-----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, MzY6ULWPHUs0liJOdtrmAKC927pMwyNFFQ9/36AQcyalXTi1k8pId6K8xDGoFqBT W4iEiPZMfgUkXjQMzMgQ+Q== 0000950152-02-008685.txt : 20021118 0000950152-02-008685.hdr.sgml : 20021118 20021118152809 ACCESSION NUMBER: 0000950152-02-008685 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20020928 FILED AS OF DATE: 20021118 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: 02831346 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 l97317ae10vq.txt SIGHT RESOURCE CORPORATION 10-Q/QTR END 9-28-02 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 September 28, 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 November 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 September 28, 2002 and December 29, 2001 1 Consolidated Statements of Operations for the Three And Nine Months Ended September 28, 2002 and September 29, 2001 2 Consolidated Statements of Cash Flows for the Nine Months Ended September 28, 2002 and September 29, 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 Item 4. Controls and Procedures 17 PART II. OTHER INFORMATION Item 5. Submission of Matters to a Vote of Security Holders 17 Item 6. Other Information 17 Item 7. 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 September 28, 2002 December 29, 2001 ------------------ ----------------- Assets (unaudited) Current assets: Cash and cash equivalents $505 $1,356 Accounts receivable, net of allowance of $2,115 and $1,915, respectively 2,489 2,613 Inventories 4,820 4,666 Prepaid expenses and other current assets 344 395 --- --- Total current assets 8,158 9,030 ----- ----- Property and equipment, net 2,174 2,729 Other assets: Intangible assets, net 19,273 19,770 Web site development 2,288 2,288 Other assets 147 127 --- --- Total assets $32,040 $33,944 ======= ======= Liabilities and Stockholders' Equity Current liabilities: Revolver notes payable $2,500 $2,500 Current portion of long term debt 5,108 5,979 Current portion of capital leases 9 10 Accounts payable 5,205 5,789 Accrued expenses 1,811 1,813 Dividends payable 381 - --- ----- Total current liabilities 15,014 16,091 ------ ------ Non-current liabilities: Long term debt, less current maturities 798 928 Capital leases 11 17 -- -- Total non-current liabilities 809 945 --- --- Series B redeemable convertible preferred stock 1,452,119 shares issued and outstanding 6,535 6,535 Stockholders' equity: Preferred Stock, $.01 par value. Authorized 5,000,000 shares; no shares of Series A issued and outstanding -- -- Common Stock, $.01 par value. Authorized 50,000,000 shares; 30,698,309 at September 28, 2002 and 29,597,703 at December 29, 2001 shares issued and outstanding 307 296 Additional paid-in capital 41,418 41,810 Treasury stock at cost, 30,600 shares at September 28, 2002 and December 29, 2001 (137) (137) Accumulated deficit (31,906) (31,596) -------- -------- Total stockholders' equity 9,682 10,373 ----- ------ $32,040 $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) (unaudited)
Three Months Ended Nine Months Ended ------------------ ----------------- SEPT 28, 2002 SEPT 29, 2001 SEPT 28, 2002 SEPT 29, 2001 ------------- ------------- ------------- ------------- Net revenue $14,223 $15,290 $43,579 $45,859 Cost of revenue 4,169 4,877 12,649 14,612 ----- ----- ------ ------ Gross profit 10,054 10,413 30,930 31,247 Selling, general and administrative expenses 9,986 11,231 30,644 33,847 ----- ------ ------ ------ Income (loss) from operations 68 (818) 286 (2,600) Interest expense, net (181) (158) (539) (587) ----- ----- ----- ----- Loss before taxes (113) (976) (253) (3,187) Income tax expense 44 18 57 67 -- -- -- -- Net Loss (157) (994) (310) (3,254) ----- ----- ----- ------- Dividends on redeemable convertible preferred stock 127 366 381 623 --- --- --- --- Net Loss attributable to common stockholders $ (284) $ (1,360) $ (691) $ (3,877) -------- ---------- -------- -------- Basic and diluted Loss per common share $(0.01) $(0.05) $(0.02) $(0.26) ------- ------- ------- ------ Weighted average number of common shares outstanding - Basic and Diluted 30,698,000 24,821,000 30,329,000 14,781,000 ---------- ---------- ---------- ----------
See accompanying notes to consolidated financial statements. 2 SIGHT RESOURCE CORPORATION Consolidated Statements of Cash Flows (In thousands)
Nine Months Ended ----------------- September 28, 2002 September 29, 2001 ------------------ ------------------ (unaudited) Operating activities: Net loss $(310) $(3,254) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 1,353 2,630 Amortization and write-off of deferred financing costs -- 105 Amortization of unearned compensation -- 5 Loss on disposal of assets -- 22 Changes in operating assets and liabilities: Accounts receivable 124 41 Inventories (154) 1,012 Prepaid expenses and other current assets 51 257 Accounts payable and accrued expenses (586) (218) ----- ----- Net cash provided by operating activities 478 600 --- --- Investing activities: Purchases of property and equipment (301) (347) Proceeds from sale of assets -- 2 Other assets (liabilities) (20) (9) -- --- Net cash used in investing activities (321) (354) ----- ----- Financing activities: Principal payments (1,008) (165) Proceeds from notes -- 76 Dividends on Preferred Shares -- 14 Merger Expenses -- (323) Proceeds from issuance of stock -- 1,739 -- ----- Net cash provided by (used in) financing activities (1,008) 1,341 ------- ----- Net increase (decrease) in cash and cash equivalents (851) 1,587 Cash and cash equivalents, beginning of period 1,356 532 --- Cash and cash equivalents, end of period $ 505 $ 2,119 ====== ======= 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 September 28, 2002, no decision had been made to resume Eyeshop development activities. Pursuant to a merger agreement, 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. Further, former Eyeshop stockholders were 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. To date, none of these options, warrants or other rights have been exercised. 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 acquired. 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 September 28, 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 nine months ended September 28, 2002 and September 29, 2001 were 13-week and 39-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 (SFAS) No. 141, Business Combinations ("Statement 141") effective July 1, 2001 and SFAS 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 September 28, 2002, goodwill had a value of $14,305,000 and other intangibles with a definite useful life had a value of $4,968,000. 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 nine months ended September 29, 2001, $263,000 and $785,000, respectively, of goodwill amortization was included in selling, general and administrative expenses. The net loss for the three and nine months ended September 29, 2001 without goodwill amortization would have been $731,000 ($0.04 per share) and $2,469,000 ($0.21 per share), 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 or $0.28 per share. In accordance with Statement 142, the Company will test each reporting unit's goodwill for impairment as of the 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 nine months ended September 28, 2002 and September 29, 2001:
Three Months Ended Nine Months Ended ------------------ ---------------- Sept 28, 2002 Sept 29, 2001 Sept 28, 2002 Sept 29, 2001 ------------- ------------- ------------- ------------ (In thousands, except share and per share data) Basic and Diluted Loss Per Share Net loss $(157) $(994) $(310) $(3,254) Net loss available to common stockholders $(284) $(1,360) $(691) $(3,877) ====== ======== ====== ======== Weighted average common shares outstanding 30,698,000 24,821,000 30,452,000 14,781,000 Net loss per share $(0.01) $(0.05) $(0.02) $(0.26) ======= ======= ======= =======
Outstanding options, warrants and convertible preferred stock were not included in the computation of diluted loss per share for the three and nine months ended September 28, 2002 and September 29, 2001, because they would have been antidilutive. The following table presents the weighted average 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 Nine Months Ended ------------------ ------------------ Sept 28, 2002 Sept 29, 2001 Sept 28, 2002 Sept 29, 2001 ------------- ------------- ------------- ------------- Options 6,206,596 328,500 6,206,596 328,500 Warrants 1,992,568 1,005,463 1,992,568 1,005,108 Convertible preferred stock 3,243,900 1,452,119 3,243,900 1,452,119 --------- --------- --------- --------- Total 11,443,064 2,786,082 11,443,064 2,785,727 ========== ========= ========== =========
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 September 28, 2002, the Company's operations consisted of 115 eye care centers, and one optical laboratory and distribution center, and was one of the fifteen largest providers in the United States based upon annual sales. The Company's eye care centers operate primarily under the brand names Cambridge Eye Doctors, E.B. Brown Opticians, Eyeglass Emporium, Kent Optical, Shawnee Optical, Vision Plaza, and Vision World. The Company also provides, or where necessary to comply with applicable law, administers the business functions of optometrists, ophthalmologists and professional corporations that provide vision related professional services. The Company operates one optical laboratory and distribution center. The regional optical laboratory provides complete services to the Company's eye care centers, including polishing, cutting and edging, tempering, tinting and coating of ophthalmic lenses. The distribution center provides and maintains an inventory of all accessories and supplies necessary to operate an eye care center, as well as "ready made" eye care products, including contact lenses and related supplies. The inventory of eyeglass lenses, frames, contact lenses, accessories and supplies is acquired through a number of sources, domestic and foreign. Management believes that the optical laboratory and distribution center has the capacity to accommodate additional multi-site eye care centers. In early 2001, the Company operated two regional optical laboratories and three distribution centers. During 2001, one laboratory and two distribution centers were closed and their operations were consolidated into the remaining laboratory and distribution center. The laboratory and distribution centers were closed in an effort for the Company to realize greater operating efficiencies from lower inventories and lower payroll costs. The Company's results of operations 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 disregarded 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 September 28, 2002 and September 29, 2001 Net Revenue. During the three months ended September 28, 2002, the Company generated net revenue of $14,223,000, as compared to net revenue of $15,290,000 for the three months ended September 29, 2001. The decrease of $1,067,000, or 7.0%, in net revenue primarily relates to four less eye care centers operating during the three months ended September 28, 2002 as compared to the corresponding period in 2001 and lower same store sales of 5.7%. Cost of Revenue. Cost of revenue decreased from $4,877,000 for the operation of the Company's 119 eye care centers during the three months ended September 29, 2001 to $4,169,000 for the operation of the Company's 115 eye care centers during the three months ended September 29, 2002. Cost of revenue as a percentage of net revenue decreased from 31.9% for the three months ended September 29, 2001 to 29.3% for the three months ended September 28, 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 $9,986,000 for the three months ended September 28, 2002 from $11,231,000 for the three months ended September 29, 2001. The decrease of $1,245,000 primarily relates to reduced staffing levels and lower amortization expenses of $263,000 resulting from the Company's adoption of Statement 142. Selling, general and administrative expenses, as a percentage of net revenue, decreased from 73.5% for the three months ended September 29, 2001 to 70.2% for the three months ended September 28, 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 September 28, 2002 by $263,000 compared to the three months ended September 29, 2001. Interest Expense, Net. Interest expense, net increased to $181,000 for the three months ended September 28, 2002 from $158,000 for the three months ended September 29, 2001. The increase of $23,000 is primarily associated with higher interest rates, offset in part by lower debt outstanding during the three months ended September 28, 2002 compared with the 2001 period. Income Tax Expense. The Company has a significant net operating loss carryforward with a full valuation allowance 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 $157,000 for the three months ended September 28, 2002 as compared to a net loss of $994,000 for the three months ended September 29, 2001. Dividends on Redeemable Convertible Preferred Stock. During the three months ended September 28, 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) 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 paid dividends on its outstanding Preferred Shares by issuing shares of Common Stock to the owner of the Preferred Shares. Net Loss Attributable to Common Stockholders. The Company realized a net loss attributable to common stockholders of $284,000, or $(0.01) per share, for the three month period ended September 28, 2002 as compared to $1,360,000, or $(0.05) per share, for the three month period ended September 29, 2001. The per share net losses for the three months ended September 28, 2002 and September 29, 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 Nine Months Ended September 28, 2002 and September 29, 2001 Net Revenue. During the nine months ended September 28, 2002, the Company generated net revenue of $43,579,000, as compared to net revenue of $45,859,000 for the nine months ended September 29, 2001. The decrease of $2,280,000, or 5.0%, in net revenue primarily relates to seven less eye care centers operating during the nine months ended September 28, 2002 as compared to the corresponding period in 2001 and lower same store sales of 3.1%. Cost of Revenue. Cost of revenue decreased from $14,612,000 for the operation of the Company's 122 eye care centers during the nine months ended September 29, 2001 to $12,649,000 for the operation of the Company's 115 eye care centers during the nine months ended September 28, 2002. Cost of revenue as a percentage of net revenue decreased from 31.9% for the nine months ended September 29, 2001 to 29.0% for the nine months ended September 28, 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 $30,644,000 for the nine months ended September 28, 2002 from $33,847,000 for the nine months ended September 28, 2001. The decrease of $3,203,000 primarily relates to reduced staffing levels and lower amortization expenses of $785,000 resulting from the Company's adoption of Statement 142. Selling, general and administrative expenses, as a percentage of net revenue, decreased from 73.8% for the nine months ended September 29, 2001 to 70.3% for the nine months ended September 28, 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 nine months ended September 28, 2002 by $785,000 compared to the nine months ended September 28, 2001. Interest Expense, Net. Interest expense, net decreased to $539,000 for the nine months ended September 28, 2002 from $587,000 for the nine months ended September 29, 2001. The decrease of $48,000 is primarily associated with a lower average balance of debt outstanding during the nine months ended September 28, 2002 as compared to the corresponding period in 2001. Income Tax Expense. The Company has a significant net operating loss carryforward with a full valuation allowance 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 $310,000 for the nine months ended September 28, 2002 as compared to a net loss of $3,254,000 for the nine months ended September 29, 2001. Dividends on Redeemable Convertible Preferred Stock. During the nine months ended September 28, 2002 the Company accrued $381,000 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) 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 paid dividends on its outstanding Preferred Shares by issuing shares of Common Stock to the owner of the Preferred Shares. Net Loss Attributable to Common Stockholders. The Company realized a net loss attributable to common stockholders of $691,000, or $0.02 per share, for the nine month period ended September 28, 2002 as compared to a net loss of $3,877,000, or $0.26 per share, for the nine month period ended September 29, 2001. The per share net losses for the nine months ended September 28, 2002 and the per share loss for the nine months ended 9 September 29, 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 September 28, 2002, the Company had $505,000 in cash and cash equivalents and a working capital deficit of $6,856,000 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 $205,000 is primarily due a decrease in outstanding indebtedness and accounts payable offset in part by a decrease in cash. The largest portion of the net working capital deficit at September 28, 2002 was debt of $7,270,000 that matures on December 31, 2002. The Company needs 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 period 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. As of November 18, 2002, the Company is in substantial negotiations with both its existing lender and a new potential senior lender. The potential loan value of the Company's tangible assets do not support repayment or refinancing of the entire amount owed to Fleet Bank of $7,120,000, as of November 18, 2002. Based on various term sheets received by the Company, the potential loan value of the Company's tangible assets is between $2,500,000 and $4,000,000. The difference between potential loan value from a new lender and amounts owed Fleet is approximately $3,100,000 to $4,600,000. This difference will require the Company to either (a) close a transaction with new equity, subordinated debt or additional collateral pledged outside of the Company's existing assets, (b) negotiate forgiveness for a portion of outstanding debt with Fleet Bank or (c) accomplish some combination of (a) and (b) above. The Company is also in substantial negotiations with a group to invest new equity or subordinated debt and with Fleet Bank for forgiveness of a portion of outstanding indebtedness. The Company is optimistic that the sum of these transactions will be complete before December 31, 2002. Because the Company does not have legally binding commitment letters or contracts with the parties above, there can be no guarantee that these transactions will be complete by December 31, 2002. If the Company is, by December 31, 2002, unable to complete the necessary transactions or negotiate an extension with Fleet Bank, the Company will be in default in respect of the Fleet Bank indebtedness. Default under the loan agreement could materially and adversely affect the Company's business and financial condition. 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 10 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 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 September 28, 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 11 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 July 2001, the Company obtained net equity proceeds of $1,753,000. In August 2001, Sovereign sold the loan back to Fleet. On July 12, 2002 the Company entered into a Fourth Modification Agreement with Fleet Bank and Kent Optometric Providers, Inc. (a professional corporation). The purpose of the fourth modification was for Fleet to approve of a restructure of Kent Optical Company such that the Company, its subsidiaries and affiliated professional corporations complied with certain business contracts. In November 2002, the Company entered into a Fifth Modification Agreement with Fleet Bank that reduced the November 2002 principal payment from $100,000 to $50,000. As of September 28, 2002, the Company's outstanding indebtedness under the 1999 Agreement was $2,500,000 under the revolving line of credit and $4,770,000 under the term loan. The Company was in compliance with the covenants contained in the Amended and Restated Third Modification Agreement for the nine months ended September 28, 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. 12 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, 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 would be recognized as the cumulative effect of a change in accounting principle in the Company's consolidated statement of operations. 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. 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 nine months ended September 28, 2002 by $263,000 and $785,000, respectively, compared to the prior periods. Effective January 1, 2002, the Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("Statement 144"). Statement 144 retained many of the fundamental provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("Statement 121"), 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 Earnings 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 SFAS No. 143, "Accounting for Asset Retirement Obligations" ("Statement 143"), which will be effective for the Company beginning January 1, 2003. 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 SFAS No. 145, "Rescission of FASB Statements No. 4, 44, 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("Statement 145"), which will be effective for the Company beginning January 1, 2003. Statement 145 rescinds FASB Statement No. 4, 44, 64 and amends SFAS 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. In July 2002, the FASB issued Statement 146, "Accounting for Costs Associated With Exit or Disposal Activities" ("Statement 146"), which will be effective for exit or disposal activities initiated after December 31, 2002. Statement 146 will require that a company record exit or disposal costs when they are incurred and can be measured at fair value, and subsequently adjust the recorded liability for changes in estimated cash flows. Statement 146 also revises accounting for specified employee and contract terminations that are part of restructuring activities. The Company has assessed the impact of Statements 143, 145 and 146, and estimates that the impact of these standards will not be material. MANAGEMENT'S DISCUSSION OF CRITICAL ACCOUNTING POLICIES In December 2001, the SEC requested that all registrants identify and describe their most "critical accounting policies" in Management's Discussion and Analysis. The SEC indicated that a "critical accounting policy" is one which is both important to the portrayal of the company's financial condition and results and requires management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company believes that the following of the Company's accounting policies fit this definition. Revenue Recognition and Allowance for Bad Debts The Company recognizes revenue from the sale of eyewear at the time an order is complete and revenue from eyecare services when the service is performed. The Company has fee for service arrangements with most of its third party payers. The Company recognizes revenue with third party payers net of contractual allowances. The level of management judgment used to determine revenue is small. Because of various circumstances, such as changes in third party plan contractual allowances, changes in patient co-pays, and goods or services denied by third party payers, the Company reviews the agings of receivables from third party payers and patients on at least a monthly basis. Sometimes claims have incomplete or inaccurate information, and the Company re-submits those claims to the third party payer. If amounts are denied by the third party payer and the Company has recourse to the patient, the Company pursues payment from the patient. Based on the Company's history of collectibility of older third party payer and patient receivables, the Company provides a reserve for uncollectibility. 13 At September 28, 2002 and December 29, 2001, the Company had reserved for 46% and 42%, respectively, of the gross amount of the outstanding third party payer and patient receivables. If actual collectibility of these receivables is significantly different from management's estimate, it could have a material (favorable or unfavorable) result on the operating results and liquidity of the Company. Impairment of Long-Lived Assets The Company records impairment losses on long-lived assets when changes in circumstances indicate that the assets carrying amount may not be recoverable and the undiscounted cash flows estimated to be generated by those assets are less than the book value of those assets. 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. The Company did not record any charges for the impairment of long-lived assets. At September 28, 2002, the Company had long-lived assets, including goodwill and other intangibles of $19,273,000, property and equipment of $2,174,000, 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 web site 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 September 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 as of December 29, 2001 and September 28, 2002. Generally accepted accounting principles require that the Company records a valuation allowance against deferred tax assets if it is "more likely than not" that the Company will not be able to generate sufficient future taxable income to recover the deferred tax assets recorded. Due to the size of the net deferred tax assets in relation to the Company's history of unprofitable operations, the Company has not recognized any of the net deferred tax assets. 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 net deferred tax assets. Upon reaching such a conclusion, the Company would immediately record the estimated net realizable value of the net deferred tax assets 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 14 approximate 40% under current tax rates. Subsequent revisions to the estimated net realizable value of the net deferred tax assets 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 deferred tax assets are utilized. The rate of utilization of the Company's NOL carryforward may be limited under Section 382 of the Internal Revenue Code due to changes in ownership of shares of the Company occurring over the past several years. To date, the Company has not determined whether in fact the utilization of its NOL carryforward is limited. 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 disregarded 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. 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 approximately $5,500,000 bringing its accumulated deficit to approximately $31,600,000 at December 29, 2001. The loss for the nine months ended September 28, 2002 was $310,000. 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. As of September 28, 2002, the Company owed Fleet Bank $2,500,000 under a revolving loan and $4,770,000 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. 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. As of November 18, 2002, the Company is in substantial negotiations with both its existing lender, and a new potential senior lender. The potential loan value of the Company's tangible assets do not support repayment or refinancing of the entire amount owed to Fleet Bank of $7,120,000, as of November 18, 2002. Based on various term sheets received by the Company, the potential loan value of the Company's tangible assets is between $2,500,000 and $4,000,000. The difference between potential loan value from a new lender and amounts owed Fleet is approximately $3,100,000 to $4,600,000. This difference will require the Company to either (a) close a transaction with new equity, subordinated debt or additional collateral pledged outside of the Company's existing assets, (b) negotiate forgiveness for a portion of outstanding debt with Fleet Bank or (c) accomplish some combination of (a) and (b) above. The Company is also in substantial negotiations with a group to invest new equity or subdebt and with Fleet Bank for forgiveness of a portion of outstanding indebtedness. The Company is optimistic that the sum of these transactions will be complete before December 31, 2002. Because the Company does not have legally binding commitment letters or contracts with the parties above, there can be no guarantee that these transactions will be complete by December 31, 2002. If the Company is, by December 31, 2002, unable to complete the necessary transactions or negotiate an extension with Fleet Bank, the Company will be in default in respect of the Fleet Bank indebtedness. Default under the loan agreement could materially and adversely affect the Company's business and financial condition. 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 15 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. In September, the Company was notified that its first appeal was denied and requested a second appeal hearing. The second appeal hearing occurred in November and the Company to date has not been notified of the determination from the second hearing. If the Company is unsuccessful in the appeal process, the Company may elect to litigate the matter. If the Company is unsuccessful in the appeal process, the Company could gradually lose this business as patients over time use other eye care providers. 16 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. 17 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 September 28, approximately $7,270,000 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 $73,000. ITEM 4. REPORT ON CONTROLS The Company's Chief Executive Officer, Carene Kunkler, and the Company's Chief Financial Officer, Duane Kimble, have evaluated the Company's disclosure controls and procedures within 90 days of the filing of this report. Ms. Kunkler and Mr. Kimble have concluded that the Company's disclosure controls and procedures systems are functioning effectively to provide reasonable assurance that the Company can meet its disclosure obligations. The reporting process is designed to ensure that information required to be disclosed by the Company in the reports that it files or submits with the Commission is recorded, processed, summarized and reported within the time period specified in the Commission's rules and forms. Since the date of Ms. Kunkler's and Mr. Kimble's evaluation, there have been no significant changes in the Company's internal controls or in other factors that could significantly affect those controls. PART II - OTHER INFORMATION ITEM 5. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 6. OTHER INFORMATION None. ITEM 7. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits - See Index to Exhibits (b) No reports on Form 8-K were filed during the three months ended September 28, 2002. 18 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: November 18, 2002 By: /S/ Carene S. Kunkler ----------------- ------- ----------------- Carene S. Kunkler President and Chief Executive Officer (duly authorized officer) Date: November 18, 2002 By: /S/ Duane D. Kimble, Jr. ----------------- ------- -------------------- Duane D. Kimble, Jr. Chief Financial Officer (principal financial officer) 19 CERTIFICATIONS I, Carene S. Kunkler, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Sight Resource Corporation (the "registrant"); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a -14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors; a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 18, 2002 By: /S/ Carene S. Kunkler ----------------- ------- ----------------- Carene S. Kunkler President and Chief Executive Officer CERTIFICATIONS I, Duane D. Kimble, Jr., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Sight Resource Corporation (the "registrant"); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a -14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors; a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 18, 2002 By: /S/ Duane D. Kimble, Jr. ----------------- ------- -------------------- Duane D. Kimble, Jr. Chief Financial Officer EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.36 Fleet Fourth Modification Agreement 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-10.36 3 l97317aexv10w36.txt EXHIBIT 10.36 EXHIBIT 10.36 FOURTH MODIFICATION AGREEMENT THIS FOURTH MODIFICATION AGREEMENT (hereinafter, this "AGREEMENT") is made this 12th day of July, 2002 by and among: FLEET NATIONAL BANK, AS SUCCESSOR-IN-INTEREST TO SOVEREIGN BANK, AS SUCCESSORIN-INTEREST TO FLEET NATIONAL BANK (hereinafter, the "BANK"), a national banking association with a usual place of business at One Federal Street, Boston, Massachusetts 02110; SIGHT RESOURCE CORPORATION (hereinafter, "SIGHT RESOURCE"), a Delaware corporation with a principal place of business at c/o Sight Resource Corporation, 6725 Miami Avenue, Cincinnati, Ohio 45243; CAMBRIDGE EYE ASSOCIATES, INC. (hereinafter, "CAMBRIDGE EYE"), a Delaware corporation with a principal place of business at One Highland Avenue, Unit 3B, Malden, Massachusetts; DOUGLAS VISION WORLD, INC. (hereinafter, "DOUGLAS VISION"), a Delaware corporation with a principal place of business at One Highland Avenue, Unit 3B, Malden, Massachusetts; E.B. BROWN OPTICIANS, INC. (hereinafter, "E.B. BROWN"), a Delaware corporation with a principal place of business at 1549 E. 30th Street, Cleveland, Ohio; EYEGLASS EMPORIUM, INC. (hereinafter, "EYEGLASS EMPORIUM"), a Delaware corporation with a principal place of business at c/o Sight Resource Corporation, 6725 Miami Avenue, Cincinnati, Ohio 45243; KENT OPTICAL COMPANY, F/K/A KENT ACQUISITION CORP. (hereinafter, "KENT OPTICAL"), a Delaware corporation with a principal place of business at c/o Sight Resource Corporation, 6725 Miami Avenue, Cincinnati, Ohio 45243; SHAWNEE OPTICAL, INC. (hereinafter, "SHAWNEE OPTICAL"), a Delaware corporation with a principal place of business at 2203 W. 38th Street, Erie, Pennsylvania; VISION PLAZA, CORP. (hereinafter, "VISION PLAZA"), a Delaware corporation with a principal place of business at 3301 Veterans Memorial Boulevard, Suite 54E, Metarie, Louisiana; and KENT OPTOMETRIC PROVIDERS, P.C. (hereinafter, "KENT PC"), a Michigan professional corporation with a principal place of business at 896 Jefferson Street, Muskegon, Michigan 49443. Hereinafter, the Sight Resource, Cambridge Eye, Douglas Vision, E.B. Brown, Eyeglass Emporium, Kent Optical, Shawnee Optical, Vision Plaza, and Kent PC and shall be referred to collectively, jointly, and severally, as the "OBLIGORS." W I T N E S S ET H WHEREAS, reference is hereby made to certain loan arrangements (hereinafter, the "LOAN ARRANGEMENTS") entered into by and between Sight Resource, Cambridge Eye, Douglas Vision, E.B. Brown, Eyeglass Emporium, Kent Optical, Shawnee Optical, Vision Plaza (hereinafter, individually and collectively, the "ORIGINAL BORROWERS") and the Bank, evidenced by, among other things, the following documents, instruments, and agreements (hereinafter collectively, together with this Agreement and all documents, instruments, and agreements executed incidental hereto, and contemplated hereby, the "LOAN DOCUMENTS"): (a) Loan Agreement (hereinafter, as amended, the "LOAN AGREEMENT") dated April 15, 1999, entered into by and between the Bank and the Original Borrowers; (b) Secured Revolving Line Note (hereinafter, the "REVOLVING NOTE") dated April 15, 1999 in the maximum principal amount of $3,000,000.00 made by the Original Borrowers payable to the Bank; (c) Secured Term Note (hereinafter, the "TERM NOTE") dated April 15, 1999 in the original principal amount of $7,000,000.00 made by the Original Borrowers payable to the Bank; (d) (i) Eight (8) Security Agreements (All Assets) dated April 15, 1999 respectively, by each of the Original Borrowers, as amended and confirmed by certain Ratifications and Amendments of Security Agreements dated January 31, 2002, and (ii) Security Agreement (All Assets) (hereinafter, collectively, the "SECURITY AGREEMENTS") dated July ____, 2002 by Kent PC, pursuant to which each of the Obligors granted the Bank a security interest in the Collateral (as defined in the Security Agreements); (e) Security Agreement (Pledged Collateral) dated April 15, 1999, pursuant to which Sight Resource assigned, transferred, and delivered to the Bank all of the Collateral (as defined therein); (f) Modification Agreement (hereinafter, the "MODIFICATION AGREEMENT") dated March 31, 2000 entered into by the Bank and the Original Borrowers; and (g) Second Modification Agreement (hereinafter, the "SECOND MODIFICATION AGREEMENT") dated November 30, 2000 entered into by the Bank and the Original Borrowers. (h) Amended and Restated Third Modification Agreement (hereinafter, the "THIRD MODIFICATION AGREEMENT") dated May 14, 2001 entered into by the Bank and the Original Borrowers. Capitalized terms used herein and not otherwise defined shall have the meanings as set forth in the Loan Agreement, as amended by (i) the Modification Agreement, (ii) the Second Modification Agreement, and (iii) the Third Modification Agreement. WHEREAS, the Obligors have requested that the Bank amend certain terms and conditions of the Loan Documents as provided for herein; and WHEREAS, the Bank has indicated its willingness to do so, BUT ONLY on the terms and conditions contained in this Agreement; and WHEREAS, the Obligors have determined that this Agreement is in the Obligors' best interest. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Obligors and the Bank agree as follows: ACKNOWLEDGMENT OF INDEBTEDNESS 2. The Obligors each hereby acknowledge and agree that, in accordance with the terms and conditions of (i) the Loan Documents, (ii) this Agreement, and (iii) all documents, instruments, and agreements executed incidental to, and contemplated by this Agreement, the Obligors are jointly and severally liable to the Bank AS OF JULY 12, 2002, as follows: (b) Revolving Note: (i) Principal: $2,500,000.00 (ii) Interest (as of 7/12/02): $6,111.12 (iii) Late Charges (as of 7/12/02): $733.33 (iv) Legal Fees & Expenses (From 1/15/02 - 7/31/02): $25,150.85 (c) Term Note: (i) Principal: $4,970,002.01 (ii) Interest (as of 7/12/02): $12,148.89 (iii) Late Charges (as of 7/12/02): $5,424.62 TOTAL $7,519,570.82 (d) All interest accruing from and after July 12, 2002 under the Revolving Note, and the Term Note, respectively, and all late fees, reasonable costs, expenses, and costs of collection (including reasonable attorneys' fees and the allocated costs of the Bank's inhouse counsel) incurred by the Bank from and after July 12, 2002 in connection with the Loan Documents, including, without limitation, all reasonable attorney's fees and expenses incurred in connection with the negotiation and preparation of this Agreement and all documents, instruments, and agreements incidental hereto. (e) Hereinafter all amounts due as set forth in this Paragraph 1, and elsewhere payable under this Agreement, shall be referred to collectively as the "OBLIGATIONS." WAIVER OF CLAIMS 3. The Obligors each hereby acknowledge and agree that they have no offsets, defenses, claims, or counterclaims against the Bank or the Bank's officers, directors, employees, attorneys, representatives, affiliates, predecessors, successors, and assigns with respect to the Obligations, the Loan Documents, or otherwise, and that if any of the Obligors now have, or ever did have, any offsets, defenses, claims, or counterclaims against the Bank or the Bank's officers, directors, employees, attorneys, representatives, affiliates, predecessors, successors, and assigns, whether known or unknown, at law or in equity, from the beginning of the world through this date and through the time of execution of this Agreement, all of them are hereby expressly WAIVED, and the Obligors each hereby RELEASE the Bank and the Bank's officers, directors, employees, attorneys, representatives, affiliates, predecessors, successors, and assigns from any liability therefor. RATIFICATION OF LOAN DOCUMENTS; FURTHER ASSURANCES 4. The Obligors: (a) Hereby ratify, confirm, and reaffirm all and singular the terms and conditions of the Loan Documents. The Obligors further acknowledge and agree that except as specifically modified in this Agreement, all terms and conditions of those documents, instruments, and agreements shall remain in full force and effect; and (b) Shall, from and after the execution of this Agreement, execute and deliver to the Bank whatever additional documents, instruments, and agreements that the Bank reasonably may require in order to vest or perfect the Loan Documents and the Collateral granted therein more securely in the Bank and to otherwise give effect to the terms and conditions of this Agreement, including, without limitation, such UCC Financing Statements and related documentation as may be necessary in order to perfect the security interest granted to the Bank by the Obligors in the Collateral. CONDITIONS PRECEDENT 5. The Bank's agreement to consent to the transfer of certain assets of Kent Optical to Kent PC, as more particularly set forth herein, shall not be effective unless and until each of the following conditions precedent have been fulfilled, all as determined by the Bank in its sole and exclusive discretion: (a) This Agreement, and all documents, instruments and agreements required hereunder or related hereto shall have been executed by the appropriate parties and delivered to the Bank, shall be in full force and effect and shall be in form and substance satisfactory to the Bank. (b) All actions on the part of the Obligors necessary for the valid execution, delivery and performance by the Obligors of the terms of this Agreement shall have been duly and effectively taken and evidence thereof satisfactory to the Bank shall have been provided to the Bank. (c) The Obligors shall have paid to the Bank in good and collected funds all amounts required to be paid by the Obligors upon the execution of this Agreement. RESTRUCTURE OF KENT OPTICAL COMPANY 6. In connection with the proposed sale of certain assets by Kent Optical to Kent PC, the Obligors and Bank each agree to the following (irrespective of whether such sale of assets by Kent Optical to Kent PC is ever consummated): (a) Kent PC hereby assumes and agrees to pay and perform when due all present and future Obligations of Original Borrowers under, based upon, or arising out of the Loan Agreement, the Loan Documents, or any other instruments or agreements between Obligors and Bank. Kent PC agrees to honor, perform and comply with, in all respects, all terms and provisions of the Loan Agreement and the Loan Documents or any other instruments or agreements between Obligors and Bank. All references in the Loan Agreement and the Loan Documents to "Borrower" and "Obligors" shall be deemed to refer to the Original Borrowers and Kent PC, jointly and severally as co-borrowers. Each of the Original Borrowers hereby consents to the foregoing, and each acknowledges and confirms that it remains and shall continue to be fully liable for the payment and performance of obligations and indebtedness due under the Loan Agreement and the Loan Documents jointly and severally as a coborrower with Kent PC. (b) In connection with the execution of this Agreement, the Obligors shall pay to Bank a non-refundable (except as provided below) fee for the modification of the Loan Agreement in the amount equal to Fifty Thousand Dollars ($50,000.00) (hereinafter, the "MODIFICATION FEE"). The Modification Fee shall be fully earned by the Bank as of the date of this agreement, and payable in accordance with the following: (i) Twenty-Five Thousand Dollars ($25,000.00) shall be payable on the date of this Agreement (and Bank acknowledges the receipt of same from the Obligors), (ii) the remaining Twenty-Five Thousand Dollars ($25,000.00) (the "MODIFICATION FEE BALANCE") shall be due and payable the earlier of the occurrence of an Event of Default under the Loan Agreement (as amended hereby), or December 24, 2002. Notwithstanding the foregoing, if the Obligors voluntarily repay (prior to an Event of Default or demand by Bank) all Obligations to Bank on or before December 24, 2002 (and terminate the Loan Agreement), the Bank shall waive the requirement that Obligors pay to Bank the Modification Fee Balance provided that no Event of Default has occurred prior to, or is existing on the date of, such repayment. (c) Upon the Obligors' execution and delivery of this Agreement, and the satisfaction by the Obligors of all conditions precedent described herein, the Bank agrees to consent to the transfer of certain assets of Kent Optical to Kent PC described in a certain Asset Purchase Agreement dated June 18, 2002 between Kent Optical and Kent PC, provided that such transfer shall remain subject to liens in favor of the Bank. LICENSING AGREEMENTS 7. The Obligors each hereby represent and warrant to the Bank that: (a) The Obligors maintain licensing agreements with only those parties specifically identified on EXHIBIT "A" attached hereto; (b) The Collateral granted to the Bank under the Security Agreements is subject to the rights of only those licensors specifically listed on EXHIBIT "A"; and (c) Complete and accurate copies of all licensing agreements (together with any amendments or addendums thereto) maintained among the Obligors and any other parties are attached hereto as EXHIBIT "B". COSTS OF COLLECTION 8. The Obligors shall: (a) Within five (5) days of the date of this Agreement, the Obligors shall pay the Bank the sum of $25,150.85 in reimbursement for reasonable costs, expenses, and costs of collection (including reasonable attorneys' fees and expenses) incurred by the Bank from January 15, 2002 through July 31, 2002, in connection with the protection, preservation, and enforcement by the Bank of its rights and remedies under the Loan Documents, including, without limitation, the negotiation and preparation of this Agreement. (b) On demand, reimburse the Bank for any and all reasonable costs, expenses, and costs of collection (including reasonable attorneys' fees and expenses) incurred by the Bank from and after August 1, 2002, in connection with the protection, preservation, and enforcement by the Bank of its rights and remedies under the Loan Documents. NOTICES 9. Any communication between the Bank and the Obligors shall be forwarded via certified mail, return receipt requested, or via recognized overnight courier, addressed as follows: If to the Bank: Fleet National Bank Managed Assets Division 111 Westminster Street Providence, Rhode Island 02903 Attn.: Mr. Albert J. Buresh With a copy via telecopier to: Steven T. Greene, Esquire Riemer & Braunstein LLP Three Center Plaza Boston, Massachusetts 02108 Telecopier No. (617) 880-3456 If to the Obligors: Sight Resource Corporation 6725 Miami Avenue Cincinnati, Ohio 45243 Attn: Carene Kunkler President and CEO With a copy via telecopier to: Thomas Mills, Esquire Winston & Strawn 1400 L Street, N.W. Washington, DC 20005-3502 Telecopier No. (202) 371-5950 WAIVERS 10. NON-INTERFERENCE. From and after the occurrence of any Event of Default, the Obligors agree not to interfere with the exercise by the Bank of any of its rights and remedies. The Obligors further agree that they shall not seek to distrain or otherwise hinder, delay, or impair the Bank's efforts to realize upon any of the collateral granted to the Bank under the Loan Documents, or otherwise to enforce the Bank's rights and remedies pursuant to the Loan Documents. This provision shall be specifically enforceable by the Bank. 11. AUTOMATIC STAY. The Obligors hereby expressly assent to any motion filed by the Bank seeking relief from the automatic stay in connection with any Petition for Relief filed by or against any one or more of the Obligors under the United States Bankruptcy Code. 12. JURY TRIAL. The Obligors hereby make the following waiver knowingly, voluntarily, and intentionally, and understand that the Bank, in entering into this Agreement, or in making any financial accommodations to the Obligors, is relying on such a waiver: THE OBLIGORS HEREBY IRREVOCABLY WAIVE ANY PRESENT OR FUTURE RIGHT TO A JURY IN ANY TRIAL OF ANY CASE OR CONTROVERSY IN WHICH THE BANK BECOMES A PARTY (WHETHER SUCH CASE OR CONTROVERSY IS INITIATED BY OR AGAINST THE BANK OR IN WHICH THE BANK IS JOINED AS A PARTY LITIGANT), WHICH CASE OR CONTROVERSY ARISES OUT OF, OR IS IN RESPECT OF, ANY RELATIONSHIP BETWEEN THE OBLIGORS, OR ANY OTHER PERSON OR ENTITY, AND THE BANK. ENTIRE AGREEMENT 13. This Agreement shall be binding upon the Obligors and the Obligors' respective employees, representatives, successors, and assigns, and shall inure to the benefit of the Bank and the Bank's successors and assigns. This Agreement and all documents, instruments, and agreements executed in connection herewith incorporate all of the discussions and negotiations between the Obligors and the Bank, either expressed or implied, concerning the matters included herein and in such other documents, instruments and agreements, any statute, custom, or usage to the contrary notwithstanding. No such discussions or negotiations shall limit, modify, or otherwise affect the provisions hereof. No modification, amendment, or waiver of any provision of this Agreement, or any provision of any other document, instrument, or agreement between the Obligors and the Bank shall be effective unless executed in writing by the party to be charged with such modification, amendment, or waiver, and if such party be the Bank, then by a duly authorized officer thereof. CONSTRUCTION OF AGREEMENT 14. In connection with the interpretation of this Agreement and all other documents, instruments, and agreements incidental hereto: (a) All rights and obligations hereunder and thereunder, including matters of construction, validity, and performance, shall be governed by and construed in accordance with the law of the Commonwealth of Massachusetts and are intended to take effect as sealed instruments. (b) The captions of this Agreement are for convenience purposes only, and shall not be used in construing the intent of the Bank and the Obligors under this Agreement. (c) In the event of any inconsistency between the provisions of this Agreement and any other document, instrument, or agreement entered into by and between the Bank and the Obligors, the provisions of this Agreement shall govern and control. (d) The Bank and the Obligors have prepared this Agreement and all documents, instruments, and agreements incidental hereto with the aid and assistance of their respective counsel. Accordingly, all of them shall be deemed to have been drafted by the Bank and the Obligors and shall not be construed against either the Bank or the Obligors. ILLEGALITY OR UNENFORCEABILITY 15. Any determination that any provision or application of this Agreement is invalid, illegal, or unenforceable in any respect, or in any instance, shall not affect the validity, legality, or enforceability of any such provision in any other instance, or the validity, legality, or enforceability of any other provision of this Agreement. INFORMED EXECUTION 16. The Obligors warrant and represent to the Bank that the Obligors: (a) Have read and understand all of the terms and conditions of this Agreement; (b) Intend to be bound by the terms and conditions of this Agreement; (c) Are executing this Agreement freely and voluntarily, without duress, after consultation with independent counsel of their own selection; and (d) Acknowledge and agree that the modifications provided to the Obligors by the Bank pursuant to this Agreement constitute a fair and reasonable time frame within which all Obligations are to be paid in full. IN WITNESS WHEREOF, this Agreement has been executed on this 12th day of July, 2002. FLEET NATIONAL BANK SIGHT RESOURCE CORPORATION By:__________________________________ By:_________________________________ Title: Title: CAMBRIDGE EYE ASSOCIATES, INC. By:Duane D. Kimble, Jr. Title: Vice President DOUGLAS VISION WORLD, INC. By:Duane D. Kimble, Jr. Title: Vice President E.B. BROWN OPTICIANS, INC. By:Duane D. Kimble, Jr. Title: Vice President EYEGLASS EMPORIUM, INC. By:Duane D. Kimble, Jr. Title: KENT OPTICAL COMPANY, f/k/a KENT ACQUISITION CORP. By:Duane D. Kimble, Jr. Title: Vice President SHAWNEE OPTICAL, INC. By:Duane D. Kimble, Jr. Title: Vice President VISION PLAZA, CORP. By:Duane D. Kimble, Jr. Title: Vice President KENT OPTOMETRIC PROVIDERS, P.C. By:Dr. Steven R. Schaff Title: President EXHIBIT "A" TO A CERTAIN FOURTH MODIFICATION AGREEMENT DATED AS OF JULY ___, 2002 AMONG SIGHT RESOURCE, ET AL. AND FLEET NATIONAL BANK Licensors 1. Marchon Delta Systems, Inc.; and 2. Microsoft Corporation EXHIBIT "B" TO A CERTAIN FOURTH MODIFICATION AGREEMENT DATED AS OF JULY ___, 2002 AMONG SIGHT RESOURCE, ET AL. AND FLEET NATIONAL BANK License Agreements EX-99.2 4 l97317aexv99w2.txt EXHIBIT 99.2 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 September 28, 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: November 18, 2002 By: /S/ Carene S. Kunkler ------- ----------------- Carene S. Kunkler Chief Executive Officer EX-99.3 5 l97317aexv99w3.txt EXHIBIT 99.3 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 September 28, 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 3. The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 18, 2002 By: /S/ Duane D. Kimble, Jr. ------- -------------------- Duane D. Kimble, Jr. Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----