-----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, Vx5gH9hUQ1C6AqOLqfgXZ8LLLMQQuPOtxnLjFjZnkx4OdAPlhjSzwpNQgAi/PiZW +Xp05jroldbSuqPRKi08hw== 0000950152-02-006270.txt : 20020813 0000950152-02-006270.hdr.sgml : 20020813 20020813150523 ACCESSION NUMBER: 0000950152-02-006270 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20020629 FILED AS OF DATE: 20020813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIGHT RESOURCE CORP CENTRAL INDEX KEY: 0000895651 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HEALTH SERVICES [8000] IRS NUMBER: 043181524 STATE OF INCORPORATION: DE FISCAL YEAR END: 1225 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-21068 FILM NUMBER: 02729396 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 l95844ae10vq.txt SIGHT RESOURCES CORPORATION > FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 for Quarterly Period Ended June 29, 2002 Commission File Number 0-21068 ----------------------------------------------------------------------- Sight Resource Corporation (Exact name of registrant as specified in its charter) Delaware 04-3181524 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 6725 Miami Avenue, Suite 102, Cincinnati, Oh 45243 -------------------------------------------------- (Address of principal executive offices) (Zip Code) (513) 527-9700 -------------- (Registrant's telephone number, including area code) N/A --- (Former name, former address and former fiscal year, if changed since the last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO______ APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: On August 11, 2002, 30,667,709 shares (does not include 30,600 shares held as treasury stock) of common stock, par value $0.01 per share, were outstanding. SIGHT RESOURCE CORPORATION INDEX PART I. FINANCIAL INFORMATION PAGE --------------------- ---- Item 1. Financial Statements Consolidated Balance Sheets as of June 29, 2002 and December 29, 2001 1 Consolidated Statements of Operations for the Three And Six Months Ended June 29, 2002 and June 30, 2001 2 Consolidated Statements of Cash Flows for the Six Months Ended June 29, 2002 and June 30, 2001 3 Notes to Consolidated Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Item 3. Quantitative and Qualitative Disclosures about Market Risk 17 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 17 Item 5. Other Information 17 Item 6. Exhibits and Reports on Form 8-K 17 Signatures 18 PART I. FINANCIAL INFORMATION Item 1. Financial Statements SIGHT RESOURCE CORPORATION Consolidated Balance Sheets (In thousands, except share and per share data)
As of As of June 29, 2002 December 29, 2001 ------------- ----------------- Assets (unaudited) Current assets: Cash and cash equivalents $ 851 $ 1,356 Accounts receivable, net of allowance of $1,855 and $1,915, respectively 2,548 2,613 Inventories 5,416 4,666 Prepaid expenses and other current assets 423 395 -------- -------- Total current assets 9,238 9,030 -------- -------- Property and equipment, net 2,405 2,729 Other assets: Intangible assets, net 19,439 19,770 Web site development 2,288 2,288 Other assets 120 127 -------- -------- Total assets $ 33,490 $ 33,944 ======== ======== Liabilities and Stockholders' Equity Current liabilities: Revolver notes payable $ 2,500 $ 2,500 Current portion of long term debt 5,328 5,979 Current portion of capital leases 4 10 Accounts payable 6,060 5,789 Accrued expenses 1,899 1,813 Dividends payable 254 -- -------- -------- Total current liabilities 16,045 16,091 -------- -------- Non-current liabilities: Long term debt, less current maturities 926 928 Capital leases 17 17 -------- -------- Total non-current liabilities 943 945 -------- -------- Series B redeemable convertible preferred stock 1,452,119 shares issued and outstanding 6,535 6,535 Stockholders' equity: Preferred Stock, $.01 par value. Authorized 5,000,000 shares; no shares of Series A issued and outstanding -- -- Common Stock, $.01 par value. Authorized 70,000,000 shares; 30,698,309 at June 29, 2002 and 29,597,703 at December 29, 2001 shares issued and outstanding 307 296 Additional paid-in capital 41,546 41,810 Treasury stock at cost, 30,600 shares at June 29, 2002 and December 29, 2001 (137) (137) Accumulated deficit (31,749) (31,596) -------- -------- Total stockholders' equity 9,967 10,373 -------- -------- $ 33,490 $ 33,944 ======== ========
See accompanying notes to consolidated financial statements. 1 SIGHT RESOURCE CORPORATION Consolidated Statements of Operations (In thousands, except share and per share data)
THREE MONTHS ENDED SIX MONTHS ENDED ------------------ ---------------- JUNE 29, 2002 JUNE 30, 2001 JUNE 29, 2002 JUNE 30, 2001 ------------ ------------ ------------ ------------ (unaudited) (unaudited) Net revenue $ 14,080 $ 14,505 $ 29,356 $ 30,564 Cost of revenue 4,113 4,822 8,480 9,740 ------------ ------------ ------------ ------------ Gross profit 9,967 9,683 20,876 20,824 Selling, general and administrative expenses 10,368 11,421 20,658 22,610 ------------ ------------ ------------ ------------ Income (loss) from operations (401) (1,738) 218 (1,786) Interest expense, net (169) (193) (358) (429) ------------ ------------ ------------ ------------ Loss before taxes (570) (1,931) (140) (2,215) Income tax expense 9 24 13 45 ------------ ------------ ------------ ------------ Net Loss (579) (1,955) (153) (2,260) ------------ ------------ ------------ ------------ Dividends on redeemable convertible preferred stock 127 129 254 257 ------------ ------------ ------------ ------------ Net Loss attributable to common stockholders $ (706) $ (2,084) $ (407) $ (2,517) ------------ ------------ ------------ ------------ Basic and diluted Loss per common share $ (0.02) $ (0.21) $ (0.01) $ (0.26) Weighted average number of common shares outstanding - Basic and Diluted 30,698,000 9,991,000 30,329,000 9,625,000 ------------ ------------ ------------ ------------
See accompanying notes to consolidated financial statements. 2 SIGHT RESOURCE CORPORATION Consolidated Statements of Cash Flows (In thousands)
SIX MONTHS ENDED ---------------- JUNE 29, 2002 JUNE 30, 2001 ------------- ------------- (unaudited) Operating activities: Net loss $ (153) $(2,260) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 929 1,820 Amortization and write-off of deferred financing costs -- 100 Loss on disposal of assets -- 22 Changes in operating assets and liabilities: Accounts receivable 65 69 Inventories (750) 561 Prepaid expenses and other current assets (28) (202) Accounts payable and accrued expenses 352 (269) ------- ------- Net cash provided by (used in) operating activities 415 (159) ------- ------- Investing activities: Purchases of property and equipment (274) (240) Proceeds from sale of assets -- -- Other assets (liabilities) 7 (5) ------- ------- Net cash used in investing activities (267) (245) ------- ------- Financing activities: Principal payments (653) (17) Proceeds from notes -- 76 Proceeds from issuance of stock -- 14 ------- ------- Net cash provided by (used in) financing activities (653) 73 ------- ------- Net decrease in cash and cash equivalents (505) (331) Cash and cash equivalents, beginning of period 1,356 532 ------- ------- Cash and cash equivalents, end of period $ 851 $ 201 ======= ======= Supplementary cash flow information: Interest paid $ 349 $ 441 Income taxes paid 22 55 See accompanying notes to consolidated financial statements
3 SIGHT RESOURCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) THE COMPANY (a) Nature of Business Sight Resource Corporation (the "Company") manufactures, distributes and sells eyewear and related products and services. (b) Eyeshop Merger In July 2001, the Company merged with eyeshop.com, inc. ("Eyeshop"), an early-stage optical development company established by E. Dean Butler in late 1999. Concurrent with the merger, there were two Common Stock Purchase Agreements whereby the former shareholders of Eyeshop purchased additional shares of the Company. It was anticipated that, following the merger, available cash resources of the combined companies would be devoted to continuation and improvement of the business of the Company, with a decision to be made at a future date as to when the Eyeshop development activities should be resumed. As of June 29, 2002, no decision had been made to resume Eyeshop development activities. Pursuant to a merger agreement, former Eyeshop stockholders are also entitled to receive additional shares of the Company's common stock if and when certain options, warrants and other rights to receive the Company's common stock that were held by the Company's security holders as of May 23, 2001 are exercised. The Company issued a total of 7,306,662 shares of common stock to former Eyeshop stockholders and assumed 1,757,096 stock options in connection with the merger. Collectively, the former stockholders of Eyeshop together with the common stock purchasers associated with Eyeshop held approximately 18,876,162 shares of the Company's common stock immediately after the merger and the common stock financings, or approximately 64% of the Company's issued and outstanding common stock and approximately 61% of the Company's issued and outstanding voting securities. The Company has completed its accounting for the merger. The treatment, for accounting purposes, was considered to be a purchase of Eyeshop's assets and assumption of Eyeshop's liabilities by the Company. The aggregate purchase price was $2,054,000 and the costs of the assets acquired and liabilities assumed have been allocated on the basis of the estimated fair value of the net assets required. There was no goodwill provided in the transaction. 4 SIGHT RESOURCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying consolidated financial statements have been prepared by the Company without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission the ("SEC"). In the opinion of the Company, these consolidated financial statements contain all adjustments (consisting of only normal, recurring adjustments) necessary to present fairly the Company's financial position as of June 29, 2002 and the results of its operations and cash flows for the periods presented. The Company's fiscal year ends on the last Saturday in December. Each quarter represents a 13-week period, except during a 53-week year in which case one quarter represents a 14-week period. The quarters and six months ended June 29, 2002 and June 30, 2001 were 13-week and 26-week periods, respectively. Fiscal years 2002 and 2001 are 52-week fiscal years. The accompanying consolidated financial statements and related notes should be read in conjunction with the audited consolidated financial statements which are contained in the Company's Annual Report on Form 10-K, as amended on Form 10-K/A, for the year ended December 29, 2001. (3) GOODWILL AND INTANGIBLE ASSETS The Company adopted the provisions of Statement of Financial Accounting Standards No. 141, Business Combinations ("Statement 141") effective July 1, 2001 and Statement No. 142, Goodwill and Other Intangible Assets ("Statement 142"), effective December 30, 2001. Statement 141 addresses financial accounting and reporting for business combinations requiring the use of the purchase method of accounting and reporting for goodwill and other intangible assets requiring that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. The Company had up to six months from the adoption of Statement 142 to determine the fair value of each reporting unit and compare it to the reporting unit's carrying amount. Statement 142 also requires intangible assets with estimated useful lives be amortized over their respective useful life to their estimated residual values, and reviewed for impairment. As of June 29, goodwill had a value of $14,305,000 and other intangibles with a definite useful life value of $5,134,000. Based on independent third party enterprise valuations of each of the Company's reporting units, the Company did not recognize any impairment of its goodwill and intangible assets upon adoption of Statement 142. The Company completed its initial review of Statement 142 during the second quarter 2002. In the three and six months ended June 30, 2001, $261,000 and $522,000, respectively, of goodwill amortization was included in selling, general and administrative expenses. The net loss for the three and six months ended June 30, 2001 without goodwill amortization would have been $1,694,000 and $1,738,000, respectively. No goodwill amortization was incurred during 2002. For the year ended December 29, 2001, goodwill amortization of $1,046,000 was included in selling, general and administrative expenses. The net loss for the year ended December 29, 2001 without goodwill amortization would have been $4,441,000. In accordance with Statement 142, the Company will test each reporting unit's goodwill for impairment as of end of the fiscal year. 5 SIGHT RESOURCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (4) EARNINGS PER SHARE The following table provides a reconciliation of the numerators and denominators of the basic and diluted loss per share computations for the three and six months ended June 29, 2002 and June 30, 2001:
THREE MONTHS ENDED SIX MONTHS ENDED ------------------ ---------------- JUNE 29, 2002 JUNE 30, 2001 JUNE 29, 2002 JUNE 30, 2001 ------------- ------------- ------------- ------------- (In thousands, except share and per share data) Basic and Diluted Loss Per Share Net loss $ (579) $ (1,955) $ (153) $ (2,262) Net loss available to common stockholders $ (706) $ (2,084) $ (407) $ (2,517) ============ ============ ============ ============ Weighted average common shares outstanding 30,698,000 9,991,000 30,329,000 9,625,000 Net loss per share $ (0.02) $ (0.21) $ (0.01) $ (0.26) ============ ============ ============ ============
Outstanding options, warrants and convertible preferred stock were not included in the computation of diluted loss per share for the three and six months ended June 29, 2002 and June 30, 2001, because they would have been antidilutive. The following table presents the number of shares of common stock underlying outstanding options, warrants and convertible preferred stock, which shares were not included in such computation of diluted loss per share.
THREE MONTHS ENDED SIX MONTHS ENDED ------------------ ---------------- JUNE 29, 2002 JUNE 30, 2001 JUNE 29, 2002 JUNE 30, 2001 ------------- ------------- ------------- ------------- Options 6,206,596 0 6,206,596 0 Warrants 1,992,568 5,463 1,992,568 5,108 Convertible preferred stock 3,243,900 1,452,119 3,243,900 1,452,119 ------------ ------------ ------------ ------------ Total 11,443,064 1,457,582 11,443,064 1,457,227 ============ ============ ============ ============
6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company manufactures, distributes and sells eyewear and related products and services. As of June 29, 2002, the Company's operations consisted of 116 eye care centers, and one optical laboratory and distribution center, and was one of the fifteen largest providers in the United States based upon annual sales. The Company's eye care centers operate primarily under the brand names Cambridge Eye Doctors, E.B. Brown Opticians, Eyeglass Emporium, Kent Optical, Shawnee Optical, Vision Plaza, and Vision World. The Company also provides, or where necessary to comply with applicable law, administers the business functions of optometrists, ophthalmologists and professional corporations that provide, vision related professional services. The Company operates one optical laboratory and distribution center. The regional optical laboratory provides complete services to the Company's eye care centers that do not have lab facilities, including polishing, cutting and edging, tempering, tinting and coating of ophthalmic lenses. The distribution center provides and maintains an inventory of all accessories and supplies necessary to operate an eye care center, as well as "ready made" eye care products, including contact lenses and related supplies. The inventory of eyeglass lenses, frames, contact lenses, accessories and supplies is acquired through a number of sources, domestic and foreign. Management believes that the optical laboratory and distribution center has the capacity to accommodate additional multi-site eye care centers. In early 2001, the Company operated two regional optical laboratories and three distribution centers. During 2001, one laboratory and two distribution centers were closed and their operations were consolidated into the remaining laboratory and distribution center. The laboratory and distribution centers were closed in an effort for the Company to realize greater operating efficiencies from lower inventories and lower payroll costs. The Company's results of operations and balance sheet include the accounts (including revenues, assets and liabilities) of the Company, its wholly owned subsidiaries, and five professional corporations ("PCs") of which the Company's subsidiaries bear financial and operational risks and rewards. The Company has no direct equity ownership in the PCs, but has rights and involvement that permit the Company to consolidate the PCs into the Company's financial statements. The Company, through its subsidiaries, provides, for a fee, certain administrative and other services to each of the PCs. The outstanding voting stock of each of the PCs is 100% owned by a licensed optometrist who generally has, in turn, executed an agreement in favor of a subsidiary of the Company that provides that if the employment of the optometrist-owner is terminated, then the optometrist-owner must sell all of the outstanding stock of the PC to another qualified person eligible to serve as a new optometrist-owner. The purchase price for the sale of the PC stock is either (i) at a nominal per share price or (ii) equal to the aggregate book value of the PC which will always be a nominal amount because each PC operates and is expected to continue to operate at an almost break-even level generating a nominal profit, if any at all. Because the assets and liabilities of the PCs are, for accounting purposes, consolidated with the assets and liabilities of the Company and its subsidiaries, any transaction by which operating assets were transferred by a Company subsidiary to a PC has been properly eliminated for accounting purposes. While the holding of assets by the PCs lessens the Company's control over those assets, the Company believes that the assets are adequately protected and maintained. 7 RESULTS OF OPERATIONS Three Months Ended June 29, 2002 and June 30, 2001 Net Revenue. During the three months ended June 29, 2002, the Company generated net revenue of $14,080,000, as compared to net revenue of $14,505,000 for the three months ended June 30, 2001. The decrease of $425,000, or 2.9%, in net revenue primarily relates to six less eye care centers operating during the three months ended June 29, 2002 as compared to the corresponding period in 2001. Cost of Revenue. Cost of revenue decreased from $4,822,000 for the operation of the Company's 122 eye care centers during the three months ended June 30, 2001 to $4,113,000 for the operation of the Company's 116 eye care centers during the three months ended June 29, 2002. Cost of revenue as a percentage of net revenue decreased from 33.2% for the three months ended June 30, 2001 to 29.2% for the three months ended June 29, 2002. The improvement as a percentage of net revenue primarily reflects the consolidation of optical laboratory operations, improved margins on frames and slightly higher eye exam revenue. Cost of revenue principally consisted of the cost of manufacturing, purchasing and distributing optical products to customers of the Company. Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased to $10,368,000 for the three months ended June 29, 2002 from $11,421,000 for the three months ended June 30, 2001. The decrease of $1,053,000 primarily relates to reduced staffing levels and lower amortization expenses of $261,000 resulting from the Company's adoption of Statement 142. Selling, general and administrative expenses, as a percentage of net revenue, decreased from 78.7% for the three months ended June 30, 2001 to 73.6% for the three months ended June 29, 2002. The Company adopted Statement 142 as of December 30, 2001 and had up to six months from the date of adoption to complete its determination of the fair value of each of the Company's reporting units. Based on independent third party enterprise valuations of each of the Company's reporting units, the Company did not recognize any impairment of its goodwill and intangible assets upon completion of such determinations. Further, under the new guidelines set forth in Statement 142, the Company ceased amortization of its goodwill, which reduced selling, general and administrative expenses for the three months ended June 29, 2002 by $261,000 compared to the three months ended June 30, 2001. Interest Expense, Net. Interest expense, net decreased to $169,000 for the three months ended June 29, 2002 from $193,000 for the three months ended June 30, 2001. The decrease of $24,000 is primarily associated with a lower average balance of debt outstanding during the three months ended June 29, 2002 as compared to the corresponding period in 2001. Income Tax Expense. The Company has a significant net operating loss carryforward and as such provides for income taxes only to the extent that it expects to pay cash taxes (primarily state taxes) for current income. Net Loss. The Company realized a net loss of $579,000 for the three months ended June 29, 2002 as compared to a net loss of $1,955,000 for the three months ended June 30, 2001. Dividends on Redeemable Convertible Preferred Stock. During the three months ended June 29, 2002 the Company accrued $127,000 for cash dividends payable to the redeemable convertible preferred stockholders. The dividends are accruing pursuant to an agreement dated May 21, 2001 and are scheduled to be paid at the earliest of the following events, as outlined in the letter with the redeemable convertible preferred stockholder: 8 (i) the merger, consolidation, reorganization, recapitalization, dissolution or liquidation of the Company where the stockholders of the Company immediately following the consummation of the merger no longer own more than 50% of the voting securities of the Company; (ii) the sale, lease, exchange or other transfer of all or substantially all of the assets of the Company; (iii) the consummation of an equity financing by the Company in which proceeds to the Company, net of transaction costs, are greater than or equal to $10,000,000; (iv) the end of the first twelve month period in which earnings before income taxes, depreciation and amortization are equal to or greater than $5,000,000; or (v) or the refinancing of the Company's outstanding indebtedness to Fleet Bank. The Company is presently unable to predict when the cash dividend will be paid. During 2001, the Company accrued and issued stock dividends. Net Loss Attributable to Common Stockholders. The Company realized a net loss attributable to common stockholders of $706,000, or $(0.02) per share, for the three month period ended June 29, 2002 as compared to $2,084,000, or $(0.21) per share, for the three month period ended June 30, 2001. The per share net loss for the three months ended June 29, 2002 and the per share loss for the three months ended June 30, 2001, were affected by an increase in the number of outstanding shares of common stock primarily due to the closing of the merger with Eyeshop and related stock purchase transactions that occurred between May 23, 2001 and July 20, 2001. RESULTS OF OPERATIONS Six Months Ended June 29, 2002 and June 30, 2001 Net Revenue. During the six months ended June 29, 2002, the Company generated net revenue of $29,356,000, as compared to net revenue of $30,564,000 for the six months ended June 30, 2001. The decrease of $1,208,000, or 4.0%, in net revenue primarily relates to six less eye care centers operating during the three months ended June 29, 2002 as compared to the corresponding period in 2001. Cost of Revenue. Cost of revenue decreased from $9,740,000 for the operation of the Company's 122 eye care centers during the six months ended June 30, 2001 to $8,480,000 for the operation of the Company's 116 eye care centers during the six months ended June 29, 2002. Cost of revenue as a percentage of net revenue decreased from 31.9% for the six months ended June 30, 2001 to 28.9% for the six months ended June 29, 2002. The improvement as a percentage of net revenue primarily reflects the consolidation of optical laboratory operations, improved margins on frames and slightly higher eye exam revenue. Cost of revenue principally consisted of the cost of manufacturing, purchasing and distributing optical products to customers of the Company. Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased to $20,658,000 for the six months ended June 29, 2002 from $22,610,000 for the six months ended June 30, 2001. The decrease of $1,952,000 primarily relates to reduced staffing levels and lower amortization expenses of $522,000 resulting from the Company's adoption of Statement 142. Selling, general and administrative expenses, as a percentage of net revenue, decreased from 74.0% for the six months ended June 30, 2001 to 70.4% for the six months ended June 29, 2002. The Company adopted Statement 142 as of December 30, 2001 and had up to six months from the date of adoption to complete its determination of the fair value of each of the Company's reporting units. Based on independent third party enterprise valuations of each of the Company's reporting units, the Company did not recognize any impairment of its goodwill and intangible assets upon completion of such determinations. Further, under the new guidelines set forth in Statement 142, the Company ceased amortization of its goodwill, which reduced selling, general and administrative expenses for the six months ended June 29, 2002 by $522,000 compared to the six months ended June 30, 2001. Interest Expense, Net. Interest expense, net decreased to $358,000 for the six months ended June 29, 2002 from $429,000 for the six months ended June 30, 2001. The decrease of $71,000 is primarily associated with a lower average balance of debt outstanding during the six months ended June 29, 2002 as compared to the corresponding period in 2001. Income Tax Expense. The Company has a significant net operating loss carryforward and as such provides for income taxes only to the extent that it expects to pay cash taxes (primarily state taxes) for current income. Net Loss. The Company realized a net loss of $153,000 for the six months ended June 29, 2002 as compared to a net loss of $2,260,000 for the six months ended June 30, 2001. Dividends on Redeemable Convertible Preferred Stock. During the six months ended June 29, 2002 the Company accrued $254,000 for cash dividends payable to the redeemable convertible preferred stockholders. The dividends are accruing pursuant to an agreement dated May 21, 2001 and are scheduled to be paid at the earliest of the following events, as outlined in the letter with the redeemable convertible preferred stockholder: (i) the merger, consolidation, reorganization, recapitalization, dissolution or liquidation of the Company where the stockholders of the Company immediately following the consummation of the merger no longer own more than 50% of the voting securities of the Company; (ii) the sale, lease, exchange or other transfer of all or substantially all of the assets of the Company; (iii) the consummation of an equity financing by the Company in which proceeds to the Company, net of transaction costs, are greater than or equal to $10,000,000; (iv) the end of the first twelve month period in which earnings before income taxes, depreciation and amortization are equal to or greater than $5,000,000; or (v) or the refinancing of the Company's outstanding indebtedness to Fleet Bank. The Company is presently unable to predict when the cash dividend will be paid. During 2001, the Company accrued and issued stock dividends. Net Loss Attributable to Common Stockholders. The Company realized a net loss attributable to common stockholders of $407,000, or $0.01 per share, for the six month period ended June 29, 2002 as compared to a net loss of $2,517,000, or $0.26 per share, for the six month period ended June 30, 2001. The per share net income for the six months ended June 29, 2002 and the per share loss for the six months ended June 30, 2001, were affected by an increase in the number of outstanding shares of common stock primarily due to the closing of the merger with Eyeshop and related stock purchase transactions that occurred between May 23, 2001 and July 20, 2001. LIQUIDITY AND CAPITAL RESOURCES At June 29, 2002, the Company had $851,000 in cash and cash equivalents and a working capital deficit of $6,807,000 in comparison to $1,356,000 in cash and cash equivalents and working capital deficit of approximately $7,061,000 as of December 29, 2001. The reduction in working capital deficit of $254,000 is primarily due to the increase of inventories and a decrease in outstanding indebtedness offset in part by an increase in accounts payable and a decrease in cash. The largest portion of the net working capital deficit at June 29, 2002 was debt of $7,570,000 that matures on December 31, 2002. The Company may need to raise additional funds during 2002 to replace maturing bank debt and may seek to raise those funds through additional financings, including public or private equity offerings. There can be no assurance that such funds will be available on terms acceptable to the Company, if at all. If adequate funds are not available, the Company may be required to limit its operations, which would have a material and adverse affect on the Company. In addition, in its report on the Company's consolidated financial statements as of and for the periods ended December 29, 2001, the Company's independent auditors have expressed substantial doubt about the Company's ability to continue as a going concern due to the Company's recurring losses and ability to pay its outstanding debts. On March 26, 2001, the Company entered into a Third Modification Agreement (as defined below) with Fleet Bank that, among other things, extended the maturity date of the loans to December 31, 2002. The Third Modification Agreement required that the Company obtain equity financing in the amount of $1,000,000 by May 2001. On May 14, 2001, the Company entered into the Amended and Restated Third Modification Agreement which extended the date for an equity infusion from May 2001 to July 2001. In July 2001, the Company obtained equity proceeds of $1,750,000. Effective April 1, 1999, the Company acquired all of the outstanding shares of capital stock of Kent Optical Company and its associated companies (collectively, "Kent"). The purchase price paid in connection with this acquisition was $5,209,000 in cash, $1,000,000 in notes payable over three years and 160,000 shares of common stock. In addition, the Company offered to issue additional consideration to the Kent stockholders if the market price of the Company's common stock did not equal or exceed $5.00 per share at any time during the period from April 23, 2000 to April 23, 2001, which the market price of the common stock did not achieve. The amount of additional consideration due to the Kent stockholders for each 9 share of common stock issued in the acquisition and held by them on April 23, 2001 is equal to the difference between $5.00 and the greater of (a) the market price of the common stock on April 23, 2001 or (b) $2.73. At the Company's option, the additional consideration may be paid to the Kent stockholders in cash or in additional shares of the Company's common stock valued at its market price on the date that the additional consideration becomes payable to the Kent stockholders. At the time of acquisition, the Company included the value of this additional consideration in its determination of the purchase price. As a result of the Company's obligation to issue additional consideration to the former Kent stockholders, on February 7, 2002, the Company entered into a settlement agreement in which it agreed to pay such additional consideration by issuing 1,100,636 shares of its common stock to the former Kent stockholders. The shares were issued on February 27, 2002. Additionally, the payment terms and interest rates on the outstanding acquisition notes of $667,000 and outstanding obligations from the acquisition contract of $100,000 were revised, as disclosed in the Company's annual report. As of June 29, 2002, the Company had warrants outstanding which provide it with potential sources of financing as outlined below. However, because the current market value of the Company's common stock is significantly less than the exercise prices for most of the warrants with the greatest potential for proceeds, it is unlikely that any significant proceeds will be realized by the Company.
Exercise Potential Price Expiration Securities Number Proceeds Per Share Date ---------- ------ -------- --------- ---- Carlyle Warrants............................................ 1,000,000 $ 200,000 $0.20 January 2009 Class II Warrants........................................... 679,684 2,100,224 3.09 November 2002 Bank Austria AG, f/k/a Creditanstalt, Warrants.............. 150,000 693,750 4.63 December 2003 Fleet Warrants.............................................. 50,000 25,500 0.51 August 2010 Fleet Warrants.............................................. 50,000 7,810 0.16 December 2010 --------- ---------- 1,929,684 $3,027,284 ========= ==========
The Company also has outstanding 62,884 Class I Warrants. The Class I Warrants entitle the holder to purchase an amount of shares of the Company's common stock equal to an aggregate of up to 19.9% of the shares of common stock purchasable under the Company's warrants and options outstanding as of October 9, 1997, which have not subsequently terminated or expired, on the same terms and conditions of existing warrant and option holders. The purchaser is obligated to exercise these warrants at the same time the options and warrants of existing holders are exercised, subject to certain limitations. The amount of proceeds from the exercise of these Class I Warrants cannot be estimated at this time. However, for the same reasons stated above, it is unlikely that any proceeds would be realized by the Company. On April 15, 1999, the Company entered into a credit agreement (the "1999 Agreement") with Fleet National Bank ("Fleet") pursuant to which the Company could borrow $10,000,000 on an acquisition line of credit, of which $7,000,000 is on a term loan basis and $3,000,000 is on a revolving line of credit basis, subject to certain performance criteria and an asset-related borrowing base for the revolver. The performance criteria include, among others, financial condition covenants such as net worth requirements, indebtedness to net worth ratios, debt service coverage ratios, funded debt coverage ratios, and pretax profit, net profit and EBITDA requirements. At December 25, 1999, the Company was not in compliance with the following financial covenants of the 1999 Agreement: minimum net worth, minimum debt service coverage, maximum funded debt service coverage and minimum net profit. However, on March 31, 2000, the Company and Fleet entered into a modification agreement (the "Original Modification Agreement") that amended the 1999 Agreement in order to, among other things, waive the Company's default, adjust certain covenants to which the Company is subject and terminate the acquisition line of credit. In addition, the Original Modification Agreement limited the revolving line note to $2,500,000 and the term loan to $6,750,000 and established the maturity date for each of these credit lines as March 31, 2001. As part of the Original Modification Agreement, the Company issued to Fleet warrants to purchase 50,000 shares of the Company's common stock at an exercise price of $0.51 per share, which was equal to the average closing price of the common stock for the last five trading days for the month of August 2000, and warrants to purchase 50,000 shares of the Company's common stock at an exercise price of $0.156 per share, which was equal to the average closing price of the Company's common stock for the last five trading days for the month of December 2000. In August 2000, as a result of a bank merger, Sovereign Bank of New England ("Sovereign") became the successor party to Fleet in the 1999 Agreement and the Original Modification Agreement. On November 30, 2000, the Company and Sovereign entered into a second modification agreement (the "Second Modification Agreement") that amended the terms of the Original Modification Agreement in order to, among other things, defer certain payments required under the term note and amend certain terms and conditions of the 1999 Agreement. At December 30, 2000, the Company was in default for non-compliance with certain negative covenants contained in the Second Modification Agreement relating to minimum net worth, minimum debt service coverage, maximum funded debt service coverage and minimum net profit. On March 26, 2001, the Company and Sovereign entered into the Third Modification Agreement (the "Third Modification Agreement") that amended the terms of the Original Modification Agreement and the Second Modification Agreement in order to, among other things, waive the Company's default, adjust or delete certain covenants to which the Company was subject, change the repayment terms and extend the maturity date of the loans to December 31, 2002. In addition, the Third Modification Agreement required that the Company close an equity financing of at least $1,000,000 with third party investors on or before May 31, 2001. The Third Modification Agreement established the following annual interest rates for both the revolving line and term loans: (i) from February 1, 2001 through September 30, 2001 - six (6%) percent, (ii) from October 1, 2001 through December 31, 2001 - seven (7%) percent, (iii) from January 1, 2002 through December 31, 2002 - prime rate subject to a minimum rate of eight (8%) percent and a maximum rate of eleven (11%) percent. The scheduled monthly 10 principal payments did not begin until July 1, 2001 and were set as $30,000 from July 1, 2001 through December 31, 2001, and $100,000 from January 1, 2002 through December 31, 2002. On May 14, 2001, the Company entered into the Amended and Restated Third Modification Agreement which restated the terms described above and extended the date for which the Company was required to close an equity financing to July 2001. In August 2001, Sovereign sold the loan back to Fleet. As of June 29, 2002, the Company's outstanding indebtedness under the 1999 Agreement was $2,500,000 under the revolving line of credit and $5,070,000 under the term loan. The Company was in compliance with the covenants contained in the Amended and Restated Third Modification Agreement for the six months ended June 29, 2002. The Company has obtained waivers from the bank for all breaches of loan covenants to date, but the Company may not receive waivers for any future breaches that may occur. Any breach that is not waived may result in the bank declaring the breach to be a default under the 1999 Agreement, which would require immediate repayment of all outstanding principal and accrued interest at a time when the Company may not be able to repay the bank. On July 20, 2001, pursuant to an Agreement and Plan of Merger (the "Merger Agreement") dated as of May 23, 2001 by and among the Company, Eyeshop Acquisition Corporation, a Delaware corporation and wholly-owned subsidiary of the Company ("EAC"), and eyeshop.com, inc. ("Eyeshop"), EAC merged with and into Eyeshop (the "Merger") and Eyeshop became a wholly-owned subsidiary of the Company. Pursuant to the Merger Agreement, former Eyeshop stockholders are also entitled to receive additional shares of the Company's common stock if and when the options, warrants and other rights to receive the Company's common stock that were held by the Company's security holders as of May 23, 2001 are exercised. The Company issued a total of 7,306,662 shares of Common Stock to former Eyeshop stockholders in connection with the Merger. Concurrently with the Eyeshop merger, the Company assumed outstanding options under the Eyeshop stock option plan to purchase up to an aggregate of 1,757,096 shares of the Company's common stock. RECENT ACCOUNTING PRONOUNCEMENTS The Company adopted the provisions of Statement 141, effective July 1, 2001 and Statement 142, effective December 30, 2001. Statement 141 addresses financial accounting and reporting for business combinations requiring the use of the purchase method of accounting and reporting for goodwill and other intangible assets requiring that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually in accordance with the provisions of Statement 142. Under Statement 142, the Company was required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company was required to test the intangible asset for impairment in accordance with the provisions of Statement 142 within the first interim period. Any impairment loss would be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period. 11 In connection with the transitional goodwill impairment evaluation, Statement 142 requires the Company to perform an assessment of whether there is an indication that goodwill (and equity-method goodwill), which totaled $14,305,000 million at December 30, 2001, is impaired as of December 30, 2001, the date of adoption. To accomplish this, the Company has identified its reporting units and determined the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. The Company had up to six months from the date of adoption to determine the fair value of each reporting unit and compare it to the reporting unit's carrying amount. To the extent a reporting unit's carrying amount exceeds its fair value, an indication exists that the reporting unit's goodwill may be impaired and the Company must perform the second step of the transitional impairment test. In the second step, the Company must compare the implied fair value of the reporting unit's goodwill, determined by allocating the reporting unit's fair value to all of its assets (recognized and unrecognized) and liabilities in a manner similar to a purchase price allocation in accordance with Statement 141, to its carrying amount, both of which would be measured as of the date of adoption, which is December 30, 2001 for the Company. This second step is required to be completed as soon as possible, but no later than the end of the year of adoption. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in the Company's statement of operations. Based on independent third party enterprise valuations of each of the Company's operating units, the Company did not recognize any impairment of its goodwill and intangible assets upon adoption of Statement 142. During the second quarter 2002, the Company finalized the enterprise evaluations. Further, under the Statement 142's new guidelines, the Company ceased amortization of its goodwill, which favorably impacts the three and six months ended June 29, 2002 by $261,000 and $522,000, respectively, compared to the prior periods. Effective December 30, 2001, the Company adopted Statement 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". Statement 144 retained many of the fundamental provisions of Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", but resolved certain implementation issues associated with that Statement. Statement 144 also requires the results of operations of a component entity that is classified as held for sale or has been disposed of to be reported as discontinued operations in the Condensed Consolidated Statements of Operations if certain conditions are met. These conditions include elimination of the operations and cash flows of the component entity from the ongoing operations of the Company, and no significant continuing involvement by the Company in the operations of the component entity after the disposal transaction. The adoption of Statement 144 did not have a material impact on the Company's consolidated results of operations. In August 2001, the Financial Accounting Standards Board ("FASB") issued Statement No. 143, "Accounting for Asset Retirement Obligations", which will be effective for the Company beginning December 29, 2002. Statement 143 addresses the financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. In April 2002, the FASB issued Statement 145, "Rescission of FASB Statements No. 4, 44, 64, Amendment of FASB Statement 13, and Technical Corrections", which will be effective for the Company beginning January 1, 2003. Statement 145 rescinds Statement 4, 44, 64 and amends Statement No. 13, "Accounting for Leases", to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. The Company has assessed the impact of Statements 143 and 145, and estimates that the impact of these standards will not be material. MANAGEMENT'S DISCUSSION OF CRITICAL ACCOUNTING POLICIES Revenue Recognition and Allowance for Bad Debts The Company recognizes revenue from the sale of eyewear at the time an order is complete and revenue from eyecare services when the service is performed. The Company has fee for service arrangements with most of its third party payers. The Company recognizes revenue with third party payers net of contractual allowances. The level of management judgment used to determine revenue is small. Because of various circumstances, such as changes in third party plan contractual allowances, changes in patient co-pays, and goods or services denied by third party payers, the Company reviews the agings of receivables from third party payers and patients on at least a monthly basis. Sometimes claims have incomplete or inaccurate information, and the Company re-submits those claims to the third party payer. If amounts are denied by the third party payer and the Company has recourse to the patient, the Company pursues payment from the patient. Based on the Company's history of collectibility of older third party payer and patient receivables, the Company provides a reserve for uncollectibility. 12 At June 29, 2002 and December 29, 2001, the Company had reserved for 42% of the gross amount of the outstanding third party payer and patient receivables. If actual collectibility of these receivables is significantly different from management's estimate, it could have a material (favorable or unfavorable) result on the operating results and liquidity of the Company. Impairment of Long Lived Assets The Company records impairment losses on long-lived assets when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the book value of those items. The Company's cash flow estimates are based on historical results adjusted to reflect the Company's best estimate of future market and operating conditions. In performing this analysis, the Company considers such factors as current results, trends and future prospects, in addition to other economic factors. Based on those analyses during the years 1999 through 2001, the Company did not record any charges for the impairment of long-lived assets. At June 29, 2002, the Company had long-lived assets, including goodwill and other intangibles of $19,439,000, property and equipment of $2,405,000, and web site development costs of $2,288,000. Conditions that could cause future impairment are deterioration of on-going or forecasted operating results resulting from increased competition, a recession in the United States or lack of liquidity causing the Company to limit its operations. If one or more of these conditions occur, the future analyses may indicate that certain long-lived assets are impaired, at which time the Company would recognize an impairment charge. That impairment charge may be material and have a significant impact on the Company's results of operations. Further, the Company's software development relates to software acquired in the Eyeshop merger. It was anticipated that, following the merger, available cash resources of the combined companies would be devoted to continuation and improvement of the business of the Company, with a decision to be made at a future date as to when the Eyeshop development activities should be resumed. As of June 29, 2002, no decision had been made to the timing of resuming Eyeshop web site development activities. If the Company were to make a future decision to not resume development of this web site, then it is possible that the Company may have to recognize an impairment charge up to the entire amount of $2,288,000 and that charge may have a material impact on the Company's results of operations. Income Taxes The Company has a history of unprofitable operations and these losses have generated a sizeable federal tax net operating loss, or NOL, carryforward of approximately $28,074,000 million as of December 29, 2001. Generally accepted accounting principles require that the Company records a valuation allowance against the deferred tax asset associated with this NOL if it is "more likely than not" that the Company will not be able to utilize it to offset future taxes. Due to the size of the NOL carryforward in relation to the Company's history of unprofitable operations, the Company has not recognized any of this net deferred tax asset. The Company currently provides for income taxes only to the extent that it expects to pay cash taxes (primarily state taxes) for current income. It is possible, however, that the Company could be profitable in the future at levels which cause management to conclude that it is more likely than not that the Company will realize all or a portion of the NOL carryforward. Upon reaching such a conclusion, the Company would immediately record the estimated net realizable value of the deferred tax asset at that time and would then provide for income taxes at a rate equal to the Company's combined federal and state effective rates, which would 13 approximate 40% under current tax rates. Subsequent revisions to the estimated net realizable value of the deferred tax asset could cause the Company's provision for income taxes to vary significantly from period to period, although the Company's cash tax payments would remain unaffected until the benefit of the NOL is utilized. Consolidation Accounting The Company's results of operations and balance sheet include the accounts (including revenues, assets and liabilities) of the Company, its wholly owned subsidiaries, and five professional corporations ("PCs") of which the Company's subsidiaries bear financial and operational risks and rewards. The Company has no direct equity ownership in the PCs, but has rights and involvement that permit, under the tests set forth in FASB Emerging Issues Task Force bulletin 97-2, "Application of FASB Statement No. 94, Consolidation of All Majority-Owned Subsidiaries, and APB Opinion No. 16, Business Combinations, To Physician Practice Management Entities," the Company to consolidate the PCs into the Company's financial statements. The Company, through its subsidiaries, provides, for a fee, certain administrative and other services to each of the PCs. The outstanding voting stock of each of the PCs is 100% owned by a licensed optometrist who generally has, in turn, executed an agreement in favor of a subsidiary of the Company that provides that if the employment of the optometrist-owner is terminated, then the optometrist-owner must sell all of the outstanding stock of the PC to another qualified person eligible to serve as a new optometrist-owner. The purchase price for the sale of the PC stock is either (i) at a nominal per share price or (ii) equal to the aggregate book value of the PC which will always be a nominal amount because each PC operates and is expected to continue to operate at an almost break-even level generating a nominal profit, if any at all. Because the assets and liabilities of the PCs are, for accounting purposes, consolidated with the assets and liabilities of the Company and its subsidiaries, any transaction by which operating assets were transferred by a Company subsidiary to a PC has been properly eliminated for accounting purposes. While the holding of assets by the PCs lessens the Company's control over those assets, the Company believes that the assets are adequately protected and maintained. In December 2001, the SEC requested that all registrants identify and describe their most "critical accounting policies" in Management's Discussion and Analysis. The SEC indicated that a "critical accounting policy" is one which is both important to the portrayal of the company's financial condition and results and requires management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company believes that the following of the Company's accounting policies fit this definition. BUSINESS RISKS AND CAUTIONARY STATEMENTS Statements in this Quarterly Report on Form 10-Q under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as oral statements that may be made by the Company or by officers, directors or employees of the Company acting on the Company's behalf, that are not historical fact constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that could cause the actual results of the Company to be materially different from the historical results or from any results expressed or implied by such forward-looking statements. Such factors include, but are not limited to, the risk factors set forth below. The Company does not intend to update any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. RISKS RELATED TO THE COMPANY'S BUSINESS The Company has experienced losses in each year of operation since inception in November 1992. For the fiscal year ended December 29, 2001, the Company incurred a net loss of $5,500,000 bringing its accumulated deficit to $31,600,000 at December 29, 2001. The Company may never achieve profitability and, if it achieves profitability, it may not be able to maintain profitability. The Company's primary loan facilities expire at December 31, 2002 and the Company may not be able to obtain financing or refinancing at terms acceptable to the Company. As of June 29, 2002, the Company owed Fleet Bank $2,500,000 under a revolving loan and $5,070,000 under a term loan. Interest rates on the loans during 2002 are at prime rate with a minimum of 8% and a maximum of 11% The principal payments during 2002 on the term loan are $100,000 per month. Given the Company's history, including substantial historical losses, the Company may not be able to obtain financing or refinancing at terms acceptable to the Company. The Company is making every effort to refinance these loans on terms that are acceptable to the Company. The failure to obtain additional financing would result in the declaration of a default with such loan facilities and could materially and adversely affect the Company's business and financial condition. Any additional equity financing, if available, may be dilutive to the Company's stockholders and any debt financing, if available, may involve restrictions on the Company's financing and operating activities. The Company has previously breached certain loan covenants for which waivers of such breaches have been granted, but the Company may not be able to obtain waivers of any future breaches of loan covenants that may occur, which could result in a default under existing or future loan agreements. The Company has previously defaulted on a credit line agreement due to non-compliance with negative covenants relating to minimum net worth, minimum debt service coverage, maximum funded 14 debt service coverage and minimum net profit. The Company has obtained waivers from the bank for all breaches of loan covenants to date, but future breaches may occur for which the Company may not be able to obtain waivers. Any breach that is not waived may result in the bank declaring the breach to be a default under the loan agreement, which would require immediate repayment of all outstanding principal and accrued interest at a time when the Company may not be able to repay the bank. Accordingly, the declaration of a default under the loan agreement could materially and adversely affect the Company's business and financial condition. The Company is dependent upon certain key management personnel and may not be able to attract and retain additional personnel. The Company's future success is dependent in part on the Company's ability to retain certain key personnel, particularly E. Dean Butler, the Company's Chairman and Carene S. Kunkler, the Company's President and Chief Executive Officer, and the Company's ability to recruit and retain qualified personnel over time. The Company may not be able to retain its existing personnel or attract additional qualified employees in the future. The primary eye care market is highly competitive. The Company's current and potential competitors include many larger companies with substantially greater financial, operating, marketing and support resources. The optical industry is highly competitive and includes chains of retail optical stores, multi-site eye care centers, and a large number of individual opticians, optometrists and ophthalmologists who provide professional services and/or dispense prescription eyewear. Because retailers of prescription eyewear generally service local markets, competition varies substantially from one location or geographic area to another. The Company believes that the principal competitive factors affecting retailers of prescription eyewear are location and convenience, quality and consistency of product and service, price, product warranties, and a broad selection of merchandise. In the Company's current regional markets, the Company faces competition from national and regional retail optical chains which, in many cases, have greater financial resources than the Company. The Company may not be able to acquire new managed primary eye care contracts, existing contracts may not be expanded in any meaningful way and the Company may not be successful in retaining existing managed care business. As an increasing percentage of optometric and ophthalmologic patients are coming under the control of managed care entities, the Company believes that its success will, in part, be dependent upon the Company's ability to negotiate, on behalf of existing and prospective affiliated practices, contracts with HMOs, employer groups and other private third party payors pursuant to which services will be provided on a risk-sharing or capitated basis by some or all affiliated practices. The proliferation of contracts that pass much of the risk of providing care from the payor to the provider in markets the Company serves may result in greater predictability of revenues, but greater unpredictability of expenses. The Company may not be able to negotiate, on behalf of the affiliated practices, satisfactory arrangements on a risk-sharing or capitated basis. In addition, to the extent that patients or enrollees covered by such contracts require more frequent or extensive care than anticipated, operating margins may be reduced or, in the worst case, the revenues derived from such contracts may be insufficient to cover the costs of the services provided. As a result, affiliated practices may incur additional costs, which would reduce or eliminate anticipated earnings under such contracts. Any such reduction or elimination of earnings would have a material adverse affect on the Company's business and results of operations. Further, the Company may not be successful in retaining existing managed care business. If the Company were to loose a significant managed care account, it could have a material adverse affect on the Company's business and results of operations. Currently, the Company is appealing a potential loss of managed care business that represents approximately 2.5% of the Company's overall revenue. If the Company is unsuccessful in the appeal process, the Company could lose this business as patients over time use other eye care providers. 15 The Company may be exposed to significant risk from liability claims if the Company is unable to obtain insurance at acceptable costs or is otherwise unable to protect itself against potential product liability claims. The provision of professional eye care services entails an inherent risk of professional malpractice and other similar claims. The Company does not influence or control the practice of medicine or optometry by professionals or have responsibility for compliance with certain regulatory and other requirements directly applicable to individual professionals and professional groups. As a result of the relationship between the Company's affiliated practices and itself, the Company may become subject to some professional malpractice actions under various theories. Claims, suits or complaints relating to professional services provided by affiliated practices may be asserted against the Company in the future. The Company may not be able to retain adequate liability insurance at reasonable rates and the Company's insurance may not be adequate to cover claims asserted against it, in which event its business and results of operations may be materially adversely affected. The Company's operations and success are dependent upon its ability to enter into agreements with health care providers. Certain states prohibit the Company from practicing medicine, employing physicians to practice medicine on the Company's behalf or employing optometrists to render optometric services on the Company's behalf. Accordingly, the success of the Company's operations as a full-service eye care provider depends upon its ability to enter into agreements with health care providers, including institutions, independent physicians and optometrists, to render surgical and other professional services at facilities owned or managed by the Company. The Company may not be able to enter into agreements with other health care providers on satisfactory terms or such agreements may not be profitable to the Company. The Company is subject to extensive federal, state and local regulation, which could materially affect the Company's operations. The health care industry is highly regulated by federal, state and local law. The regulatory environment in which the Company operates may change significantly in the future. The Company expects to modify agreements and operations from time to time as the business and regulatory environment changes. Although the Company believes that its operations comply with applicable law, the Company may not be able to address changes in the regulatory environment successfully. The Company's common stock was delisted from the Nasdaq Stock Market, which makes it more difficult for stockholders to sell shares of the Company's common stock. On September 11, 2000, the Nasdaq National Market ("Nasdaq") terminated the Company's listing on Nasdaq and the Company's common stock began trading on the Over-the-Counter Bulletin Board (the "OTC"). Stockholders are likely to find it more difficult to trade the Company's common stock on the OTC than on Nasdaq. In order for the Company's common stock to resume trading on Nasdaq, the Company must satisfy all of Nasdaq's requirements for initial listing, apply for listing and be accepted for listing by Nasdaq. The Company does not currently satisfy Nasdaq's initial listing requirements and may never satisfy Nasdaq's listing requirements or, if the Company does satisfy such requirements in the future, the Company's securities may not be accepted for listing by Nasdaq. If the Company's securities are not accepted for listing on Nasdaq or another stock exchange, it will also likely be more difficult for the Company to raise equity capital. 16 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has not entered into any transactions using derivative financial instruments or derivative commodity instruments and believes that its exposure to market risk associated with other financial instruments (such as investments) is not material. As of June 29, 2002, approximately $7,570,000 of the Company's debt is subject to a floating interest rate and every 1% increase in the relevant interest rate would adversely affect the Company on an annual basis by $76,000. PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Stockholders of the Company was held on May 30, 2002. The following actions were taken at the meeting: - - William Connell and William G. McLendon were elected as Directors of the Company for a three year term expiring at the 2005 Annual Meeting of Stockholders. NAME SHARES VOTED FOR SHARES WITHHELD ---- ---------------- --------------- Connell 29,671,016 458,031 McLendon 29,598,316 530,731 - - The 2002 Employee, Director and Consultant Stock Option Plan was adopted. SHARES VOTED FOR SHARES VOTED AGAINST SHARES WITHHELD ---------------- -------------------- --------------- 23,413,019 767,696 27,774 - - An amendment to the Company's Restated Certificate of Incorporation increasing the number of authorized shares of common stock from 50,000,000 to 70,000,000 was adopted. SHARES VOTED FOR SHARES VOTED AGAINST SHARES WITHHELD ---------------- -------------------- --------------- 23,788,652 380,447 39,390 - - The appointment of KPMG LLP as independent public accountants for the Company for the fiscal year ending December 28, 2002 was ratified. SHARES VOTED FOR SHARES VOTED AGAINST SHARES WITHHELD ---------------- -------------------- --------------- 30,085,148 35,900 7,999 ITEM 5. OTHER INFORMATION Mr. William Connell resigned as a Director of the Company effective July 18, 2002. Mr. Connell's resignation was not the result of any disagreement with the Company. ITEM 6. EXHIBITS AND REPORTS ON FORM 10-K a) The exhibits filed with this report are listed on the Exhibit Index. b) No reports on Form 8-K were filed during the quarter ended June 29, 2002. 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Sight Resource Corporation Date: August 13, 2002 BY: /S/ CARENE S. KUNKLER --------------- ------- ----------------- Carene S. Kunkler President and Chief Executive Officer (duly authorized officer) Date: August 13, 2002 BY: /S/ DUANE D. KIMBLE, JR. --------------- ------- -------------------- Duane D. Kimble, Jr. Chief Financial Officer (principal financial officer) 18 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.37 Carene S. Kunkler's employment contract 99.2 Certification by Carene S. Kunkler pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.3 Certification by Duane D. Kimble, Jr., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 EX-10.37 3 l95844aexv10w37.txt EX-10.37 EMPLOYMENT CONTRACT EXHIBIT 10.37 SIGHT RESOURCE CORPORATION 6725 MIAMI ROAD CINCINNATI, OHIO 45243 May 30, 2002 Ms. Carene Kunkler 3100 Hawkslanding Drive Cincinnati, Ohio 45244 Dear Ms. Kunkler: This letter is to confirm our understanding with respect to (i) your continued employment by Sight Resource Corporation, a Delaware corporation (the "Company"), (ii) your agreement not to compete with the Company and (iii) your agreement to protect and preserve information and property which is confidential and proprietary to the Company, subject to your agreement with the terms hereof as indicated by your execution of this letter on the final page (the terms and conditions agreed to in this letter shall hereinafter be referred to as the "Agreement"). In consideration of the mutual promises and covenants contained in this Agreement (including but not limited to (a) the Company's provision to you of life and disability insurance as set forth in Section 6 hereof, termination and severance protections set forth in Section 7 hereof and a grant of 1,325,000 stock options on or about August 16, 2001 with the understanding that you would enter into an employment agreement substantially similar to this Agreement as consideration in exchange for (b) your covenants contained in Sections 9-11 of this Agreement), and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, we have agreed as follows: 1. POSITIONS. The Company will continue to employ you, and you agree to be employed by the Company, as its President and Chief Executive Officer, to have such responsibilities, duties and authority as are customary to such positions, including, without limitation, general supervision and control over, and responsibility for, the general management and operation of the Company and its subsidiaries. You will also have such other responsibilities, duties and authority as may from time to time be assigned to you by the Board of Directors (the "Board") that are consistent with your status as President and Chief Executive Officer of the Company. In addition, so long as you serve in such capacities, the Company will nominate you for election to its Board of Directors (the "Board") and you will report only to the Board. You agree to devote your full business time and energies to the business and affairs of the Company and its subsidiaries, if any, as is necessary from time to time. 2. BASE SALARY. In consideration for your services under this Agreement, you shall be paid at the annualized rate of Two Hundred and Ten Thousand Dollars ($210,000), subject to increase from time to time by action of the Board in accordance with your performance and the Company's performance ("Base Salary"), and payable at such intervals as is the Company's regular payroll practice or as otherwise agreed by the Company and you, less any amounts customarily withheld, consistent with applicable law. Such compensation will be reduced by any disability payments you receive. 3. BONUSES. Following execution of this Agreement, you and the Compensation Committee of the Board will discuss alternatives for determining the amount of any annual bonuses for which you will be eligible (commencing with the fiscal year beginning January 1, 2002). Following such discussions, the Compensation Committee will establish a policy, procedure or formula for determining the award and amount of any annual bonuses. Thereafter, you will be eligible for such bonuses in accordance with the criteria established by the Compensation Committee. 4. EXPENSES. The Company will reimburse you for travel, entertainment and other business expenses reasonably incurred by you in connection with the business of the Company in accordance with then Company policy. 5. BENEFITS. In connection with your employment hereunder, you will be entitled during your employment to the following additional benefits: (a) At the Company's expense, such benefits as the Company may provide from time to time for its senior management, but in any event providing you an automobile allowance not to exceed $850 per month. (b) No less than the number of vacation days in each year determined in accordance with the Company's vacation policy, but not less than five (5) weeks in any year (prorated in any year during which you are employed hereunder for less than the entire year). You shall also be entitled to all paid days off given by the Company to its executives. Unused vacation days shall not accumulate from year to year, but, upon termination of your employment for any reason, you shall be paid an amount equal to your accrued but unused vacation entitlement (if any) for the year during which such termination occurs. For purposes of this paragraph, each "year" commences on the date of your commencement of employment with the Company. 6. LIFE AND DISABILITY INSURANCE. (a) You shall be entitled to participate in any life insurance program made available by the Company to executive officers generally. Such life insurance coverage shall, however, in no event provide a death benefit of less than four hundred twenty thousand dollars ($420,000). (b) Within thirty (30) days following the execution of this Agreement, the Company or you shall procure, and the Company shall pay or reimburse you for the premiums on, throughout your employment pursuant to this Agreement, a disability insurance policy providing, during the period commencing ninety (90) days after onset of your disability and continuing thereafter until the earlier of the abatement of such disability or your 65th birthday, a monthly benefit equal to not less than sixty percent (60%) of one-twelfth (1/12) of your predisability annual compensation. Disability under such policy shall be determined with reference to your "own occupation." The disability insurance policy shall, as you direct, be owned by the Company or by you. If owned by the Company, the benefits payable under the policy shall be payable as you direct. If the policy is owned by the Company, then, unless otherwise agreed by you and the Company or as required by applicable law, the premiums shall not be included in your gross income for federal income tax purposes. 7. TERMINATION OF EMPLOYMENT; SEVERANCE. Your employment may terminate under the following circumstances only: (a) TERMINATION BY THE COMPANY FOR CAUSE. The Company may, immediately and unilaterally, terminate your employment hereunder for Cause at any time. Termination of your employment by the Company shall constitute a termination for Cause if such termination is for one or more of the following reasons: (i) your continuing failure (other than for reasons of mental or physical disability) to render services to the Company in accordance with your duties consistent with Section 1 of this Agreement and such failure of performance continues for a period of more than ten (10) days after notice thereof has been provided to you by or at the direction of the Board of Directors; (ii) your willful misconduct or gross negligence in connection with the performance of your duties under this Agreement; (iii) you are convicted of a felony; (iv) your willful disloyalty, deliberate dishonesty, or willful breach of fiduciary duty, (v) material breach of the terms of this Agreement which continues for a period of ten (10) days after notice thereof has been provided to you by or at the direction of the Board of Directors; (vi) the commission by you of an act of fraud, embezzlement, or deliberate disregard of the rules or policies of the Company which deliberate disregard results in significant loss, damage or injury to the Company; (vii) your willful unauthorized disclosure of any trade secret or confidential information of the Company; or (viii) your willful commission of an act inconsistent with Section 9 of this Agreement. For purposes of this Agreement, no act, or failure to act, on your part shall be considered "willful" or the equivalent unless done by you in bad faith or without reasonable belief that such action or omission was in the best interest of the Company. A determination that Cause exists shall be made only by the Board of Directors at a duly-conducted meeting of a majority of the Board of Directors. In making any determination under this Section, the Board of Directors shall act in good faith and shall give you an opportunity to be heard by the Board. The right of the Company to terminate your employment hereunder to which you hereby agree, shall be exercisable by written notice sent to you by the Company and shall, except as otherwise expressly provided in this Agreement, be effective as of the date of such notice or as of such later date as may be specified in such notice. Such notice shall not be effective unless it states the specific provision(s) of this Agreement upon which the termination is based. In the event that the Company terminates your employment for Cause, you shall not be entitled to any severance pay or other termination benefits except to the extent that you may be entitled to any benefits pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"). (b) TERMINATION BY THE COMPANY WITHOUT CAUSE. Your employment with the Company may be terminated, Without Cause by the Company at any time upon written notice to you, provided, however, that if the Company terminates your employment Without Cause, the Company shall continue to pay your Base Salary (the "Salary Continuation Payments") and health and dental insurance premiums to the extent previously paid by the Company (or the cash equivalent, at the Company's discretion) for the two (2) year period immediately following the termination of your employment. In addition, you will also be entitled to reimbursement of reasonable outplacement expenses actually incurred by you, not to exceed $15,000. Reimbursement of outplacement expenses shall be made within twenty (20) days after the Company's receipt of a properly documented request for reimbursement. The Salary Continuation Payments shall be made by the Company to you in monthly installments on the first day of each calendar month. If the Salary Continuation Payments or any other payment to be made or benefit to be provided pursuant to the preceding paragraph is not paid or provided when due, and such failure of compliance is not cured within fifteen (15) days after you give written notice of such failure to the Company, then such failure shall constitute a material breach of this Agreement, and you shall from that point forward and forever thereafter be relieved of your obligations under Section 9 of this Agreement, irrespective of any subsequent cure by the Company of its failure of compliance. The fact that you are relieved from your obligations under Section 9 shall not, however, relieve the Company of its obligation to make the payments and provide the other benefits contemplated by the preceding paragraph. Furthermore, in the event you are terminated by the Company Without Cause or in the event you terminate your employment for Good Reason (as discussed below), any stock options held by you shall (i) automatically and fully vest so that the same are exercisable in full, and (ii) remain exercisable as provided in the applicable option documentation, provided that in no event shall any such option be exercisable for less than twelve (12) months following such termination of employment. Any stock options hereafter granted to you shall provide for such automatic and full vesting under such circumstances. (c) TERMINATION BY THE EXECUTIVE WITH GOOD REASON. You may resign and terminate your employment with the Company for Good Reason (as defined below), provided, however, that upon written notice to the Board of your decision to terminate for Good Reason, the Company shall have ten (10) days in which to cure such Good Reason and, further, provided, that notice of resignation for Good Reason shall not be effective unless received by the Board within forty-five (45) days following the occurrence of the applicable reason (except with respect to Section 7(c)(viii)). If you resign for Good Reason, you shall be entitled to the same treatment as if your employment was terminated Without Cause, pursuant to Section 7(b). Good Reason shall mean the occurrence of any of the following during your employment with the Company: (i) any material diminution, without your prior consent, of your duties, responsibilities or decision making authority, or any material change, without your prior consent, in the location at which or manner in which such duties, responsibilities and authority are discharged, including without limitation, (i) any material change, without your approval, in either the place of your employment or the headquarters of the Company, or (ii) the imposition of any material requirement or material change to an existing requirement (without your approval) that you travel a greater percentage of your working time than you reasonably consider appropriate for the effective discharge of your duties; (ii) any requirement that you report to anyone other than the Board, without your prior consent; (iii) any failure to elect (and re-elect, as applicable) you as a member of the Board, or, after having been so elected (or re-elected), your removal as a member of the Board; (iv) any material breach by the Company of any material provision of this Agreement which continues for a period of at least ten (10) days after the Board receives written notice thereof from you; or (v) your resignation from the Company upon a Change of Control, provided that written notice of your resignation clearly stating the reason for your resignation is provided to the Board within twelve (12) months following a Change of Control. For the purposes of this Agreement, a "Change of Control" shall be deemed to have occurred either: (A) If during any consecutive six (6) month period beginning on or after the date on which this Agreement is executed individuals who at the beginning of such period were directors of the Company cease, for any reason, to constitute at least fifty percent (50%) of the Board; or (B) If during any consecutive twelve (12) month period beginning on or after the date on which this Agreement is executed both (x) the Company shall be party to or the subject of an Extraordinary Transaction, and (y) individuals who at the beginning of such period were directors of the Company cease, for any reason, to constitute at least fifty percent (50%) of the Board. As used herein, "Extraordinary Transaction" means: a merger (other than solely for the purpose of changing jurisdiction of incorporation); a tender offer; a proxy contest; an acquisition or a capital infusion involving the issuance of (or rights to acquire, by conversion or otherwise) shares representing 25% or more of the voting power of all shares of all classes of the Company outstanding immediately following such capital infusion; or a transaction resulting in a successor to the Company as described in Section 12. Your right to terminate your employment hereunder to which the Company hereby agrees, shall be exercisable by written notice sent to the Board by you and shall, except as otherwise expressly provided in this Agreement, be effective as of the date of such notice or as of such later date as may be specified in such notice. Such notice shall not be effective unless it states the specific provision(s) of this Agreement upon which the termination is based. (d) TERMINATION BY THE EXECUTIVE WITHOUT GOOD REASON. You may terminate your employment with the Company, upon at least thirty (30) days' written notice, at any time. If you elect to terminate your employment Without Good Reason, the Company shall have no further obligation or duty to you other than to pay your accrued compensation in accordance with Section 8 and to allow you to make a COBRA election, as provided by law. In addition, once the Company receives notice of resignation Without Good Reason from you, the Company may elect to terminate your employment at any time thereafter, provided the Company agrees to pay your Base Salary for the thirty (30) day period following the Board's receipt of your written notice of termination. (e) TERMINATION DUE TO DEATH OR DISABILITY. In the event of your death during the term of this Agreement, your employment with the Company shall immediately and automatically terminate, and the Company shall have no further obligation or duty to you other than the payment of Base Salary through the last date of employment. The Company may terminate your employment with the Company, upon written notice to you, in the event that you become disabled during your employment through any illness, injury, accident, or condition of either a physical or psychological nature and, as a result, are, with or without reasonable accommodation, unable to perform the essential functions of the services contemplated hereunder for a period of sixty (60) consecutive days, or for shorter periods aggregating one hundred twenty (120) days during any twelve (12) month period. In the event of such termination, the Company shall, for a period of two (2) years following such termination, continue to pay your Base Salary on regular Company pay dates reduced, however, by the amount of the benefits received by you during such two year period under any disability insurance policy or policies paid for by the Company. Any such termination shall become effective upon mailing or hand delivery of notice that the Company has elected its right to terminate under this Section 7(e), and the Company shall have no further obligation or duty to you other than (i) as set forth in this paragraph, (ii) the payment of your accrued compensation in accordance with Section 8, and (iii) to allow you to make a COBRA election, as provided by law. 8. ACCRUED COMPENSATION. In the event of any termination of your employment for any reason, you (or your estate) shall be paid such portion of your Base Salary and bonuses as have accrued by virtue of your employment during the period prior to termination and have not yet been paid, together with any amounts for expense reimbursement which have been properly incurred prior to termination and have not yet been paid. Such amounts shall, to the extent known, be paid within ten (10) days of the termination date. The amount due to you (or your estate) under this Section 8 in payment of any bonus shall be a proportionate amount of the bonus that would otherwise have been due to you as if such termination had not occurred. In the case of a bonus calculation of which is dependent upon full fiscal year performance of the Company, (i) the bonus shall be computed and paid as promptly as possible following the end of the fiscal year, and (ii) the proportionate amount of the bonus payable to you shall be determined by multiplying the full amount of the bonus by a fraction, the numerator of which shall equal the number of days during the fiscal year that you shall have been employed by the Company and the denominator of which shall be 365. 9. PROHIBITED COMPETITION AND SOLICITATION. You acknowledge that the Company has invested substantial time, money and resources in the development and retention of its Inventions and Confidential Information (including trade secrets) customers and business partners, and further acknowledge that during the course of your employment you have had and will continue to have access to Company Inventions and Confidential Information (including trade secrets), and that you have been and will continue to be introduced to existing and prospective customers and business partners of the Company. You acknowledge and agree that any and all "goodwill" associated with any customer, prospective customer or business partner belongs exclusively to the Company including, but not limited to, any goodwill created as a result of direct or indirect contacts or relationships between you and any customer, prospective customer or business partner of the Company. The phrase, "business partner," shall include but not be limited to all persons and entities with whom the Company has maintained or pursued investment, strategic alliance or consulting relationships of any type. In recognition of the acknowledgments contained in the preceding paragraph, you covenant and agree that: (a) Throughout your employment with the Company and for a period of two (2) years following such termination (regardless of the reasons for the termination), you shall not, without the prior written consent of the Board, for yourself or on behalf of any other, directly or indirectly, either as principal, agent, stockholder, employee, consultant, representative or in any other capacity, own, manage, operate or control, or be concerned, connected or employed by, or otherwise associate in any manner with, engage in or have a financial interest in any business which operates a Retail Optical Outlet (as hereinafter defined) in any Restricted Territory (as hereinafter defined); PROVIDED, HOWEVER, that nothing contained herein shall preclude you from (i) purchasing or owning up to three percent (3%) of the issued and outstanding capital stock of any business whose stock is publicly traded or (ii) serving on the boards of directors of entities which do not compete with the Company, so long as you provide advance, written notice of such service to the Board and such service does not interfere with the performance of your obligations hereunder, including those contained in this Section 9. As used herein, "Retail Optical Outlet" means a retail establishment that sells any retail optical product or service of a type which either (i) represents ten percent (10%) or more of the revenues of the Company (as measured during the preceding twelve (12) months), or (ii) is expected, under the Company's then current Board-approved Business Plan, to represent ten percent (10%) or more of the revenues of the Company during the period covered by such Business Plan. As used herein, "Restricted Territory" means a geographical retail market in which the Company has a retail location or in which the Company's then current Board-approved Business Plan calls for the opening of a specific retail location. (b) Throughout your employment with the Company and for a period of two (2) years following such termination (regardless of the reasons for the termination), you may not directly or indirectly solicit or encourage any customer of the Company to purchase retail optical products or services (of the type then being sold by the Company) from any competitive Retail Optical Outlet in any Restricted Territory, without the express prior written consent of the Board. (c) Throughout your employment with the Company and for a period of two (2) years following such termination (regardless of the reasons for the termination), you may not, directly or indirectly, entice, solicit or encourage any person who is then-engaged as an employee or independent contractor of the Company or who was so engaged at any time within ninety (90) days preceding the enticement, solicitation or encouragement to sever his or her relationship with the Company, nor may you, directly or indirectly, be involved in the recruitment of any such employee or independent contractor on behalf of yourself or any person or entity other than the Company, without the express prior written consent of the Board. (d) Throughout the course of your employment with the Company and at all times thereafter, you will not voluntarily make any statement that is professionally or personally disparaging about, or adverse to, the interests of the Company, any of its officers, directors, shareholders or employees including, but not limited to, any statement that disparages any person, product, service, financing, financial condition, capability or other aspect of the business of the Company or any of its officers, directors, shareholders or employees. You further agree that during the course of your employment with the Company and at all times thereafter, you will not engage in any conduct that is intended to or has the result of inflicting harm upon the professional or personal reputation of the Company or any of its officers, director, shareholders or employees. (e) Throughout your employment with the Company and for a period of two (2) years following such termination (regardless of the reasons for the termination), you shall not, without the prior written consent of the Board, use or assist anyone else in using, other than for the benefit of the Company, the in-store frame placement software developed by Eyeshop.Com Inc., a subsidiary of the Company, or any software substantially similar thereto. For purposes of application of this Section 9 following termination of your employment, the determination of (w) products or services then being sold by the Company, (x) Restricted Territories, (y) the then current Board-approved Business Plan, and (z) the customers of the Company, shall all be made as of the date of termination of your employment. You agree that (i) the provisions of this Section 9 are necessary and reasonable to protect the Company's Confidential Information, Inventions, and goodwill; (ii) the specific temporal, geographic and substantive provisions set forth in this Section 9 are reasonable and necessary to protect the Company's business interests; and (iii) in the event of any breach of any of the covenants set forth herein, the Company would suffer substantial irreparable harm that would not have an adequate remedy at law. In recognition of the foregoing, you agree that in the event of a breach or threatened breach of any of these covenants, in addition to such other remedies as the Company may have at law, without posting any bond or security, the Company shall be entitled to seek and obtain equitable relief, in the form of specific performance, and/or temporary, preliminary or permanent injunctive relief, or any other equitable remedy which then may be available. The seeking of such injunction or order shall not affect the Company's right to seek and obtain damages or other equitable relief on account of any such actual or threatened breach. 10. PROTECTED INFORMATION. The Company has developed, uses and maintains trade secrets1 and other confidential and proprietary information. As used in this Agreement, the phrase, "Confidential Information," means that secret proprietary information of the Company of whatever kind or nature pertaining to any aspect of the Company's business disclosed to or known by you as a consequence of or through your employment with the Company. Such proprietary information includes but is not limited to information relating to the Company's Inventions, research, drawings, engineering plans, products, software, hardware configuration information, licenses, sources of supply and material, operating and other cost data, information regarding present, past or prospective customers (including customer contact information, preferences, purchase histories, etc.), customer proposals, price lists and data relating to pricing of the Company's products or services, training materials, product information, personnel information relating to Company employees and contractors, operating procedures, marketing information, profit and loss information, budgets, product costs, profit margins, product development and selling strategies, and supplier information, any of which information is not generally known to the public or to actual or potential competitors of the Company as it is known and organized by the Company (other than through a breach of this Agreement or similar obligations). You further recognize that during your employment you have received and will continue to receive confidential and/or proprietary information from third parties, subject to a duty to maintain the confidentiality thereof and to utilize the information for limited Company related purposes. You agree that you will not use or disclose any such information without the Company's consent except as may be necessary in the performance of your duties to the extent consistent with the Company's agreements with any such third party. You acknowledge that during your employment with the Company you have had and will continue to have direct access to and knowledge of Confidential Information. You covenant and agree that all such Confidential Information is and shall remain the sole property of the Company, and that during your employment with the Company and thereafter, you will hold in strictest confidence, and will not (except as required by your duties on behalf of the Company) disclose to any business, firm, entity or person, either directly or indirectly, any of the Confidential Information, except to the extent authorized by the Company or otherwise required by law. You also agree not to make copies of any such Confidential Information except to the extent authorized by the Company or otherwise required by law. You further agree that you will return all such Confidential Information (regardless of how it is maintained) and any copies thereof, to the Company upon termination of your employment, whether voluntary or involuntary and regardless of the reason for termination. The terms of this paragraph are in addition to, and not in lieu of any legal or other contractual obligations that you may have relating to the protection of the Company's Confidential Information. If you are required by law to disclose Confidential Information, you agree to provide the Board with at least five (5) days' advance, written notice thereof. The terms of this Section 10 shall survive indefinitely the termination of this Agreement and/or your employment with the Company. 11. OWNERSHIP OF IDEAS, COPYRIGHTS AND PATENTS. You agree that all ideas, discoveries, creations, manuscripts and properties, innovations, improvements, know-how, inventions, developments, apparatus, techniques, methods, and formulae (all of the foregoing being hereinafter referred to as "the inventions") which may be used in the business of the Company, whether patentable, copyrightable or not, which you may conceive or develop during your term of employment with the Company, alone or in conjunction with another, or others, whether during or out of regular business hours, and whether at the request, or upon the suggestion of the Company, or otherwise, shall be the sole and exclusive property - -------- 1/ The phrase, "trade secrets," shall be given its broadest interpretation under Delaware law and shall include, but not be limited to, information, including any formula, pattern, compilation, program, device, method, technique or process, that: (i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of reasonable efforts, under the circumstances, to maintain its secrecy. of the Company, and that you shall not publish any of the inventions without the prior consent of the Company. You hereby assign to the Company all of your right, title and interest in and to all of the foregoing. You further represent and agree that to the best of your knowledge and belief none of the inventions will violate or infringe upon any right, patent, copyright, trademark or right of privacy, or constitute libel or slander against or violate any other rights of any person, firm or corporation, and that you will use your best efforts to prevent any such violation. At any time during or after your employment with the Company, you agree that you will fully cooperate with the Company, its attorneys and agents, in the preparation and filing of all papers and other documents as may be required to perfect the Company's rights in and to any of such inventions, including, but not limited to, joining in any proceeding to obtain letters patent, copyrights, trademarks or other legal rights of the United States and of any and all other countries on such inventions, provided that the Company will bear the expense of such proceedings, and that any patent or other legal right so issued to you, personally, shall be assigned by you to the Company without charge by you. 12. PARTIES. This Agreement is personal and shall in no way be subject to assignment by you except as contemplated hereby. The Company agrees that a successor in interest by merger, operation of law, consolidation, assignment, purchase or otherwise of a controlling interest in the business of the Company will be informed prior to such event of the existence of this Agreement. The Company will require any successor (whether direct or indirect, by purchase, merger, operation of law, consolidation, assignment or otherwise of a controlling interest in the business, stock or other assets of the Company) to assume expressly and agree to perform this Agreement. 13. INVALIDITY. The parties hereto intend this Agreement to be enforced as written. However, if any term or provision of this Agreement shall to any extent be declared illegal or unenforceable by a duly authorized court of competent jurisdiction, then the remainder of this Agreement, or the application of such term or provision in circumstances other than those as to which it is so declared illegal or unenforceable, shall not be affected thereby, each term and provision of this Agreement shall be valid and be enforceable to the fullest extent permitted by law and the illegal or unenforceable term or provision shall be deemed replaced by a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision. 14. NOTICES. All notices and communications required or permitted to be given hereunder shall be duly given by delivering the same in hand or by depositing such notice or communication in the mail, sent by certified or registered mail, return receipt requested, postage prepaid, or by delivery by overnight courier, with a receipt obtained therefor, as follows: If sent to the Company: Sight Resource Corporation 6725 Miami Road Cincinnati, Ohio 45243 Attn: Board of Directors If sent to you: Ms. Carene Kunkler 3100 Hawkslanding Drive Cincinnati, Ohio 45244 or such other address as either party furnishes to the other by like notice, provided, however, that any notice of a change of address shall be effective only upon receipt. 15. ENTIRE AGREEMENT. This Agreement embodies the entire agreement and understanding between the parties in relation to the subject matter hereof and there are no promises, representations, conditions, provisions or terms related thereto other than those set forth or referred to in this Agreement and the exhibits hereto. This Agreement supersedes all previous understandings, agreements and representations between the Company and you regarding your employment by the Company, whether written or oral (including, without limitation, the Employment Agreement, dated March 20, 2000 between eyeshop.com USA inc. and you). 16. HEADINGS. All captions in this Agreement are intended solely for the convenience of the parties, and none shall be deemed to affect the meaning or construction of any provision hereof. 17. WAIVER. No failure of the Company or you to exercise any power reserved to it or you, respectively, by this Agreement, or to insist upon strict compliance by you or the Company, respectively, with any obligation or condition hereunder, and no custom or practice of the parties at variance with the terms hereof, shall constitute a waiver of the Company's or your right, as the case may be, to demand exact compliance with any of the terms hereof. Waiver by either party of any particular default by the other party hereto shall not affect or impair the waiving party's rights with respect to any subsequent default of the same, similar or different nature, nor shall any delay, forbearance or omission of either party to exercise any power or right arising out of any breach or default by the other party of any of the terms, provisions or covenants hereof, affect or impair our or your right to exercise the same, nor shall such constitute a waiver by the Company or you, as the case may be, of any right hereunder, or the right to declare any subsequent breach or default and to terminate this Agreement prior to the expiration of its term. 18. SUBSIDIARIES. As used herein, the term, "Subsidiaries," shall mean all corporations a majority of the capital stock of which entitling the holder thereof to vote is owned by the Company or a Subsidiary. 19. GOVERNING LAW. This Agreement shall be construed under and be governed in all respects by the law of the State of Ohio. 20. MITIGATION; POST-EMPLOYMENT PAYMENTS AND BENEFITS. You shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise. However, if you are employed or otherwise earning compensation for professional services during the period beginning twelve (12) months following the termination of your employment with the Company and ending twenty-four (24) months following the termination of your employment with the Company, (i) the Company's obligation to make compensation payments pursuant to Section 7 shall, for the remainder of such period, be reduced to amounts equal to the excess of the payments called for by Section 7 over the compensation earned by you, and (ii) in lieu of providing to you the health and dental insurance called for by Section 7 during the remainder of such period, the Company shall pay you $700 per month during such remainder (pro rated for any partial month). 21. AMENDMENT. No amendment or modification to this Agreement shall be effective unless in writing and signed by both parties hereto. 22. RESOLUTION OF DISPUTES. The parties agree that any litigation arising out of or relating to the terms and conditions of this Agreement shall be initiated and conducted only in a court of competent jurisdiction in Hamilton County, Ohio. The parties consent to the jurisdiction of such courts in Hamilton County, Ohio for this purpose. 23. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each executed counterpart constituting an original and such counterparts together constituting one agreement. If you agree with the terms of your employment as set forth in this Agreement, please execute the duplicate copy hereof in the space provided below. SIGHT RESOURCE CORPORATION BY: /S/ RYAN M. SCHWARZ ------------------------ Name: Ryan M. Schwarz --------------- Title: Director, Chair of Compensation Committee ----------------------------------------- ACCEPTED AND AGREED as of the date above: BY: /S/ CARENE S. KUNKLER ----------------- CARENE KUNKLER EX-99.2 4 l95844aexv99w2.txt EX-99.2 CERTIFICATION Exhibit 99.2 SECTION 906 CERTIFICATION I, Carene S. Kunkler, Chief Executive Officer of Sight Resource Corporation (the "Company"), do hereby certify in accordance with 19 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: 1. The Quarterly Report on Form 10-Q of the Company for the period ended June 29, 2002 (the "Periodic Report") fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)) and 2. The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 13, 2002 BY: /S/ CARENE S. KUNKLER ------- ----------------- Carene S. Kunkler Chief Executive Officer EX-99.3 5 l95844aexv99w3.txt EX-99.3 CERTIFICATION Exhibit 99.3 SECTION 906 CERTIFICATION I, Duane D. Kimble, Jr., Chief Financial Officer of Sight Resource Corporation (the "Company"), do hereby certify in accordance with 19 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: 1. The Quarterly Report on Form 10-Q of the Company for the period ended June 29, 2002 (the "Periodic Report") fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)) and 2. The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 13, 2002 BY: /S/ DUANE D. KIMBLE, JR. ------- -------------------- Duane D. Kimble, Jr. Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----