-----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, TknIbXjgKwP7oWmEftm+hDecA95sHs6CJzg+6b8e8JZpnj4Fvk0kFT8C1DcpmwkL 7BsCqWTeGGVjPUied7jhOQ== 0001019056-99-000183.txt : 19990402 0001019056-99-000183.hdr.sgml : 19990402 ACCESSION NUMBER: 0001019056-99-000183 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIGHT RESOURCE CORP CENTRAL INDEX KEY: 0000895651 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HEALTH SERVICES [8000] IRS NUMBER: 043181524 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-21068 FILM NUMBER: 99582451 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-K405 1 FORM 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998, OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________ 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) 100 JEFFREY AVENUE, HOLLISTON, MA 01746 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) Registrant's telephone number, including area code: (508) 429-6916 Securities registered pursuant to Section 12(b) of the Exchange Act: NONE. Securities registered pursuant to Section 12(g) of the Exchange Act: COMMON STOCK, $.01 PAR VALUE PER SHARE -------------------------------------- (Title of Class) PREFERRED SHARE PURCHASE RIGHTS ------------------------------- (Title of Class) Redeemable Warrants, each exercisable for the purchase of one share of COMMON STOCK, $.01 PAR VALUE PER SHARE, AT $6.00 ------------------------------------------------ (Title of Class) 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 [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] The aggregate market value of the registrant's voting stock held by non-affiliates of the registrant (without admitting that any person whose shares are not included in such calculation is an affiliate) on March 18, 1999, was approximately $26,050,237, based on the last sale price as reported by NASDAQ. As of March 18, 1999, the registrant had 9,060,952 shares of common stock outstanding, which does not include 30,600 shares held as treasury stock. DOCUMENTS INCORPORATED BY REFERENCE The following documents (or parts thereof) are incorporated by reference into the following parts of this Form 10-K: Certain information required in Part III of this Annual Report on Form 10-K is incorporated from the registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on May 20, 1999. 1 PART 1 ITEM 1. BUSINESS GENERAL Sight Resource Corporation (the "Company") manufactures, distributes and sells eyewear and related products and services. As of December 31, 1998 the Company's operations consisted of 93 eye care centers, with three regional optical laboratories and distribution centers, making it one of the seventeen largest providers in the primary eye care industry based upon sales. Effective January 1, 1999 the Company acquired Shawnee Optical, a chain of nine primary eye care centers operating in Ohio and western Pennsylvania, increasing to 102 the total number of eye care centers operated by the Company. The Company's eye care centers operate primarily under the brand names Cambridge Eye Doctors, E.B. Brown Opticians, Eyeglass Emporium, Vision Plaza, Vision World and Shawnee Optical. The Company also provides or, where necessary to comply with applicable law, administers the business functions of optometrists, ophthalmologists and professional corporations that provide vision related professional services. In addition, as of December 31, 1998 the Company operated two laser vision correction ("LVC") centers. ACQUISITION HISTORY AND STRATEGY Effective January 1, 1995, the Company acquired the assets of Cambridge Eye Associates, Inc. ("Cambridge Eye"), an optometric practice which, at December 31, 1998, operated 23 primary eye care centers, principally in Massachusetts. The assets and liabilities of Cambridge Eye were acquired from a Company by the same name (Cambridge Eye Associates, Inc.) owned by Elliot S. Weinstock, O.D. as sole stockholder. Following the acquisition, Cambridge Eye entered into a management services contract with Optometric Providers, Inc. ("Optometric Providers"), a corporation established to employ the optometrists previously employed by the acquired company. Effective July 1, 1995, the Company acquired the assets of Douglas Vision World, Inc. ("Vision World"), a company which, at December 31, 1998, operated seven primary eye care centers in Rhode Island. The assets and liabilities of Vision World were acquired from a company by the same name (Douglas Vision World, Inc.) owned by Kathleen Haronian, Lynn Haronian and Shirley Santoro. Following the acquisition Vision World entered into a management services contract with Optometric Care, Inc. ("Optometric Care"), a professional corporation established to employ the optometrists previously affiliated with the acquired Company. Effective July 1, 1996, the Company acquired the assets and liabilities of three companies, the E.B. Brown Optical Company, Brown Optical Laboratories, Inc. and E.B. Brown Opticians, Inc. (collectively, "E.B. Brown"), all owned by Gordon and Evelyn Safran. At December 31, 1998, E. B. Brown operated 37 eye care centers in Ohio and western Pennsylvania. Independent optometrists are associated with all E.B. Brown eye care centers; therefore, the Company does not record revenue from the provision of vision related medical services at these locations. The Company may add optometrists to the staffs of several of its eye care centers in Ohio and Pennsylvania. To accomplish this, it may be necessary to enter into management services contracts with professional corporations established to employ these optometrists. Effective July 1, 1997, the Company acquired all of the outstanding shares of stock of Vision Holdings, Ltd. (formerly known as Dr. Greenberg, An Optometry Corporation d/b/a Vision Plaza)("Vision Plaza"). At December 31, 1998, Vision Plaza operated 15 primary eye care centers and two specialty eyewear centers in Louisiana and Mississippi. Following the acquisition, Vision Plaza entered into a management services contract with Dr. John Musselman, A Professional Corporation ("Musselman"), a corporation established to employ the optometrists previously employed by the acquired company. 2 Effective April 1, 1998, the Company acquired all of the outstanding shares of stock of Eye Glass Emporium, Inc. ("Eyeglass Emporium"). At December 31, 1998, Eyeglass Emporium operated nine primary eye care centers in northwest Indiana. Independent optometrists are associated with all Eyeglass Emporium eye care centers, therefore, the Company does not record revenue from the provision of vision related medical services at these locations. Effective January 1, 1999, the Company acquired all of the outstanding shares of stock of Shawnee Optical, Inc. ("Shawnee"). At January 1, 1999, Shawnee operated nine primary eye care centers in western Pennsylvania and central Ohio. Independent optometrists are associated with all Shawnee eye care centers, therefore, the Company does not record revenue from the provision of vision related medical services at these locations. The Company has an acquisition strategy to acquire and integrate the assets of multi-site eye care centers and the practices of eye care professionals and to employ or enter into management services contracts with these professionals. This strategy includes both expanding existing regional markets and entering new regional markets. The Company will also target acquisitions in strategic markets that will serve as platforms from which the Company can consolidate a given service area by making and integrating additional "in-market" acquisitions. In assessing potential acquisition candidates, the Company evaluates qualitative issues such as the reputation of the eye care professional in the local and national marketplace, the training and education of the eye care professional, licensure and experience, Medicare and Medicaid compliance, billing practices and operating history. Prior to entering any market, the Company considers such factors as the local level of eye care competition, networking and consolidation activity, the regulatory environment, customer-provider ratios and the economic condition of the local market. The Company from time to time also considers acquisitions of, or affiliations with, ambulatory surgical centers, specialty eye hospitals and other complementary practices and services that are consistent with its objective of being a leading integrated provider of eye care products and services in select, regional markets. CURRENT OPERATIONS EYE CARE CENTERS The Company's 102 eye care centers are located in major shopping malls, strip shopping centers, urban locations and free-standing buildings and generally are clustered within discrete market areas so as to maximize the benefit of advertising strategies and to minimize the cost of supervising operations. The Company's centers in Massachusetts, Rhode Island, Ohio and Louisiana are leading providers of prescription and non-prescription eye care products and services in those markets. In addition, the Company's eye care centers in Indiana, New Hampshire, Pennsylvania and Mississippi are leading providers in their local markets. The eye care centers are substantially similar in appearance within each region and are operated under certain uniform standards and operating procedures. Each eye care center carries a selection of eyeglass frames, ranging in price from value models to designer collections. Lens and frame selections include a variety of materials and styles. The Company continually analyzes sales of its frames to keep its eye care centers stocked with a wide selection of the latest in eyewear fashion and a proper assortment of styles, colors, and sizes. In addition to prescription eyewear, each eye care center also carries fashion sunglasses and eyewear accessories. E.B. Brown's eye care centers also offer hearing aids and audiology goods and services which are provided by audiologists who service many of E.B. Brown's centers on a rotating schedule. Each eye care center in Massachusetts, New Hampshire, Rhode Island, Indiana, Louisiana and Mississippi is staffed by one or more licensed optometrists, a manager and a number of trained eye care technicians and/or 3 licensed opticians. The Company intends to continue to add optometrists to several of its eye care centers in Ohio and Pennsylvania. CENTRALIZED OPTICAL LABORATORIES AND DISTRIBUTION CENTERS To meet the volume needs of the eye care centers for certain prescription eyeglass lenses and the delivery needs of each center's customers, the Company operates three regional optical laboratories and distribution centers. The regional optical laboratories provide complete laboratory services to the Company's eye care centers, including polishing, cutting and edging, tempering, tinting and coating of ophthalmic lenses. The distribution centers provide and maintain an inventory of all accessories and supplies necessary to operate the primary eye care centers in their regions, as well as "ready made" eye care products, including contact lenses and related supplies. The inventory of eyeglass lenses, frames, contact lenses, accessories and supplies is acquired through a number of sources, domestic and foreign. The Company is not dependent on any one supplier. Management believes that the regional optical laboratories and distribution centers have the capacity to accommodate additional multi-site eye care centers. MANAGEMENT INFORMATION AND FINANCIAL SYSTEMS In 1998 the Company completed the first stage of testing and installation of software associated with a new point of sale system and perpetual inventory system for its primary eye care centers, regional optical laboratories and distribution centers. The Company completed the installation of the new point of sale system in its New England eye care chains in the Fall of 1998 and anticipates the installation of the system to be completed in its remaining chains during 1999. The Company believes that the new system will facilitate the processing of customer sales information and replenishment of inventory by passing such information, including customer specific orders, to the Company's home office, and its regional optical laboratories and distribution centers for further processing. When the Company acquires additional eye care chains, it intends to integrate those chains into the new system or a similar compatible system. MANAGED PRIMARY EYE CARE The Company implemented its SightCare program to address the expanding enrollment of patients in managed primary eye care programs and the resulting customer flow to designated providers of these managed primary eye care services. SightCare is responsible for developing programs for third party payors, securing new contracts for providing managed primary eye care services, and ensuring the consistency and quality of managed primary eye care products and services delivered by the Company. As of December 31, 1998, the Company provided managed primary eye care benefits to more than 50 organizations in the markets served by its chains, including private companies, unions and leading health maintenance organizations. The Company believes that its buying power, regional laboratories, in-center optometrists, and broad outreach within its markets, enable it to deliver consistent, quality eyewear and primary eye care at competitive prices, thereby positioning the Company to achieve a leadership position in managed primary eye care in its markets. MANAGEMENT AGREEMENTS Many states have laws which prohibit or restrict the practice of optometry by non-licensed persons or entities. See "- Government Regulation." In states which allow the Company to employ optometrists and ophthalmologists, the Company plans on providing professional services directly. Otherwise, the Company will enter into management agreements with optometrists, ophthalmologists and/or professional corporations which will provide the professional eye care services. The Company's wholly owned subsidiaries, Cambridge Eye, Vision World, and Vision Plaza each entered into a management agreement with Optometric Providers, 4 Optometric Care, and Musselman (collectively the "PCs"), respectively. Accordingly, Cambridge Eye operates as the management service organization ("MSO") for Optometric Providers, Vision World operates as the MSO for Optometric Care, and Vision Plaza operates as the MSO for Musselman. Cambridge Eye, Vision World, and Vision Plaza, as MSOs, have exclusive decision making authority for the ongoing major operations of the PCs, with the exception of the provision of professional eye care services. Pursuant to these management agreements, the Company, among other things, (i) acts as the exclusive financial manager, business manager and administrator of all business and administrative functions and services associated with the provision of the professional services, (ii) orders and purchases all professional and office inventory and supplies and arranges for the availability of the same, (iii) maintains files and records, (iv) provides or arranges for the provision of technical and ancillary service and support personnel, (v) establishes, operates and maintains bookkeeping, payroll, accounting, billing and collection systems, (vi) renders advice concerning the marketing of services, (vii) develops and administers benefit plans for the professionals and (viii) renders such other business and financial management, consultation and advice as may reasonably be needed from time to time by the practice in connection with its provision of professional services. As a result, the Company is involved in the daily on-site financial and administrative management of these optometric practices. The Company's goals in providing such services are to (i) improve the performance of these optometric practices in these non-professional activities, (ii) allow the optometrists employed by or associated with these practices to more fully dedicate their time and efforts toward their professional practice activities, and (iii) afford the Company expanded service capabilities, and, for itself and on behalf of the optometric practices, capitalize on opportunities for contracting with third party payors and their intermediaries, including managed care providers. The management fees payable to the Company by the affiliated practices under the management agreements vary based on the cost, nature and amount of services provided, and may be adjustable or subject to renegotiation from time to time. Management fees payable under existing and future contracts are subject to the requirements of applicable laws, rules and regulations and negotiations with individual professional practices. Under the management agreements, the affiliated practices retain the responsibility for, among other things, (i) hiring and compensating professionals, (ii) ensuring that professionals have the required licenses, credentials, approvals and other certifications needed to perform their duties and (iii) complying with applicable federal and state laws, rules and regulations. In addition, the affiliated practices exclusively control all aspects of professional practice and the delivery of professional services. STOCK RESTRICTIONS AND PLEDGE AGREEMENTS The outstanding voting capital stock of each of the PCs is 100% owned by a licensed optometrist (the "nominee shareholder") who has, in turn, executed a Stock Restrictions and Pledge Agreement (a "Pledge Agreement") in favor of the respective MSO. Set forth below is a chart identifying each PC, the nominee shareholder for each PC and the total number of employees for each PC as of the end of fiscal 1998: NAME OF PC NOMINEE SHAREHOLDER NO. OF EMPLOYEES ---------- ------------------- ---------------- Optometric Providers, Inc. Alerino Iacobbo, O.D. 33 persons Optometric Care, Inc. Alerino Iacobbo, O.D. 9 persons Dr. John Musselman, An Optometry Corporation John Musselman, O.D. 19 persons Through each Pledge Agreement, the nominee has pledged all of the outstanding voting capital stock of his PC to the respective MSO. The Company requires that a nominee shareholder execute a Pledge Agreement in order to provide security for the prompt payment, performance and observance by the PC of all of its obligations, debts and covenants under its management agreement with the MSO. The Pledge Agreement also contains restrictions on the nominee shareholder's ability to transfer the stock of the PC, in order to provide 5 that the stockholder will at all times be a person eligible to hold such stock pursuant to the provisions of applicable law, the PC's Articles of Organization and the PC's By-Laws. The Pledge Agreement may be terminated only upon the written agreement of the parties thereto or upon the termination of the management agreement and satisfaction in full of all of the PC's obligations thereunder; a nominee shareholder may not unilaterally terminate a Pledge Agreement. In order to provide for the orderly continuation of the PC's business and affairs, each Pledge Agreement also enumerates several events or circumstances that require or permit the MSO to effect a change of the nominee shareholder. Upon the occurrence of any of the following events (each of which is enumerated in the Company's form of Pledge Agreement), an MSO may require the nominee stockholder to sell and transfer the stock of the PC to another person eligible to serve as a new nominee shareholder: (i) the death or disability of the nominee shareholder; (ii) the nominee shareholder's disqualification to practice optometry in the relevant jurisdiction or any other event or circumstance the effect of which is to cause the nominee shareholder to cease being eligible to serve as the shareholder of the PC; (iii) the transfer, by operation of law or otherwise, of the nominee shareholder's shares of stock in the PC to a person who is not eligible to serve as the shareholder of the PC; (iv) the termination of the nominee shareholder's employment by the PC or by the Company (including its subsidiaries); (v) the occurrence of any other event or the existence of any other condition which, in the reasonable opinion of the MSO (in its capacity as exclusive business manager and administrator of the professional corporation), impairs or renders less-than-optimal the Company's business management and administration of all of the business and administrative functions and services of the PC; or (vi) the occurrence of any other event or the existence of any other condition which might require or otherwise result in the sale or transfer by the nominee shareholder (or his estate or personal representative) of the nominee shareholder's shares of stock in the PC. The purchase price for a sale of the PC's stock is equal to the aggregate book value of the PC. The Company believes that such book value will always be a nominal cost because each PC operates and expects to continue to operate at an almost break-even level generating a nominal profit, if any at all, and each PC does not own or hold or plan to own or hold any significant assets of any nature. The Company believes that the events or circumstances identified in clauses items (iv) and (v) are entirely within the Company's control. For example, as there are no employment agreements between the Company and any nominee shareholder, each nominee shareholder is an "at-will" employee of the MSO, whose employment can be terminated at any time, with or without cause. Either of these events are entirely within the Company's control and, therefore, these provisions provide the Company with the ability at all times to cause a change in the nominee shareholder and for an unlimited number of times, at nominal cost. These provisions meet the criteria described in footnote 1 to EITF 97-2, so that (i) the Company can at all times establish or effect a change in the nominee shareholder, (ii) the Company can cause a change in the nominee shareholder an unlimited number of times, that is, changing the nominee shareholder one or more times does not affect the Company's ability to change the nominee shareholder again and again, (iii) the Company has the sole discretion without cause to establish or change the nominee shareholder, (iv) the Company can name any qualified optometrist as a new nominee shareholder (that is, the Company's choice of an eligible nominee is not materially limited), (v) the Company and the nominally owned entity incur no more than a nominal cost to cause a change in the nominee shareholder and (vi) neither the Company nor the nominally owned entity is subject to any significant adverse impact upon a change in the nominee shareholder. The Company effected the change of the nominee shareholder for Optometric Providers in August of 1998, without an adverse impact on the Company or the PC. The Company does not believe that any future change in any nominee shareholder would have a significant adverse impact on it or any PC. To date, the Company's experience with the nominee shareholders has been satisfactory. LASER VISION CORRECTION SERVICES At December 31, 1998, the Company operated two laser vision correction ("LVC") centers in association with selected ophthalmic surgical providers. By affiliating with the Company, these LVC surgical providers 6 benefit by having a convenient way of participating in LVC without incurring substantial capital expenditures. The LVC surgical providers also benefit from the Company's ability to acquire, counsel and refer customers for LVC services through its primary eye care centers. LVC centers are established in compliance with applicable law and pursuant to a written LVC center agreement between the Company and the provider. The Company's obligations pursuant to such agreements typically include: furnishing the laser system to be used for the delivery of LVC, therapeutic and related eye care services at the LVC center; maintenance, repairs and upgrades to the laser system; and certain training and oversight of medical, technical and administrative personnel involved in the delivery of services at the center. The providers' responsibilities pursuant to such agreements typically include: providing ophthalmologists to perform the LVC, therapeutic and related eye care services to patients at the LVC center, including performing LVC on qualified patients originated through the Company's marketing efforts; furnishing suitable space and certain ancillary equipment, furniture and supplies for the LVC center's operations; and providing administrative, nursing and technical support for the LVC center. The LVC center agreements also generally provide for the Company to pay the providers for certain services associated with each LVC procedure performed by the provider on a customer generated through the Company's marketing efforts. In addition, the provider pays the Company an access fee for use of the laser system to perform LVC or therapeutic procedures on any patient generated by such provider. Community-based ophthalmologists who access the LVC center pay the Company an access fee for use of the laser. In 1998 the Company sold two of the excimer laser systems which it owned, reducing the number of operating systems in place at the end of the year to two, both of which operate in New England and primarily service customers referred from the Company's primary eye care centers. In markets outside New England, the Company believes it can negotiate contracts with excimer laser owners and operators who may offer LVC services at favorable terms for the Company's customers. MARKETING AND MERCHANDISING The Company's marketing and merchandising strategy focuses on the following key concepts: (i) selling quality, brand name and private-label eyewear at competitive prices, (ii) offering a wide selection of eyewear products, (iii) offering convenient locations and hours, and in-house optometric examinations by licensed optometrists, (iv) using a variety of media, such as radio, newspaper, direct mail, television and yellow pages advertising, to differentiate it from competitors and to create general consumer awareness and traffic in its eye care centers and (v) providing knowledgeable and personalized customer service. The Company makes use of various tools to market its products and services: ADVERTISING. The Company uses newspaper, magazine, television, radio, direct mail and other advertising to reach prospective, as well as existing, customers. Advertisements emphasize the Company's benefits to the eyewear public, such as value pricing, product promotions, convenience of location, customer service and knowledgeable salespersons. In-house optometric examinations by licensed optometrists are also emphasized in advertising, subject to regulatory requirements. IN-CENTER MARKETING. The Company prepares and revises point-of-purchase displays which convey promotional messages to customers upon arriving at its centers. Visual merchandising techniques, educational videotapes, and take-home brochures are employed to draw attention to products displayed in the eye care centers. QUARTERLY CATALOGS. The Company mails a quarterly catalog to customers who are in its marketing database. This database consists of individuals who have utilized the services of the Company and its 7 affiliated professionals over the last several years. The catalog includes educational, promotional and marketing information about the Company's products and services, including LVC. The Company markets its comprehensive and competitively priced primary eye care programs to leading HMOs, insurance companies and other third party payors in the Company's regional markets. The Company's marketing strategy towards these organizations stresses its regional coverage, its complete range of eye care products and services and its commitment to quality and service. Through its SightCare programs the Company has upgraded and simplified its frame collection available to managed care organizations in order to allow it to compete more effectively for managed care contracts. Eventually, the Company intends to offer its SightCare programs in all of its markets. COMPETITION The Company experiences competition regarding the acquisition of the assets of, and the provision of management services to, eye care centers and practices. Several companies, both publicly and privately held, that have established operating histories and greater resources than the Company are pursuing the acquisition of the assets of general and specialty practices and the management of such practices. Eye care practices affiliated with the Company will compete with other local eye care practices as well as managed care organizations. The Company believes that changes in governmental and private reimbursement policies and other factors have resulted in increased competition for consumers of eye care services. The Company believes that cost, accessibility and quality of services are the principal factors that affect competition. 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. Optical retailers generally serve individual, local or regional markets, and, as a result, competition is fragmented and varies substantially among locations and geographic areas. 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, and that it competes favorably in each of these respects. The Company and its affiliated practices compete with other providers for managed primary eye care contracts. The Company believes that trends toward managed primary eye care have resulted in increased competition for such contracts. Competition in providing LVC comes from entities similar to the Company and from hospitals, hospital-affiliated group entities, physician group practices and private ophthalmologists that, in order to offer LVC to existing patients, purchase refractive lasers. Suppliers of conventional vision correction alternatives (eyeglasses and contact lenses), such as optometric chains, may also compete with the Company by purchasing laser systems and training personnel to offer LVC to their customers. In certain markets, competition to provide LVC has reduced and may continue to reduce prices for LVC, as has happened in some countries where the treatment has been available for several years. GOVERNMENT REGULATION The Company and its operations are subject to extensive federal, state and local laws, rules and regulations affecting the healthcare industry and the delivery of healthcare, including laws and regulations prohibiting the practice of medicine and optometry by persons not licensed to practice medicine or optometry, prohibiting control over optometrists or physicians in the practice of optometry by parties not licensed to practice 8 optometry or medicine, prohibiting the unlawful rebate or unlawful division of fees and limiting the manner in which prospective patients may be solicited. The Company attempts to structure all of its operations so as to comply with the relevant state statutes and regulations. The Company believes that its operations and planned activities do not violate any applicable medical practice, optometry practice, fee-splitting or other laws identified above. Laws and regulations relating to the practice of medicine, the practice of optometry, fee-splitting or similar laws vary widely from state to state and seldom are interpreted by courts or regulatory agencies in a manner that provide guidance with respect to business operations such as those of the Company. There can be no assurance that courts or governmental officials with the power to interpret or enforce these laws and regulations will not assert that the Company or certain transactions in which it is involved are in violation of such laws and regulations. In addition, there can be no assurance that future interpretations of such laws and regulations will not require structural and organizational modifications of the Company's business. Services that are reimbursed by third party payors may be subject to provisions of the Social Security Act (sometimes referred to as the "anti-kickback" statute) and similar state laws that impose criminal and civil sanctions on persons who solicit, offer, receive, or pay any remuneration, whether directly or indirectly, in return for inducing the referral of a patient for treatment or the ordering or purchasing of items or services that are paid for in whole or in part by Medicare, Medicaid or other specified federal or state programs, or, in some states, private payors. The federal government has promulgated regulations that create exceptions or "safe harbors" for certain business transactions. Transactions that are structured in accordance with such safe harbors will not be subject to prosecution under federal law. In order to obtain safe harbor protection, the business arrangement must satisfy each of and every requirement of the applicable safe harbor(s). Business relationships that do not satisfy each element of a safe harbor do not necessarily violate the anti-kickback statute but may be subject to greater scrutiny by enforcement agencies. Many state anti-kickback statutes do not include safe harbors and some state anti-kickback statutes apply to all third party payors. The Company is concerned about federal and state anti-kickback statutes only to the extent that it provides healthcare services that are reimbursed by federal, state and in some states, private third party payors. The Company believes its business relationships and operations are in material compliance with applicable laws. Nevertheless, there can be no assurance that the Company will not be required to change its practices or experience a material adverse effect as a result of a challenge by federal or state enforcement authorities under the foregoing statutes. Significant prohibitions against physician referrals have been enacted by Congress. These prohibitions, commonly known as "Stark II," amended prior physician self-referral legislation known as "Stark I" by dramatically enlarging the field of physician-owned or physician-interested entities to which the referral prohibitions apply. Effective December 31, 1994, Stark II prohibits a physician from referring Medicare or Medicaid patients to an entity providing "designated health services" in which the physician has an ownership or investment interest, or with which the physician has entered into a compensation arrangement. The designated health services include prosthetic devices, which under applicable regulations and interpretations include one pair of eyeglasses or contact lenses furnished after cataract surgery and intraocular lenses provided at ambulatory surgery centers. The penalties for violating Stark II include a prohibition on payment by these government programs and civil penalties of as much as $15,000 for each violative referral and $100,000 for participation in a "circumvention scheme." The Company's current business is not governed by Stark I or II. To the extent the Company or any affiliated practice is deemed to be subject to the prohibitions contained in Stark II for services, the Company believes its activities fall within the permissible activities defined in Stark II, including, but not limited to, the provision of in-office ancillary services. The FDA and other federal, state or local governmental agencies may amend current, or adopt new, rules and regulations that could affect the use of ophthalmic excimer lasers for LVC and therefore adversely affect the business of the Company. 9 ENVIRONMENTAL REGULATION The Company's business activities are not significantly affected by environmental regulations and no material expenditures are anticipated in order for the Company to comply with environmental regulations. However, the Company is subject to certain regulations promulgated under the Federal Environmental Protection Act with respect to grinding, tinting, edging and disposing of ophthalmic lenses and solutions. PROPRIETARY PROPERTY The Company has no licenses, patents or registered copyrights. The Company does have various registered trademarks in the U.S., including "Sight Resource", "Cambridge Eye Doctors", "E.B. Brown Opticians", "Eyeglass Emporium", "Kidspecs", "Shawnee Optical", "SightCare" and "Vision Plaza." EMPLOYEES As of December 31, 1998, the Company had 616 employees. The Company intends to hire additional key personnel it believes will be required for advancement and expansion of the Company's activities. The success of the Company's future operations depends in large part on the Company's ability to recruit and retain qualified personnel over time. There can be no assurance, however, that the Company will be successful in retaining or recruiting key personnel. BUSINESS RISKS AND CAUTIONARY STATEMENTS When used in this Form 10-K and in future filings by the Company with the Securities and Exchange Commission, in the Company's press releases and in oral statements made with the approval of an authorized executive officer, the words or phrases "will likely result", "are expected to", "estimate", "project" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties, including those discussed below, that could cause actual results to differ materially from historical results and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company wishes to advise readers that the factors listed below could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. The Company will not undertake and specifically declines any obligation to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. There are a number of risks and uncertainties that could cause actual results to differ materially from historical results and those presently anticipated or projected. Such significant risks and uncertainties include but are not limited to: 1. The Company has a limited operating history, entering the LVC market in 1993 and the primary eye care market in 1995. 2. The Company has a history of operating losses, has not yet demonstrated sustained profitability and may continue to incur significant operating losses for the foreseeable future. 3. The primary eye care market and LVC market are highly competitive. The Company's current and potential competitors include many larger companies with substantially greater financial, operating, marketing and support resources than the Company. 4. There can be no assurance that attractive acquisition candidates, or the financing necessary for any such acquisitions, will be available to the Company. 10 5. There can be no assurance that the Company will be able to realize any operating efficiencies from the purchase and consolidation of primary eye care centers or optical chains. 6. There can be no assurance that the Company will acquire new managed primary eye care contracts or that existing contracts will be expanded in any meaningful way. 7. The Company and its operations are subject to extensive federal, state and local regulation, which could materially affect the Company's operations. CORPORATE LIABILITY AND INSURANCE 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 and its affiliated practices, the Company may become subject to some professional malpractice actions under various theories. There can be no assurance that claims, suits or complaints relating to professional services provided by affiliated practices will not be asserted against the Company in the future. The Company believes that the providers with which the Company enters into LVC center agreements or other strategic affiliation agreements are covered by such providers' professional malpractice or liability insurance. The Company may not be able to purchase professional malpractice insurance, and may not be able to purchase other insurance at reasonable rates, which would protect it against claims arising from the professional practice conducted by providers. Similarly, the use of laser systems in the Company's LVC centers may give rise to claims against the Company by persons alleging injury as a result of the use of such laser systems. The Company believes that claims alleging defects in the laser systems it purchases from its suppliers are covered by such suppliers' product liability insurance and that the Company could take advantage of such insurance by adding such suppliers to lawsuits against the Company. There can be no assurance that the Company's laser suppliers will continue to carry product liability insurance or that any such insurance will be adequate to protect the Company. The Company maintains insurance coverage that it believes will be adequate both as to risks and amounts. The Company believes that such insurance will extend to professional liability claims that may be asserted against employees of the Company that work on site at affiliated practice locations. In addition, pursuant to the management agreements, the affiliated practices are required to maintain professional liability and comprehensive general liability insurance. The availability and cost of such insurance has been affected by various factors, many of which are beyond the control of the Company and its affiliated practices. There can be no assurance that the Company will be able to retain adequate liability insurance at reasonable rates, or that the insurance will be adequate to cover claims asserted against the Company, in which event the Company's business may be materially adversely affected. 11 ITEM 2. DESCRIPTION OF PROPERTIES At December 31, 1998, the Company leased space for 90 of the Company's eye care centers (which range in size from approximately 600 to 6,200 square feet), under operating leases, which expire as follows, exclusive of renewal options. At 12/31/98 YEAR NUMBER OF LEASES EXPIRING - ---- ------------------------- 1999 15 2000 19 2001 17 2002 13 2003 9 2004 and thereafter 17 In addition, the Company is currently in lease negotiations or is an at will tenant for three eye care centers. The Company's corporate headquarters, centralized optical laboratory and distribution center occupy approximately 22,000 square feet of space leased in an industrial complex in Holliston, Massachusetts pursuant to a lease which expires in 2004. The Company believes that its facilities are adequate for its present needs and that suitable space will be available to the Company upon commercially reasonable terms to accommodate its future needs. ITEM 3. LEGAL PROCEEDINGS From time to time the Company's subsidiaries may be defendants in certain lawsuits alleging various claims incurred in the ordinary course of business. These claims are generally covered by various insurance policies, subject to certain deductible amounts and maximum policy limits. In the opinion of management, the resolution of existing claims should not have a material adverse effect, individually or in the aggregate, upon the Company's business or financial condition. Sight Resource Corporation is not currently a party to any claims, suits or complaints, although there can be no assurance that such claims will not be asserted against Sight Resource Corporation in the future. From time to time Sight Resource Corporation has been party to claims, litigation or other proceedings in the ordinary course of its business, none of which has been material to the Company or its business. There can be no assurance that future claims against the Company or any of its subsidiaries will not have a material adverse effect on the Company, its operations or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the quarter ended December 31, 1998. 12 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET FOR COMPANY'S COMMON EQUITY The Company's Common Stock began trading on NASDAQ on March 31, 1993 under the symbol "VISN". The Company also issued Warrants which began trading on NASDAQ on August 25, 1994 under the symbol "VISNZ". The following table sets forth for the periods indicated, the high and low sales prices for the Common Stock and Warrants as reported by NASDAQ: COMMON STOCK WARRANTS ------------ ------------ HIGH LOW HIGH LOW ---- --- ---- --- 1998: First Quarter $5 1/16 $3 1/2 $1 3/8 $1 1/16 Second Quarter 4 1/2 3 5/8 1 5/32 5/8 Third Quarter 3 21/32 1 15/16 3/4 1/8 Fourth Quarter 3 11/16 1 5/8 9/16 1/16 1997: First Quarter $5 1/2 $3 3/4 $1 7/8 $1 1/8 Second Quarter 5 1/16 3 3/8 1 7/8 7/8 Third Quarter 6 3/8 3 7/8 1 29/32 1 1/16 Fourth Quarter 5 3 /4 3 3/8 1 3/4 1 1/8 The Common Stock and Warrants have been quoted on the NASDAQ National Market System since August 25, 1994. Prior to that time, the Common Stock was quoted on the NASDAQ SmallCap Market. The Company has not paid dividends to its common stockholders since its inception and does not plan to pay cash dividends in the foreseeable future. The Company currently intends to retain earnings, if any, to finance the growth of the Company. As of March 18, 1999, there were 257 and 17 holders of record of the Company's Common Stock and Warrants, respectively. There are approximately 4,000 beneficial owners of the Company's Common Stock. 13 ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31 1998(1) 1997(2,3,4) 1996(4,5) 1995(6) 1994 - -------------------------------------------------------------------------------------------- STATEMENT OF OPERATIONS DATA: Net revenues $ 54,971 $ 44,576 $ 29,987 $ 18,240 $ 529 Net loss (985) (2,004) (5,850) (4,888) (2,945) Net loss per common share (0.11) (0.46) (0.78) (0.89) (0.94) Weighted average number of common shares outstanding 8,867 8,669 7,523 5,488 3,122 BALANCE SHEET DATA: Working capital $ 3,176 $ 4,243 $ 7,774 $ 5,325 $ 9,787 Total assets 32,145 34,507 31,430 23,249 13,911 Non-current liabilities 348 101 1,876 1,703 -- Stockholders' equity 18,959 19,446 22,766 16,445 13,364
1. Effective April 1, 1998, the Company acquired one hundred percent of the outstanding shares of stock of Eye Glass Emporium, Inc. ("Eyeglass Emporium"). The purchase price paid in connection with this acquisition was $2,309 in cash, $350 in notes payable in twelve equal quarterly installments commencing June 30, 1998, and 87,940 shares of common stock. At December 31, 1998, Eyeglass Emporium operated nine eye care centers in Indiana. 2. Effective July 1, 1997, the Company acquired one hundred percent of the outstanding shares of stock of Vision Holdings, Ltd. (formerly known as Dr. Greenberg, An Optometry Corporation d/b/a/ Vision Plaza) ("Vision Plaza"). At December 31, 1998, Vision Plaza operated 14 primary eye care centers and three specialty eyewear centers in Louisiana and Mississippi. Following the acquisition, Vision Plaza entered into a management services contract with Dr. John Musselman, A Professional Corporation ("Musselman"), a corporation established to employ the optometrists previously employed by the acquired company. 3. The net loss per share in 1997 includes a $1,953 dividend to the preferred stock holders as discussed in Note 8 of the Notes To Consolidated Financial Statements. 4. Includes a $110 provision for store closings and $400 write off of software development costs in 1997 and a $2,622 provision for impairment of ophthalmic equipment in 1996. 5. Effective July 1, 1996, the Company purchased certain assets and assumed certain liabilities of The E.B. Brown Optical Company and Brown Optical Laboratories, Inc. and acquired by merger E.B. Brown Opticians, Inc. (collectively "E.B. Brown"). At December 31, 1998, E.B. Brown operated 37 eye care centers located throughout Ohio and western Pennsylvania which provide optometric and audiology goods and services to persons with vision and hearing disorders. 6. Effective January 1, 1995 and July 1, 1995 the Company purchased substantially all the assets of Cambridge Eye Associates, Inc. and Douglas Vision World, Inc., respectively. At December 31, 1998, these companies combined had a practice of 30 optometric offices throughout New England providing comprehensive vision care services to residents of this region. 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION OVERVIEW Sight Resource Corporation (the "Company") manufactures, distributes and sells eyewear and related products and services. As of December 31, 1998, the Company's operations consisted of 93 eye care centers, with three regional optical laboratories and distribution centers, making it one of the seventeen largest providers in the United States' primary eye care industry based upon sales. Effective January 1, 1999, the Company acquired Shawnee Optical, a chain of nine primary eye care centers operating in Ohio and western Pennsylvania, increasing to 102 the total number of eye care centers operated by the Company. The Company's eye care centers operate primarily under the brand names Cambridge Eye Doctors, E.B. Brown Opticians, Eyeglass Emporium, Vision Plaza, Vision World and Shawnee Optical. The Company also provides, or where necessary to comply with applicable law administers the business functions of optometrists, ophthalmologists and professional corporations that provide, vision related professional services. In addition, as of December 31, 1998, the Company operated two laser vision correction ("LVC") centers. The Company operates three regional optical laboratories and distribution centers. The regional optical laboratories provide complete laboratory services to the Company's eye care centers, including polishing, cutting and edging, tempering, tinting and coating of ophthalmic lenses. The distribution centers provide and maintain an inventory of all accessories and supplies necessary to operate the primary eye care centers in their regions, as well as "ready made" eye care products, including contact lenses and related supplies. The inventory of eyeglass lenses, frames, contact lenses, accessories and supplies is acquired through a number of sources, domestic and foreign. Management believes that the regional optical laboratories and distribution centers have the capacity to accommodate additional multi-site eye care centers. The Company's results of operation include the accounts of the Company, its wholly-owned subsidiaries and three professional corporation's ("PCs") in which the Company's subsidiaries assume the financial risks and rewards of such entities. The Company has no direct equity ownership in the PCs since the outstanding voting capital stock of each of the PCs is 100% owned by a licensed optometrist (the "nominee shareholder") who has, in turn, executed a Stock Restrictions and Pledge Agreement (a "Pledge Agreement") in favor of a subsidiary of the Company. Each Pledge Agreement contains provisions that provide the Company with the ability at all times to cause a change in the nominee shareholder and for an unlimited number of times, at nominal cost. For example, if (i) the employment of the nominee shareholder is terminated by the PC or by the Company (including its subsidiaries) or (ii) the Company determines that the nominee shareholder is impairing or rendering less-than-optimal the Company's business management and administration of the PC, then the Company has the right to require the existing nominee shareholder to sell all of the outstanding stock of the PC to another person eligible to serve as a new nominee shareholder. The purchase price for a sale of the PC's stock is equal to the aggregate book value of the PC, which will always be a nominal cost because each PC operates and expects to continue to operate at an almost break-even level generating a nominal profit, if any at all. See "Business STOCK RESTRICTIONS AND PLEDGE AGREEMENTS." RESULTS OF OPERATIONS 1998 AS COMPARED WITH 1997 NET REVENUE. The Company generated net revenue of approximately $55.0 million during the year ended December 31, 1998 from the operation of its 93 eye care centers and two laser vision correction centers in the United States as compared to net revenue of approximately $44.6 million from the operation of its 86 eye care centers and four laser vision correction centers in the United States for the same period in 1997. Of the $10.4 million (or 23.3%) increase in net revenue for the year ended December 31, 1998 as compared to the year ended December 31, 1997, $3.2 million (or 7.2%) relates to the additional nine eye care centers acquired 15 effective April 1, 1998. The remaining increase of $7.2 million (or 16.1%) relates primarily to recognition of a full year of revenue from the Vision Plaza acquisition. COST OF REVENUE. Cost of revenue increased to approximately $19.0 million for the year ended December 31, 1998 as compared to $16.1 million for the year ended December 31, 1997. Cost of revenue decreased as a percentage of net revenue from 36.1% for the year ended December 31, 1997, to 34.5% for the year ended December 31, 1998. The improvement as a percentage of net revenue is primarily due to the improved gross profit margin resulting from sales from both the additional 17 eye care centers acquired July 1, 1997 and the nine eye care centers acquired effective April 1, 1998. Cost of revenue for the years ended December 31, 1998 and 1997 principally consisted of (i) the cost of manufacturing, purchasing and distributing optical products to its customers and (ii) the cost of delivering LVC, including depreciation and maintenance on excimer lasers. In February, 1997 the Company discontinued the operations of an optical laboratory and distribution facility operated by E.B. Brown in Cleveland, Ohio, and consolidated its operations with those at its Holliston, Massachusetts facility in order to reduce the cost of revenue. In August, 1997 the Company elected to re-open a smaller version of the Cleveland facility to improve the quality and timeliness of product delivery. The closing and subsequent reopening of the smaller Cleveland facility did not have a material affect on the Company's cost of revenue. SELLING, GENERAL AND ADMINISTRATION EXPENSE. Selling, general and administration expenses were approximately $37.0 million and $30.7 million for the years ended December 31, 1998 and 1997, respectively. The increase primarily relates to payroll and facility costs incurred in operating the additional nine eye care centers acquired effective April 1, 1998 and costs incurred for a full year of operations of the 17 eye care centers acquired in the Vision Plaza acquisition. Selling, general and administrative expense, as a percentage of net revenue, declined from 68.9% for the year ended December 31, 1997, to 67.3% for the year ended December 31, 1998. This decrease is primarily a result of (i) the nine eye care centers acquired effective April 1, 1998, which operate with a level of selling, general and administrative expenses as a percentage of net revenue that is lower than that of the Company and its other subsidiaries, and (ii) the Company's ability to better leverage its fixed expenses in connection with the acquisition of multi-site eye care centers. PROVISION FOR STORE CLOSINGS. The Company had a $110,000 provision for store closings in 1997. Although the Company closed three stores in 1998, no provisions for store closings were provided for in 1998. PROVISION FOR WRITE OFF OF SOFTWARE DEVELOPMENT COSTS. In 1996 the Company selected a vendor and began the testing and installation of software associated with a new point of sale system and perpetual inventory system for its primary eye care centers, regional optical laboratories and distribution centers. By late 1997 the Company, after testing the software system in selected eye care centers, elected to utilize an alternative software vendor whose product is better suited to the needs of the Company. As a result, the Company wrote down $400,000 of capitalized costs associated with the original point of sale system. The Company believes that the new system will facilitate the processing of customer sales information and replenishment of inventory by passing such information, including customer specific orders, to the Company's home office, and its regional optical laboratories and distribution centers for further processing. In 1998, the Company began operating the new point of sale system. OTHER INCOME AND EXPENSE. Interest income decreased to approximately $184,000 from $360,000 for the years ended December 31, 1998 and 1997, respectively. This decrease resulted from the investment of a lower average cash and cash equivalents balance during 1998 as compared to 1997. Interest expense decreased from approximately $344,000 to $201,000 for the years ended December 31, 1997 and 1998, respectively. The decrease is associated with a lower average balance of debt outstanding during 1998 as compared to 1997. The sale of certain ophthalmic equipment during 1998 generated a gain of approximately $158,000 compared to a 16 gain of approximately $738,000 from similar sales in 1997. In 1998 the Company sold two of the excimer laser systems which it owned, reducing the number of operating systems in place at the end of the year to two, both of which operate in New England and primarily service customers referred from the Company's primary eye care centers. NET LOSS. The Company realized a net loss of approximately $1.0 million ($0.11 per share) and $2.0 million ($0.46 per share, including the $1,953,000 dividend to the preferred stock holders as discussed in Note 8 of the Notes To Consolidated Financial Statements), for the years ended December 31, 1998 and 1997, respectively. The decrease in net loss is attributable to the increased income generated by a full year of operations of the 17 eye care centers acquired in the Vision Plaza acquisition in 1997, the additional nine eye centers acquired effective April 1, 1998, improvements in gross profit margins, sales volume gain, and, to a lesser extent, the non-recurrence of the $110,000 provision for store closings in 1997 and the $400,000 provision for the writedown of software development costs. The reduction in net loss was partially offset by a reduction of $580,000 in gain from the sale of equipment in 1998 versus 1997. RESULTS OF OPERATIONS 1997 AS COMPARED WITH 1996 NET REVENUE. The Company generated net revenue of approximately $44.6 million during the year ended December 31, 1997 from the operation of its 86 eye care centers and four laser vision correction centers in the United States as compared to net revenue of approximately $30.0 million from the operation of its 72 eye care centers and ten laser vision correction centers in the United States for the same period in 1996. Of the $14.6 million (or 48.7%) increase in net revenue for the year ended December 31, 1997 as compared to the year ended December 31, 1996, $5.7 million (or 19.0%) relates to the additional 17 eye care centers acquired effective July 1, 1997. The remaining increase of $8.9 million (or 29.7%) relates primarily to recognition of a full year of revenue from the E.B. Brown acquisition. COST OF REVENUE. Cost of revenue decreased as a percentage of net revenue from 39.5% (approximately $11.8 million) for the year ended December 31, 1996, to 36.1% (approximately $16.1 million) for the year ended December 31, 1997. The decrease as a percentage of net revenue is primarily due to increased LVC procedure volume which covered more of the fixed cost components of cost of goods sold, and an increase in eyeglass sales as a percentage of total sales. Cost of revenue for the years ended December 31, 1997 and 1996 principally consisted of (i) the cost of manufacturing, purchasing and distributing optical products to its customers and (ii) the cost of delivering LVC, including depreciation and maintenance on excimer lasers. In February, 1997 the Company discontinued the operations of an optical laboratory and distribution facility operated by E.B. Brown in Cleveland, Ohio, and consolidated its operations with those at its Holliston, Massachusetts facility in order to reduce the cost of revenue. In August, 1997 the Company elected to re-open a smaller version of the Cleveland facility to improve the quality and timeliness of product delivery. As the Company grows, it may elect to expand or contract the operations of any or all of its optical laboratories and distribution centers based on the needs of the Company at that time. SELLING, GENERAL AND ADMINISTRATION EXPENSE. Selling, general and administration expenses were approximately $30.7 million and $21.6 million for the years ended December 31, 1997 and 1996, respectively. The increase primarily relates to payroll and facility costs incurred in operating the additional 17 eye care centers acquired effective July 1, 1997 and a full year of operations from the E.B. Brown acquisition. Selling, general and administrative expense as a percentage of net revenue, declined from 72.1% for the year ended December 31, 1996, to 68.9% for the year ended December 31, 1997. This decrease is a result of operating efficiencies which the Company has begun to realize from the acquisition and expansion of multi-site eye care centers and an increase in LVC revenue. 17 PROVISION FOR STORE CLOSINGS. The Company had a $110,000 provision for store closings in 1997. No similar closings were provided for in 1996. PROVISION FOR WRITE OFF OF SOFTWARE DEVELOPMENT COSTS. In 1996 the Company selected a vendor and began the testing and installation of software associated with a new point of sale system and perpetual inventory system for its primary eye care centers, regional optical laboratories and distribution centers. By late 1997 the Company, after testing the software system in selected eye care centers, elected to utilize an alternative software vendor whose product is better suited to the needs of the Company. As a result, the Company wrote off $400,000 of capitalized costs associated with the original point of sale system. The Company believes that the new system will facilitate the processing of customer sales information and replenishment of inventory by passing such information, including customer specific orders, to the Company's home office, and its regional optical laboratories and distribution centers for further processing. IMPAIRMENT OF OPHTHALMIC EQUIPMENT. During the fourth quarter of 1996, the Company recognized a $2.6 million write down due to impairment of ophthalmic equipment. Operating losses sustained during 1996 from the operation of this equipment coupled with anticipated future operating losses over the remaining depreciable life of the equipment, which were based upon operating history and a recent industry report indicating a slower than expected growth in LVC, resulted in the Company's decision to recognize the impairment in the fourth quarter 1996. The fair value of the equipment was based upon recent publications in ophthalmic trade journals, offers from third parties, as well as recent sales of similar equipment. Since the Company has no other significant tangible or intangible assets associated with LVC, the Company believes the impairment relates only to ophthalmic equipment. OTHER INCOME AND EXPENSE. Interest income totaled approximately $360,000 and $499,000 for the years ended December 31, 1997 and 1996, respectively. This decrease resulted from the investment of a lower average cash and cash equivalents balance during 1997 as compared to 1996. Interest expense increased from approximately $248,000 in 1996 to approximately $344,000 in 1997. This increase is associated with a higher average balance of debt outstanding during 1997 as compared to 1996. The sale of certain ophthalmic equipment during 1997 generated a gain of approximately $738,000. In 1997 the Company sold 12 of the excimer laser systems which it owned, reducing the number of operating systems in place at the end of the year to four. NET LOSS. The Company realized a net loss of approximately $2.0 million ($0.46 per share, including the $1,953,000 dividend to the preferred stock holders as discussed in Note 8 of the Notes To Consolidated Financial Statements) and $5.9 million ($0.78 per share) for the years ended December 31, 1997 and 1996, respectively. The decrease in net loss is attributable to the increased income generated by a full year of operations from the E. B. Brown acquisition in 1996, the additional 17 eye centers acquired effective July 1, 1997, the gain on sale of excimer laser systems of $738,000, and the $2.6 million impairment of ophthalmic equipment recognized in 1996. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1998, the Company had approximately $1.9 million in cash and cash equivalents and working capital of approximately $3.2 million in comparison to approximately $6.1 million in cash and cash equivalents and working capital of approximately $4.2 million as of December 31, 1997. Effective April 1, 1998, the Company acquired one hundred percent of the outstanding shares of stock of Eye Glass Emporium, Inc. ("Eyeglass Emporium"). The purchase price paid in connection with this acquisition was $2,300,000 in cash, the assumption and payment of notes payable outstanding as of April 1, 1998 of approximately $350,000 and 87,940 shares of common stock. Eyeglass Emporium operated nine eye care centers in northwest Indiana. The acquisition was accounted for using the purchase method of accounting. 18 Effective January 1, 1999, the Company acquired one hundred percent of the outstanding shares of stock of Shawnee Optical, Inc. ("Shawnee Optical"). The purchase price paid in connection with this acquisition was $1,750,000 in cash, the payment of notes payable in the aggregate amount of $300,000 and 70,000 shares of common stock. Shawnee Optical operated nine eye care centers in Ohio and western Pennsylvania. The acquisition was accounted for using the purchase method of accounting. As of December 31, 1998, the Company had securities outstanding which provide it with potential sources of financing as outlined below: Potential Securities proceeds - ------------------------------------------------------------ ------------ Warrants 2,472,100 $14,800,000 Class A Warrants 85,000 500,000 Class II Warrants 290,424 2,032,968 Unit Purchase Options 215,000 3,700,000 Bank Austria AG, f/k/a Creditanstalt, Warrants 150,000 694,000 Representative Warrants 170,000 1,400,000 ----------- $23,126,968 =========== The Company also has outstanding 842,294 Class I Warrants. The Class I Warrants entitle the holder to purchase an amount of shares of the Company's common stock equal to an aggregate of up to 19.9% of the shares of common stock purchasable under the Company's outstanding warrants and options on the same terms and conditions of existing warrant and option holders. The purchaser is obligated to exercise these warrants at the same time the options and warrants of existing holders are exercised, subject to certain limitations. The amount of proceeds from the exercise of these warrants cannot be estimated at this time. There can be no assurance that the Company will obtain any of the proceeds from the exercise of the above securities. On February 20, 1997, the Company entered into a Credit Agreement (the "Agreement") with a bank pursuant to which the Company can borrow up to $5.0 million on a term loan basis and up to $5.0 million on a revolving credit basis, subject to certain performance criteria. Such certain performance criteria include, among others, financial condition covenants such as rolling EBITDA levels, indebtedness to EBITDA ratios, current ratio of 1:1 and minimum net worth ratios. The term loan facility bears interest at the bank's prime rate plus 1.5% or LIBOR plus 3% at the Company's election, and the revolving credit facility bears interest at the bank's prime rate plus 1.25% or LIBOR plus 2.75% at the Company's election. These loans are secured by all assets of the Company and its wholly owned subsidiaries. Amounts borrowed under the Agreement have been and will continue to be used to refinance existing debt, finance future acquisitions, provide ongoing working capital and for other general corporate purposes. As part of the Agreement, the Company issued to the bank warrants to purchase 150,000 shares of the Company's common stock at a purchase price of $4.625 per share. The warrants expire December 31, 2003. As of December 31, 1998, there were no amounts outstanding under the Agreement. At December 31, 1998, the Company was not in compliance with a financial covenant which requires that the Company maintain a certain minimum net worth. The Company has received a waiver of this covenant. The Company has an acquisition strategy to acquire and integrate the assets of multi-site eye care centers and the practices of eye care professionals and to employ or enter into management services contracts with these professionals. This strategy includes both expanding existing regional markets and entering new regional markets. The Company will also target acquisitions in strategic markets that will serve as platforms 19 from which the Company can consolidate a given service area by making and integrating additional "in-market" acquisitions. The Company is currently evaluating potential acquisition candidates. Without additional funding, the Company's rate of acquisition and size of acquisition could be limited. The Company anticipates that its working capital and sources of capital, such as the existing credit facility, will be adequate to fund the Company's currently proposed operating activities for at least the next twelve months. The Company anticipates using financing vehicles such as bank debt, leasing, and other sources of funding, such as additional equity offerings, to achieve its business plan, including the acquisition of eye care centers. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued SFAS 133 ("Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. SFAS 133, which becomes effective for the Company in its year ending December 26, 1999 is not expected to have a material impact on the Consolidated Financial Statements of the Company. YEAR 2000 ISSUE When used in this Section, the words or phrases "plans to", "expected to", "believes" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties, including those discussed below, that could cause actual results to differ materially from historical results and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company will not undertake and specifically declines any obligation to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. The "Year 2000" issue refers to the inability of certain computer systems, as well as certain hardware and equipment containing embedded microprocessors with date sensitive data, to recognize accurate dates commencing on or after January 1, 2000. This has the potential to affect the operation of these systems adversely and materially. The Company has identified four phases in its Year 2000 compliance efforts: discovery, assessment, remediation and applicable testing and verification. The Company has substantially completed its assessment of critical internal systems which include customer service, customer order entry, lab operations, purchasing and financial situations. The Company has surveyed, by written questionnaire, its principal vendors, customers and others on whom it relies to assure that their systems will be Year 2000 compliant, and that they will be able to continue their business with the Company without interruption. The Company has received written confirmation of Year 2000 compliance from vendors and suppliers of its (i) point of sale system, (ii) general ledger software system, (iii) laser vision correction equipment, (iv) laboratory finishing equipment, and (v) corporate headquarters telecommunications systems. The Company identified that some early versions of the software (RX calc) used in two of its regional optical laboratories is not Year 2000 compliant. However, Year 2000 compliant upgraded versions of that same software are available and the Company plans to upgrade this software by the end of the third quarter of 1999. The Company plans to complete the remediation phase of its critical internal systems by the second quarter of 1999 and complete the applicable testing and verification phase by the end of the third quarter of fiscal year 20 1999, however no assurance can be given that any or all of the Company's systems are or will be Year 2000 compliant. The Company has drafted a contingency plan in the event normal operations are interrupted as a result of Year 2000 issues. Certain precautionary measures are considered in the contingency plan, including restriction of vacation schedules in January 2000, increasing inventory levels and manual processing of key financial documents and other operations. The plan is expected to be completed during the second quarter of 1999. Contingency plan testing will be completed by the end of the third quarter of 1999. The Company estimates costs to become Year 2000 compliant will be approximately $50,000, however, no assurance can be given that the ultimate costs required to address the Year 2000 issue will not exceed such amounts. The Company expects to convert all of its existing eye care centers to the new point of sale system, which the Company has received written confirmation is Year 2000 compliant, by the third quarter of 1999, except for the nine recently acquired Shawnee Optical locations. The Company believes that the Shawnee Optical centers will be converted to the new point of sale system by December 31, 1999. However, the Company has not completed its assessment of the integration plan timetable for Shawnee Optical. The Company believes that there are multiple sources of supply in the industry and the failure of some vendors to remediate Year 2000 issues would not disrupt the supply chain. The Company provides managed primary eye care benefits to more than fifty organizations. Presently, the Company manually files paper claims with these organizations. However, during 1999 the Company intends to convert to electronic filing for some of these organizations. If Year 2000 issues did not permit electronic filing, the Company would revert back to manually processing paper claims. The Company currently believes that its most reasonably likely worst case Year 2000 scenario would relate to problems with systems of third parties which could create the greatest risks with infrastructure, including water and sewer services, electricity, transportation, telecommunications and critical supplies, or raw materials and spare parts. The Company's ability to eliminate or control these potential third party problems is limited. Therefore, contingency plans are limited to ensuring that store operations, eye examinations and optical laboratory operations can be performed manually, if necessary. No assurance can be given that the impact of any failure to achieve substantial Year 2000 compliance will not have a material adverse effect on the Company's financial condition. ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK The Company has no significant fixed rate debt obligations or related interest rate swap and cap agreements. 21 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Sight Resource Corporation: We have audited the consolidated balance sheets of Sight Resource Corporation and its subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sight Resource Corporation and its subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998 in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP KPMG Peat Marwick LLP Boston, Massachusetts March 19, 1999 22 SIGHT RESOURCE CORPORATION CONSOLIDATED BALANCE SHEETS DECEMBER 31 1998 1997 - -------------------------------------------------------------------------------- (IN THOUSANDS EXCEPT FOR SHARE AMOUNTS) ASSETS Current assets: Cash and cash equivalents $ 1,860 $ 6,076 Accounts receivable, net of allowance of $748 and $478, respectively 2,658 1,781 Inventories 4,584 4,434 Prepaid expenses and other current assets 377 377 -------- -------- Total current assets 9,479 12,668 -------- -------- Property and equipment, net (note 3) 6,140 5,664 -------- -------- Other assets: Intangible assets (note 4) 15,337 14,898 Other assets 1,189 1,277 -------- -------- Total other assets 16,526 16,175 ======== ======== $ 32,145 $ 34,507 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long term debt (note 6) 146 1,000 Current portion of capital leases (note 7) 34 -- Accounts payable 2,870 1,797 Accrued expenses (note 5) 3,253 5,628 -------- -------- Total current liabilities 6,303 8,425 -------- -------- Non-current liabilities: Long term debt, less current maturities (note 6) 184 -- Capital leases (note 7) 13 -- Other liabilities 151 101 -------- -------- Total non-current liabilities 348 101 -------- -------- Series B redeemable convertible preferred stock 1,452,119 shares issued (note 8) 6,535 6,535 -------- -------- Stockholders' equity (note 9): Preferred Stock, $.01 par value. Authorized 5,000,000 shares; no shares of Series A issued and outstanding -- -- Common stock, $.01 par value. Authorized 20,000,000 shares; issued 8,936,330 and 8,787,100 shares in 1998 and 1997, respectively 90 88 Additional paid-in capital 36,847 36,329 Common stock issuable, 71,181 shares in 1998 and 1997 (note 1(b)) 432 432 Treasury stock at cost (30,600 shares in 1998 and 1997) (137) (137) Unearned compensation (22) -------- -------- Accumulated deficit (18,251) (17,266) -------- Total stockholders' equity 18,959 19,446 ======== ======== $ 32,145 $ 34,507 ======== ======== See accompanying notes to consolidated financial statements. 23 SIGHT RESOURCE CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31 1998 1997 1996 - ------------------------------------------------------------------------------------ (IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS) Net revenue $ 54,971 $ 44,576 $ 29,987 Cost of revenue 18,991 16,096 11,841 -------- -------- -------- Gross margin 35,980 28,480 18,146 Selling, general and administrative expense 37,036 30,703 21,600 Provision for store closings -- 110 -- Provision for write off of software development costs -- 400 -- Impairment of ophthalmic equipment (note 3) -- -- 2,622 -------- -------- -------- Total operating expenses 37,036 31,213 24,222 -------- -------- -------- Loss from operations (1,056) (2,733) (6,076) -------- -------- -------- Other income (expense): Interest income 184 360 499 Interest expense (201) (344) (248) Gain on sale of assets 158 738 -- -------- -------- -------- Total other income 141 754 251 -------- -------- -------- Loss before income tax expense (915) (1,979) (5,825) Income tax expense 70 25 25 -------- -------- -------- Net loss $ (985) $ (2,004) $ (5,850) ======== ======== ======== Dividends on redeemable convertible preferred stock (note 8) -- (1,953) -- Net loss attributable to common shareholders $ (985) $ (3,957) $ (5,850) ======== ======== ======== Basic and Diluted loss per common share (note 2) $ (0.11) $ (0.46) $ (0.78) ======== ======== ======== Weighted average number of common shares outstanding 8,867 8,669 7,523 ======== ======== ========
See accompanying notes to consolidated financial statements. 24
SIGHT RESOURCE CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 - --------------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) COMMON STOCK ADDITIONAL ACCUMU- COMMON UNEARNED TOTAL PAR PAID-IN LATED STOCK TREASURY COMP- STOCKHOLDERS SHARES VALUE CAPITAL DEFICIT ISSUABLE STOCK ENSATION EQUITY -------- -------- -------- -------- -------- -------- -------- -------- Balance, December 31, 1995 6,347 $ 63 $ 25,794 $ (9,412) $ -- $ -- $ -- $ 16,445 Proceeds from exercise of warrants -- -- 1 -- -- -- -- 1 Proceeds from public offering, net of offering costs 1,775 18 9,816 -- -- -- -- 9,834 Issuance of common stock for acquisitions 522 5 1,896 -- 432 -- -- 2,333 Proceeds from exercise of stock options 5 -- 3 -- -- -- -- 3 Net loss -- -- -- (5,850) -- -- -- (5,850) -------- -------- -------- -------- -------- -------- -------- -------- Balance, December 31, 1996 8,649 86 37,510 (15,262) 432 -- -- 22,766 Exercise of stock options (notes 9 and 12) 138 2 592 -- -- -- -- 594 Acquisition of treasury stock (note 9) -- -- -- -- -- -- (137) (137) Dividend to preferred shareholders (note 8) -- -- (1,953) -- -- -- -- (1,953) Issuance of warrants under Credit Agreement (note 6) -- -- 180 -- -- -- -- 180 Net loss -- -- -- (2,004) -- -- -- (2,004) -------- -------- -------- -------- -------- -------- -------- -------- Balance, December 31, 1997 8,787 88 36,329 (17,266) 432 (137) -- 19,446 Exercise of stock options (notes 9 and 12) 20 -- 9 -- -- -- -- 9 Issuance of Common Stock for acquisitions 88 1 349 -- -- -- -- 350 Issuance of Common Stock 41 1 160 -- -- -- (40) 121 Amortization of unearned compensation -- -- -- -- -- -- 18 18 Net loss -- -- -- (985) -- -- -- (985) -------- -------- -------- -------- -------- -------- -------- -------- Balance, December 31, 1998 8,936 $ 90 $ 36,847 $(18,251) $ 432 $ (137) $ (22) $ 18,959 ======== ======== ======== ======== ======== ======== ======== ======== See accompanying notes to consolidated financial statements
25 SIGHT RESOURCE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31 1998 1997 1996 - ------------------------------------------------------------------------------------------ (IN THOUSANDS) Operating activities: Net loss $ (985) $(2,004) $(5,850) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 2,596 2,183 2,221 Amortization of unearned compensation 18 -- -- Impairment of ophthalmic equipment -- -- 2,622 Gain on sale of assets (158) (738) -- Provision for store closings and write off of software developments costs -- 510 -- Changes in operating assets and liabilities: Accounts receivable (746) 138 (248) Inventories 289 (1,027) 153 Prepaid expenses and other current assets 47 (78) (47) Accounts payable and accrued expenses (829) (1,349) (1,408) ------- ------- ------- Net cash provided by (used in) operating activities 232 (2,365) (2,557) ------- ------- ------- Investing activities: Purchases of property and equipment (1,612) (1,948) (1,639) Payments for acquisitions (2,201) (2,075) (2,854) Proceeds from sale of assets 235 1,747 -- Other assets 88 (240) (72) ------- ------- ------- Net cash used in investing activities: (3,490) (2,516) (4,565) ------- ------- ------- Financing activities: Principal payments on debt (1,087) (2,754) (400) Debt financing costs -- (320) -- Proceeds from issuance of stock 129 -- -- Proceeds from exercise of warrants and stock options -- -- 4 Net proceeds from offerings -- 4,582 9,834 Purchase of treasury stock -- (137) -- Payment of other liabilities -- (338) (427) ------- ------- ------- Net cash provided by (used in) financing activities (958) 1,033 9,011 ------- ------- ------- Net increase (decrease) in cash and cash equivalents (4,216) (3,848) 1,889 Cash and cash equivalents, beginning of period 6,076 9,924 8,035 ------- ------- ------- Cash and cash equivalents, end of period $ 1,860 $ 6,076 $ 9,924 ======= ======= =======
See note 11 for supplementary cash flow information. See accompanying notes to consolidated financial statements. 26 SIGHT RESOURCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997, AND 1996 (1) THE COMPANY (A) NATURE OF BUSINESS Sight Resource Corporation (the "Company") manufactures, distributes and sells eyewear and related products and services. (B) ACQUISITIONS During 1995, the Company acquired two primary eye care chains, effective January 1, 1995 and July 1, 1995, respectively. The aggregate purchase price paid in connection with the acquisitions consisted of (i) $2,660,000 in cash, (ii) 555,525 shares of common stock, (iii) the assumption of approximately $1,600,000 of net liabilities, and (iv) $660,000 payable over a 3 year period and $250,000 payable over 18 months, contingent upon the occurrence of certain future events. The transactions were accounted for using the purchase method of accounting. Effective July 1, 1996, the Company purchased certain assets and assumed certain liabilities of The E.B. Brown Optical Company and Brown Optical Laboratories, Inc. as well as entered into a merger with E.B. Brown Opticians, Inc. (collectively, "E.B. Brown") for approximately $7,733,000, consisting of: $4,000,000 in cash, 521,997 shares of common stock issued, 71,181 shares of common stock to be issued and $1,400,000 in notes payable over an 18 month period. When the common stock to be issued is issued, the $432,000 of common stock issuable will be reclassed into common stock and additional paid-in capital. As of July 1, 1996, E.B. Brown operated 42 eye care centers located throughout Ohio and Western Pennsylvania which provide optometric and audiology goods and services to persons with vision and hearing disorders. The transaction was accounted for using the purchase method of accounting. Effective July 1, 1997, the Company acquired one hundred percent of the outstanding shares of stock of Vision Holdings, Ltd. (formerly known as Dr. Greenberg, An Optometry Corporation, d/b/a Vision Plaza ("Vision Plaza")). The purchase price paid in connection with this acquisition was $2,000,000 in cash and the assumption and payment of notes payable outstanding as of July 1, 1997 of approximately $800,000. Vision Plaza operated 17 eye care centers in Southeast Louisiana and Mississippi. The acquisition was accounted for using the purchase method of accounting. Effective April 1, 1998, the Company acquired one hundred percent of the outstanding shares of stock of Eye Glass Emporium, Inc. ("Eyeglass Emporium"). The purchase price paid in connection with this acquisition was $2,309,000 in cash, the assumption and payment of notes payable outstanding as of April 1, 1998 of approximately $350,000 and 87,940 shares of common stock. Eyeglass Emporium operated nine eye care centers in northwest Indiana. The acquisition was accounted for using the purchase method of accounting. The results of operations of the five acquisitions have been included in the consolidated financial statements from their respective dates of acquisition. The excess of the purchase price and expenses associated with each acquisition over the estimated fair value of the net assets acquired has been recorded as goodwill. In connection with the acquisitions, the Company recorded purchase accounting adjustments to increase liabilities and establish reserves for the closing of stores and related restructuring costs, including lease commitments and severance costs. During 1997, the Company recorded reserves, principally in anticipation of closing certain stores and labs, by $1,229,000 and for severance costs of $224,000. The Company charged $100,000 and $43,000, respectively, against those reserves in 1997. During 1998, the Company recorded $32,000 for store closings and $21,000 for severance costs and charged $32,000 and $59,000, respectively, 27 against these reserves. At December 31, 1998, the Company reduced these reserves by $1,383,000 against goodwill as an adjustment to the cost of the acquired enterprises. At December 31, 1998, there are no purchase accounting reserves. The following unaudited pro forma financial information gives effect to the acquisitions as if: i) the acquisition of Vision Plaza was effective January 1, 1996 ii) the acquisition of Eyeglass Emporium was effective January 1, 1997 These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which actually would have resulted had the acquisitions occurred on the date indicated, or which may result in the future. (IN THOUSANDS EXCEPT FOR PER SHARE DATA) 1998 1997 1996 -------- -------- -------- Revenue $ 56,188 $ 54,741 $ 48,636 ======== ======== ======== Net loss $ (1,018) $ (4,073) $ (5,084) ======== ======== ======== Basic and Diluted loss per share $ (0.11) $ (0.47) $ (0.63) ======== ======== ======== Weighted average number of common shares outstanding 8,889 8,757 8,045 ======== ======== ======== Subsequent to year end the Company acquired Shawnee Optical, Inc. for $2,400,000. Had the Shawnee acquisition occurred at the beginning of 1998, the pro forma results for 1998 would have been as follows: (IN THOUSANDS EXCEPT FOR PER SHARE DATA) 1998 -------- Revenue $ 60,144 ======== Net loss $ (918) ======== Basic and Diluted loss per share $ (0.10) ======== Weighted average number of common shares outstanding 8,937 ======== The above unaudited pro forma financial information reflects certain adjustments, including amortization of goodwill, and an increase in the weighted average shares outstanding. This pro forma information does not necessarily reflect the results of operations that would have occurred had the acquisitions taken place at the beginning of 1996, 1997 and 1998 and is not necessarily indicative of results that may be obtained in the future. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) PRINCIPLES OF CONSOLIDATION The Company's results of operation include the accounts of the Company, its wholly-owned subsidiaries and three professional corporation's ("PCs") in which the Company's subsidiaries assume the financial risks and rewards of such entities. The Company has no direct equity ownership in the PCs since the outstanding voting capital stock of each of the PCs is 100% owned by a licensed optometrist (the "nominee shareholder") who has, in turn, executed a Stock Restrictions and Pledge Agreement (a "Pledge Agreement") in favor of a subsidiary of the Company. Each Pledge Agreement contains provisions that provide the Company with the ability at all times to cause a change in the nominee shareholder and for an unlimited number of times, at 28 nominal cost. The purchase price for a sale of the PC's stock is equal to the aggregate book value of the PC, which will always be a nominal cost because each PC operates at an almost break-even level generating a nominal profit, if any at all. All significant intercompany balances and transactions have been eliminated. In preparation of these consolidated financial statements in conformity with generally accepted accounting principles, management of the Company has made estimates and assumptions that affect the reported amounts of assets and liabilities, such as accounts receivable, inventory, impairment of property and equipment and intangibles. Actual results could differ from those estimates. (B) STATEMENT OF CASH FLOWS Cash and cash equivalents consist of cash in banks and short-term investments with original maturities of three months or less. (C) FINANCIAL INSTRUMENTS The carrying amount of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value because of the short maturity of these items. The carrying amount of other long-term maturities approximates fair value. The carrying amount of the Company's revolving line of credit approximates fair value because the borrowing rate changes with market interest rates. (D) REVENUE RECOGNITION Revenue and the related costs from the sale of eyewear are recognized at the time an order is complete. Revenue from eye care services is recognized when the service is performed. The Company has fee for service arrangements with most of its third party payors. Revenue is reported net of contractual allowances. Under revenue sharing arrangements for refractive surgery where the Company is not responsible for patient billing, the Company receives a specified payment from the hospital or center for each refractive surgical procedure performed. Accordingly, the Company recognizes revenue on a per procedure basis at the time procedures are performed. Under revenue-sharing arrangements for refractive surgery where the Company is responsible for the collection from the patient and payment to the ophthalmologist and other operating costs, the total patient charge is recorded as revenue with the corresponding expenses recorded in cost of revenue. (E) INVENTORIES Inventories primarily consist of the costs of eyeglass frames, contact lenses, ophthalmic lenses, sunglasses and other optical products and are valued at the lower of cost (using the first-in, first-out method) or market. (F) PROPERTY AND EQUIPMENT Property and equipment is stated at cost. The Company provides for depreciation at the time the property and equipment is placed in service. The straight-line method is used over the estimated useful life of the assets. The Company assesses the recoverability of the undepreciated property and equipment on an ongoing basis by comparing anticipated operating profits and future, undiscounted cash flows to net book value. In performing this analysis, management considers such factors as current results, trends, and future prospects, in addition to other economic factors. (G) ADVERTISING Advertising costs are expensed when incurred. (H) INTANGIBLE ASSETS Intangible assets resulting from the business acquisitions consist of customer lists, trademarks, non-compete agreements and the excess cost of the acquisition over the fair value of the net assets acquired (goodwill). Certain values assigned are based upon independent appraisals and are amortized on a straight line basis over a period of 5 to 25 years. The Company assesses the recoverability of unamortized intangible assets on an 29 ongoing basis by comparing anticipated operating profits and future, undiscounted cash flows to net book value. In performing this analysis, management considers such factors as current results, trends, and future prospects, in addition to other economic factors. (I) INCOME TAXES The Company follows the asset and liability method of accounting for income taxes and records deferred tax assets and liabilities based on temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial statement purposes. (J) DEFERRED REVENUE The Company offers a contact lens purchasing program in which, for a set fee, customers may purchase contacts at discounted rates for a 12 month period. The Company recognizes revenue from the sales of its contact lens purchasing program on a monthly basis over the life of the program. (K) NET LOSS PER SHARE Earnings per share are computed based on Statement of Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS 128"). SFAS 128 requires presentation of basic earnings per share ("Basic EPS") and diluted earnings per share ("Diluted EPS") by all entities that have publicly traded common stock or potential common stock (options, warrants, convertible securities or contingent stock arrangements). Basic EPS is computed by dividing income attributable to common stockholders by the weighted average number of common shares outstanding during the period. The computation of Diluted EPS does not assume conversion, exercise or contingent exercise of securities that would have an antidilutive effect on earnings. The following table provides a reconciliation of the numerators and denominators of the basic and diluted earnings (loss) per share computations for the years ended December 31:
YEARS ENDED DECEMBER 31 1998 1997 1996 (IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS) ------- ------- ------- BASIC LOSS PER SHARE Net loss $ (985) $(2,004) $(5,850) Less: dividends on redeemable convertible preferred stock -- (1,953) -- ------- ------- ------- Net loss attributable to common stockholders $ (985) $(3,957) $(5,850) ======= ======= ======= Weighted average common shares outstanding 8,867 8,669 7,523 Net loss per share $ (0.11) $ (0.46) $ (0.78) ======= ======= ======= DILUTED LOSS PER SHARE Net loss $ (985) $(2,004) $(5,850) Less: dividends on redeemable convertible preferred stock -- (1,953) -- ======= ======= ======= Net loss attributable to common stockholders $ (985) $(3,957) $(5,850) ======= ======= ======= Weighted average common shares outstanding 8,867 8,669 7,523 Net loss per share $ (0.11) $ (0.46) $ (0.78) ======= ======= =======
The options, warrants and convertible preferred stock discussed in Notes 8 and 9 were not included in the computation of diluted Earnings Per Share because the effect would be antidilutive. 30 (3) PROPERTY AND EQUIPMENT Property and equipment consists of the following:
ESTIMATED YEARS ENDED DECEMBER 31 1998 1997 USEFUL LIFE - ---------------------------------------------------------------------------------------------- (IN THOUSANDS) Land and building $ 87 $ 87 40 years Equipment 5,195 4,123 3-5 years Computer equipment 1,143 485 3 years Furniture and fixtures 1,751 1,243 3 years Leasehold improvements 4,731 3,974 Life of lease Construction-in-progress 310 158 ------- ------- 13,217 10,070 Less accumulated depreciation 7,077 4,406 ======= ======= Property and equipment, net $ 6,140 $ 5,664 ======= =======
During the fourth quarter of 1997, the Company recorded a $400,000 charge for the write off of development costs associated with Point of Sale software due to a decision to change the system provider to be utilized. (4) INTANGIBLE ASSETS Intangible assets consists of the following:
ESTIMATED YEARS ENDED DECEMBER 31 1998 1997 USEFUL LIFE - ---------------------------------------------------------------------------------------------- (IN THOUSANDS) Goodwill $14,331 $ 13,061 20-25 Customer lists 2,662 2,659 11-15 Non-compete 120 120 5 Trademarks 713 713 15 -------- -------- 17,826 16,553 Accumulated amortization 2,489 1,655 ======== ======== Total $ 15,337 $ 14,898 ======== ========
The useful lives of the above intangible assets are estimated based upon, among other things, independent appraisals, history of operations acquired, terms of agreements and industry standards. 31 (5) ACCRUED EXPENSES Accrued expenses consists of the following: YEARS ENDED DECEMBER 31 1998 1997 - ------------------------------------------------------------------------ (IN THOUSANDS) Professional fees $ 118 $ 308 Payroll and related cost 1,505 1,671 Acquisition reserves and accruals -- 1,863 Deferred revenue 161 161 Other 1,469 1,625 ------- ------- $ 3,253 $ 5,628 ======= ======= (6) DEBT YEARS ENDED DECEMBER 31 1998 1997 - -------------------------------------------------------------------------------- (IN THOUSANDS) Notes payable, 7% interest rate, principal and interest due quarterly until March 31, 2001 $ 263 $ -- Notes payable, 12% interest rate, principal and interest due monthly until January, 2001 67 -- Unsecured notes payable, 7% interest rate, $400 paid on September 18, 1997 and $1,000 due on March 18, 1998; due on demand if the Company's cash balance is less than $2,800 -- 1,000 ------ ----- 330 1,000 Less current maturities 146 1,000 ====== ====== Long term debt, less current maturities $ 184 $ -- ====== ====== On April 8, 1998, as part of the acquisition of Eyeglass Emporium, the Company issued a three-year $350,000 note to the seller. The annual interest rate is 7%. Principal and interest are due quarterly beginning June 30, 1998 and continuing until March 31, 2001. On February 20, 1997, the Company entered into a Credit Agreement (the "Agreement") with a bank pursuant to which the Company can borrow $5,000,000 on a term loan basis and $5,000,000 on a revolving credit basis, subject to certain performance criteria. The performance criteria include, among others, financial condition covenants such as rolling EBITDA levels, indebtedness to EBITDA ratios, current ratio of 1:1 and minimum net worth requirements. The term loan facility bears interest at the bank's prime rate plus 1.5% or LIBOR plus 3% at the Company's election and the revolving credit facility bears interest at the bank's prime rate plus 1.25% or LIBOR plus 2.75% at the Company's election. These loans are secured by all assets of the Company and its wholly owned subsidiaries. As of December 31, 1998, the entire term loan and revolving note was unused. Amounts borrowed under the Agreement will be used to finance future acquisitions, provide ongoing working capital and for other general corporate purposes. As part of the Agreement, the Company issued to the bank warrants to purchase 150,000 shares of the common stock at a purchase price of $4.625 per share. The warrants expire December 31, 2003. The warrants were accounted for as additional paid in capital based upon the fair value of the securities. Fair market value was determined by using the relationship of the interest rate charged with the warrants versus the rate to be charged without the warrants. This value 32 approximated that obtained using the Black Scholes Method. As of December 31, 1998 and 1997, there were no amounts outstanding under the Agreement. At December 31, 1998, the Company was not in compliance with a financial covenant which requires that the Company maintain a certain minimum net worth. The Company has received a waiver of this covenant. In January 1996, one of the Company's subsidiaries entered into a five-year, $140,000 construction note payable relating to one of its mall locations. The annual interest rate is 12%. Principal and interest payments are due monthly until January 2001. (7) LEASE OBLIGATIONS The Company has operating leases primarily for its primary eye care centers, distribution center, corporate offices and certain equipment. The leases are generally for periods of up to 10 years with renewal options at fixed rentals. Certain of the leases provide for additional rentals based on sales exceeding specified amounts. Capitalized leases consists of various office and optometric equipment at multiple locations. Future minimum annual lease commitments for facilities and equipment for the five years subsequent to December 31, 1998 and in the aggregate are as follows: Capital Operating (IN THOUSANDS) Leases Leases -------------- ----------------- 1999 $ 39 $ 5,394 2000 12 4,501 2001 2 3,579 2002 -- 2,762 2003 -- 2,233 Thereafter -- 5,187 ----- ------- Total minimum lease obligations 53 $23,656 ======= Less amount representing interest 6 ----- Present value of net minimum capital lease obligations 47 Less current maturities 34 ----- $ 13 ===== Rental expenses charged to operations, including real estate taxes, common area maintenance and other expenses related to the leased facilities and equipment, were approximately $5,335,000, $4,500,000 and $2,592,000, for fiscal years 1998, 1997 and 1996, respectively. (8) REDEEMABLE CONVERTIBLE PREFERRED STOCK On November 25, 1997, the Company issued 1,452,119 shares of Series B Convertible Preferred Stock (the "Series B"), Class I and Class II Warrants to an outside investor (the "Purchaser") for a net purchase price of $4,582,000. The Series B was purchased with a conversion price into common stock that was lower than market value of the common stock, and as a result, the difference of $1,953,000 was reflected as a dividend to the preferred stockholders to reflect the preferred stock at its fair value. Each share of Series B is convertible into one share of Common Stock at $3.50 per share, subject to adjustment, at the Purchaser's option at any time and at the Company's option if the price per share of Common Stock during any period of thirty consecutive trading days equals or exceeds $7.00 at any time during the first three years or $9.00 at any time thereafter. The holders of the Series B have the right to appoint two directors to the Company's Board of Directors. 33 The Class I (Mirror) Warrants entitle the Purchaser to purchase an amount of shares of the Company's Common Stock equal to an aggregate of up to 19.9% of the shares of Common Stock purchasable under the Company's outstanding warrants and options on the same terms and conditions of existing warrant and option holders. The Purchaser is obligated to exercise these warrants at the same time the options and warrants of existing holders are exercised, subject to certain limitations. The Class II Warrants entitle the Purchaser to purchase an aggregate of 290,424 shares of the Company's Common Stock at an exercise price of $7.00 for a term of five years. The Purchaser is entitled to "shelf" registration rights and "piggyback" registration rights with respect to the shares of Common Stock underlying the Series B, the Class I Warrants and the Class II Warrants. Upon a change of control of the Company, defined as (i) a change in any person or group obtaining a majority of the securities ordinarily having the right to vote in an election of Directors; (ii) during any two year period, the individuals who at the beginning of the period constituted the Company's Board of Directors no longer constitute a majority of the Board of Directors; (iii) any merger, consolidation, recapitalization, reorganization, dissolution or liquidation of the Company which results in the current stockholders no longer owning more than 50% of the voting securities or the Company; (iv) any sale, lease, exchange or other transfer of all, or substantially all, of the assets of the Company; or (v) the adoption of a plan leading to the liquidation or dissolution of the Company, at the option of the Purchaser, the Company would have to redeem the Series B at a price of 105% of the offering price, subject to certain adjustments, plus accrued and unpaid dividends. The redemption value at December 31, 1997 and 1998 was $5,337,000. (9) STOCKHOLDERS' EQUITY PREFERRED STOCK As of December 31, 1998 and 1997, the Company has authorized 5,000,000 shares of preferred stock at $.01 par value of which 1,452,119 shares of Series B are issued and outstanding (see Note 8), and 200,000 shares have been designated Series A Junior Participating Preferred Stock pursuant to a certificate of designation filed with the State of Delaware on May 12, 1997, of which no shares are issued and outstanding. The terms and conditions of any other series of preferred stock, including any preferences and dividends, will not be established until such time, if ever, as such shares are in fact issued by the Company. COMMON STOCK As of December 31, 1998 and 1997, the Company has authorized 20,000,000 shares of common stock at $.01 par value. Common stock is entitled to dividends if declared by the Board of Directors, and each share carries one vote. WARRANTS In connection with the Company's initial public offering, the Company sold to the IPO Representative (at an aggregate price of $85), warrants to purchase up to 85,000 IPO Units at an exercise price of $7.98 per IPO Unit at any time during the four-year period commencing March 31, 1994. Each IPO Unit consisted of one share of common stock and one redeemable common stock purchase warrant, which entitled the holder to purchase one share of common stock at a price of $6.75. No IPO Units were exercised prior to their expiring on March 31, 1998. In connection with the Company's private placement of Bridge Notes, the Company issued 110,000 Class A Warrants. Each Class A Warrant entitles the holder to purchase one share of common stock at a price of $6.00 and is exercisable at any time through March 25, 1999. During 1995, 25,000 Class A Warrants were exercised providing the Company with net proceeds of $150,000. 34 In connection with the Company's second public offering, the Company issued 2,472,500 redeemable common stock purchase warrants ("Z Warrant"). Each Z Warrant entitles the holder to purchase one share of common stock at a price of $6.00 and terminates on August 25, 1999, unless previously redeemed. The Z Warrants are redeemable at the option of the Company at a price of $.05 per warrant, upon 30 days written notice, provided that the closing price of the common stock exceeds $9.50 for a period of 20 consecutive business days. During fiscal 1995, 300 Z Warrants were exercised providing the Company with $1,800 in proceeds. During the year ended December 31, 1996, 100 Z Warrants were exercised providing the Company with $600 in proceeds. In connection with the Company's second public offering, the Company sold to its underwriter and a finder, 215,000 Unit Purchase Options ("UPOs") at a price of $.001 per UPO. Each UPO consists of one share of common stock and one redeemable common stock purchase warrant, which entitles the holder to purchase one share of common stock at a price of $7.20. The UPOs are exercisable for a period of four years commencing August 25, 1995, at a price of $9.90. No UPOs have been exercised. In connection with its third public offering in 1996, the Company sold to its underwriter warrants to purchase an aggregate of 170,000 shares of the Company's common stock at $8.45. No underwriter warrants have been exercised. In connection with the Company issuing 1,452,119 shares of Series B Convertible Preferred Stock , Class I and Class II Warrants were issued to an outside investor (the "Purchaser"). The Class I (Mirror) Warrants entitle the Purchaser to purchase an amount of shares of the Company's Common Stock equal to an aggregate of up to 19.9% of the shares of Common Stock purchasable under the Company's outstanding warrants and options on the same terms and conditions of existing warrant and option holders. The Purchaser is obligated to exercise these warrants at the same time the options and warrants of existing holders are exercised, subject to certain limitations. The Class II Warrants entitle the Purchaser to purchase an aggregate of 290,424 shares of the Company's Common Stock at an exercise price of $7.00 for a term of five years. No Class I or Class II Warrants have been exercised. TREASURY STOCK From time to time, the Company's Board of Directors has authorized the repurchase of shares of the Company's common stock in the open market. During the year ended December 31, 1997, the Company repurchased 30,600 shares of common stock at a cost of $137,000. There were no repurchases of shares of common stock during the year ended December 31, 1998. STOCK OPTION PLAN On November 30, 1992, the Company's Board of Directors and the stockholders approved the Company's 1992 Employee, Director and Consultant Stock Option Plan (the "Plan"). On April 26, 1994, the Board of Directors and the stockholders approved an increase in shares of common stock reserved for issuance under the Plan to an aggregate of 1,000,000 shares. In March 1996, the Board recommended and the stockholders subsequently approved, that an additional 500,000 shares of common stock be reserved for issuance under the Plan. In December 1998, the Board recommended that an additional 350,000 shares of common stock be reserved for issuance under the Plan. Such proposal will be submitted to the stockholders at the 1999 Annual Meeting. Under the Plan, incentive stock options may be granted to employees of the Company. Non-qualified stock options may be granted to consultants, directors, employees or officers of the Company. Most options vest after two or three years from date of grant with a maximum term of ten years. 35 The Company applies APB Opinion No. 25 and related interpretations in accounting for the Plan and as a result no compensation expense has been recorded for granted options. Had compensation costs been determined consistent with FASB Statement No. 123, the Company's net loss and loss per share would have been as follows:
(IN THOUSANDS EXCEPT FOR PER SHARE DATA) 1998 1997 1996 --------- --------- --------- Net loss as reported $ (985) $ (2,004) $ (5,850) ========= ========= ========= pro forma $ (1,863) $ (2,370) $ (6,308) ========= ========= ========= Net loss per share as reported $ (0.11) $ (0.46) $ (0.78) ========= ========= ========= pro forma $ (0.21) $ (0.50) $ (0.84) ========= ========= =========
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants as follows: 1998 1997 1996 ---- ---- ---- Dividend Yield 0.00% 0.00% 0.00% Volatility 91.1% 93.9% 63.9% Interest Rate 5.50% 5.73% 6.41% Expected Life 8.12 years 7.97 years 6.00 years A summary of the stock option transactions follows: WEIGHTED NUMBER OF AVERAGE SHARES SHARES UNDER PRICE PER AVAILABLE OPTION SHARE --------- ---------- ------ Balance, December 31, 1995 336,767 661,133 $ 4.80 Increase in Plan 500,000 -- -- Canceled 42,600 (42,600) 5.16 Granted (225,400) 225,400 6.46 Exercised -- (20,700) 4.39 --------- ---------- ------ Balance, December 31, 1996 653,967 823,233 5.25 Canceled 154,600 (154,600) 4.67 Granted (298,395) 298,395 4.13 Exercised -- (138,332) 4.29 --------- ---------- ------ Balance, December 31, 1997 510,172 828,696 5.11 Canceled 217,666 (217,666) 5.08 Granted (613,999) 613,999 3.43 Exercised -- (20,000) 0.43 --------- ---------- ------ Balance, December 31, 1998 113,839 1,205,029 $ 4.15 ========= ========== ====== There were 557,200 and 405,561 shares exercisable under the Plan at December 31, 1998 and 1997, respectively. The weighted average fair value of options granted under the Plan was $2.90 and $3.53 for the years ended December 31, 1998 and 1997, respectively. 36 The following table summarizes information about options outstanding as of December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------------- ------------------------------------ WEIGHTED AVERAGE WEIGHTED RANGE OF NUMBER REMAINING AVERAGE NUMBER WEIGHTED EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE AT AVERAGE PRICES AT 12/31/98 LIFE PRICE 12/31/98 EXERCISE PRICE ------ ----------- ---- ----- -------- -------------- $0.00-$0.95 15,000 3.9 $0.43 15,000 $0.43 $1.90-$2.85 97,000 9.9 $2.00 0 $0.00 $2.85-$3.80 224,999 9.3 $3.28 45,001 $3.53 $3.80-$4.75 632,630 7.8 $4.12 300,800 $4.23 $4.75-$5.70 54,900 5.9 $5.00 54,900 $5.00 $5.70-$6.65 125,500 7.1 $6.43 88,833 $6.39 $6.65-$7.60 52,000 6.5 $6.82 49,666 $6.83 $7.60-$8.55 3,000 6.9 $7.81 3,000 $7.81 ----------- --------- 1,205,029 557,200 =========== =========
(10) INCOME TAXES Income tax benefit attributable to loss from operations differed from the amounts computed by applying the U.S. federal income tax rate of 34 percent as a result of the following: YEARS ENDED DECEMBER 31 1998 1997 1996 - ------------------------------------------------------------------------------ (IN THOUSANDS) Computed "expected" tax benefit $ 305 $ 680 $ 1,989 Increase in tax benefit resulting from: State net operating loss and State tax deductions 137 111 338 Decrease in tax benefit resulting from: Other (104) (78) (7) Increase in valuation allowance for deferred tax assets allocated to income tax expense (408) (738) (2,345) ------- ------- ------- $ (70) $ (25) $ (25) ======= ======= ======= The tax effects of temporary differences that give rise to significant portions of the net deferred tax asset are presented below: YEARS ENDED DECEMBER 31 1998 1997 - ---------------------------------------------------------- (IN THOUSANDS) Deferred tax assets: Net operating loss carryforwards $ 7,513 $ 7,001 Plant and equipment 720 819 Vacation accrual 201 181 Bad debt reserve 259 107 Other reserves 117 761 ------- ------- Gross deferred tax assets 8,810 8,869 Valuation allowance under SFAS 109 (8,810) (8,869) ------- ------- Net deferred tax assets -- -- ======= ======= 37 A valuation allowance in the amount of $8,810,000 and $8,869,000 was established at December 31, 1998 and 1997, respectively. This allowance has been established due to the uncertainty of the Company to benefit from the federal and state operating loss carryforwards. Subsequently recognized tax benefit relating to the valuation allowance for deferred tax assets will be allocated as follows: YEARS ENDED DECEMBER 31 1998 1997 - -------------------------------------------------------------------- (IN THOUSANDS) Income tax benefit that would be reported in the statement of operations $8,171 $7,763 Charge to goodwill for recognition of acquired tax assets 639 1,106 ------ ------- $8,810 $8,869 ====== ====== The net operating loss carryforwards ("NOLs") for federal and state tax purposes at December 31, 1998 are approximately $18,901,000 and $17,328,000 respectively and expire through 2018 and 2003, respectively. (11) SUPPLEMENTARY CASH FLOW INFORMATION The following represents supplementary cash flow information: YEARS ENDED DECEMBER 31 1998 1997 1996 - ------------------------------------------------------------------------ (IN THOUSANDS) Interest paid $ 222 $ 343 $ 223 Non-cash financing activities: Equity issued associated with Credit Agreement -- 180 -- Acquisitions: Assets acquired 3,949 5,623 10,266 Net liabilities assumed (1,247) (3,548) (2,533) Notes payable (350) -- (1,400) Common stock issued (1) -- (1,901) Common stock issuable -- -- (432) -------- -------- -------- Cash paid 2,351 2,075 4,000 Less cash acquired (150) -- (1,146) -------- -------- -------- Net cash paid for acquisition $ 2,201 $ 2,075 $ 2,854 ======== ======== ======== (12) RELATED PARTY TRANSACTIONS In connection with the exercise of stock options during 1997, the Company's former Executive Vice President and Director (the "Borrower") issued a promissory note (the "Promissory Note") to the Company for $594,000. The Promissory Note is due the earlier of September 2, 2007 or the date upon which the Borrower receives the proceeds of the sale of not less than 20,000 shares of the shares acquired by the exercise of the stock options. Interest accrues at the rate of 6.55%, compounding annually, and is payable on the earlier of the 38 maturity date of the Promissory Note or upon certain defined Events of Default. The Borrower may prepay all or any part of the Note without penalty or premium. (13) OPERATING SEGMENT AND RELATED INFORMATION The following table presents certain operating segment information.
LASER VISION CONSOLIDATED EYE CARE CENTERS CORRECTION ALL OTHER TOTALS (IN THOUSANDS) 1998 1997 1998 1997 1998 1997 1998 1997 -------- -------- -------- -------- -------- -------- -------- -------- Revenues: External customers $ 53,100 $ 42,510 $ 1,871 $ 2,066 $ -- $ -- $ 54,971 $ 44,576 Interest: Interest revenue 1 20 -- -- 183 340 184 360 Interest expense (98) (54) (34) -- (69) (290) (201) (344) -------- -------- -------- -------- -------- -------- -------- -------- Net interest revenue (expense) (97) (34) (34) -- 114 50 (17) 16 Depreciation and amortization 2,426 1,971 113 164 57 48 2,596 2,183 Profit (loss) from operations 1,423 (122) 253 (97) (2,732) (2,514) (1,056) (2,733) Identifiable assets 28,644 26,700 587 624 2,914 7,183 32,145 34,507 Capital expenditures 1,316 1,808 296 140 -- -- 1,612 1,948
Each operating segment is individually managed and has separate financial results that are reviewed by the Company's chief operating decision-makers. Each segment contains closely related products that are unique to the particular segment. The principal products of the Company's eye care centers are eyeglasses, frames, ophthalmic lenses and contact lenses. The Company also operates two laser vision correction centers. Profit from operations is net sales less cost of sales and selling, general and administrative expenses, but is not affected by nonoperating charges/income or by income taxes. Nonoperating charges/income consists principally of net interest expense. In calculating profit from operations for individual operating segments, certain administrative expenses incurred at the operating level that are common to more than one segment are not allocated on a net sales basis. All intercompany transactions have been eliminated, and intersegment revenues are not significant. (14) SUBSEQUENT EVENTS Effective January 1, 1999, the Company acquired one hundred percent of the outstanding shares of stock of Shawnee Optical, Inc. ("Shawnee Optical"). The purchase price paid in connection with this acquisition was $1,750,000 in cash, the payment of notes payable in the aggregate amount of $300,000 and 70,000 shares of common stock. The related estimated goodwill is expected to be approximately $2,155,000. Shawnee Optical operated nine eye care centers in Ohio and western Pennsylvania. The acquisition was accounted for using the purchase method of accounting. 39 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT The response to this item is incorporated by reference from the discussion responsive thereto under the captions "Management" and "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the Company's Proxy Statement for the 1999 Annual Meeting of Stockholders. ITEM 11. EXECUTIVE COMPENSATION The response to this item is incorporated by reference from the discussion responsive thereto under the caption "Executive Compensation" in the Company's Proxy Statement for the 1999 Annual Meeting of Stockholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The response to this item is incorporated by reference from the discussion responsive thereto under the caption "Share Ownership" in the Company's Proxy Statement for the 1999 Annual Meeting of Stockholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The response to this item is incorporated by reference from the discussion responsive thereto under the caption "Certain Transactions" in the Company's Proxy Statement for the 1999 Annual Meeting of Shareholders. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K ITEM 14(A)(1). INDEX TO CONSOLIDATED FINANCIAL STATEMENTS COVERED BY REPORT OF INDEPENDENT AUDITORS The Consolidated Financial Statements of Sight Resource Corporation are included in Item 8: - Independent Auditors' Report - Consolidated Balance Sheets as of December 31, 1998 and 1997 - Consolidated Statements of Operations for the Years Ended December 31, 1998, 1997 and 1996 - Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1998, 1997 and 1996 - Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996 - Notes to Consolidated Financial Statements 40 ITEM 14(A)(2) INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULES INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Sight Resource Corporation: Under date of March 19, 1999, we reported on the consolidated balance sheets of Sight Resource Corporation and its subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998, which are included in the 10-K. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule in the 10-K. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG Peat Marwick LLP KPMG Peat Marwick LLP Boston, Massachusetts March 19, 1999 41
Sight Resource Corporation Schedule II - Valuation and Qualifying Accounts (DOLLARS IN THOUSANDS) FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998 Additions (Deductions) ------------------------- Charged Balance at (Credited) to Beginning Costs and Balance at Description of Year Expenses Other Net End of Period - ------------------------------------------------------------------------------------------------------------ Valuation and qualifying accounts deducted from assets: Allowances for accounts receivable $ 478 $ 215 $ 55 $ 748 Valuation allowance for deferred tax assets 8,869 (59) -- 8,810
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997 Additions (Deductions) --------------------------- Charged Balance at (Credited) to Beginning Costs and Balance at Description of Year Expenses Other Net End of Period - ------------------------------------------------------------------------------------------------------------ Valuation and qualifying accounts deducted from assets: Allowances for accounts receivable $ 353 $ 97 $ 28 $ 478 Valuation allowance for deferred tax assets 7,600 1,269 -- 8,869
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996 Additions (Deductions) -------------------------- Charged Balance at (Credited) to Beginning Costs and Balance at Description of Year Expenses Other Net End of Period - ------------------------------------------------------------------------------------------------------------ Valuation and qualifying accounts deducted from assets: Allowances for accounts receivable $ 277 $ 16 $ 60 $ 353 Valuation allowance for deferred tax assets 4,591 3,009 -- 7,600
42 ITEM 14(A)(3) EXHIBITS The exhibits listed on the Exhibit Index below are filed or incorporated by reference as part of this report and such Exhibit Index is hereby incorporated herein by reference. EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION - ------ ----------- (3.1) - Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit 3.1 of the Company's Registration Statement filed with the Securities and Exchange Commission on Form SB-2 File No. 33-56668) (3.2) - By-Laws of the Company, as amended (3.3) - Certificate of Designation for Series A Junior Participating Preferred Stock (incorporated herein by reference to Exhibit 1 of the Company's Report on Form 8-K filed with the Securities and Exchange Commission on May 13, 1997) (3.4) - Certificate of Designation, Preferences and Rights of Series B Convertible Preferred Stock (incorporated herein by reference to Exhibit 4.1 of the Company's Report on Form 8-K filed with the Securities and Exchange Commission on December 9, 1997) (4.1) - Article 4 of the Certificate of Incorporation (incorporated herein by reference to Exhibit 3.1 of the Company's Registration Statement filed with the Securities and Exchange Commission on Form SB-2 File No. 33-56668) (4.2) - Form of Common Stock Certificate (incorporated herein by reference to Exhibit 4.2 of the Company's Registration Statement filed with the Securities and Exchange Commission on Form SB-2 File No. 33-56668) (4.3) - Warrant Agreement dated August 24, 1994 between the Registrant and American Stock Transfer and Trust Company (incorporated herein by reference to Exhibit 4.5 of the Company's Registration Statement filed with the Securities and Exchange Commission on Form S-1 File No. 33-77030) (4.4) - Form of Redeemable Warrant Certificate (included in 4.3 above) (4.5) - Form of Class A Warrant (incorporated herein by reference to the Company's Form 10-K for the year ended December 31, 1994 filed with the Securities and Exchange Commission as Exhibit 4.7) (4.6) - Form of Class 1 (Mirror) Warrants (incorporated herein by reference to Exhibit 4.2 of the Company's Report on Form 8-K filed with the Securities and Exchange Commission on December 9, 1997) (4.7) - Form of Class II Warrants (incorporated herein by reference to Exhibit 4.3 of the Company's Report on Form 8-K filed with the Securities and Exchange Commission on December 9, 1997) +(10.1) - Employment Agreement, dated as of December 1, 1992, between the Registrant and William G. McLendon, as amended (incorporated by reference herein to Exhibit 10.5 of the Company's Registration Statement filed with the Securities and Exchange Commission on Form S-1 File No. 33-77030) 43 EXHIBIT NUMBER DESCRIPTION - ------ ----------- +(10.2) - 1992 Employee, Director and Consultant Stock Option Plan, as amended +(10.3) - Employment Agreement for Stephen M. Blinn, as amended (incorporated by reference herein to Exhibit 10.18 of the Company's Registration Statement filed with the Securities and Exchange Commission on Form S-1 File No. 33-77030) +(10.4) - Employment Agreement, dated as of February 24, 1995, between the Registrant and Elliot S. Weinstock, O.D. (incorporated herein by reference to the Company's Form 10-K for the year ended December 31, 1994 filed with the Securities and Exchange Commission as Exhibit 10.9) +(10.5) - Amendment Number 1 to Employment Agreement, dated as of January 2, 1997, between the Registrant and Elliot S. Weinstock, O.D. (incorporated herein by reference to Exhibit 10.1 of the Company's Form 10-Q filed with the Securities and Exchange Commission on May 6, 1997) +(10.6) - Employment Agreement, dated as of January 26, 1998, between the Registrant and William T. Sullivan +(10.7) - Amendment No.1 to Employment Agreement, dated as of December 4, 1998, between the Registrant and William T. Sullivan +(10.8) - Letter Agreement, dated as of July 27, 1998, between the Registrant and William G. McLendon (incorporated herein by reference to Exhibit 10b of the Company's Report on Form 10-Q filed with the Securities and Exchange Commission on November 12, 1998) +(10.9) - Letter Agreement, dated as of August 3, 1998, between the Registrant and Stephen M. Blinn (incorporated herein by reference to Exhibit 10c of the Company's Report on Form 10-Q filed with the Securities and Exchange Commission on November 12, 1998) +(10.10) - Employment Agreement, dated as of August 17, 1998, between the Registrant and James W. Norton (incorporated herein by reference to Exhibit 10a of the Company's Report on Form 10-Q filed with the Securities and Exchange Commission on November 12, 1998) (10.11) - Form of Management Agreement between certain of the Registrant's subsidiaries and their related optometric professional corporations (10.12) - Form of Stock Restrictions and Pledge Agreement between certain of the Registrant's subsidiaries, their related optometric professional corporations and the nominee shareholders. (10.13) - Asset Purchase Agreement dated February 24, 1995 between the Registrant, CEA Acquisition Corporation, Cambridge Eye Associates, Inc. and Elliot S. Weinstock, O.D. (incorporated herein by reference to Exhibit 2.1 of the Company's Form 8-K filed with the Securities and Exchange Commission on March 8, 1995) (10.14) - Credit Agreement, dated February 20, 1997, between the Company and Creditanstalt Corporate Finance Corporation, Inc. (incorporated herein by reference to Exhibit 10.1 of the Company's Form 8-K filed with the Securities Exchange Commission on March 7, 1997) 44 EXHIBIT NUMBER DESCRIPTION - ------ ----------- (10.15) - Asset Purchase Agreement dated August 24, 1995 between the Registrant, Douglas Vision World, Inc., S.J. Haronian, Kathleen Haronian, Lynn Haronian, Shirley Santoro and Tri-State Leasing Company (incorporated herein by reference to Exhibit 2.1 of the Company's Form 8-K filed with the Securities and Exchange Commission on September 8, 1995) (10.16) - Asset Transfer and Merger Agreement dated as of July 1, 1996 by and among Sight Resource Corporation, E.B. Acquisition Corp., The E.B. Brown Optical Company, Brown Optical Laboratories, Inc., E.B. Brown Opticians, Inc., Gordon Safran and Evelyn Safran (incorporated herein by reference to Exhibit 2.1 of the Company's Form 8-K filed with the Securities and Exchange Commission on October 3, 1996.) (10.17) - Form of Rights Agreement dated as of May 15, 1997 between the Company and American Stock Transfer & Trust Company (incorporated herein by reference to Exhibit 1 of the Company's Form 8-K filed with the Securities and Exchange Commission on May 13, 1997) (10.18) - Stock Purchase Agreement dated as of July 1, 1997 by and among Marjory O. Greenberg, As Testamentary Executrix of the Succession of Tom I. Greenberg, Peter Brown, and Vision Plaza Corp. (incorporated herein by reference to Exhibit 10.1 of the Company's Form 10-Q filed with the Securities and Exchange Commission on November 12, 1997) (10.19) - Promissory Note dated as of September 2, 1997 between Sight Resource Corporation and Mr. Stephen Blinn (incorporated herein by reference to Exhibit 10.2 of the Company's Form 10-Q filed with the Securities and Exchange Commission on November 12, 1997) (10.20) - Series B Convertible Preferred Stock Agreement (incorporated herein by reference to Exhibit 10.1 of the Company's Form 8-K filed with the Securities and Exchange Commission on December 9, 1997) (21) - Subsidiaries of the Company (27) - Financial Data Schedule + Management contract or compensatory plan, contract or arrangement. ITEM 14(B) REPORTS ON FORM 8-K No reports on Form 8-K were filed during the quarter ended December 31, 1998. 45 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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, in Holliston, Massachusetts on March 26, 1999. SIGHT RESOURCE CORPORATION By: /s/ WILLIAM T. SULLIVAN ------------------------------------- William T. Sullivan President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- By: /s/ WILLIAM T. SULLIVAN President (principal executive March 26, 1999 -------------------------------------------- officer), Chief Executive William T. Sullivan Officer and Director By: /s/ WILLIAM G. MCLENDON Chairman March 26, 1999 -------------------------------------------- William G. McLendon By: /s/ STEPHEN M. BLINN Director March 26, 1999 -------------------------------------------- Stephen M. Blinn By: /s/ RICHARD G. DARMAN Director March 26, 1999 -------------------------------------------- Richard G. Darman By: /s/ GARY JACOBSON, M.D. Director March 26, 1999 -------------------------------------------- Gary Jacobson, M.D. By: /s/ ALLEN R. KIRKPATRICK Director March 26, 1999 -------------------------------------------- Allen R. Kirkpatrick By: /s/ J. MITCHELL REESE Director March 26, 1999 -------------------------------------------- J. Mitchell Reese By: /s/ RUSSELL E. TASKEY Director March 26, 1999 -------------------------------------------- Russell E. Taskey By: /s/ ELLIOT S. WEINSTOCK, O.D. Director March 26, 1999 -------------------------------------------- Elliot S. Weinstock, O.D. By: /s/ JAMES W. NORTON Chief Financial Officer March 26, 1999 -------------------------------------------- (principal financial and James W. Norton accounting officer)
46 Exhibit Index SIGHT RESOURCE CORPORATION Exhibit 3.2 By-Laws As Amended Exhibit 10.6 Sullivan Employment Agreement Exhibit 10.7 Amendment No. 1 to Sullivan Employment Agreement Exhibit 10.11 Form of Management Agreement Exhibit 10.12 Form of Stock Restrictions and Pledge Agreement Exhibit 21 Subsidiaries of the Company;and Exhibit 27 Financial Data Schedule EX-3.2 2 BY-LAWS AS AMENDED Exhibit 3.2 SIGHT RESOURCE CORPORATION BY-LAWS, AS AMENDED ARTICLE I - STOCKHOLDERS SECTION 1. ANNUAL MEETING. An annual meeting of the stockholders, for the election of directors to succeed those whose terms expire and for the transaction of such other business as may properly come before the meeting, shall be held at such place, on such date, and at such time as the board of directors shall each year fix. SECTION 2. SPECIAL MEETINGS. Special meetings of the stockholders, for any purpose or purposes prescribed in the notice of the meeting, may be called by the Chairman of the Board, if any, the President or the board of directors, by the affirmative vote of a majority of the Whole Board. The special meeting shall be held at such place, on such date, and at such time as shall be fixed by the board of directors or the person calling the meeting. The term "Whole Board" shall mean the total number of authorized directors, whether or not there exists any vacancies in previously authorized directorships. SECTION 3. NOTICE OF MEETINGS. Written notice of the place, date, and time of all meetings of the stockholders shall be given, not less than ten (10) nor more than sixty (60) days before the date on which the meeting is to be held, to each stockholder entitled to vote at such meeting, except as otherwise provided herein or required by law (meaning, here and hereinafter, as required from time to time by the Delaware General Corporation Law or the Certificate of Incorporation of the Corporation, as amended and restated from time to time). When a meeting is adjourned to another place, date or time, written notice need not be given of the adjourned meeting if the place, date and time thereof are announced at the meeting at which the adjournment is taken; provided, however, that if the date of any adjourned meeting is more than thirty (30) days after the date for which the meeting was originally noticed, or if a new record date is fixed for the adjourned meeting, written notice of the place, date, and time of the adjourned meeting shall be given in conformity herewith. At any adjourned meeting, any business may be transacted that might have been transacted at the original meeting. SECTION 4. QUORUM. At any meeting of the stockholders, the holders of a majority of the voting power of the outstanding shares of the stock entitled to vote at the meeting, present in person or by proxy, shall constitute a quorum for all purposes, unless or except to the extent that the presence of a larger number may be required by law. Where a separate vote by a class or classes, or series thereof, is required, a majority of the voting power of the outstanding shares of such class or classes, or series, present in person or represented by proxy shall constitute a quorum entitled to take action with respect to that vote on that matter. If a quorum shall fail to attend any meeting, the chairman of the meeting or the holders of a majority of the voting power of the shares of stock entitled to vote who are present, in person or by proxy, may adjourn the meeting to another place, date, or time. SECTION 5. ORGANIZATION. Such person as the board of directors may have designated or, in the absence of such a person, the Chairman of the Board or, in his absence, such person as may be chosen by the holders of a majority of the shares entitled to vote who are present, in person or by proxy, shall call to order any meeting of the stockholders and act as chairman of the meeting. In the absence of the Secretary of the Corporation, the secretary of the meeting shall be such person as the chairman of the meeting appoints. SECTION 6. CONDUCT OF BUSINESS. The chairman of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of discussion as may seem to him in order. The date and time of the opening and closing of the polls for each matter upon which the stockholders will vote at the meeting shall be announced at the meeting. SECTION 7. NOTICE OF STOCKHOLDER BUSINESS AND NOMINATIONS. A. ANNUAL MEETINGS OF STOCKHOLDERS. (1) Nominations of persons for election to the board of directors and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders (a) pursuant to the Corporation's notice of meeting, (b) by or at the direction of the board of directors or (c) by any stockholder of the Corporation who was a stockholder of record at the time of giving of notice provided for in this Section, who is entitled to vote at the meeting and who complies with the notice procedures set forth in this Section. (2) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to -2- clause (c) of paragraph (A)(1) of this Section, the stockholder must have (i) given timely notice thereof in writing to the Secretary of the Corporation, (ii) such other business must otherwise be a proper matter for stockholder action, (iii) if the stockholder, or the beneficial owner on whose behalf any such proposal or nomination is made, has provided the Corporation with a Solicitation Notice, as that term is defined below in this paragraph (A)(2), such stockholder or beneficial owner must, in the case of a proposal, have delivered a proxy statement and form of proxy to holders of at least the percentage of the Corporation's voting shares required under applicable law to carry any such proposal, or in the case of a nomination or nominations, have delivered a proxy statement and form of proxy to holders of at least a percentage of the Corporation's voting shares reasonably believed by such stockholder or beneficial owner to be sufficient to elect the nominee or nominees proposed to be nominated by such stockholder, and must, in either case, have included in such materials the Solicitation Notice and (iv) if no Solicitation Notice relating thereto has been timely provided pursuant to this Section, the stockholder or beneficial holder proposing such business or nomination must not have solicited a number of proxies sufficient to have required the delivery of such a Solicitation Notice under this Section. To be timely, a stockholder's notice shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the forty-fifth (45th) day nor earlier than the close of business on the seventy-fifth (75th) day prior to the first anniversary of the preceding year's mailing date for stockholder proxy materials; provided, however, that in the event that the date of the annual meeting is more than thirty (30) days before or more than sixty (60) days after the date of the annual meeting in the preceding year or if an annual meeting was not held in the preceding year, notice by the stockholder to be timely must be so delivered not earlier than the close of business on the ninetieth (90) day prior to such annual meeting and not later than the close of business on the later of the sixtieth (60th) day prior to such annual meeting or the close of business on the tenth (10th) day following the day on which public announcement of the date of such meeting is first made by the Corporation. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (b) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the -3- business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; (c) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such stockholder, as they appear on the Corporation's books, and of such beneficial owner and (ii) the class and number of shares of the Corporation that are owned beneficially and held of record by such stockholder and such beneficial owner; and (d) whether either such stockholder or the beneficial owner intends to deliver a proxy statement and form of proxy to holders of, in the case of a proposal, at least the percentage of the Corporation's voting shares required under applicable law to carry the proposal or, in the case of a nomination or nominations, a sufficient number of holders of the Corporation's voting shares to elect such nominee or nominees (an affirmative statement of such intent, a "Solicitation Notice"). (3) Notwithstanding anything in the second sentence of paragraph (A)(2) of this Section to the contrary, in the event that the number of directors to be elected to the board of directors of the Corporation is increased and there is no public announcement by the Corporation naming all of the nominees for director or specifying the size of the increased board of directors at least seventy (70) days prior to the first anniversary of the preceding year's annual meeting (or, if the annual meeting is held more than thirty (30) days before or sixty (60) days after such anniversary date, at least seventy (70) days prior to such annual meeting), a stockholder's notice required by this Section shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive office of the Corporation not later than the close of business on the tenth (10th) day following the day on which such public announcement is first made by the Corporation. B. SPECIAL MEETINGS OF STOCKHOLDERS. Only such business shall be conducted at a special meeting of stockholders as shall have been set forth in the Corporation's notice of meeting. Nominations of persons for election to the board of directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Corporation's notice of meeting (a) by or at the direction of the board of directors or (b) provided that the board of directors has determined that directors shall be elected at such meeting, by any stockholder of the Corporation who is a stockholder of record at the time of giving of notice of the special meeting, who shall be entitled to vote at the meeting and -4- who complies with the notice procedures set forth in this Section. In the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the board of directors, any such stockholder may nominate a person or persons (as the case may be), for election to such position(s) as specified in the Corporation's notice of meeting, if the stockholder's notice required by paragraph (A)(2) of this Section shall be delivered to the Secretary at the principal executive offices of the Corporation not earlier than the ninetieth (90th) day prior to such special meeting nor later than the close of business on the later of the sixtieth (60th) day prior to such special meeting, or the tenth (10th) day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the board of directors to be elected at such meeting. C. GENERAL. (1) Only such persons who are nominated in accordance with the procedures set forth in this Section shall be eligible to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section. Except as otherwise provided by law or these by-laws, the chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this Section and, if any proposed nomination or business is not in compliance herewith to declare that such defective proposal or nomination shall be disregarded. (2) For purposes of this Section, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (3) Notwithstanding the foregoing provisions of this Section, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth herein. Nothing in this Section shall be deemed to affect any rights (i) of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act or (ii) of the holders of any series of Preferred Stock to elect directors under specified circumstances. SECTION 8. PROXIES AND VOTING. At any meeting of the -5- stockholders, every stockholder entitled to vote may vote in person or by proxy authorized by an instrument in writing or by a transmission permitted by law filed in accordance with the procedure established for the meeting. Any copy, facsimile telecommunication or other reliable reproduction of the writing or transmission created pursuant to this Section may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used, provided that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing or transmission. All voting, including on the election of directors but excepting where otherwise required by law, may be by voice vote. Any vote not taken by voice shall be taken by ballots, each of which shall state the name of the stockholder or proxy voting and such other information as may be required under the procedure established for the meeting. The Corporation may, and to the extent required by law, shall, in advance of any meeting of stockholders, appoint one or more inspectors to act at the meeting and make a written report thereof. The Corporation may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the person presiding at the meeting may, and to the extent required by law, shall, appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his ability. All elections shall be determined by a plurality of the votes cast, and except as otherwise required by law, all other matters shall be determined by a majority of the votes cast affirmatively or negatively. SECTION 9. STOCK LIST. A complete list of stockholders entitled to vote at any meeting of stockholders, arranged in alphabetical order for each class of stock and showing the address of each such stockholder and the number of shares registered in such stockholder's name, shall be open to the examination of any such stockholder, for any purpose germane to the meeting, during ordinary business hours for a period of at least ten (10) days prior to the meeting either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The stock list shall also be kept at the place of the -6- meeting during the whole time thereof and shall be open to the examination of any such stockholder who is present. This list shall presumptively determine the identity of the stockholders entitled to vote at the meeting and the number of shares held by each of them. ARTICLE II - BOARD OF DIRECTORS SECTION 1. GENERAL POWERS, NUMBER AND TERM OF OFFICE. The business and affairs of the Corporation shall be managed by or under the direction of its board of directors. The number of directors who shall constitute the Whole Board shall be such number as the board of directors shall from time to time have designated. The board of directors shall be divided into three classes, as nearly equal in number as possible. The term of office of the first class shall expire at the annual meeting of stockholders or any special meeting in lieu thereof in 1994, the term of office of the second class shall expire at the annual meeting of stockholders or any special meeting in lieu thereof in 1995, and the term of office of the third class shall expire at the annual meeting of stockholders or any special meeting in lieu thereof in 1996, and with respect to each class and until their successors are duly elected and qualified. At each annual meeting of stockholders or special meeting in lieu thereof following such initial classification, directors elected to succeed those directors whose terms expire shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders or special meeting in lieu thereof after their election and until their successors are duly elected and qualified. SECTION 2. VACANCIES AND NEWLY CREATED DIRECTORSHIPS. Except as otherwise determined by the board of directors or required by law, newly created directorships resulting from any increase in the authorized number of directors or any vacancies in the board of directors resulting from death, resignation, retirement, disqualification, removal from office or other cause may be filled only by a majority vote of the directors then in office, though less than a quorum, or the sole remaining director; a director so chosen shall hold office for a term expiring at the annual meeting of stockholders at which the term of office of the class to which he has been elected expires, if applicable, and if no such classes shall have been established, at the next annual meeting of stockholders and until such director's successor shall have been duly elected and qualified. No decrease in the number of authorized directors constituting the board shall shorten the term of any incumbent director. SECTION 3. RESIGNATION. Any director may resign at any -7- time upon written notice to the Corporation at its principal place of business or to the President or Secretary. Such resignation shall be effective upon receipt unless it is specified to be effective at some other time or upon the happening of some other event. SECTION 4. REGULAR MEETINGS. Regular meetings of the board of directors shall be held at such place or places, on such date or dates, and at such time or times as shall have been established by the board of directors and publicized among all directors. A notice of each regular meeting shall not be required. SECTION 5. SPECIAL MEETINGS. Special meetings of the board of directors may be called by a majority of the Whole Board or by the Chairman of the Board or President and shall be held at such place, on such date, and at such time as they or he shall fix. Notice of the place, date, and time of each such special meeting shall be given each director by whom it is not waived by mailing written notice not less than five (5) days before the meeting, by sending written notice by recognized overnight courier service not less than two (2) days before the meeting or by telegraphing or telexing or by facsimile transmission of the same not less than twenty-four (24) hours before the meeting. Unless otherwise indicated in the notice thereof, any and all business may be transacted at a special meeting. SECTION 6. QUORUM. At any meeting of the board of directors, a majority of the Whole Board shall constitute a quorum for all purposes. If a quorum shall fail to attend any meeting, a majority of those present may adjourn the meeting to another place, date, or time, without further notice or waiver thereof. SECTION 7. PARTICIPATION IN MEETINGS BY CONFERENCE TELEPHONE. Members of the board of directors, or of any committee thereof, may participate in a meeting of the board of directors or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other and such participation shall constitute presence in person at such meeting. SECTION 8. CONDUCT OF BUSINESS. At any meeting of the board of directors, business shall be transacted in such order and manner as the board of directors may from time to time determine, and all matters shall be determined by the vote of a majority of the directors present, except as otherwise provided herein or required by law. Action may be taken by the board of directors without a meeting if all members of the board of -8- directors who are then in office consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the board of directors. SECTION 9. POWERS. The board of directors may, except as otherwise required by law, exercise all such powers and do all such acts and things as may be exercised or done by the Corporation, including, without limiting the generality of the foregoing, the unqualified power: (1) To declare dividends from time to time in accordance with law; (2) To purchase or otherwise acquire any property, rights or privileges on such terms as it shall determine; (3) To authorize the creation, making and issuance, in such form as it may determine, of written obligations of every kind, negotiable or non-negotiable, secured or unsecured, to borrow funds and guarantee obligations, and to do all things necessary in connection therewith; (4) To remove any officer of the Corporation with or without cause, and from time to time to devolve the powers and duties of any officer upon any other person for the time being; (5) To confer upon any officer of the Corporation the power to appoint, remove and suspend subordinate officers, employees and agents; (6) To adopt from time to time such stock option, stock purchase, bonus or other compensation plans for directors, officers, employees and agents of the Corporation and its subsidiaries as it may determine; (7) To adopt from time to time such insurance, retirement, and other benefit plans for directors, officers, employees and agents of the Corporation and its subsidiaries as it may determine; and (8) To adopt from time to time regulations not inconsistent herewith, for the management of the Corporation's business and affairs. SECTION 10. COMPENSATION OF DIRECTORS. Directors, as such, may receive, pursuant to resolution of the board of directors, fixed fees and other compensation for their services as directors, including, without limitation, their services as members of committees of the board of directors. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. -9- ARTICLE III - COMMITTEES SECTION 1. COMMITTEES OF THE BOARD OF DIRECTORS. The board of directors, by a vote of a majority of the Whole Board, may from time to time designate committees of the board of directors, with such lawfully delegable powers and duties as it thereby confers, to serve at the pleasure of the board of directors and shall, for those committees and any others provided for herein, elect a director or directors to serve as the member or members, designating, if it desires, other directors as alternate members who may replace any absent or disqualified member at any meeting of a committee. Any committee so designated may exercise the power and authority of the board of directors to declare a dividend, to authorize the issuance of stock or to adopt a certificate of ownership and merger pursuant to Section 253 of the Delaware General Corporation Law if the resolution that designates the committee or a supplemental resolution of the board of directors shall so provide. In the absence or disqualification of any member of any committee and any alternate member in his place, the member or members of the committee present at the meeting and not disqualified from voting, whether or not he or they constitute a quorum, may by unanimous vote appoint another member of the board of directors to act at the meeting in the place of the absent or disqualified member. SECTION 2. CONDUCT OF BUSINESS. Each committee of the board of directors may determine the procedural rules for meeting and conducting its business and shall act in accordance therewith, except as otherwise provided herein or required by law. Adequate provisions shall be made for notice to members of all meetings of committees. One-third (1/3) of the members of any committee shall constitute a quorum unless the committee shall consist of one (1) or two (2) members, in which event one (1) member shall constitute a quorum; and all matters shall be determined by a majority vote of the members present. Action may be taken by any committee without a meeting if all members thereof consent thereto in writing, and the writing or writings are filed with the minutes of the proceedings of such committee. ARTICLE IV - OFFICERS SECTION 1. GENERALLY. The officers of the Corporation shall consist of a President, a Secretary, a Treasurer and such other officers as may from time to time be appointed by the board of directors with such titles, terms of office and duties as the board of directors may designate. Officers shall be elected by -10- the board of directors, which shall consider that subject at its first meeting after every annual meeting of stockholders. Each officer shall hold office until his successor is elected and qualified or if earlier, until he dies, resigns, is removed or becomes disqualified, unless a shorter term is specified by the board of directors at the time of election of such officer. Any number of offices may be held by the same person. SECTION 2. CHAIRMAN OF THE BOARD. The Chairman of the Board, if any, shall preside at all meetings of the board of directors at which he is present and shall have such authority and perform such duties as may be prescribed by these by-laws or from time to time determined by the board of directors. The Chairman of the Board shall have power to sign all stock certificates, contracts and other instruments of the Corporation which are authorized. SECTION 3. PRESIDENT. The President shall be the chief operating officer of the Corporation. He shall also be the chief executive officer of the Corporation unless the board of directors otherwise provides. Except for meetings at which the Chairman of the Board, if any, presides, the President shall, if present and unless the board of directors provides otherwise in a specific instance or generally, preside at all meetings of stockholders, and if a director, at all meetings of the board of directors. The President shall, subject to the control and direction of the board of directors, have general and active control of the business of the Corporation, see that all orders and resolutions of the board of directors are carried into effect and perform such powers and duties as may be prescribed by these by-laws or from time to time be determined by the board of directors. The President shall have power to sign all stock certificates, contracts and other instruments of the Corporation which are authorized. SECTION 4. VICE PRESIDENT. Each Vice President shall have such powers and duties as may be delegated to him by the board of directors and the President. One (1) Vice President shall be designated by the board of directors to perform the duties and exercise the powers of the President in the event of the President's absence or disability. SECTION 5. TREASURER. The Treasurer shall have the responsibility for maintaining the financial records of the Corporation. The Treasurer shall make such disbursements of the funds of the Corporation as are authorized and shall render from time to time an account of all such transactions and of the financial condition of the Corporation. The Treasurer shall also perform such other duties as the board of directors may from time to time prescribe. -11- SECTION 6. SECRETARY. The Secretary shall issue all authorized notices for, and shall keep minutes of, all meetings of the stockholders and the Board of Directors. The Secretary shall have charge of the corporate books and shall perform such other duties as the board of directors may from time to time prescribe. SECTION 7. DELEGATION OF AUTHORITY. The board of directors may from time to time delegate the powers or duties of any officer to any other officers or agents, notwithstanding any provisions hereof. SECTION 8. REMOVAL. Any officer of the Corporation may be removed at any time, with or without cause, by the board of directors. SECTION 9. RESIGNATION. Any officer may resign by giving written notice of his resignation to the Chairman of the Board, if any, the President, or the Secretary, or to the board of directors at a meeting of the board, and such resignation shall become effective at the time specified therein. SECTION 10. BOND. If required by the board of directors, any officer shall give the Corporation a bond in such sum and with such surety or sureties and upon such terms and conditions as shall be satisfactory to the board of directors, including without limitation a bond for the faithful performance of the duties of his office and for the restoration to the Corporation of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control and belonging to the Corporation. SECTION 11. ACTION WITH RESPECT TO SECURITIES OF OTHER CORPORATIONS. Unless otherwise directed by the board of directors, the President or any officer of the Corporation authorized by the President shall have power to vote and otherwise act on behalf of the Corporation, in person or by proxy, at any meeting of stockholders of or with respect to any action of stockholders of any other corporation in which this Corporation may hold securities and otherwise to exercise any and all rights and powers which this Corporation may possess by reason of its ownership of securities in such other corporation. -12- ARTICLE V - INDEMNIFICATION OF DIRECTORS AND OFFICERS SECTION 1. RIGHT TO INDEMNIFICATION. Each person who was or is made a party or is threatened to be made a party to or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was a director or an officer of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan (hereinafter an "Indemnitee"), whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than such law permitted the Corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by such Indemnitee in connection therewith; provided, however, that, except as provided in Section 3 of this Article with respect to proceedings to enforce rights to indemnification, the Corporation shall indemnify any such Indemnitee in connection with a proceeding (or part thereof) initiated by such Indemnitee only if such proceeding (or part thereof) was authorized by the board of directors of the Corporation. SECTION 2. RIGHT TO ADVANCEMENT OF EXPENSES. The right to indemnification conferred in Section 1 of this Article shall include the right to be paid by the Corporation the expenses (including attorney's fees) incurred in defending any such proceeding in advance of its final disposition; provided, however, that, if the Delaware General Corporation Law requires, an advancement of expenses incurred by an Indemnitee in his capacity as a director or officer (and not in any other capacity in which service was or is rendered by such Indemnitee, including, without limitation, service to an employee benefit plan) shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such Indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal that such Indemnitee is not entitled to be indemnified for such expenses under this Section 2 or otherwise. The rights to indemnification and to the advancement of expenses conferred in -13- Sections 1 and 2 of this Article shall be contract rights and such rights shall continue as to an Indemnitee who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the Indemnitee's heirs, executors and administrators. Any repeal or modification of any of the provisions of this Article shall not adversely affect any right or protection of an Indemnitee existing at the time of such repeal or modification. SECTION 3. RIGHT OF INDEMNITEES TO BRING SUIT. If a claim under Section 1 or 2 of this Article is not paid in full by the Corporation within sixty (60) days after a written claim has been received by the Corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be twenty (20) days, the Indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the Indemnitee shall also be entitled to be paid the expenses of prosecuting or defending such suit. In (i) any suit brought by the Indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the Indemnitee to enforce a right to an advancement of expenses) it shall be a defense that, and (ii) in any suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the Corporation shall be entitled to recover such expenses upon a final adjudication that, the Indemnitee has not met any applicable standard for indemnification set forth in the Delaware General Corporation Law. Neither the failure of the Corporation (including its board of directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such suit that indemnification of the Indemnitee is proper in the circumstances because the Indemnitee has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Corporation (including its board of directors, independent legal counsel, or its stockholders) that the Indemnitee has not met such applicable standard of conduct, shall create a presumption that the Indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the Indemnitee, be a defense to such suit. In any suit brought by the Indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder, or brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the Indemnitee is not entitled to be indemnified, or to such advancement of expenses, under this Article or otherwise shall be on the Corporation. SECTION 4. NON-EXCLUSIVITY OF RIGHTS. The rights to indemnification and to the advancement of expenses conferred in -14- this Article shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, the Corporation's Certificate of Incorporation as amended from time to time, these by-laws, any agreement, any vote of stockholders or disinterested directors or otherwise. SECTION 5. INSURANCE. The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law. SECTION 6. INDEMNIFICATION OF EMPLOYEES AND AGENTS OF THE CORPORATION. The Corporation may, to the extent authorized from time to time by the board of directors, grant rights to indemnification and to the advancement of expenses to any employee or agent of the Corporation to the fullest extent of the provisions of this Article with respect to the indemnification and advancement of expenses of directors and officers of the Corporation. ARTICLE VI - STOCK SECTION 1. CERTIFICATES OF STOCK. Each stockholder shall be entitled to a certificate signed by, or in the name of the Corporation by, the Chairman of the board of directors, the President or a Vice President, and by the Secretary or an Assistant Secretary, or the Treasurer or an Assistant Treasurer, certifying the number of shares owned by him. Any or all of the signatures on the certificate may be by facsimile. SECTION 2. TRANSFERS OF STOCK. Transfers of stock shall be made only upon the transfer books of the Corporation kept at an office of the Corporation or by transfer agents designated to transfer shares of the stock of the Corporation. Except where a certificate is issued in accordance with Section 4 of this Article VI, an outstanding certificate for the number of shares involved shall be surrendered for cancellation before a new certificate is issued therefor. SECTION 3. RECORD DATE. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders, or to receive payment of any dividend or other distribution or allotment of any rights or to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, -15- the board of directors may fix a record date, which record date shall not precede the date on which the resolution fixing the record date is adopted and which record date shall not be more than sixty (60) nor less than ten (10) days before the date of any meeting of stockholders, nor more than sixty (60) days prior to the time for such other action as hereinbefore described; provided, however, that if no record date is fixed by the board of directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held, and, for determining stockholders entitled to receive payment of any dividend or other distribution or allotment of rights or to exercise any rights of change, conversion or exchange of stock or for any other purpose, the record date shall be at the close of business on the day on which the board of directors adopts a resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the board of directors may fix a new record date for the adjourned meeting. SECTION 4. LOST, STOLEN OR DESTROYED CERTIFICATES. In the event of the loss, theft or destruction of any certificate of stock, another may be issued in its place pursuant to such regulations as the board of directors may establish concerning proof of such loss, theft or destruction and concerning the giving of a satisfactory bond or bonds of indemnity. SECTION 5. REGULATIONS. The issue, transfer, conversion and registration of certificates of stock shall be governed by such other regulations as the board of directors may establish. ARTICLE VII - NOTICES SECTION 1. NOTICES. Except as otherwise specifically provided herein or required by law, all notices required to be given to any stockholder, director, officer, employee or agent shall be in writing and may in every instance be effectively given by hand delivery to the recipient thereof, by depositing such notice in the mails, postage paid, or by sending such notice by recognized courier service, prepaid telegram, mailgram or by facsimile transmission. Any such notice shall be addressed to such stockholder, director, officer, employee or agent at his last known address as the same appears on the books of the Corporation. The time when such notice is received, if hand delivered, or dispatched, if delivered through the mails, by -16- courier or by telegram, facsimile transmission or mailgram, shall be the time of the giving of the notice. SECTION 2. WAIVERS. A written waiver of any notice, signed by a stockholder, director, officer, employee or agent, whether before or after the time of the event for which notice is to be given, shall be deemed equivalent to the notice required to be given to such stockholder, director, officer, employee or agent. Neither the business nor the purpose of any meeting need be specified in such a waiver. ARTICLE VIII - MISCELLANEOUS SECTION 1. FACSIMILE SIGNATURES. In addition to the provisions for use of facsimile signatures elsewhere specifically authorized in these by-laws, facsimile signatures of any officer or officers of the Corporation may be used whenever and as authorized by the board of directors or a committee thereof. SECTION 2. CORPORATE SEAL. The board of directors may provide a suitable seal, containing the name of the Corporation, which seal shall be in the charge of the Secretary. If and when so directed by the board of directors or a committee thereof, duplicates of the seal may be kept and used by the Secretary or Treasurer or by an Assistant Secretary or Assistant Treasurer. SECTION 3. RELIANCE UPON BOOKS, REPORTS AND RECORDS. Each director, each member of any committee designated by the board of directors, and each officer of the Corporation shall, in the performance of his duties, be fully protected in relying in good faith upon the books of account or other records of the Corporation and upon such information, opinions, reports or statements presented to the Corporation by any of its officers or employees or committees of the board of directors so designated, or by any other person as to matters which such director or committee member reasonably believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Corporation. SECTION 4. FISCAL YEAR. The fiscal year of the Corporation shall be as fixed by the board of directors. SECTION 5. TIME PERIODS. In applying any provision of these by-laws that requires that an act be done or not be done a specified number of days prior to an event or that an act be done during a period of a specified number of days prior to an event, calendar days shall be used, the day of the doing of the act shall be excluded, and the day of the event shall be included. -17- SECTION 6. PRONOUNS. Whenever the context may require, any pronouns used in these by-laws shall include the corresponding masculine, feminine or neuter forms. -18- ARTICLE IX - AMENDMENTS These by-laws may be amended or repealed by the affirmative vote of a majority of the Whole Board at any meeting or by the stockholders by the affirmative vote of at least sixty six and two-thirds percent (66 2/3%) of the outstanding voting power of the then-outstanding shares of capital stock of the Corporation at any meeting at which a proposal to amend or repeal these by-laws is properly presented. EX-10.6 3 SULLIVAN EMPLOYMENT AGREEMENT Exhibit 10.6 SIGHT RESOURCE CORPORATION 100 JEFFREY AVENUE HOLLISTON, MA 01746 As of January 26, 1998 Mr. William T. Sullivan 4711 North Lindhurst Dallas, Texas 75229 Dear Mr. Sullivan: This letter is to confirm our understanding with respect to (i) your employment by Sight Resource Corporation, a Delaware corporation (the "Company"), (ii) your agreement not to compete with the Company and (ii) your agreement to protect and preserve information and property which is confidential and proprietary to the Company, subject to your agreement with the terms hereof as indicated by your execution of this letter on the final page (the terms and conditions agreed to in this letter shall hereinafter be referred to as the "Agreement"). In consideration of the mutual promises and covenants contained in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, we have agreed as follows: 1. EMPLOYMENT. The Company will employ you, and you agree to work for the Company, as its President and Chief Executive Officer, to have such responsibilities, duties and authority as are customary to such positions, including, without limitation, general supervision and control over, and responsibility for, the general management and operation of the Company and its subsidiaries. You will also have such other responsibilities, duties and authority as may from time to time be assigned to you by the Board of Directors (the "Board") that are consistent with your status as President and Chief Executive Officer of the Company. In addition, so long as you service in such capacities, the Company will appoint you or nominate you for election to the Board. You will report only to the Board. You agree to devote your full business time and energies to the business and affairs of the Company and its subsidiaries, if any, as is necessary from time to time for your fulfillment of your obligations to the Company hereunder; however, nothing contained in this Paragraph 1 shall be deemed to prevent or limit your right to: (a) make passive investments in the securities of any publicly-owned corporation, (b) make any other passive investments with respect to which you are not obligated or required to, and which you do not in fact, devote any substantial managerial efforts which interfere with your fulfillment of your duties hereunder or (c) serve as member of the board of directors of other for-profit or not-for-profit corporations or entities, so long as such service (i) does not interfere with the performance of your obligations hereunder or (ii) does not constitute a violation of Section 10. 2. TERM OF EMPLOYMENT. (a) Your retention hereunder shall commence as of the date above and will continue until the third anniversary thereof (the "Initial Term"); provided that the Initial Term, and any succeeding two-year period thereafter, shall automatically be renewed for a two-year period, and for successive two-year periods, unless, not later than 6 months prior to the expiration of the Initial Term or any such successor two-year term (or such shorter period as may mutually be agreed by you and the Company), either you or the Company delivers written notice to the other stating that such term shall not be so extended or renewed Notwithstanding the foregoing, your employment hereunder shall be terminated by the first to occur of the following: (i) Immediately upon your death; (ii) Upon notice from the Company following your inability, due to illness, accident or any other physical or mental incapacity, to perform the services provided for hereunder for an aggregate of 180 business days within any one year period during the term hereof; (iii) By the Company upon notice, for Cause, as defined herein, and as set forth below; (iv) By the Company, upon notice subject to Section 3 hereof, without Cause; or (v) By you, upon notice to the Company, PROVIDED, that if you do not give at least 60 days' prior written notice of your intention to terminate your employment hereunder, you will forfeit all unused vacation, prepaid benefits, any unused but unpaid incentive compensation, and any stock options which have not vested as of the date such notice is given. The right of the Company to terminate your employment hereunder to which you hereby agree, shall be exercisable by written notice sent to you by the Company and shall be effective as of the date of such notice. (b) The Company may, immediately and unilaterally, terminate your employment hereunder for Cause at any time upon ten (10) days' advance written notice to you. Termination of your employment by the Company shall constitute a termination for Cause if such termination is for one or more of the following reasons: (i) your continuing failure to render services to the Company in accordance with your assigned duties consistent with Section 1 of this Agreement and such failure of performance continues for a period of more than 120 days after notice thereof has been provided to you by the Board of Directors; (ii) your willful misconduct or gross negligence; (iii) you are convicted of a felony, either in connection with the performance of your obligations to the Company or which conviction materially adversely affects your ability to perform such obligations, or materially adversely affects the business activities, reputation, good will or image of the Company; (iv) willful disloyalty, deliberate dishonesty, breach of fiduciary duty or breach of the terms of this Agreement; (v) the commission by you of an act of fraud, embezzlement or deliberate disregard of the rules or policies of the Company which results in significant loss, damage or injury to the Company; (vi) your willful unauthorized disclosure of any trade secret or confidential information of the Company; or (vii) your willful commission of -2- an act which constitutes unfair competition with the Company or which induces any employee or customer of the Company to break a contract with the Company. In making any determination under this Section, the Board of Directors shall act fairly and in utmost good faith and shall give you an opportunity to appear and be heard at a meeting of the Board of Directors or any committee thereof and present evidence on your behalf. For purposes of this Section, no act, or failure to act, on your part shall be considered "willful" unless done, or admitted to be done, by you in bad faith and without reasonable belief that such action of omission was in the best interest of the Company. In the event you are terminated for Cause, you shall be entitled to no severance or other termination benefits, or any other benefits (except for any health insurance benefits required by applicable law). 3. COMPENSATION. (a) In consideration for your services under this Agreement, you shall be paid at the annual rate of Two Hundred and Forty Five Thousand Dollars ($245,000), subject to increase from time to time by action of the Board in accordance with your performance and the Company's performance ("Base Salary"), and payable at such intervals as may be agreed upon by the Company and you, less any amounts required to be withheld under applicable law. Such compensation will be reduced by any disability payments which you receive, after taking into account the tax benefits (if any) of such payments. In addition, upon commencement of your employment you will be granted options to purchase an aggregate of 300,000 shares of the Company's Common Stock, at fair market value on the date of grant, vesting 1/3 immediately and the remaining 2/3 in two equal annual installments thereafter, pursuant to the Company's standard form of stock option agreement. In addition, during the first 60 days of your employment hereunder, you will have the right to purchase from the Company shares of the Company's Common Stock, at a purchase price equal to a 25% discount from the fair market value of such shares on the date of purchase, such shares to be locked up for 2 years from the date of purchase pursuant to a lock-up agreement in form and substance reasonably satisfactory to you and the Company. (b) In the event your employment shall be terminated by the Company without Cause at any time, or in the event that you terminate your employment hereunder by reason of a material change in your duties imposed by the Board of Directors of the Company, or by reason of any material breach by the Company of its obligations to you, the Company shall continue to pay you your Base Salary then in effect and the cost of your health insurance for a period (the "Severance Period") following any such termination determined as follows: DATE OF TERMINATION SEVERANCE PERIOD ------------------- ---------------- any time on or after the first anniversary One year of the date of this Agreement any time prior to the first anniversary Two years initially, -3- DATE OF TERMINATION SEVERANCE PERIOD ------------------- ---------------- of the date of reduced to this Agreement one year in 12 monthly periodic installments commencing on the date of this Agreement and ending on the first anniversary of the date of this Agreement. In the event that you are terminated by the Company without Cause, you will also be entitled to reimbursement of reasonable outplacement expenses actually incurred by you, not to exceed in any event an amount equal to 17% of your Base Salary. All payments made under this Section 3(b) shall be made at the times and at the rate specified in Section 3(a) hereof. (c) In the event your employment shall be terminated by the Company for Cause, no further compensation or benefits of any kind shall be payable to you hereunder (except for any health insurance benefits required by applicable law); provided, however, that you shall continue to be bound by the provisions of this Agreement, other than Section 1. 4. BONUSES. Following the commencement of your employment hereunder, you and the Compensation Committee of the Board will discuss alternatives for determining the amount of any annual bonuses to which you will be entitled. Following such discussions, the Compensation Committee of the Board will establish a policy, procedure or formula for determining the amount of any annual bonuses to which you will be entitled. Thereafter, you will be entitled to such bonuses as are determined from time to time by the Compensation Committee of the Board in accordance with such policy, procedure or formula. 5. EXPENSES. The Company will reimburse you for travel, entertainment and other business expenses reasonably incurred by you in connection with the business of the Company to the extent and in a manner consistent with then Company policy and appropriate to someone in a position of your stature. 6. BENEFITS. In connection with your employment hereunder, you will be entitled during your employment to the following additional benefits: (a) At the Company's expense, such fringe benefits as the Company may provide from time to time for its senior management, but in any event providing you an automobile allowance not to exceed $850 per month. (b) You shall be entitled to no less than the number of vacation days in each calendar year determined in accordance with the Company's vacation policy as in effect from time to time, but not less than three (3) weeks in any calendar year (prorated in any calendar year during which you are employed hereunder for less than the entire such year in accordance with the number of days in such calendar year in which you are so employed). You shall also be entitled to all paid holidays and personal days given by the Company to its executives. -4- (c) The Company shall furnish you with office space, stenographic assistance and such other facilities and services as shall be suitable to and appropriate for your position and for the performance of your duties as set forth herein. (d) In addition to the foregoing, you shall also be entitled to participate in any employee benefit plans which the Company provides or may establish for the benefit of its executive employees generally. 7. TERMINATION UPON DEATH OR DISABILITY. Your employment by the Company shall terminate upon your death, or if, by virtue of total and permanent disability, you are unable to perform your duties hereunder. The determination that, by virtue of total and permanent disability, you are unable to perform your duties hereunder shall be made by a physician chosen by the Company and reasonably satisfactory to you (or your legal representative). The cost of such examination shall be borne by the Company. Without limiting the generality of the foregoing, unless otherwise agreed, you shall be conclusively presumed to be totally and permanently disabled hereunder if for reasons involving mental or physical illness or physical injury you fail to perform your duties hereunder for a period aggregating one hundred eighty (180) days or more in any twelve (12) consecutive month period. For purposes of this Paragraph 7, the termination date in the event of death shall be the date of death and in the event of such total and permanent disability shall be the earlier of the date of such physician's examination pursuant to which such determination is made or the first business day after which such 180 days has expired. In the event of such a termination of employment as a result of your death or total and permanent disability, the Company shall have no further obligations hereunder except as provided in Paragraphs 3 and 9 hereof and except as provided below in this Paragraph 7: (a) In the event of death, the Company shall pay to your estate amounts, at the Base Salary rate in effect on the termination date, in monthly payments, for a period of twelve (12) months following the termination date; and (b) In the event of total and permanent disability, the Company shall pay to you (or your estate) amounts, at the Base Salary rate in effect on the termination date, payable in monthly payments, for a period of twelve (12) months following the termination date. Amounts to which you would otherwise be entitled under this subparagraph (b) shall be reduced by the amount of any disability insurance proceeds actually paid to you or paid for your benefit (or to your estate or legal representatives) with respect to such twelve (12) months following the termination date under any disability policy provided by the Company. -5- 8. CHANGE OF CONTROL. (a) In the event you, the Company, or a successor to the Company elect to terminate your employment upon a Change of Control (as defined in Section 8(b) below), provided that such notice of termination is given within twenty-four (24) months of a Change of Control (a "Change of Control Notice"), then upon such termination pursuant to this paragraph, you (or your estate, if you die prior to receiving the payments hereinafter set forth in this sentence) shall be entitled to receive within thirty (30) days of such termination a lump sum payment equal to your Base Salary in effect on the date of such termination. For the purposes of this Section 8(a), the time when a termination occurs shall be the effective date of your termination. In addition, in the event of such a termination pursuant to a Change of Control Notice, the Company or a successor to the Company shall provide, and you shall continue to be entitled to receive, such benefits you have been receiving pursuant to Section 6(a) as of the date of your Change of Control Notice until the earlier of (i) your full-time employment by a third-party who offers you at least comparable benefits in the particular benefit category or (ii) two (2) years following such date of termination. Any compensation payable under this Section 8(a) shall be paid notwithstanding your total and permanent disability or death occurring after termination of your employment hereunder. In addition, the stock option agreements described in Section 3(a) above shall provide for the automatic vesting of any unvested stock options upon the occurrence of a Change of Control. (b) As used herein a "Change of Control" shall be deemed to have occurred if (i) any "person" (as such term is used in sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended), is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing twenty-five percent (25%) or more of the outstanding Common Stock of the Company, or (ii) ten (10) days following the commencement of, or announcement of an intention to make, a tender offer or exchange offer the consummation of which would result in the beneficial ownership by any "person" of twenty-five percent (25%) or more of the outstanding Common Stock of the Company, provided, however, that at the conclusion of such ten (10) day period such person has not discontinued or rescinded his intention to make a tender or exchange offer or (iii) if during any consecutive twelve (12) month period beginning on or after the date on which this Agreement is executed individuals who at the beginning of such period were directors of the Company cease, for any reason, to constitute at least a majority of the Board of Directors of the Company; or (iv) if a merger of, or consolidation involving, the Company in which the Company's stock is converted into securities of another corporation or into cash shall be consummated, or a plan of complete liquidation of the Company (whether or not in connection with a sale of all or substantially all of the Company's assets) shall be adopted and consummated, or substantially all of the Company's operating assets are sold (whether or not a plan of liquidation shall be adopted or a liquidation occurs), excluding in each case a transaction solely for the purpose of reincorporating the Company in a different jurisdiction or recapitalizing the Company's stock. 9. ACCRUED COMPENSATION. In the event of any termination of your employment for -6- any reason, you (or your estate) shall be paid such portion of your Base Salary and bonuses as has accrued by virtue of your employment during the period prior to termination and has not yet been paid, together with any amounts for expense reimbursement and similar items which have been properly incurred in accordance with the provisions hereof prior to termination and have not yet been paid. Such amounts shall be paid within ten (10) days of the termination date. The amount due to you (or your estate) under this Paragraph 9 in payment of any bonus shall be a proportionate amount of the bonus that would otherwise have been due to you as if such termination had not occurred. 10. PROHIBITED COMPETITION. You agree and covenant that, with respect to the business of the Company, until your termination of employment, whether or not such termination is voluntary or involuntary, and for a period of one (1) year following such termination, you shall not, without the prior written consent of the Company, for yourself or on behalf of any other, directly or indirectly, either as principal, agent, stockholder, employee, consultant, representative or in any other capacity, own, manage, operate or control, or be concerned, connected or employed by, or otherwise associate in any manner with, engage in or have a financial interest in any business which is directly or indirectly competitive with the business of the Company; PROVIDED, HOWEVER, that nothing contained herein shall preclude you from purchasing or owning stock in any such business if such stock is publicly traded, and provided that your holdings do not exceed three percent (3%) of the issued and outstanding capital stock of such business. 11. PROTECTED INFORMATION. You shall not, without the prior written consent of the Company, use, except in the course of performance of your duties for the Company, disclose or give to others any fact or information which was disclosed to or developed by you during the course of performing services for or receiving training from, the Company, and is not generally available to the public, including but not limited to information and facts concerning business plans, customers, prospects, client lists, or any other scientific, technical, trade or business secret or confidential or proprietary information of the Company. 12. OWNERSHIP OF IDEAS, COPYRIGHTS AND PATENTS. You agree that all ideas, discoveries, creations, manuscripts and properties, innovations, improvements, know-how, inventions, developments, apparatus, techniques, methods, and formulae (all of the foregoing being hereinafter referred to as "the inventions") which may be used in the business of the Company, whether patentable, copyrightable or not, which you may conceive or develop during your term of employment with the Company, alone or in conjunction with another, or others, whether during or out of regular business hours, and whether at the request, or upon the suggestion of the Company, or otherwise, shall be the sole and exclusive property of the Company, and that you shall not publish any of the inventions without the prior consent of the Company. You hereby assign to the Company all of your right, title and interest in and to all of the foregoing. You further represent and agree that to the best of your knowledge and belief none of the inventions will violate or infringe upon any right, patent, copyright, trademark or right of privacy, or constitute libel or slander against or violate any other rights of any person, -7- firm or corporation, and that you will use your best efforts to prevent any such violation. At any time during or after your term of employment with the Company, you agree that you will fully cooperate with the Company, its attorneys and agents, in the preparation and filing of all papers and other documents as may be required to perfect the Company's rights in and to any of such inventions, including, but not limited to, joining in any proceeding to obtain letters patent, copyrights, trademarks or other legal rights of the United States and of any and all other countries on such inventions, provided that the Company will bear the expense of such proceedings, and that any patent or other legal right so issued to you, personally, shall be assigned by you to the Company without charge by you. 13. PARTIES. This Agreement is personal and shall in no way be subject to assignment by you except as contemplated hereby. This Agreement shall be binding upon and shall inure to the benefit of the Company and its successors and assigns either by merger, operation of law, consolidation, assignment, purchase or otherwise of a controlling interest in the business of the Company and shall be binding upon and shall inure to the benefit of you, your heirs, executors, administrators, personal and legal representatives, distributees, devisees, legatees, successors and permitted assigns. If you should die while any amounts would still be payable to you hereunder if you had continued to live (other than amounts to which you would be entitled by reason of continued employment), all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisees, legatees or other designees or, if there be no such designee, to your estate. The Company agrees that a successor in interest by merger, operation of law, consolidation, assignment, purchase or otherwise of a controlling interest in the business of the Company will be informed prior to such event of the existence of this Agreement. The Company will require any successor (whether direct or indirect, by purchase, merger, operation of law, consolidation, assignment or otherwise of a controlling interest in the business, stock or other assets of the Company) to assume expressly and agree to perform this Agreement. As used in this Agreement, "the Company" shall mean the Company as hereinbefore defined and any successor as aforesaid. 14. INVALIDITY. We intend this Agreement to be enforced as written. However, if any term or provision of this Agreement shall to any extent be declared illegal or unenforceable by a duly authorized court of competent jurisdiction, then the remainder of this Agreement, or the application of such term or provision in circumstances other than those as to which it is so declared illegal or unenforceable, shall not be affected thereby, each term and provision of this Agreement shall be valid and be enforceable to the fullest extent permitted by law and the illegal or unenforceable term or provision shall be deemed replaced by a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision. -8- 15. NOTICES. All notices and communications required or permitted to be given hereunder shall be duly given by delivering the same in hand or by depositing such notice or communication in the mail, sent by certified or registered mail, return receipt requested, postage prepaid, or by delivery by overnight courier, with a receipt obtained therefor, as follows: If sent to the Company: Sight Resource Corporation 100 Jeffrey Avenue Holliston, MA 01747 If sent to you: William T. Sullivan 4711 North Lindhurst Dallas, Texas 75229 or such other address as either party furnishes to the other by like notice, provided, however, that any notice of a change of address shall be effective only upon receipt. 16. ENTIRE AGREEMENT. This Agreement embodies the entire agreement and understanding between us in relation to the subject matter hereof and there are no promises, representations, conditions, provisions or terms related thereto other than those set forth or referred to in this Agreement and the exhibits hereto. This Agreement supersedes all previous understandings, agreements and representations between the Company and you regarding your employment by the Company, whether written or oral. 17. HEADINGS. All captions in this Agreement are intended solely for the convenience of the parties, and none shall be deemed to affect the meaning or construction of any provision hereof. 18. WAIVER. No failure of the Company or you to exercise any power reserved to it or you, respectively, by this Agreement, or to insist upon strict compliance by you or the Company, respectively, with any obligation or condition hereunder, and no custom or practice of the parties at variance with the terms hereof, shall constitute a waiver of the Company's or your right, as the case may be, to demand exact compliance with any of the terms hereof. Waiver by either party of any particular default by the other party hereto shall not affect or impair the waiving party's rights with respect to any subsequent default of the same, similar or different nature, nor shall any delay, forbearance or omission of either party to exercise any power or right arising out of any breach or default by the other party of any of the terms, provisions or covenants hereof, affect or impair our or your right to exercise the same, nor shall such constitute a waiver by the Company or you, as the case may be, of any right hereunder, or the right to declare any subsequent breach or default and to terminate this Agreement prior to the expiration of its term. -9- 19. SUBSIDIARIES. As used herein, the term "Subsidiaries" shall mean all corporations a majority of the capital stock of which entitling the holder thereof to vote is owned by the Company or a Subsidiary. 20. GOVERNING LAW. This Agreement shall be construed under and be governed in all respects by the law of the Commonwealth of Massachusetts. 21. EXCISE TAX. In the event you are subject to any excise tax ("Excise Tax") on your compensation by the Company or any of its Affiliates (including but not limited to excise taxes imposed under Section 4999 of the Internal Revenue Code), the Company agrees that it will then "gross-up" your compensation by making an additional payment to you in an amount which, after reduction for any income or excise taxes payable as a result of receiving such additional payment, is equal to the Excise Tax. 22. MITIGATION. You shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor, other than as provided in Section 7(a) hereof, shall the amount of any payment or benefit provided for herein be reduced by any compensation or benefits earned by you as the result of employment by another employer after the date of your termination by the Company. 23. AMENDMENT. No amendment or modification to this Agreement shall be effective unless in writing and signed by both parties hereto. 24. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each executed counterpart constituting an original and such counterparts together constituting one agreement. -10- If you agree with the terms of your employment as set forth in this Agreement, please execute the duplicate copy hereof in the space provided below. SIGHT RESOURCE CORPORATION By: /s/ WILLIAM G. MCLENDON ----------------------------- Name: William G. McLendon Title: Chairman, Board of Directors ACCEPTED AND AGREED as of the date above: /s/ WILLIAM T. SULLIVAN - --------------------------------------- William T. Sullivan -11- EX-10.7 4 AMENDMENT NO. 1 TO SULLIVAN EMPLOYEMENT AGREEMENT Exhibit 10.7 AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT THIS AMENDMENT (the "Amendment"), dated as of December 4, 1998, is by and between SIGHT RESOURCE CORPORATION, a Delaware corporation ("SRC"), and WILLIAM T. SULLIVAN (the "Employee"). Capitalized terms used herein and not defined shall have the meanings ascribed to such terms in the Agreement (as defined below). WHEREAS, the parties have previously entered into an Employment Agreement dated as of January 26, 1998 (the "Agreement"), pursuant to which, among other things, the Employee serves as the Company's President; WHEREAS, the Board of Directors of SRC has determined the need to continue to provide the Employee with appropriate compensation incentives and market-based compensation arrangements; WHEREAS, in connection with the foregoing, the parties desire to amend and/or clarify certain terms and provisions of the Agreement. NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: Section 1. AMENDMENT TO TERM OF EMPLOYMENT. The first sentence of Section 2(a) of the Agreement is amended by deleting the words "6 months" in the first proviso of such sentence and substituting the words "thirty (30) days" in lieu thereof. Section 2. AMENDMENT TO COMPENSATION AS PRESIDENT. Section 3(b) of the Agreement is amended by deleting such subsection in its entirety and substituting in lieu thereof the following new Section 3(b): (b) In the event your employment shall be terminated by the Company without Cause at any time or in the event that the Company elects not to renew your employment at the end of the Initial Term or at the end of any successor two-year period (or such shorter period as may be mutually agreed by you and the Company) pursuant to Section 2(a) herein, or in the event that you terminate your employment hereunder by reason of a material change in your duties imposed by the Board of Directors of the Company or by reason of any material breach by the Company of its obligations to you, the Company shall continue to pay you your Base Salary then in effect and the cost of your health insurance for a period of two years (the "Severance Period") following any such termination or non-renewal of employment. In the event that you are terminated by the Company without Cause, you will also be entitled to reimbursement of reasonable outplacement expenses actually incurred by you, not to exceed in any event an amount equal to 17% of your Base Salary. All payments made under this Section 3(b) shall be made at the times and at the rate specified in Section 3(a) hereof. Section 3. AMENDMENT TO CHANGE OF CONTROL PROVISIONS. The first sentence of Section 8(a) of the Agreement is amended by deleting the words "your Base Salary" in the last clause of such sentence and substituting the words "two (2) times your Base Salary" in lieu thereof. Section 4. EFFECT OF AMENDMENT. The parties hereby ratify and confirm all of the provisions of the Agreement, as amended hereby, and agree and acknowledge that the Agreement as so amended remains in full force and effect. Section 5. GOVERNING LAW. This Amendment shall be deemed to be a contract made under the laws of the Commonwealth of Massachusetts and for all purposes shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts applicable to contracts to be made and performed entirely within the Commonwealth of Massachusetts. Section 6. COUNTERPARTS. This Amendment may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. [Remainder of Page Intentionally Left Blank] IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed, all as of the day and year first above written. SIGHT RESOURCE CORPORATION By: /s/ JAMES T. NORTON --------------------------------- James T. Norton Chief Financial Officer Hereunto Duly Authorized /s/ WILLIAM T. SULLIVAN --------------------------------- William T. Sullivan EX-10.11 5 FORM OF MANAGEMENT AGREEMENT Exhibit 10.11 MANAGEMENT AGREEMENT BETWEEN [insert name of Optometric PC] AND [insert name of Management Company] This MANAGEMENT AGREEMENT (this "AGREEMENT") is made as of the ____ day of _______________, 199__, between [insert name of Optometric PC], a _____________ professional service corporation (the "PC"), and [insert name of Management Company], a Delaware corporation ("MC"). I. BACKGROUND A. The PC has an interest in providing optometric services to ophthalmologists, hospitals, clinics, health care facilities and other health care providers and their patients (the "OPTOMETRIC SERVICES"). B. Pursuant to the provisions of Section 4(h) below, the PC will employ or contract with licensed, qualified optometrists (the "DESIGNATED OPTOMETRISTS") to provide the Optometric Services under the supervision and direction of the PC. C. The PC desires to provide the Optometric Services in premises owned or leased currently or in the future by MC or its affiliates or on premises to which MC or any of its affiliates currently or in the future has a license or other contractual right of access (the "PREMISES"). D. The PC wishes to have access to, and MC wishes to make available to the PC, various resources and expertise of MC, in order for the PC to provide the Optometric Services and to develop an optometric practice serving ophthalmologists, hospitals, clinics, health care facilities and other health care providers and patients in various locations throughout New England; E. MC has the expertise and resources to enable it to assist the PC in providing the Optometric Services, including, without limitation, the access to equipment required for the provision of the Optometric Services. F. The PC desires to engage, on a sole and exclusive basis, MC to provide, and MC wishes to provide, certain management services, administrative services, facilities and equipment necessary for the PC to provide the Optometric Services. -1- Accordingly, in order to evidence and confirm their understandings and in consideration of the mutual covenants and agreements contained herein and for other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: II. AGREEMENT 1. INTRODUCTION. Paragraphs A through F above accurately set forth the background of this Agreement. 2. APPOINTMENT OF MC. The PC hereby appoints MC to be the sole and exclusive business manager and administrator of all business and administrative functions and services associated with the provision of the Optometric Services, and MC accepts such appointment. 3. SERVICES OF MC. (a) IN GENERAL. MC shall manage and coordinate all business and administrative aspects of the PC's provision of the Optometric Services. Without limiting the generality of the foregoing, MC shall: (i) order and purchase all medical and office inventory and supplies and arrange for the availability of the same as reasonably required for the PC's provision of the Optometric Services; (ii) maintain the PC's patient records in connection with the Optometric Services; (iii) provide or arrange for the provision of clerical, secretarial, reception, bookkeeping, collection, technical and ancillary services personnel and all other support personnel as may be necessary for the PC's provision of the Optometric Services; (iv) with respect to the provision of the Optometric Services, establish, operate and maintain bookkeeping, accounting, billing and collection systems for the PC; (v) advise the PC concerning the marketing of Optometric Services to ophthalmologists, hospitals, clinics, health care facilities, insurance companies (plans and programs), unions and other health care providers and patients to whom the PC may provide the Optometric Services; (vi) develop and administer benefit plans for the Designated Optometrists, including pension, health care, disability and other benefits the PC shall require; and -2- (vii) render such business and financial management, consultation and advice as may reasonably be needed from time to time by the PC in connection with its provision of the Optometric Services. (b) EXPENSES. All expenses incurred by MC in connection with MC's fulfillment of its obligations hereunder shall be expenses of MC. (c) SUPPORT PERSONNEL. (i) MC shall provide or arrange for the provision of such non-optometrist personnel as are from time to time necessary for the PC to provide the Optometric Services, including but not limited to all marketing and sales personnel necessary for marketing the Optometric Services; all clerical, secretarial, bookkeeping and collection personnel necessary for the maintenance of records, collection of accounts receivable, and upkeep of the financial books of account; and all technical and ancillary services personnel, to the extent that the same are required for and directly related to the provision of the Optometric Services or services ancillary thereto. MC shall have the sole and exclusive responsibility for determining the salaries and fringe benefits of, and, subject to Section 3(c)(ii) below, the sole and exclusive right to hire and fire, all such personnel. (ii) MC shall from time to time remove from association with the PC's provision of the Optometric Services any support personnel who are not, in the PC's reasonable judgment, satisfactorily performing their duties. In so exercising such judgment, the PC shall not discriminate against any such personnel on the basis of race, religion, age, sex, sexual orientation, or national origin or otherwise in violation of local, state or federal fair employment laws. (iii) The PC acknowledges and agrees that MC, or any employees of MC, or any other persons engaged by MC, may perform services, whether or not similar to the types of services to be provided by MC hereunder, from time to time for others, including MC itself. This Agreement shall not prevent MC from performing such services for others or restrict MC from so using any of its employees or other persons engaged by it who are performing services pursuant to this Agreement. The decision as to which personnel are to be employed at what times and for what purposes shall be solely within MC's discretion, except as may be otherwise provided in this Agreement. (d) BILLING AND COLLECTION OF FEES FOR THE OPTOMETRIC SERVICES. MC shall be responsible, on behalf of and in the name of the PC, for billing patients, other health care providers, or third party payors on behalf of patients, as the case may be, and collecting from same the fees of the PC and the Designated Optometrists for their provision of the Optometric Services. In this connection, the PC appoints MC for the term of this Agreement as its true and lawful attorney-in-fact. With respect to Sections 3(d)(ii), (iii), (iv) and (v) below, such -3- appointment shall survive the expiration or termination of this Agreement for all accounts receivable for billings for Optometric Services provided prior to such expiration or termination, as the case may be. MC is hereby authorized: (i) to bill, on behalf of and in the name of the PC and the Designated Optometrists, patients, other health care providers, or third party payors on behalf of patients, as the case may be, the fees of the PC and the Designated Optometrists for their provision of Optometric Services; (ii) to collect accounts receivable generated by billings done in the name of the PC relating to Optometric Services provided by the PC or the Designated Optometrists, whether from patients, health care providers, or third party payors on behalf of patients; (iii) to receive payments from whatever source for the provision of the Optometric Services by the PC or the Designated Optometrists, including but not limited to payments, where not prohibited, in the form of advances or deposits from patients in anticipation of receipt of the Optometric Services, and payments from Blue Shield plans, insurance companies, health maintenance organizations, governmental agencies and any other third party payors, and the PC hereby covenants to turn over all such payments to MC for deposit in the one or more bank accounts established pursuant to Section 3(e) below; (iv) to take possession of and cause to be deposited any notes, checks, money orders, insurance payments and any other instruments received in payment of accounts receivable, payable to the PC or the Designated Optometrists, and to deposit the same as provided in Section 3(e) below; and (v) to take such other actions relative to billing, collection of fees and financial matters in connection with the PC's provision of the Optometric Services as are appropriate and consistent with sound business practice and the purposes of this Agreement. The professional fees to be charged by the PC for the Optometric Services shall be determined by the PC after consultation with MC. Subject to any confidentiality obligations to which MC may be subject from time to time, MC shall provide to the PC such items and information as are available to MC and appropriate to assist the PC in maintaining a competitive fee schedule, and shall have the right to review and comment on the professional fees proposed to be charged by the PC for the Optometric Services prior to the implementation of such fees. -4- (e) BANK ACCOUNTS. (i) Except as otherwise provided in Section 3(e)(ii) below, all funds collected by MC pursuant to this Agreement shall be deposited in one or more bank accounts established and maintained by MC for the benefit of the PC. (ii) In the event that any funds are collected as a result of billings to Medicare or Medicaid, such funds shall be deposited in one or more bank accounts established by MC jointly in the names of the PC and MC. The PC hereby agrees to deposit in such accounts all income received by it on account of such billings. It is specifically agreed that the PC and MC shall both have the right to withdraw funds from said accounts, and that all such withdrawals shall be consistent with the fee arrangements created by this Agreement. (f) LICENSE OF PREMISES AND EQUIPMENT. MC grants to the PC a non-exclusive, revocable (in accordance with the provisions of this Agreement) and non-assignable license to use the Premises and optometric, optical and office equipment located therein (the "EQUIPMENT") during the term of this Agreement for the provision of the Optometric Services. This Agreement shall not constitute an assignment to the PC of any rights of MC to the use of the Premises, and in no event shall the PC constitute a tenant or lessee of the Premises. (g) DELEGATION BY MC. MC may, in its sole discretion, delegate or subcontract to any other party or parties any of MC's obligations under this Agreement without the consent of the PC. (h) LICENSE OF NAME. Each party grants to the other party a non-exclusive, non-assignable and, in the case of MC, revocable (in accordance with the provisions of this Agreement) license for the term of this Agreement (i) in the case of the PC, to use the name "____________" and derivations thereof (collectively, the "MC TRADE NAME") for purposes of the PC's provision of Optometric Services, and (ii) in the case of MC, to use the name "___________" and derivations thereof for purposes of fulfilling MC's obligations under this Agreement. Upon the expiration or termination of this Agreement, each party will forthwith discontinue the use of the other party's trade names and thereafter shall not use or otherwise seek the benefits of the other party's trade names as to derogate from the full and complete ownership and enjoyment of the same by and for the benefit of such other party. Recognizing the special and unique value to each party of its trade names, each party agrees that it shall take no action nor permit any action to be taken that shall in any way derogate from the high level of quality and value associated with the other party's trade names and the ownership and enjoyment of same by such other party. (i) ACCOUNTING; FINANCIAL STATEMENTS. MC shall keep complete and accurate books and records that reflect all fees billed in the name of the PC or any of the Designated Optometrists for the provision of the Optometric Services, all revenue received in the name of the PC or any of the Designated Optometrists from all sources in connection with -5- the provision of the Optometric Services, and all expenses incurred by the PC or any of the Designated Optometrists in providing the Optometric Services and by MC in performing its responsibilities under this Agreement. MC shall allow a designee of the PC to audit and inspect these books and records at appropriate and reasonable times, upon prior notice and at the PC's sole expense. Upon termination of this Agreement, MC shall be entitled to retain copies of all books and records produced or kept in connection with the performance of its services under this Agreement until the later of: (i) such time as any payments due to MC from the PC under this Agreement have been determined and made; and (ii) the expiration of the statute of limitations applicable with respect to any income tax audit. (j) DATA FOR TAX RETURNS. MC shall provide to the PC, on a timely basis, the financial data necessary to enable the PC to prepare its annual income tax returns. (k) PERFORMANCE OF OBLIGATIONS. MC is expressly authorized to fulfill its obligations hereunder in whatever reasonable manner it deems appropriate to enable the PC to provide the Optometric Services. (l) FORCE MAJEURE. MC shall not be liable to the PC for failure to perform any of the services required under this Agreement in the event of a strike, lockout, calamity, act of God, unavailability of supplies, or other event over which MC has no control, for so long as such event continues and for a reasonable period of time thereafter, and in no event shall MC be liable for consequential, indirect, incidental or like damages. (m) NO MEDICAL OR OPTOMETRIC PRACTICE BY MC. It is acknowledged that MC is not competent or authorized to engage in any activity that constitutes the practice of medicine or optometry and that nothing contained in this Agreement is intended to authorize or require MC to engage in the practice of medicine or optometry. To the extent that any act or service of MC under this Agreement is construed or considered to constitute the practice of medicine or optometry, the performance of such act or service by MC shall be deemed waived and excused. Furthermore, if any administrative agency or other governmental authority of The Commonwealth of Massachusetts, the State of Rhode Island or the United States of America (any such agency or authority, a "GOVERNMENT AUTHORITY") shall assert that the services provided by MC under this Agreement are unlawful and such assertion is not contested (or if contested, such Government Authority's assertion is found to be correct by a court of competent jurisdiction and no appeal is taken, or, if any appeals are taken, such assertion is ultimately upheld), the parties shall in good faith negotiate to amend this Agreement to comply with the requirements set by such Government Authority while preserving as far as possible the benefits of this Agreement now accruing to each party. (n) CONFIDENTIALITY OF PATIENT RECORDS. MC shall preserve the confidentiality of the PC's patients' records and use information in such records only for the limited purposes necessary to perform its responsibilities under this Agreement. Upon termination of this Agreement, unless otherwise prohibited by law, MC may retain copies of the records of patients to whom Optometric Services were provided hereunder. -6- (o) WORKING CAPITAL ADVANCES. MC shall make working capital advances to the PC as provided in Section 5 of this Agreement. 4. OBLIGATIONS OF THE PC. (a) MANAGEMENT FEES. The PC shall pay MC a fee for the services provided by MC pursuant to this Agreement, as set forth in Section 5 below. (b) USE OF PREMISES AND EQUIPMENT. The PC shall use the Premises and associated Equipment under the license granted by this Agreement exclusively for the provision of the Optometric Services, and in a manner which complies with all applicable laws, rules and regulations of applicable Government Authorities and standards of accrediting agencies having jurisdiction over the Optometric Services or the PC. The PC shall comply with all use and occupancy restrictions contained in any lease or other agreement applicable to the Premises and shall refrain from performing any act that would subject MC to liability under such lease or other agreement. (c) QUALITY OF CARE; COMPLIANCE WITH LAWS AND PAYOR CONTRACTS. The PC shall at all times be solely responsible for the quality of the Optometric Services it provides, it being agreed that MC shall have no responsibility or liability for such services. The PC shall provide all Optometric Services, or shall be responsible for assuring that all Optometric Services are provided, in a manner consistent with recognized standards of care applicable to optometry. The PC shall at all times comply and shall cause the Designated Optometrists to comply at all times with all applicable laws, rules and regulations relating to the practice of optometry and relating to payment under the Medicaid, Medicare and other government health insurance programs. The PC shall at all times comply and shall cause the Designated Optometrists to comply at all times with all applicable covenants and provisions contained in each contract between the PC (or any Designated Optometrist) and any third party payor under any health insurance plan or program. (d) EXCLUSIVITY. The PC shall provide Optometric Services exclusively to MC and to ophthalmologists, hospitals, clinics, health care facilities and other health care providers, and their patients, designated by MC. (e) NON-DELEGATION. The PC shall not delegate any of its obligations under this Agreement to any other person or entity or engage any independent contractors or consultants other than the Designated Optometrists or take any other action in connection with the provision of the Optometric Services not specifically delineated in this Agreement. (f) CONFIDENTIALITY. The PC understands and agrees that, in the course of performing its obligations hereunder, MC will use and impart information and management and marketing techniques that contain information that is secret and confidential or proprietary to MC ("CONFIDENTIAL OR PROPRIETARY INFORMATION"), and MC may also provide to the PC or use -7- certain materials and writings that are subject to copyright protection under the laws of the United States of America. In each such case, the PC agrees that it shall not, without first securing the express written consent of MC, dispense, copy, use, sell or disclose in any way, at any time, any such Confidential or Proprietary Information, or materials, or any part thereof, or authorize anyone to do so, except in direct connection with the PC's provision of the Optometric Services under the terms of this Agreement; and the PC further agrees that it will enter into agreements with the Designated Optometrists imposing on them obligations of the nature specified in this Section 4(f). It is understood that a breach of any of the provisions contained in this Section 4(f) shall constitute a substantial and material breach of contract, whenever occurring, from which MC is likely to suffer financial and economic loss and loss of good will. In the event of such breach or a threatened breach by the PC of any of such provisions, without limiting other possible remedies available to MC, MC shall be entitled to injunctive or other equitable relief restraining the PC from disclosing such information or from providing services to another party to whom such information has been or may be disclosed, such relief to be without the necessity of posting bond, cash, or otherwise. (g) COOPERATION. The PC agrees that it will, and that it will assure that the Designated Optometrists will, participate in marketing and development activities and otherwise cooperate with MC in performing such services hereunder, as requested by MC, subject to all applicable laws, rules and regulations governing such activities. (h) SERVICES OF OPTOMETRIC DIRECTOR AND DESIGNATED OPTOMETRISTS. The PC shall provide the services of ___________________hereinafter referred to as the Optometric Director, and such other optometrists as may from time to time be proposed by the PC and approved by MC, to provide Optometric Services at the Premises. The PC covenants that at all times during the term of this Agreement the Optometric Director shall be an employee of the PC, the owner of 100% of the voting capital stock of the PC and a director of the PC. The PC shall hire Designated Optometrists in such numbers as may be required to provide timely services of high quality to patients and to clients identified by MC, in accordance with the Plan developed in cooperation with MC, as provided in Section 4(j) below. (i) PAYROLL TAXES, ETC.. The PC shall pay when due all salaries, wages, payroll taxes, tax withholding payments, workers compensation, insurance premiums and similar taxes and expenses with respect to all employees of the PC. If the PC shall fail to pay any such amount when due, MC shall have the right, but not the obligation, to pay such amount and reimburse itself as provided in Section 5(b) of this Agreement. (j) STAFFING PLAN. The PC shall adopt (and, whenever appropriate, adjust) a staffing plan (the "PLAN") for the hiring of Designated Optometrists. The purpose of the Plan is to enable the PC to have adequate coverage by Designated Optometrists to meet the needs of patients and clients, but to avoid over-staffing such that would require MC to make working capital advances or cause the PC to be inefficiently staffed. The Plan shall specify the volume -8- of services that will justify the engagement of additional Designated Optometrists and minimum productivity levels and shall be subject to the mutual approval of MC and the PC. Designated Optometrists may be hired only in conformance with the Plan. (k) INSURANCE. The PC shall at all times during the term of this Agreement carry professional liability and comprehensive general liability insurance for itself and for the Designated Optometrists with such insurers as shall be selected by the PC and approved by MC and with such limits as are customary in the State of Rhode Island but in no case less than the greater of (i) $100,000/$300,000 per Designated Optometrist or (ii) $100,000 plus an amount equal to $50,000 multiplied by the number of professional employees of the PC. MC shall be named as an additional insured in all such insurance policies. Subject to all applicable laws, rules and regulations, the PC may, in lieu of carrying such insurance for any of the Designated Optometrists, provide written evidence satisfactory to MC that each Designated Optometrist not covered by the PC's insurance is covered by equivalent insurance for himself or herself. 5. COMPENSATION TO MC; ADVANCES TO THE PC. (a) MANAGEMENT FEE. As compensation for the services rendered to the PC by MC pursuant to this Agreement, MC shall be paid monthly the management fee described on SCHEDULE 1 attached hereto (the "MANAGEMENT FEE"). (b) PAYMENT OF MANAGEMENT FEE. The PC hereby authorizes and directs MC to pay to itself, on behalf of the PC, any and all compensation and reimbursable expenses owed to MC by the PC under the terms of this Agreement as and when such amounts become due or are incurred by MC, as the case may be. (c) ADVANCES. So long as the PC is in compliance with the Plan and its other obligations under this Agreement, in the event that the total cash receipts of the PC in any fiscal month are less than the total cash expenditures (including the Management Fee) of the PC for such fiscal month, MC shall advance the difference to the PC. If such advances are required for more than three (3) consecutive months, the parties shall work together diligently to identify and implement reasonable means for reducing the working capital needs of the PC, including, if and to the extent necessary, revising the Plan or the amount or timing of the Management Fee payable by the PC to MC hereunder. (d) SECURITY INTEREST. The PC does hereby assign absolutely to MC and grant to MC a first and continuing security interest in all of its accounts receivable, other contractual rights for the payment of money, billing records, contract rights, inventory, equipment supplies and proceeds thereof (together, the "COLLATERAL") to secure the payment and performance of the PC's obligations to MC under this Agreement. On any default by the PC, MC shall be entitled to all remedies available to a secured creditor under the Uniform Commercial Code in addition to any other remedy provided for under this Agreement. The PC agrees to execute and deliver, promptly upon MC's request, such security agreements, -9- financing statements, and any and all other instruments and documents as MC may require to carry out the provisions of this Section 5(d). The PC covenants, represents and warrants that: it shall maintain its principal office at the address set forth on SCHEDULE 2 attached hereto (the "PRINCIPAL OFFICE"); all of its business and billing records, if any, shall be stored at the Principal Office; it has not adopted and shall not adopt any trade name or fictitious name with respect to the Collateral; it shall not grant any person other than MC a security interest in the Collateral; and the Collateral shall at all times be free of all liens, pledges and charges other than those created by this Agreement. 6. TERM OF THE AGREEMENT. This Agreement shall be in effect from the date first set forth above and, unless otherwise terminated in accordance with the terms of this Agreement, shall continue in effect until the tenth anniversary of such date, or such earlier date specified in Section 7 hereof. Upon termination of this Agreement, whether pursuant to this Section 6 or otherwise, all rights and obligations hereunder shall terminate except with respect to (i) services provided prior to the effective date of the termination of this Agreement and (ii) the PC's obligations under Section 4(f) hereof. 7. TERMINATION OF THE AGREEMENT. (a) Notwithstanding any other provision of this Agreement, if a receiver, liquidator or trustee of either party shall be appointed by court order, or a petition to reorganize shall be filed against either party under any bankruptcy, reorganization or insolvency law, and shall not be dismissed within ninety (90) days, or either party shall file a petition in voluntary bankruptcy or make an assignment for the benefit of creditors, or if the PC loses its status as a professional service corporation under the laws of the State of _______________, then either party may forthwith terminate this Agreement upon written notice to the other party. (b) If either party shall materially breach its respective obligations hereunder, the other party may terminate this Agreement by giving thirty (30) days written notice to the breaching party detailing the nature of the breach, provided that the breaching party shall not have cured the breach within such thirty (30)-day period, or, with respect to breaches that are not curable within such thirty (30)-day period, shall not have commenced to cure such breach within such thirty (30)-day period and thereafter shall not have prosecuted to completion the cure of the breach with the exercise of due diligence. (c) MC may forthwith terminate this Agreement with respect to any specific Designated Optometrist upon written notice to the PC if: (i) such Optometrist's license to practice optometry is suspended or revoked, or if any other formal disciplinary action is taken against such Optometrist, by the Division of Professional Registration of the State of Rhode Island or the equivalent board of another state, (ii) such Optometrist engages in an act of moral turpitude or is convicted of a felony; (iii) such Optometrist engages in conduct which MC believes will tarnish its reputation or the reputation of the MC Trade Name or others of its trade names, or will cause professional damage to MC; or (iv) such Optometrist is physically, mentally or emotionally disabled for a period of thirty (30) consecutive days; and (v) the PC -10- fails, no later than ten (10) days following written notice from MC, to remove such Optometrist from providing Optometric Services under this Agreement. 8. MISCELLANEOUS. (a) INDEPENDENT CONTRACTOR; NO PARTNERSHIP. It is expressly understood and agreed by the parties that, in providing services under this Agreement, MC shall at all times act as an independent contractor, not as an employee or agent of the PC, and neither the PC nor any Designated Optometrist shall be an employee or servant of MC. Further, it is expressly understood and agreed by the parties that nothing contained in this Agreement shall be construed to create a joint venture, partnership, association or other affiliation or like relationship between the parties, or a relationship of landlord and tenant, it being specifically agreed that their relationship is and shall remain that of independent parties to a contractual relationship as set forth in this Agreement. In no event shall either party be liable for the debts or obligations of the other of them except as otherwise specifically provided in this Agreement. Neither the PC nor any Designated Optometrist shall have any claim under this Agreement or otherwise against MC for vacation pay, sick leave, retirement benefits, social security, worker's compensation, disability or unemployment benefits or employee benefits of any kind. (b) EQUITABLE RELIEF. Without limiting other possible remedies available to MC for the breach of PC's covenants contained in this Agreement, the PC acknowledges and agrees that the rights acquired by MC hereunder are unique and that irreparable damage would occur in the event that any of the provisions of this Agreement to be performed by the PC were not performed in accordance with their specific terms or were otherwise breached. Accordingly, in addition to any other remedy to which MC is entitled at law or in equity, MC shall be entitled to an injunction or injunctions to prevent breaches of this Agreement by the PC and to enforce specifically the terms and provisions hereof in any federal or state court to which the parties have agreed hereunder to submit to jurisdiction. (c) ENTIRE AGREEMENT. This Agreement embodies the entire agreement and understanding between the parties hereto with respect to the subject matter hereof and supersedes all prior oral or written agreements and understandings relating to the subject matter hereof. No statement, representation, warranty, covenant or agreement of any kind not expressly set forth in this Agreement shall affect, or be used to interpret, change or restrict, the express terms and provisions of this Agreement. (d) MODIFICATIONS AND AMENDMENTS; WAIVERS AND CONSENTS. The terms and provisions of this Agreement may be modified or amended only by written agreement executed by all parties hereto. The terms and provisions of this Agreement may be waived, or consent for the departure therefrom granted, only by written document executed by the party entitled to the benefits of such terms or provisions. No such waiver or consent shall be deemed to be or shall constitute a waiver or consent with respect to any other terms or provisions of this Agreement, whether or not similar. Each such waiver or consent shall be effective only in the -11- specific instance and for the purpose for which it was given, and shall not constitute a continuing waiver or consent. (e) NO ASSIGNMENT BY PC. The PC shall not assign this Agreement or any of its rights hereunder nor delegate any of its duties hereunder without the prior written consent of MC, and any purported assignment without such written consent shall be void and of no force and effect. (f) BINDING EFFECT; BENEFIT. All statements, representations, warranties, covenants and agreements in this Agreement shall be binding on the parties hereto and shall inure to the benefit of the respective successors and permitted assigns of each party hereto. (g) NO WAIVER OF RIGHTS, POWERS AND REMEDIES. The failure to insist upon strict compliance with any of the terms, covenants or conditions herein shall not be deemed a waiver of such terms, covenants or conditions, nor shall any waiver or relinquishment of any right at any one or more times be deemed a waiver or relinquishment of such right at any other time or times. No failure or delay by a party hereto in exercising any right, power or remedy under this Agreement, and no course of dealing between the parties hereto, shall operate as a waiver of any such right, power or remedy of the party. No single or partial exercise of any right, power or remedy under this Agreement by a party hereto, nor any abandonment or discontinuance of steps to enforce any such right, power or remedy, shall preclude such party from any other or further exercise thereof or the exercise of any other right, power or remedy hereunder. The election of any remedy by a party hereto shall not constitute a waiver of the right of such party to pursue other available remedies. No notice to or demand on a party not expressly required under this Agreement shall entitle the party receiving such notice or demand to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of the party giving such notice or demand to any other or further action in any circumstances without such notice or demand. (h) GOVERNING LAW. This Agreement and the rights and obligations of the parties hereunder shall be construed in accordance with and governed by the law of the State of ________, without giving effect to the conflict of law principles thereof. (i) JURISDICTION AND SERVICE OF PROCESS. Any legal action or proceeding with respect to this Agreement shall be brought only in the courts of The Commonwealth of Massachusetts or the State of Rhode Island or of the United States of America for the District of Massachusetts or the District of Rhode Island. By execution and delivery of this Agreement, each of the parties hereto accepts for itself and in respect of its property, generally and unconditionally, the jurisdiction of the aforesaid courts. Each of the parties hereto irrevocably consents to the service of process of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by certified mail, postage prepaid, to the party at its address set forth in Section 8(m) hereof. (j) SEVERABILITY. In the event that any court of competent jurisdiction shall -12- determine that any provision, or any portion thereof, contained in this Agreement shall be unenforceable in any respect, then such provision shall be deemed limited to the extent that such court deems it enforceable, and as so limited shall remain in full force and effect. In the event that such court shall deem any such provision, or portion thereof, wholly unenforceable, the remaining provisions of this Agreement shall nevertheless remain in full force and effect. (k) INTERPRETATION. The parties hereto acknowledge and agree that: (i) each party and its counsel reviewed and negotiated the terms and provisions of this Agreement and have contributed to its revision; (ii) the rule of construction to the effect that any ambiguities are resolved against the drafting party shall not be employed in the interpretation of this Agreement; and (iii) the terms and provisions of this Agreement shall be construed fairly as to all parties hereto and not in favor of or against any party, regardless of which party was generally responsible for the preparation of this Agreement. (l) HEADINGS AND CAPTIONS. The headings and captions of the various subdivisions of this Agreement are for convenience of reference only and shall in no way modify, or affect the meaning or construction of any of the terms or provisions hereof. (m) NOTICES. All notices, requests, consents and other communications hereunder shall be in writing, shall be addressed to the receiving party's address set forth below or to such other address as a party may designate by notice hereunder, and shall be either (i) delivered by hand, (ii) made by telex, telecopy or facsimile transmission, (iii) sent by overnight courier, or (iv) sent by registered or certified mail, return receipt requested, postage prepaid. If to MC: 100 Jeffrey Avenue Holliston, Massachusetts 01746 Attn: President If to the PC: c/o ____________________ 100 Jeffrey Avenue Holliston, Massachusetts 01746 Attn: President All notices, requests, consents and other communications hereunder shall be deemed to have been given either (i) if by hand, at the time of the delivery thereof to the receiving party at the address of such party set forth above, (ii) if made by telex, telecopy or facsimile transmission, at the time that receipt thereof has been acknowledged by electronic confirmation or otherwise, (iii) if sent by overnight courier, on the next business day following the day such notice is delivered to the courier service, or (iv) if sent by registered or certified mail, on the 5th business day following the day such mailing is made. -13- (n) COUNTERPARTS. This Agreement may be executed in one or more counterparts, and by different parties hereto on separate counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. [SIGNATURE PAGE FOLLOWS] -14- Executed under seal as of the date first set forth above. [insert name of PC] By: ---------------------------------- Name: Title: [insert name of MC] By: ---------------------------------- Name: Title: -15- SCHEDULE 1 MANAGEMENT FEE As consideration for the provision by MC to the PC of the Premises, Equipment, supplies, and billing and collection, administrative and other services hereunder, the PC agrees to pay to MC a Management Fee in the amount of $___________ per month, payable in advance on the _____ day of each month, which amount may be adjusted (either upward or downward) quarterly by MC to reflect actual expenses incurred by MC in connection with its obligations hereunder, each such adjustment to be effective upon written notice by MC to the PC thereof following consultation with the PC. -16- SCHEDULE 2 PRINCIPAL OFFICE OF THE PC The Principal Office of the PC is, and shall continue to be located at: ------------------------ ------------------------ ------------------------ -17- EX-10.12 6 FORM OF STOCK RESTRICTIONS AND PLEDGE AGREEMENT Exhibit 10.12 STOCK RESTRICTIONS AND PLEDGE AGREEMENT This Stock Restrictions and Pledge Agreement (this "AGREEMENT") is made as of this ___ day of _______, 199_, by and among [insert name of Optometric professional corporation] a corporation duly organized and existing under the laws of (the "PC"), [insert name of stockholder] (the "STOCKHOLDER") and [insert name of management company] a Delaware corporation ("MC"). WHEREAS, the Stockholder is the holder of all of the issued and outstanding capital stock of the PC; WHEREAS, MC has entered into a Management Agreement dated as of ________, 199__ (as amended, the "MANAGEMENT AGREEMENT") with the PC, pursuant to which the PC has appointed MC to be its sole and exclusive business manager and administrator of all business and administrative functions and services associated with the PC's provision of Optometric Services (as defined therein); WHEREAS, the Stockholder may transfer his stock in the PC only to those eligible to hold such stock pursuant to the provisions of applicable law, the PC's Articles of Organization and the PC's By-Laws; WHEREAS, the PC desires to provide for the orderly continuation of its business and affairs in the event of the death of the Stockholder, his disqualification to practice optometry in the State of ________, the cessation of his employment by MC, the occurrence of certain other circumstances including any other event or condition which might result in or, under applicable law, require the transfer of his stock; and WHEREAS, the Stockholder desires to determine prospectively the conditions and terms under which his shares in the PC shall be sold or otherwise transferred. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. PURCHASE AND SALE. As hereinafter set forth, an Eligible Person (as hereinafter defined) shall purchase and the Stockholder (or, if applicable, his estate or personal representative or, in the case of an impermissible transferee, such purported transferee) shall sell and transfer to the Eligible Person, all of the Stockholder's shares of stock in the PC upon the occurrence of any one or more of the following events or conditions (each, an "EVENT"): A. the death or disability of the Stockholder; B. the Stockholder's disqualification to practice optometry in the Commonwealth of Massachusetts or any other event or circumstance the effect of which is to cause the Stockholder to cease being an Eligible Person; C. the transfer, by operation of law or otherwise, of the Stockholder's shares of stock in the PC to a person who is not an Eligible Person; D. the termination of the Stockholder's employment by the PC or by MC; E. the occurrence of any other event or the existence of any other condition which, in the reasonable opinion of MC (in its capacity as exclusive business manager and administrator of the PC), impairs or renders less-than-optimal MC's business management and administration of all of the business and administrative functions and services of the PC; or F. the occurrence of any other event or the existence of any other condition which might require or otherwise result in the sale or transfer by the Stockholder (or his estate or personal representative) of the Stockholder's shares of stock in the PC. The Stockholder or his personal representative shall notify MC within ten (10) days of the occurrence of any Event. If any Event occurs, the Stockholder's shares of stock in the PC shall be offered to an Eligible Person designated by MC, which Eligible Person shall purchase the shares from the Stockholder (or his estate, personal representative or purported transferee, as the case may be). In the event that MC shall fail to designate an Eligible Person to purchase the shares within sixty (60) days of the later of the occurrence of an Event and MC's notification thereof, the PC shall repurchase the shares. The price to be paid to and to be accepted by the Stockholder (or his estate, personal representative or purported transferee, as the case may be) as payment in full for the Stockholder's shares of stock in the PC shall be the fair market value of such shares, as computed in accordance with Section 2 of this Agreement. For purposes of this Agreement, "Eligible Person" shall mean an individual who (i) is duly licensed to practice optometry or ophthalmology in the Commonwealth of Massachusetts or such other state or territory of the United States or the District of Columbia as may be permitted under applicable laws, rules and regulations as in effect from time to time and, (ii) in the case of any holder of shares of the PC other than the Stockholder, shall have been approved by MC. 2. PURCHASE PRICE. Unless and until changed as provided hereinafter, it is agreed that, for the purpose of determining the purchase price to be paid for the interest of the Stockholder, the "fair market value" of each share of stock shall mean the book value per share outstanding as appearing upon the books of the PC according to the balance sheet of the PC as of the last day of the month preceding the date of the Event giving rise to the sale, as adjusted as hereinafter set forth. Shares of stock held in the treasury of the PC shall not be considered as shares outstanding. Such balance sheet shall be prepared and certified by the independent accountant serving as auditor of the PC. Such accountant shall compute the book value per share from such balance sheet and such computation shall be final and binding upon the parties -2- as to such book value. Such balance sheet shall be prepared in accordance with generally accepted accounting principles, subject, however, to the following: A. Property subject to depreciation or amortization shall be valued at depreciated or amortized book value as of the date of the balance sheet. The depreciation and amortization rates and methods in current use by the PC shall be followed in determining the amount of such depreciation or amortization. B. Real estate taxes and taxes based on tangible personal property shall be prorated for the current year. If the amount of such taxes is not known, they shall be computed on the basis of the last known tax rate and assessment, so far as available. C. All taxes other than those included in subparagraph B. above shall be computed as though the PC's current tax year had ended on the date of the balance sheet. D. No allowance shall be made for the value of goodwill, trademarks, copyrights, licenses, agencies, patents, contracts, employment agreements, or the value of any lease-hold interests. E. Investments in securities having an established market value shall be valued at the market price as of the date of the balance sheet or if such date is not a business day, as of the last preceding business day. F. Investments in securities having no established market value and not representing 100% ownership shall be valued at the book value thereof determined for the latest audited balance sheet of the corporation issuing such securities. G. In any determination of value made after the death of the Stockholder, the value of any insurance proceeds paid or payable to the PC shall not be taken into account. 3. METHOD OF PAYMENT. A. An amount equal to the purchase price per share (as determined in accordance with Section 2) multiplied by the number of shares of capital stock of the PC to be purchased hereunder (the "PURCHASE PRICE") shall be paid to the Stockholder (or the Stockholder's estate or purported transferee, as the case may be) within sixty (60) days following the later of the date upon which the Event requiring purchase of the shares shall have occurred and MC's notification thereof. The purchaser shall pay such Purchase Price wholly in cash, wholly by delivery of its promissory note, or partly in cash and partly by -3- delivery of its promissory note, as the purchaser shall elect. In the event that the purchaser shall elect to pay the Purchase Price in whole or in part by delivery of its promissory note, such note shall bear interest at a rate equal to the prime interest rate then prevailing at Bank of Boston, computed as of the date of the Event requiring purchase, and shall be fully amortized in equal monthly payments including interest over a three (3) year period, with the right of the purchaser to prepay at any time without premium or penalty. B. Upon the payment to the Stockholder (or to the Stockholder's estate, personal representative or purported transferee, as the case may be) of the Purchase Price for the Stockholder's shares of capital stock of the PC, the Stockholder (or the Stockholder's personal representative or purported transferee) shall promptly cause the delivery to the purchaser of the certificate or certificates representing such shares duly endorsed for transfer to the purchaser or accompanied by one or more separate stock powers duly executed by the Stockholder (or the Stockholder's personal representative or purported transferee) and shall take all such further action as may then be necessary in order to effect the valid transfer of such shares, provided that such shares shall continue to be subject to the provisions of this Agreement. For the purpose of this Section 3.B, payment shall mean payment of cash or delivery of the purchaser's promissory note or both, as the case may be. 4. RESTRICTIONS ON TRANSFERS; COMPLIANCE WITH AGREEMENT. A. The Stockholder agrees not to transfer, assign, hypothecate or in any way alienate any of his shares of stock of the PC or any right or interest therein, except as provided in this Agreement. B. Each certificate representing shares of capital stock of the PC held by the Stockholder shall bear a legend indicating that such shares are subject to the restrictions upon transfer and other covenants contained in this Agreement. -5- C. In the event that the Stockholder (or, if deceased, the personal representative of the Stockholder) shall neglect or refuse to comply with the provisions of this Agreement, the shares of stock held by such person shall, so long as such neglect or refusal shall continue, have no voting power and shall not be entitled to any dividends. D. Any transfer or other disposition of shares of capital stock of the PC by the Stockholder (or his estate or personal representative) other than in accordance with this Agreement shall be null and void and shall not be recognized upon the books of the PC. If the transfer to the Eligible Person designated by MC or the repurchase by the PC of any shares of the PC is not completed within the prescribed time period, the PC may cancel such shares and the holder thereof shall have no further interest or rights of a shareholder of the PC other than the right to receive the Purchase Price therefor, as computed in accordance with Sections 2 and 3 of this Agreement. In the event that the -4- Stockholder (or, if deceased, the personal representative of the Stockholder) shall fail to deliver the stock certificate(s) and stock power(s) as provided in Section 3.B within five (5) days after payment of the Purchase Price for the shares represented by such certificate(s), the PC may cancel such shares or take such other steps as the PC reasonably deems necessary to effect on the books of the PC the transfer of the shares to the Eligible Person designated by MC or the redemption by the PC of such shares, as the case may be. E. The provisions of this Agreement shall not be deemed to have been waived or discharged by any transfer of shares of capital stock of the PC made in compliance herewith and any such shares held by any holder subsequent to such transfer shall be subject in every respect to the provisions of this Agreement. Any transfer of stock is subject to the security interest created by Section 5 of this Agreement. 5. GRANT OF SECURITY INTEREST. To induce MC to enter into the Management Agreement, and as security for the prompt payment, performance and observance by the PC of all of its obligations, debts and covenants now existing or hereafter arising thereunder (the "SECURED OBLIGATIONS"), the Stockholder hereby pledges and hypothecates to MC, and grants to MC a security interest in, the following property (the "PLEDGED SECURITIES"): A. all shares of stock and other forms of ownership interest and the certificates or other instruments or documents evidencing the Stockholder's ownership in the PC (the "INITIAL PLEDGED SECURITIES"); B. any additional shares of stock and other forms of ownership interest of the PC which may at any time hereafter be acquired by the Stockholder and the certificates or other instruments or documents evidencing same; and C. all dividends, distributions and monies paid or distributed in respect of or in exchange for, and all proceeds of, any or all of the foregoing. 6. DELIVERY OF CERTIFICATES AND INSTRUMENTS. The Stockholder shall deliver to MC: A. the original certificates or other instruments or documents evidencing the Initial Pledged Securities concurrently with the execution and delivery of this Agreement; and B. the original certificates or other instruments or documents evidencing all other Pledged Securities promptly and, in any event, within three days after the Stockholder's receipt thereof. -5- All Pledged Securities which are certificated securities shall be in registered form. 7. OPTION TO PURCHASE. The Stockholder hereby grants to MC the option to designate an Eligible Person to purchase up to 100% of the Stockholder's shares in the PC at a purchase price computed in accordance with Section 2 and payable in accordance with Section 3 of this Agreement. 8. REPRESENTATIONS, WARRANTIES AND COVENANTS. The Stockholder represents, warrants and covenants that: A. the Initial Pledged Securities are, and all other Pledged Securities hereafter delivered to MC will be, owned by the Stockholder free and clear of all claims, mortgages, pledges, liens, encumbrances and security interests of every nature whatsoever, except as created by this Agreement; B. the Stockholder shall not sell, transfer, assign, pledge or grant a security interest in the Pledged Securities to any person other than as permitted by this Agreement; C. the Pledged Securities consisting of shares of stock constitute, and during the term of the Management Agreement will continue to constitute, 100% of the outstanding shares of capital stock of the PC; and D. no consent of any other person and no consent, license, permit, approval or authorization of, exemption by, notice or report to, or registration, filing or declaration with, any governmental instrumentality is required in connection with the execution, delivery, performance, validity or enforceability of this Agreement. 9. VOTING RIGHTS AND CERTAIN PAYMENTS PRIOR TO DEFAULT. So long as there shall exist no condition, event or act which constitutes, or with notice or lapse of time or both would constitute, a default by the PC or the Stockholder hereunder or a default by the PC under the Management Agreement, the Stockholder shall be entitled: A. to exercise, as the Stockholder shall think fit, but in a manner not inconsistent with the terms hereof or of the Management Agreement, the voting power with respect to the Pledged Securities; and B. to receive and retain for his own account any and all dividends (other than stock or liquidating dividends) and interest at any time and from time to time declared or paid upon any of the Pledged Securities. As used in this Agreement, a "default" shall be deemed to have occurred in the event that (i) the Stockholder shall fail to perform on a timely basis any of his obligations or shall -6- breach any of his covenants hereunder in any material respect, (ii) the PC shall fail to perform on a timely basis any of its obligations hereunder or under the Management Agreement or breach any of its covenants hereunder or under the Management Agreement in any material respect or (iii) any representation or warranty made by the Stockholder or the PC hereunder or, in the case of the PC, under the Management Agreement, shall be discovered by MC to have been false or misleading in any material respect when made. 10. VOTING RIGHTS AND CERTAIN PAYMENTS AFTER DEFAULT. So long as there shall exist a condition, event or act which constitutes, or with notice or lapse of time or both would constitute, a default by the PC or Stockholder hereunder or a default by the PC under the Management Agreement, MC shall be entitled to exercise all voting power with respect to the Pledged Securities and to receive and retain, as additional collateral hereunder or, at MC's option, for application to the Secured Obligations, any and all dividends and interest at any time and from time to time declared or paid upon any of the Pledged Securities. 11. EXTRAORDINARY PAYMENTS AND DISTRIBUTIONS. In the event that, upon the dissolution or liquidation (in whole or in part) of the PC, any sum is paid as a liquidating dividend or otherwise upon or with respect to any of the Pledged Securities, then such sum shall be paid over to MC promptly, and in any event within three (3) days after receipt thereof, to be held by MC as additional collateral to secure full payment of the Secured Obligations in accordance with the terms of the Management Agreement. In case any stock dividend shall be declared on any of the Pledged Securities, or any shares of stock or fractions thereof shall be issued pursuant to any stock split involving any of the Pledged Securities, or any distribution of capital shall be made on any of the Pledged Securities, or any shares, obligations or other property shall be distributed upon or with respect to the Pledged Securities pursuant to a recapitalization or reclassification of the capital of the issuer thereof, or pursuant to the dissolution, liquidation (in whole or in part), bankruptcy or reorganization of the PC, or to the merger or consolidation of the PC, with or into another corporation, the shares, obligations or other property so distributed shall be delivered to MC promptly, and in any event within three days after receipt thereof, to be held by MC as additional collateral hereunder, and all of the same (other than cash which shall be held as cash collateral or applied as set forth in Section 12 hereof) shall constitute Pledged Securities for all purposes hereof. 12. APPLICATION OF CASH COLLATERAL. Any cash received and retained by MC as additional collateral hereunder pursuant to the foregoing provisions may at any time and from time to time be applied (in whole or in part) by MC, at its option, to the payment of the Secured Obligations. 13. REMEDIES UPON DEFAULT. A. If a default by the PC or the Stockholder shall occur hereunder or a default by the PC shall occur under the Management Agreement, MC, without -7- obligation to resort to other security, shall have the right at any time and from time to time to sell, resell, assign and deliver, in its discretion, all or any of the Pledged Securities, in one or more parcels at the same or different times, and all right, title and interest, claim and demand therein and right of redemption thereof, on any securities exchange on which the Pledged Securities or any of them may be listed, or at public or private sale, for cash, upon credit or for future delivery, and in connection therewith MC may bid at any such sale for its own account and MC may grant options, the Stockholder hereby waiving and releasing any and all equity or right of redemption. If any of the Pledged Securities are sold by MC upon credit or for future delivery, MC shall not be liable for the failure of the purchaser to purchase or pay for the same and, in the event of any such failure, MC may resell such Pledged Securities. In no event shall the Stockholder be credited with any part of the proceeds of sale of any Pledged Securities until cash payment thereof has actually been received by MC. B. No demand, advertisement or notice, all of which are hereby expressly waived, shall be required in connection with any sale or other disposition of any part of the Pledged Securities which threatens to decline speedily in value; or otherwise MC shall give the Stockholder at least ten (10) days' prior notice sent by ordinary mail of the time and place of any sale and of the time after which any private sale or other disposition is to be made, which notice the Stockholder agrees is reasonable, all other demands, advertisements and notices being hereby waived. MC shall not be obligated to make any sale of Pledged Securities if it shall determine not to do so, regardless of the fact that notice of sale may have been given. MC may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for sale, and such sale may, without further notice, be made at the time and place to which the same was so adjourned. C. The remedies provided herein in favor of MC shall not be deemed exclusive, but shall be cumulative. 14. CARE OF PLEDGED SECURITIES. MC shall have no duty as to the collection or protection of the Pledged Securities or any income thereon or as to the preservation of any rights pertaining thereto, beyond the safe custody of any thereof actually in its possession. 15. POWER OF ATTORNEY. The Stockholder hereby appoints MC as its attorney-in-fact for the purpose of carrying out the provisions of this Agreement and taking any action and executing any instrument which MC may deem necessary or advisable to accomplish the purposes hereof. Without limiting the generality of the foregoing, MC shall have the right and power to (a) receive, endorse and collect all checks and other orders for the payment of money made payable to the Stockholder representing any interest or dividend or other distribution payable in respect of the Pledged Securities or any part thereof and to give full discharge for the same, and (b) to execute endorsements, assignments or other instruments of conveyance or -8- transfer with respect to all or any of the Pledged Securities. The power of attorney granted hereunder is coupled with an interest and is irrevocable. 16. TERMINATION OF AGREEMENT. This Agreement shall terminate on the earlier of: A. Upon the written agreement of the parties hereto; and B. Upon the termination of the Management Agreement and satisfaction in full of all of the PC's obligations thereunder. 17. MISCELLANEOUS. A. FURTHER ASSURANCES. The Stockholder shall, upon request of MC, duly execute and deliver, or cause to be duly executed and delivered, to MC such further instruments and take and cause to be taken such further actions as may be necessary or proper in the reasonable opinion of MC to carry out more effectively the provisions and purposes of this Agreement. The other parties hereto agree to perform such further acts and to execute and deliver such further documents as may be reasonably necessary to carry out the provisions of this Agreement. B. NOTICES. Unless otherwise provided herein, all notices, requests and other communications to any party hereunder shall be in writing and shall be personally delivered or sent by registered or certified mail, postage prepaid, return receipt requested, or by a reputable courier delivery service or by telecopy and shall be given to the respective party to whom such notice relates at such party's last known address as recorded in the records of the PC, or such other address or telecopy number as such party may hereafter specify. Each such notice, request or other communication shall be effective (i) if given by telecopy, when such telecopy is transmitted to the telecopy number specified in this Section and the appropriate confirmation is received, (ii) if given by registered or certified mail, 72 hours after such communication is deposited with the post office, addressed as aforesaid, or (iii) if given by any other means (including, without limitation, by air courier), when delivered at the address specified in accordance with this Section. C. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts, without giving effect to the conflict of law principles thereof. D. NO WAIVER. No act, omission or delay by MC or course of dealing between MC and the Stockholder shall constitute a waiver of the rights and remedies of MC hereunder. No single or partial waiver by MC of any default hereunder, under the Management Agreement or right or remedy which it may have shall operate as a waiver of any other default, right or remedy or of the same default, right or remedy on -9- a future occasion. The Stockholder hereby waives presentment, notice of dishonor and protest of all instruments included in or evidencing the Secured Obligations or Pledged Securities, and all other notices and demands whatsoever (except as expressly provided herein). E. AMENDMENTS AND WAIVERS. No provision hereof shall be modified, altered or limited except by a written instrument expressly referring to this Agreement and to such provision, and executed by the parties hereto. F. BENEFIT OF AGREEMENT; CONTINUING SECURITY INTEREST. This Agreement shall be binding upon the parties hereto, their respective heirs, executors, administrators, successors and assigns, and shall inure to the benefit of the parties hereto and their respective heirs, executors, administrators, successors and assigns. This Agreement shall create a continuing security interest in the Pledged Securities which shall remain in full force and effect until termination of the Management Agreement and satisfaction in full of all of the PC's obligations thereunder. G. SEVERABILITY. In the event that any court of competent jurisdiction shall determine that any provision, or any portion thereof, contained in this Agreement shall be unreasonable or unenforceable in any respect, then such provision shall be deemed limited to the extent that such court deems it reasonable and enforceable, and as so limited shall remain in full force and effect. In the event that such court shall deem any such provision, or portion thereof, wholly unenforceable, the remaining provisions of this Agreement shall nevertheless remain in full force and effect. If the provisions of this Agreement governing the transferability of the Stockholder's shares of capital stock in the PC shall be deemed unenforceable, then the provisions of Article IV of the PC's By-Laws shall instead govern the transferability of such shares. H. COUNTERPARTS. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original and all of which shall together constitute one and the same agreement. I. ACKNOWLEDGMENT OF RECEIPT. The Stockholder acknowledges receipt of a copy of the Management Agreement. [SIGNATURE PAGE FOLLOWS] -10- IN WITNESS WHEREOF, the parties to this Agreement have caused the same to be duly executed as of the date first written above. [____________________] BY: --------------------------------- Name: Title: President [____________________] BY: --------------------------------- Name: William T. Sullivan Title: President --------------------------------- [Insert name of shareholder] -11- EX-21 7 SUBSIDIARIES OF THE COMPANY Exhibit 21 SIGHT RESOURCE CORPORATION Subsidiaries of the Company (as of March 26, 1999) 1. Cambridge Eye Associates, Inc. 2. Douglas Vision World, Inc. 3. E. B. Brown Opticians, Inc. 4. Vision Plaza, Corp. 5. Eyeglass Emporium, Inc. 6. Shawnee Optical, Inc. EX-27 8 FDS
5 0000895651 SIGHT RESOURCE CORPORATION 1 USD 3-MOS 12-MOS DEC-31-1998 DEC-31-1998 OCT-01-1998 JAN-01-1998 DEC-31-1998 DEC-31-1998 1 1 1,860 1,860 0 0 3,406 3,406 748 748 4,584 4,584 9,479 9,479 13,217 13,217 7,077 7,077 32,145 32,145 6,303 6,303 0 0 0 0 6,535 6,535 90 90 18,869 18,869 32,145 32,145 12,594 54,971 17,594 54,971 4,291 18,991 4,291 18,991 9,476 36,878 0 0 38 17 (1,211) (915) 7 70 (1,218) (985) 0 0 0 0 0 0 (1,218) (985) (0.14) (0.11) (0.14) (0.11)
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