABILITY. ----------------------------------------------- Except as otherwise provided in the pertinent Option Agreement, a Participant who ceases to be an employee of or -11- consultant to the Company or of an Affiliate by reason of Disability may exercise any Option granted to such Participant: a. To the extent that the right to purchase Shares has accrued on the date of his Disability; and b. In the event rights to exercise the Option accrue periodically, to the extent of a pro rata portion of such rights based upon the number of days prior to such Participant's Disability and during the accrual period which next ends following the date of Disability. A Disabled Participant may exercise such rights only within a period of not more than one (1) year after the date that the Participant became Disabled or, if earlier, within the originally prescribed term of the Option. The Administrator shall make the determination both of whether Disability has occurred and the date of its occurrence (unless a procedure for such determination is set forth in another agreement between the Company and such Participant, in which case such procedure shall be used for such determination). If requested, the Participant shall be examined by a physician selected or approved by the Administrator, the cost of which examination shall be paid for by the Company. 12. EFFECT OF DEATH WHILE AN EMPLOYEE OR CONSULTANT. ----------------------------------------------- Except as otherwise provided in the pertinent Option Agreement, in the event of the death of a Participant to whom an Option has been granted while the Participant is an employee or consultant of the Company or of an Affiliate, such Option may be exercised by the Participant's Survivors: a. To the extent exercisable but not exercised on the date of death; and b. In the event rights to exercise the Option accrue periodically, to the extent of a pro rata portion of such rights based upon the number of days prior to the Participant's death and during the accrual period which next ends following the date of death; If the Participant's Survivors wish to exercise the Option, they must take all necessary steps to exercise the Option within one (1) year after the date of death of such Participant, notwithstanding that the decedent might have been able to exercise the Option as to some or all of the Shares on a later date if he or she had not died and had continued to be an employee or consultant or, if earlier, within the originally prescribed term of the Option. -12- 13. TERMINATION OF DIRECTORS' OPTION RIGHTS. --------------------------------------- Except as otherwise provided in the pertinent Non-Qualified Option Agreement, if a director who receives Options pursuant to Article 5, subparagraph (f): a. ceases to be a member of the Board of Directors of the Company for any reason other than death or disability, any then unexercised Options granted to such Director may be exercised by the director within a period of ninety (90) days after the date the director ceases to be a member of the Board of Directors, but only to the extent of the number of shares with respect to which the Options are exercisable on the date the director ceases to be a member of the Board of Directors, and in no event later than the expiration date of the Option; or, b. ceases to be a member of the Board of Directors of the Company by reason of his or her death or Disability, any then unexercised Options granted to such Director may be exercised by the director (or by the director's personal representative, heir or legatee, in the event of death) within a period of one hundred eighty (180) days after the date the director ceases to be a member of the Board of Directors, but only to the extent of the number of Shares with respect to which the Options are exercisable on the date the director ceases to be a member of the Board of Directors, and in no event later than the expiration date of the Option. 14. PURCHASE FOR INVESTMENT. ----------------------- Unless the offering and sale of the Shares to be issued upon the particular exercise of an Option shall have been effectively registered under the Securities Act of 1933, as now in force or hereafter amended (the "Act"), the Company shall be under no obligation to issue the Shares covered by such exercise unless and until the following conditions have been fulfilled: a. The person(s) who exercise such Option shall warrant to the Company, prior to receipt of the Shares, that such person(s) are acquiring such Shares for their own respective accounts, for investment, and not with a view to, or for sale in connection with, the distribution of any such Shares, in which event the person(s) acquiring such Shares shall be bound by the -13- provisions of the following legend which shall be endorsed upon the certificate(s) evidencing their Shares issued pursuant to such exercise or such grant: "The shares represented by this certificate have been taken for investment and they may not be sold or otherwise transferred by any person, including a pledgee, in the absence of an effective registration statement of the shares under the Securities Act of 1933 or an opinion of counsel satisfactory to the Company that an exemption from registration is then available." b. The Company shall have received an opinion of its counsel that the Shares may be issued upon such particular exercise in compliance with the Act without registration thereunder. The Company may delay issuance of the Shares until completion of any action or obtaining of any consent which the Company deems necessary under any applicable law (including, without limitation, state securities or "blue sky" laws). 15. DISSOLUTION OR LIQUIDATION OF THE COMPANY. ----------------------------------------- Upon the dissolution or liquidation of the Company, all Options granted under this Plan which as of such date shall not have been exercised will terminate and become null and void; provided, however, that if the rights of a Participant or a Participant's Survivors have not otherwise terminated and expired, the Participant or the Participant's Survivors will have the right immediately prior to such dissolution or liquidation to exercise any Option to the extent that the right to purchase Shares has accrued under the Plan as of the date immediately prior to such dissolution or liquidation. 16. ADJUSTMENTS. ----------- Upon the occurrence of any of the following events, a Participant's rights with respect to any Option granted to him or her hereunder which have not previously been exercised in full shall be adjusted as hereinafter provided, unless otherwise specifically provided in the written agreement between the optionee and the Company relating to such Option: A. Stock Dividends and Stock Splits. If the shares of Common Stock shall -------------------------------- be subdivided or combined into a greater or smaller number of shares or if the Company shall issue any shares of Common Stock as a stock dividend on its outstanding Common Stock, the number of shares of Common Stock deliverable upon the -14- exercise of such Option shall be appropriately increased or decreased proportionately, and appropriate adjustments shall be made in the purchase price per share to reflect such subdivision, combination or stock dividend. B. Consolidations or Mergers. If the Company is to be consolidated with ------------------------- or acquired by another entity in a merger, sale of all or substantially all of the Company's assets or otherwise (an "Acquisition"), the Administrator or the board of directors of any entity assuming the obligations of the Company hereunder (the "Successor Board"), shall, as to outstanding Options, either (i) make appropriate provision for the continuation of such Options by substituting on an equitable basis for the shares then subject to such Options the consideration payable with respect to the outstanding shares of Common Stock in connection with the Acquisition or securities of any successor or acquiring entity; or (ii) upon written notice to the optionees, provide that all Options must be exercised, to the extent then exercisable, within a specified number of days of the date of such notice, at the end of which period the Options shall terminate; or (iii) terminate all Options in exchange for a cash payment equal to the excess of the fair market value of the shares subject to such Options (to the extent then exercisable) over the exercise price thereof. C. Recapitalization or Reorganization. In the event of a recapitalization ---------------------------------- or reorganization of the Company (other than a transaction described in subparagraph B above) pursuant to which securities of the Company or of another corporation are issued with respect to the outstanding shares of Common Stock, an optionee upon exercising an Option shall be entitled to receive for the purchase price paid upon such exercise the securities he or she would have received if he or she had exercised such Option prior to such recapitalization or reorganization. D. Modification of ISOs. Notwithstanding the foregoing, any adjustments -------------------- made pursuant to subparagraphs A, B or C with respect to ISOs shall be made only after the Administrator, after consulting with counsel for the Company, determines whether such adjustments would constitute a "modification" of such ISOs (as that term is defined in Section 424(h) of the Code) or would cause any adverse tax consequences for the holders of such ISOs. If the Administrator determines that such adjustments made with respect to ISOs would constitute a modification of such ISOs, it may refrain from making such adjustments, unless the holder of an ISO specifically requests in writing that such adjustment be made and such writing indicates that the holder has full knowledge of the consequences of such "modification" on his or her income tax treatment with respect to the ISO. -15- 17. ISSUANCES OF SECURITIES. ----------------------- Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares subject to Options. Except as expressly provided herein, no adjustments shall be made for dividends paid in cash or in property (including without limitation, securities) of the Company. 18. FRACTIONAL SHARES. ----------------- No fractional share shall be issued under the Plan and the person exercising such right shall receive from the Company cash in lieu of such fractional share equal to the Fair Market Value thereof. 19. CONVERSION OF ISOs INTO NON-QUALIFIED OPTIONS: TERMINATION OF ISOs. ------------------------------------------------------------------ The Administrator, at the written request of any optionee, may in its discretion take such actions as may be necessary to convert such optionee's ISOs (or any installments or portions of installments thereof) that have not been exercised on the date of conversion into Non-Qualified Options at any time prior to the expiration of such ISOs, regardless of whether the optionee is an employee of the Company or an Affiliate at the time of such conversion. Such actions may include, but not be limited to, extending the exercise period or reducing the exercise price of the appropriate installments of such Options. At the time of such conversion, the Administrator (with the consent of the optionee) may impose such conditions on the exercise of the resulting Non- Qualified Options as the Administrator in its discretion may determine, provided that such conditions shall not be inconsistent with this Plan. Nothing in the Plan shall be deemed to give any optionee the right to have such optionee's ISO's converted into Non-Qualified Options, and no such conversion shall occur until and unless the Administrator takes appropriate action. The Administrator, with the consent of the optionee, may also terminate any portion of any ISO that has not been exercised at the time of such termination. 20. WITHHOLDING. ----------- Upon the exercise of a Non-Qualified Option for less than its fair market value, the making of a Disqualifying Disposition (as defined in paragraph 21) or the vesting of restricted Common Stock acquired on the exercise of an Option hereunder, the -16- Company may withhold from the optionee's wages, if any, or other remuneration, or may require the optionee to pay additional federal, state, and local income tax withholding and employee contributions to employment taxes in respect of the amount that is considered compensation includible in such person's gross income. Such amounts may be payable in Common Stock at the discretion of the Committee (if permitted by law), provided that with respect to persons subject to Section 16 of the 1934 Act, any such withholding arrangement shall be in compliance with any applicable provisions of Rule 16b-3 promulgated under Section 16 of the 1934 Act. The Administrator in its discretion may condition the exercise of an Option for less than its fair market value or the vesting of restricted Common Stock acquired by exercising an Option on the grantee's payment of such additional income tax withholding and employee contributions to employment taxes. 21. NOTICE TO COMPANY OF DISQUALIFYING DISPOSITION. ---------------------------------------------- Each Key Employee who receives an ISO must agree to notify the Company in writing immediately after the Key Employee makes a Disqualifying Disposition of any shares acquired pursuant to the exercise of an ISO. A Disqualifying Disposition is any disposition (including any sale) of such shares before the later of (a) two years after the date the Key Employee was granted the ISO, or (b) one year after the date the Key Employee acquired shares by exercising the ISO. If the Key Employee has died before such stock is sold, these holding period requirements do not apply and no Disqualifying Disposition can occur thereafter. 22. TERMINATION OF THE PLAN. ----------------------- Except as provided in the following sentence, the Plan will terminate on November 30, 2002. The Plan may be terminated at an earlier date by vote of the stockholders of the Company; provided, however, that any such earlier termination will not affect any Options granted or Option Agreements executed prior to the effective date of such termination. 23. AMENDMENT OF THE PLAN. --------------------- The Plan may be amended by the stockholders of the Company. The Plan may also be amended by the Administrator, including, without limitation, to the extent necessary to qualify any or all outstanding ISOs granted under the Plan or ISOs to be granted under the Plan for favorable federal income tax treatment (including deferral of taxation upon exercise) as may be afforded incentive stock options under Section 422 of the Code, to the -17- extent necessary to ensure the compliance of the Plan with Rule 16b-3 under the 1934 Act, and to the extent necessary to qualify the shares issuable upon exercise of any outstanding options granted, or options to be granted, under the Plan for listing on any national securities exchange or quotation in any national automated quotation system of securities dealers. Any amendment approved by the Administrator which is of a scope that requires stockholder approval in order to ensure favorable federal income tax treatment for any incentive stock options or requires stockholder approval in order to ensure the qualification of the Plan under Rule 16b-3 shall be subject to obtaining such stockholder approval. Any modification or amendment of the Plan shall not, without the consent of an optionee, adversely affect his or her rights under an option previously granted to him or her. With the consent of the optionee affected, the Administrator may amend outstanding option agreements in a manner not inconsistent with the Plan. 24. EMPLOYMENT OR OTHER RELATIONSHIP. -------------------------------- Nothing in this Plan or any Option Agreement shall be deemed to prevent the Company or an Affiliate from terminating the employment, consultancy or director status of a Participant, nor to prevent a Participant from terminating his or her own employment, consultancy or director status or to give any Participant a right to be retained in employment or other service by the Company or any Affiliate for any period of time. 25. GOVERNING LAW. ------------- This Agreement shall be construed and enforced in accordance with the law of the State of Delaware. -18- EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-25-1999 JAN-01-1999 MAR-27-1999 954 0 4,524 1,138 5,007 9,907 14,748 8,700 34,200 7,340 0 0 6,535 91 19,286 34,200 15,764 15,764 5,013 5,013 10,517 0 40 194 21 173 0 0 0 173 0.02 0.02
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