-----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, Orpvv8C4pKe4dx5YAgZ2yVxPE4P1ZzRW1ALXdfQiLrpEyr5mtAn8FGDBWvRR8fdd zwuECDISvIEKy/iSBcR07g== 0000927016-99-003619.txt : 19991109 0000927016-99-003619.hdr.sgml : 19991109 ACCESSION NUMBER: 0000927016-99-003619 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990925 FILED AS OF DATE: 19991108 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: SEC FILE NUMBER: 000-21068 FILM NUMBER: 99743458 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 September 25, 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 October 23, 1999, 9,225,952 shares (does not include 30,600 shares held as treasury stock) of common stock, par value $0.01 per share, were outstanding. TOTAL PAGES 23 EXHIBIT INDEX AT PAGE 22 1 Sight Resource Corporation Index PART I. FINANCIAL INFORMATION Page ---- Item 1 Financial Statements Consolidated Balance Sheets as of September 25, 1999 and December 31, 1998 3 Consolidated Statements of Operations for the Three and Nine Months Ended September 25, 1999 and September 30, 1998 4 Consolidated Statements of Cash Flows for the Nine Months Ended September 25, 1999 and September 30, 1998 5 Notes to Consolidated Financial Statements 6 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 3 Quantitative and Qualitative Disclosures About Market Risk 21 PART II. OTHER INFORMATION Item 2 Changes in Securities and Use of Proceeds 22 Item 6 Exhibits and Reports on Form 8-K 22 Signatures 23 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements SIGHT RESOURCE CORPORATION Consolidated Balance Sheets (In thousands, except share and per share data)
September 25 December 31, 1999 1998 -------------- -------------- (unaudited) Assets Current assets: Cash and cash equivalents $ 774 $ 1,860 Accounts receivable, net of allowance of $1,750 and $748, respectively 3,995 2,658 Inventories 6,815 4,584 Prepaid expenses and other current assets 559 377 -------------- -------------- Total current assets 12,143 9,479 -------------- -------------- Property and equipment 14,337 13,217 Less accumulated depreciation (8,541) (7,077) -------------- -------------- Net property and equipment 5,796 6,140 -------------- -------------- Other assets: Intangible assets, net 23,741 15,337 Other assets 918 1,189 -------------- -------------- Total other assets 24,659 16,526 -------------- -------------- $ 42,598 $ 32,145 ============== ============== Liabilities & Stockholders' Equity Current liabilities: Revolver notes payable $ 986 $ --- Current portion of long term debt 1,585 146 Current portion of capital leases 37 34 Accounts payable 3,426 2,870 Accrued expenses 2,520 3,253 -------------- -------------- Total current liabilities 8,554 6,303 -------------- -------------- Non-current liabilities: Long term debt, less current maturities 7,151 184 Capital leases 9 13 Other liabilities 34 151 -------------- -------------- Total non-current liabilities 7,194 348 -------------- -------------- 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 9,225,952 at September 25, 1999 and 8,936,330 at December 31, 1998 93 90 Additional paid-in capital 38,153 36,847 Common stock issuable, 71,181 shares at December 31, 1998 --- 432 Treasury stock at cost, 30,600 shares at September 25, 1999 and December 31, 1998 (137) (137) Unearned compensation (7) (22) Accumulated deficit (17,787) (18,251) -------------- -------------- Total stockholders' equity 20,315 18,959 -------------- -------------- $ 42,598 $ 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 Nine Months Ended -------------------------------------- ------------------------------------- September 25, September 30, September 25, September 30, 1999 1998 1999 1998 -------------------------------------- ------------------------------------- (Unaudited) (Unaudited) Net revenue $ 18,160 $ 14,299 $ 51,506 $ 42,377 Cost of revenue 5,871 4,877 16,711 14,700 ---------------- ---------------- ----------------- --------------- Gross profit 12,289 9,422 34,795 27,677 Selling, general and administrative expenses 12,136 9,265 33,630 27,471 ---------------- ---------------- ----------------- --------------- Income from operations 153 157 1,165 206 ---------------- ---------------- ----------------- --------------- Other income (expense) Interest income 16 34 77 162 Interest expense (203) (45) (447) (141) Gain on sale of assets 58 --- 58 69 Write off of deferred financing costs --- --- (323) --- ---------------- ---------------- ----------------- --------------- Total other income (expense) (129) (11) (635) 90 ---------------- ---------------- ----------------- --------------- Income before income tax expense 24 146 530 296 Income tax expense 21 3 66 63 ---------------- ---------------- ----------------- --------------- Net income $ 3 $ 143 $ 464 $ 233 ================ ================ ================= =============== Net earnings per common share: Basic $ 0.00 $ 0.02 $ 0.05 $ 0.03 ================ ================ ================= =============== Diluted $ 0.00 $ 0.01 $ 0.04 $ 0.02 ================ ================ ================= =============== Weighted average number of common shares outstanding used to compute net earnings per common share: Basic 9,224,008 8,890,000 9,166,081 8,853,000 ================ ================ ================= =============== Diluted 10,799,716 10,380,000 10,703,908 10,352,000 ================ ================ ================= ===============
See accompanying notes to consolidated financial statements. 4 SIGHT RESOURCE CORPORATION Consolidated Statements of Cash Flows (In thousands)
Nine Months Ended September 25, September 30, 1999 1998 -------------------------------------- (unaudited) Operating activities: Net income $ 464 $ 233 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 2,688 1,952 Amortization and write off of deferred 347 -- financing costs Amortization of unearned compensation 15 -- Adjustments to goodwill 111 -- Gain on sale of assets (58) (69) Changes in operating assets and liabilities: Accounts receivable 25 (1,408) Inventories (1,103) 270 Prepaid expenses and other current assets (149) 176 Accounts payable and accrued expenses (2,866) (1,350) --------------- -------------- Net cash used in operating activities (526) (196) --------------- -------------- Investing activities: Purchases of property and equipment (855) (1,183) Net payments for acquisitions (6,419) (2,351) Proceeds from sale of assets --- 112 Other assets 370 48 --------------- -------------- Net cash used in investing activities (6,904) (3,374) --------------- -------------- Financing activities: Principal payments (2,770) (1,058) Proceeds from notes 9,234 --- Proceeds from issuance of stock 2 127 Other liabilities (122) (7) --------------- -------------- Net cash provided by (used in) financing activities 6,344 (936) --------------- -------------- Net decrease in cash and cash equivalents (1,086) (4,506) Cash and cash equivalents, beginning of period 1,860 6,076 --------------- -------------- Cash and cash equivalents, end of period $ 774 $ 1,570 =============== ============== Supplemental cash flow information: Interest paid $ 351 $ 162 Income taxes paid 102 42
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. The Company preliminarily recorded $450 in acquisition reserves, of which the Company provided a reserve of $400 for the potential closing of two stores and one laboratory, and a reserve of $50 for costs to sever administrative, store and laboratory personnel. During the second quarter, the Company further revised its plan and determined that no stores or laboratories would be closed. The $440 revision adjusted the acquisition reserves allocated to goodwill. At September 25, 1999, no amounts have been charged against the acquisition reserves. Thus, the preliminary acquisition reserves at September 25, 1999 are $10 relating to a reserve for potential costs to sever administrative personnel. The Company will finalize its plan by December 26, 1999. Effective April 1, 1999, the Company acquired one hundred percent of the outstanding shares of stock of Kent Optical, Inc. and its associated companies (collectively "Kent"). The purchase price paid in connection with this acquisition was $5,209 in cash, $1,000 in notes payable over three years and 160,000 shares of common stock. Kent operated 28 eye care centers in Michigan. The acquisition was accounted for using the purchase method of accounting. In connection with the acquisition, the Company recorded purchase accounting adjustments to increase liabilities and establish reserves for the closing of facilities and related restructuring costs, including lease commitments and severance costs. Total preliminary acquisition reserves at September 25, 1999 are $115, of which the Company provided a reserve of $85 for the potential costs to sever administrative or store personnel and $30 for the potential closing of two stores. At September 25, 1999, no amounts have been charged against the acquisition reserves. The Company intends to finalize its plan by March 25, 2000. 6 Sight Resource Corporation Notes to Consolidated Financial Statements (In thousands, except share and per share data) Any further revisions to the plan will adjust the acquisition reserves allocated to 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 September 25, 1999 and the results of its operations and cash flows for the three and nine months ended September 25, 1999 and September 30, 1998. 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. Fiscal years 1999 and 1998 are 52 weeks. Prior to 1999, 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 has and will continue to report the fiscal period end date, not the month end date. 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 operations 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. Under the Pledge Agreement, the purchase price for a sale of the stock of each PC is equal to the aggregate book value of such 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. 7 Sight Resource Corporation Notes to Consolidated Financial Statements (In thousands, except share and per share data) (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 payers. Revenue is reported net of contractual allowances. Under revenue sharing arrangements for refractive surgery where the Company is not responsible for patient billing, the Company receives a specified payment from the hospital or center for each refractive surgical procedure performed. Accordingly, the Company recognizes revenue on a per procedure basis at the time procedures are performed. Under revenue sharing arrangements for refractive surgery where the Company is responsible for the collection from the patient and payment to the ophthalmologist and other operating costs, the total patient charge is recorded as revenue with the corresponding expenses recorded in cost of revenue. (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. 8 Sight Resource Corporation Notes to Consolidated Financial Statements (In thousands, except share and per share data) (i) Intangible Assets Intangible assets resulting from the acquisition of businesses consist of patient lists, trademarks, non-compete agreements, work force in place 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. (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. 9 Sight Resource Corporation Notes to Consolidated Financial Statements (In thousands, except share and per share data) The following table provides a reconciliation of the numerators and denominators of the computations of Basic EPS and Diluted EPS for the three months and nine months ended September 25, 1999 and September 30, 1998:
Three Months Ended Nine Months Ended September 25, September 30, September 25, September 30, 1999 1998 1999 1998 ---- ---- ---- ---- Basic Income Per Share Net income $ 3 $ 143 $ 464 $ 233 ------------ ------------- -------------- ------------- Net income available to common shareholders $ 3 $ 143 $ 464 $ 233 ============ ============= ============== ============= Weighted average common shares outstanding 9,224,000 8,890,000 9,166,000 8,853,000 Net income per share $ 0.00 $ 0.02 $ 0.05 $ 0.03 ============ ============= ============== ============= Diluted Income Per Share Net income $ 3 $ 143 $ 464 $ 233 ------------ ------------- -------------- ------------- Net income available to common shareholders $ 3 $ 143 $ 464 $ 233 ============ ============= ============== ============= Weighted average common shares outstanding 9,224,000 8,890,000 9,166,000 8,853,000 Convertible preferred stock 1,452,000 1,452,000 1,452,000 1,452,000 Options and warrants 124,000 38,000 88,000 47,000 ------------ ------------- -------------- ------------- Weighted average common shares outstanding and potential diluted shares 10,800,000 10,380,000 10,704,000 10,352,000 ============ ============= ============== ============= Net income per share $ 0.00 $ 0.01 $ 0.04 $ 0.02 ============ ============= ============== =============
10 Sight Resource Corporation Notes to Consolidated Financial Statements (In thousands, except share and per share data) (3) Debt
September 25, December 31, 1999 1998 ----------------- ---------------- Short-term borrowings consist of the following: Bank revolver loan payable, variable interest rate (7.31% at 9/25/99), interest due monthly $ 975 $ 0 Bank line of credit note payable, 8.75% interest rate, principal and interest due monthly until November, 1999 11 0 ----------------- ---------------- $ 986 $ 0 ================= ================ Long-term debt consists of the following: Bank term loan payable, variable interest rate (7.63% at 9/25/99), principal due monthly beginning October, 1999, and interest due monthly until April, 2006 $ 7,000 $ 0 Unsecured notes payable, 7.5% interest rate, principal due annually and interest due quarterly until April, 2002 1,000 0 Unsecured notes payable, 7.5% interest rate, principal due annually and interest due quarterly until January, 2002 300 0 Unsecured notes payable, with interest rates of between 8 and 9%, principal and interest due monthly until June, 2010 217 20 Unsecured note payable, 7% interest rate, principal and interest due quarterly until March 31, 2001 175 263 Unsecured note payable, 12% interest rate, principal and interest due monthly until January, 2001 44 67 ----------------- ---------------- 8,736 330 Less current maturities 1,585 146 ----------------- ---------------- Long term debt, less current maturities $ 7,151 $ 184 ================= ================
On April 22, 1999, as part of the acquisition of Kent, the Company issued three- year notes to the sellers in the aggregate amount of $1,000. The annual interest rate is 7.5%. Principal is due in three annual substantially equal installments beginning April, 2000 and continuing 11 Sight Resource Corporation Notes to Consolidated Financial Statements (In thousands, except share and per share data) until April, 2002. Interest is due quarterly in arrears beginning July, 1999 and continuing until April, 2002. On April 15, 1999, the Company entered into a Credit Agreement (the "1999 Agreement") with a bank pursuant to which the Company can borrow $10,000 on an acquisition line of credit, $7,000 on a term loan basis and $3,000 on a revolving line of credit basis, subject to certain performance criteria and an asset-related borrowing base for the revolver. The performance criteria include, among others, financial condition covenants such as net worth requirements, indebtedness to net 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/or for other general corporate purposes. As of September 25, 1999, $7,000 was borrowed on the term loan and $975 was borrowed on the revolving credit facility. 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. 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. In 1995 and 1996, as part of acquisitions made, one of the Company's subsidiaries issued a note bearing interest at 8% and two non-interest bearing notes to the sellers. For financial reporting purposes, interest of 9% has been imputed on the non-interest bearing notes. The interest bearing note with a value at September 25, 1999 of $43 will be due in August, 2006. The other non- interest bearing notes have principal and interest payments due monthly until June, 2010. One of the Company's subsidiaries has a bank line of credit secured by accounts receivable, inventory and equipment. As of September 25, 1999, $11 was borrowed under this facility. 12 Sight Resource Corporation Notes to Consolidated Financial Statements (In thousands, except share and per share data) No additional borrowings will be made on this credit facility. Principal payments of approximately $6 and interest at 8.75% annually are due monthly until November, 1999. (4) Segment Reporting The following tables present certain operating segment information. For the three months ended September 25, 1999 and September 30, 1998:
Eye Care Laser Vision Consolidated Centers Correction All Others Totals 1999 1998 1999 1998 1999 1998 1999 1998 -------- -------- -------- -------- -------- -------- -------- -------- Revenues: External Customers $ 17,619 $ 13,713 $ 541 $ 586 $ 0 $ 0 $ 18,160 $ 14,299 Interest: Interest income 0 0 0 0 16 34 16 34 Interest expense (9) (30) (2) 0 (192) (15) (203) (45) -------- -------- -------- -------- -------- -------- -------- -------- Net interest income/(expense) (9) (30) (2) 0 (173) 19 (187) (11) Depreciation and Amortization 865 669 29 36 39 12 933 717 Income/(loss) from operations 1,236 564 173 139 (1,256) (546) 153 157 Identifiable assets 31,703 30,495 437 793 10,458 2,605 42,598 33,893 Capital expenditures 404 433 0 109 50 38 454 580
For the nine months ended September 25, 1999 and September 30, 1998:
Eye Care Laser Vision Consolidated Centers Correction All Others Totals 1999 1998 1999 1998 1999 1998 1999 1998 -------- -------- -------- -------- -------- -------- -------- -------- Revenues: External Customers $ 49,646 $ 41,028 $ 1,860 $ 1,349 $ 0 $ 0 $ 51,506 $ 42,377 Interest: Interest income 0 0 0 0 77 162 77 162 Interest expense (41) (80) (5) 0 (401) (61) (447) (141) -------- -------- -------- -------- -------- -------- -------- -------- Net interest income/(expense) (41) (80) (5) 0 (324) 101 (370) 21 Depreciation and Amortization 2,480 1,846 97 75 111 31 2,688 1,952 Income/(loss) from operations 3,861 1,808 690 170 (3,386) (1,772) 1,165 206 Identifiable assets 31,703 30,495 437 793 10,458 2,605 42,598 33,893 Capital expenditures 743 907 0 238 112 38 855 1,183
13 Sight Resource Corporation Notes to Consolidated Financial Statements (In thousands, except share and per share data) 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. 14 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 September 25, 1999, the Company's operations consisted of 131 eye care centers, with four regional optical laboratories and distribution centers, making the Company one of the fifteen largest providers in the United States' primary eye care industry based upon sales. The Company's eye care centers operate primarily under the brand names Cambridge Eye Doctors, E.B. Brown Opticians, Eyeglass Emporium, 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. In addition, as of September 25, 1999 the Company operated one laser vision correction ("LVC") center. The Company operates four 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 and Nine Months Ended September 25, 1999 and September 30, 1998 Net Revenue. During the three months ended September 25, 1999, the Company generated net revenue of approximately $17.6 million and $0.5 million from the operation of its 131 eye care and two LVC centers, respectively, as compared to net revenue of approximately $13.7 million and $0.6 million from its 93 eye care and three LVC centers, respectively, for the three months ended September 30, 1998. 15 Net revenues for the first nine months of fiscal 1999 were $49.6 million and $1.9 million from the operations of its eye care centers and LVC centers, respectively, as compared to the net revenue of $41.0 million and $1.3 million from its eye care centers and LVC centers for the comparable period of fiscal 1998. The $3.9 million or 27.0% increase in total net revenue for the three months ended September 25, 1999 relates primarily to the additional 38 eye care centers acquired since January, 1999. The $9.1 million or 21.5% increase in total net revenue for the first nine months of fiscal 1999 relates primarily to the additional 38 eye care centers acquired since January 1999 and to the nine eye care centers acquired effective April 1, 1998. Cost of Revenue. Cost of revenue increased from approximately $4.6 million and $0.3 million from the operation of the 93 eye care and three LVC centers, respectively, for the three months ended September 30, 1998 to approximately $5.6 million and $0.3 million from the operation of the 131 eye care and two LVC centers, respectively, for the three months ended September 25, 1999. Total cost of revenue as a percentage of net revenue decreased from 34.1% for the three months ended September 30, 1998 to 32.3% for the three months ended September 25, 1999. Cost of revenue increased from $13.9 million and $0.8 million from operations of the eye care centers and LVC centers for the first nine months of 1998 to $15.7 million and $1.0 million for the first nine months of 1999. Cost of revenue as a percentage of net revenue decreased from 34.7% for the nine months ended September 30, 1998, to 32.4% for the nine months ended September 25, 1999. The improvement as a percentage of net revenue primarily 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 customers of the Company 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 increased to approximately $12.1 million and $33.6 million for the three months and nine months ended September 25, 1999 from approximately $9.3 million and $27.5 million for the three and nine months ended September 30, 1998. The increase primarily relates to payroll and facility costs incurred in operating additional eye care centers in the first three quarters of fiscal 1999 as compared to the same periods in fiscal 1998. Selling, general and administrative expense, as a percentage of net revenue, increased from 64.8% for the three months ended September 25, 1999, to 66.8% for the comparable period in 1998, and from 64.8% for the nine months ended September 25, 1999, to 65.3% for the comparable period in 1998. Other Income and Expense. Interest income decreased from $16,000 and $77,000 for the three and nine months ended September 25, 1999, respectively, to $34,000 and $162,000 for the three and nine months ended September 30, 1998, respectively. This decrease resulted from the investment of a lower average cash and cash equivalents balance during the first three quarters of 1999 as compared to the same period in 1998. Interest expense increased to $203,000 and $447,000 for the three and nine months ended September 25, 1999, respectively, from $45,000 and $141,000 for the three and nine months ended September 30, 1998, respectively. The increase is primarily associated with a higher average balance of debt outstanding during the first three quarters of 1999 as compared to the same periods in 1998. The sale of certain ophthalmic equipment during the nine months ended September 30, 1998 generated a gain of approximately $69,000. Disposals of 16 equipment during the three and nine months ended September 25, 1999, generated a gain of approximately $58,000. Income Taxes. The effective tax rate includes the utilization of net operating loss carry forwards and the amounts for state income taxes. The effective tax rate for the three quarters ended September 25, 1999 was lower than the effective rate for the same period in 1998 due to a lower effective state tax rate. Net Income. The Company realized net income of $3,000 or $0.00 per share on a basic and diluted basis for the three months ended September 25, 1999, as compared to net income of $143,000 or $0.02 per share on a basic basis and $0.01 per share on a diluted basis for the comparable period last year. The Company realized net income of $464,000 or $0.05 per share basic and $0.04 per share diluted for the nine months ended September, 1999, as compared to net income of $233,000 or $0.03 per share on a basic basis and $0.02 per share on a diluted basis for the comparable period last year. Liquidity and Capital Resources At September 25, 1999, the Company had approximately $0.8 million in cash and cash equivalents and working capital of approximately $3.6 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. As compared to December 31, 1998, current assets have increased by $2.7 million and current liabilities have increased by $2.3 million. The overall increase in working capital is primarily due to the net effect of the purchases of the nine Shawnee Optical eye care centers effective January 1, 1999, and the 28 Kent Optical eye care centers effective April 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 $2.3 million in cash, $0.4 million 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 $1.8 million in cash, $0.3 million 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 $5.2 million in cash, $1.0 million 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 operated 28 eye care centers in central and southwest Michigan. The acquisition was accounted for using the purchase method of accounting. 17 As of September 25, 1999, the Company had securities outstanding which provide it with potential sources of financing as outlined below:
Securities Securities Potential Outstanding Proceeds - ------------------------------------------------------------------------------------------ Class II Warrants 290,424 2,032,968 Bank Austria AG (f/k/a Creditanstalt) Warrants 150,000 694,000 Representative Warrants 170,000 1,400,000 ------------ $ 4,126,968 ============
As of September 25, 1999, the Company also has outstanding 350,124 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 such outstanding existing warrants and options. The holder of the Class I Warrants is obligated to exercise such Class I 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 the Class I Warrants cannot be estimated at this time. There can be no assurance that the Company will obtain any such potential 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 following paragraph, the Company has entered into a new credit facility and retired the 1997 Agreement. On April 15, 1999, the Company entered into a Credit Agreement (the "1999 Agreement") with a bank pursuant to which the Company can borrow $10.0 million on an acquisition line of credit, $7.0 million on a term loan basis and $3.0 million on a revolving line of credit basis, subject to certain performance criteria and 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/or for other general corporate purposes. As of September 25, 1999, $7.0 million was borrowed on the term loan and $0.975 million was borrowed on the revolving credit facility. 18 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. 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. In June 1999, the Financial Accounting Standards Board issued SFAS No. 137 "Accounting for Derivative Instruments and Hedging Activities", which amended the effective date of SFAS No. 133. SFAS No. 137 is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. 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 19 four phases in its Year 2000 compliance efforts: discovery, assessment, remediation and applicable testing and verification. The Company has 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 has completed the remediation phase of its critical internal systems and has substantially completed the applicable testing and verification phase, however no assurance can be given that any or all of the Company's systems are or will be Year 2000 compliant. The Company has drafted a 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. Contingency plan testing has been completed. Policy and procedure manuals will be distributed during the fourth quarter. 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 has converted 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, except for the nine recently acquired Shawnee and 28 recently acquired Kent locations. The Company expects to convert the Shawnee and Kent locations to a point-of-sale system during 2000, however, because Shawnee's and Kent's order-entry system is currently manual, the Year 2000 issue will not impact operations at these locations. 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 files electronically with one of its largest third party providers. The Company manually files paper claims with the other organizations. Where possible, the Company intends to file electronically with these other companies. 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, 20 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. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company has no significant fixed rate debt obligations or related interest rate swap and cap agreements. 21 PART II. OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds (a) Not applicable. (b) Not applicable. (c) (1) Securities sold. On September 9, 1999 the Company issued a total of 5,000 shares (the "Option Shares") of its Common Stock, par value $0.01 per share. (2) Underwriters and other purchasers. No underwriters were involved in the transaction listed above. The Company issued the Option Shares pursuant to the exercise of a stock option held by a former employee. (3) Consideration. The Option Shares were issued at an exercise price of $0.43 per share for an aggregate exercise price of $2,150. (4) Exemption from registration claimed. The Option Shares were issued in reliance upon Section 4(2) of the Securities Act of 1933, as amended, because the above transaction did not involve any public offering by the Company. (5) Terms of conversion or exercise. Not applicable. Use of proceeds. Not applicable. (6) Use of proceeds. Not applicable. (d) Not applicable. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit No. Title --- ----- 27 Financial Data Schedule (b) Reports on Form 8-K. An amendment on Form 8-K/A was filed on July 6, 1999 to amend the Current Report on Form 8-K, dated April 15, 1999, to provide the audited financial statements and pro forma financial information required in connection with the acquisition by the Company of Kent Optical, Inc. and its affiliated companies. A second amendment on Form 8-K/A was filed on August 27, 1999 to further amend the Current Report on Form 8-K, dated April 15, 1999, to revise the audited financial statements and pro forma financial information previously provided in connection with the acquisition by the Company of Kent Optical, Inc. and its affiliated companies. 22 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Sight Resource Corporation Date: November 8, 1999 By: /s/ William T. Sullivan ________________ __________________________ William T. Sullivan President and Chief Executive Officer (principal executive officer) Date: November 8, 1999 By: /s/ James W. Norton ________________ __________________________ James W. Norton Chief Financial Officer (principal financial officer) 23 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SIGHT RESOURCE CORPORATION'S BALANCE SHEET AND STATEMENT OF OPERATIONS AS OF AND FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 25, 1999 AS REPORTED ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 25, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS 9-MOS DEC-25-1999 DEC-25-1999 JUN-27-1999 JAN-01-1999 SEP-25-1999 SEP-25-1999 774 774 0 0 5,745 5,745 1,750 1,750 6,815 6,815 12,143 12,143 14,337 14,337 8,541 8,541 42,598 42,598 8,554 8,554 0 0 0 0 0 0 0 0 20,315 20,315 42,598 42,598 18,160 51,506 18,160 51,506 5,871 16,711 5,871 16,711 12,136 33,630 0 0 203 447 24 530 21 66 0 0 0 0 0 0 0 0 3 464 0.00 0.05 0.00 0.04
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