<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No.1)
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended June 26, 1999 Commission File Number 0-21068
------------- -------
Sight Resource Corporation
--------------------------
(Exact name of Registrant as specified in its charter)
Delaware 04-3181524
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Jeffrey Avenue
Holliston, MA 01746
--------------------
(Address of principal executive offices)
508-429-6916
------------
(Issuer's telephone number)
N/A
---
(Former name, former address and former fiscal year, if changed since the last
report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the issuer was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No ___
---
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
On August 1, 1999, 9,220,952 shares (does not include 30,600 shares held as
treasury stock) of common stock, par value $0.01 per share, were outstanding.
TOTAL PAGES 24
EXHIBIT INDEX AT PAGE 23
1
<PAGE>
Sight Resource Corporation
Index
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
----
<S> <C>
Item 1 Financial Statements
Consolidated Balance Sheets as of June 26, 1999 and
December 31, 1998 3
Consolidated Statements of Operations for the Three
and Six Months Ended June 26, 1999 and June 30, 1998 4
Consolidated Statements of Cash Flows for the Six
Months Ended June 26, 1999 and June 30, 1998 5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
Item 3 Quantitative and Qualitative Disclosures About Market Risk 21
PART II. OTHER INFORMATION
Item 2 Changes in Securities and Use of Proceeds 22
Item 4 Submission of Matters to a Vote of Security Holders 22
Item 6 Exhibits and Reports on Form 8-K 23
Signatures 24
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SIGHT RESOURCE CORPORATION
Consolidated Balance Sheets
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
June 26, December 31,
1999 1998
------------ --------------
Assets (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 988 $ 1,860
Accounts receivable, net of allowance
of $1,448 and $748, respectively 3,952 2,658
Inventories 6,234 4,584
Prepaid expenses and other current assets 534 377
------------ -----------
Total current assets 11,708 9,479
------------ -----------
Property and equipment 15,289 13,217
Less accumulated depreciation (9,257) (7,077)
------------ -----------
Net property and equipment 6,032 6,140
------------ -----------
Other assets:
Intangible assets, net 24,018 15,337
Other assets 745 1,189
------------ -----------
Total other assets 24,763 16,526
------------ -----------
$ 42,503 $ 32,145
============ ===========
Liabilities & Stockholders' Equity
Current liabilities:
Revolver notes payable $ 1,003 $ ---
Current portion of long term debt 1,353 146
Current portion of capital leases 49 34
Accounts payable 2,279 2,870
Accrued expenses 3,509 3,253
------------ -----------
Total current liabilities 8,193 6,303
------------ -----------
Non-current liabilities:
Long term debt, less current maturities 7,422 184
Capital leases 14 13
Other liabilities 33 151
------------ -----------
Total non-current liabilities 7,469 348
------------ -----------
Series B redeemable convertible preferred stock
1,452,119 shares issued 6,535 6,535
Stockholders' equity:
Preferred Stock, $.01 par value. Authorized 5,000,000
shares; no shares of Series A issued and outstanding --- ---
Common Stock, $.01 par value. Authorized 20,000,000
shares; issued 9,220,952 at June 26, 1999
and 8,936,330 at December 31, 1998 93 90
Additional paid-in capital 38,152 36,847
Common stock issuable, 71,181 shares at December 31, 1998 --- 432
Treasury stock at cost, 30,600 shares at June 26,
1999 and December 31, 1998 (137) (137)
Unearned compensation (12) (22)
Accumulated deficit (17,790) (18,251)
------------ -----------
Total stockholders' equity 20,306 18,959
------------ -----------
$ 42,503 $ 32,145
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
SIGHT RESOURCE CORPORATION
Consolidated Statements of Operations
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------------ ------------------------------------
June 26, June 30, June 26, June 30,
1999 1998 1999 1998
------------------------------------ ------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net revenue $ 17,582 $ 14,498 $ 33,346 $ 28,078
Cost of revenue 5,827 5,071 10,840 9,823
-------------- -------------- --------------- --------------
Gross profit 11,755 9,427 22,506 18,255
Selling, general and administrative expenses 11,300 9,311 21,494 18,206
-------------- -------------- --------------- --------------
Income from operations 455 116 1,012 49
-------------- -------------- --------------- --------------
Other income (expense)
Interest income 19 57 61 128
Interest expense (162) (45) (244) (96)
Gain on sale of assets --- --- --- 69
Write off of deferred financing costs --- --- (323) ---
-------------- -------------- --------------- --------------
Total other income (expense) (143) 12 (506) 101
-------------- -------------- --------------- --------------
Income before income tax expense 312 128 506 150
Income tax expense 24 51 45 60
-------------- -------------- --------------- --------------
Net income $ 288 $ 77 $ 461 $ 90
============== ============== =============== ==============
Net earnings per common share:
Basic $ 0.03 $ 0.01 $ 0.05 $ 0.01
============== ============== =============== ==============
Diluted $ 0.03 $ 0.01 $ 0.04 $ 0.01
============== ============== =============== ==============
Weighted average number of common shares
outstanding used to compute net earnings per
common share:
Basic 9,214,000 8,885,000 9,137,000 8,791,000
============== ============== =============== ==============
Diluted 10,771,000 10,392,000 10,663,000 10,306,000
============== ============== =============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
SIGHT RESOURCE CORPORATION
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 26, June 30,
1999 1998
---------------------------------------------
(unaudited)
<S> <C> <C>
Operating activities:
Net income $ 461 $ 90
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 1,755 1,235
Amortization and write off of deferred
financing costs 343 42
Amortization of unearned compensation 10 --
Gain on sale of assets --- (69)
Changes in operating assets and liabilities:
Accounts receivable 69 (612)
Inventories (522) 30
Prepaid expenses and other current assets (124) (51)
Accounts payable and accrued expenses (3,005) (1,690)
---------------------- -----------------
Net cash used in operating activities (1,014) (1,025)
---------------------- -----------------
Investing activities:
Purchases of property and equipment (400) (603)
Net payments for acquisitions (6,419) (2,351)
Proceeds from sale of assets --- 99
Other assets 546 40
---------------------- -----------------
Net cash used in investing activities (6,273) (2,815)
---------------------- -----------------
Financing activities:
Principal payments (2,689) (1,000)
Proceeds from notes 9,234 ---
Proceeds from issuance of stock --- 121
Other liabilities (130) (7)
---------------------- -----------------
Net cash provided by (used in) financing activities 6,415 (886)
---------------------- -----------------
Net decrease in cash and cash equivalents (872) (4,726)
Cash and cash equivalents, beginning of period 1,860 6,076
---------------------- -----------------
Cash and cash equivalents, end of period $ 988 $ 1,350
====================== =================
Supplemental cash flow information:
Interest paid $ 115 $ 132
Income taxes paid 89 42
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
Sight Resource Corporation
Notes to Consolidated Financial Statements
(In thousands, except share and per share data)
(1) The Company
(a) Nature of Business
Sight Resource Corporation (the "Company") manufactures, distributes
and sells eyewear and related products and services.
(b) Acquisitions
Effective April 1, 1998, the Company acquired one hundred percent of
the outstanding shares of stock of Eye Glass Emporium, Inc. ("Eyeglass
Emporium"). The purchase price paid in connection with this
acquisition was $2,309 in cash, $350 in notes payable in twelve equal
quarterly installments commencing June 30, 1998, and 87,940 shares of
common stock. Eyeglass Emporium operated nine eye care centers in
Indiana. The acquisition was accounted for using the purchase method
of accounting.
Effective January 1, 1999, the Company acquired one hundred percent of
the outstanding shares of stock of Shawnee Optical, Inc. ("Shawnee").
The purchase price paid in connection with this acquisition was $1,750
in cash, $300 in notes payable over three years and 70,000 shares of
common stock. Shawnee operated nine eye care centers in Pennsylvania
and Ohio. The acquisition was accounted for using the purchase method
of accounting. In connection with the acquisition, the Company
recorded purchase accounting adjustments to increase liabilities and
establish reserves for the closing of facilities and related
restructuring costs, including lease commitments and severance costs.
The Company preliminarily recorded $450 in acquisition reserves, of
which the Company provided a reserve of $400 for the potential closing
of two stores and one laboratory, and a reserve of $50 for costs to
sever administrative, store and laboratory personnel. During the
second quarter, the Company further revised its plan and determined
that no stores or laboratories would be closed. The $440 revision
adjusted the acquisition reserves allocated to goodwill. At June 26,
1999, no amounts have been charged against the acquisition reserves.
Thus, the preliminary acquisition reserves at June 26, 1999 are $10
relating to a reserve for potential costs to sever administrative
personnel. The Company will finalize its plan by December 26, 1999.
Effective April 1, 1999, the Company acquired one hundred percent of
the outstanding shares of stock of Kent Optical, Inc. and its
associated companies (collectively "Kent"). The purchase price paid in
connection with this acquisition was $5,209 in cash, $1,000 in notes
payable over three years and 160,000 shares of common stock. Kent
operated 28 eye care centers in Michigan. The acquisition was
accounted for using the purchase method of accounting. In connection
with the acquisition, the Company recorded purchase accounting
adjustments to increase liabilities and establish reserves for the
closing of facilities and related restructuring costs, including lease
commitments and severance costs. Total preliminary acquisition
reserves at June 26, 1999 are $115, of which the Company provided a
reserve of $85 for the potential costs to sever administrative or
store personnel and $30 for the potential closing of two stores. At
June 26, 1999, no amounts have been charged against the acquisition
reserves. The Company intends to finalize its plan by December 26,
1999. Any further revisions to the plan will adjust the acquisition
reserves allocated to goodwill.
6
<PAGE>
Sight Resource Corporation
Notes to Consolidated Financial Statements
(In thousands, except share and per share data)
The following unaudited pro forma financial information gives effect
to the Kent acquisition as if the acquisition was effective January 1,
1998.
<TABLE>
<CAPTION>
Twelve Months Ended
December 31, 1998
-------------------
<S> <C>
Revenue $ 65,177
(Loss) (1,359)
Basic loss per share (0.15)
Weighted number of shares used to compute
earnings per share:
Basic 9,027,000
<CAPTION>
Six Months Ended
June 26, 1999
-----------------
<S> <C>
Revenue $ 35,901
(Loss) (96)
Basic loss per share (0.01)
Weighted number of shares used to compute
earnings per share:
Basic 9,221,000
</TABLE>
The above unaudited pro forma financial information reflects certain
adjustments, including amortization of goodwill, interest expense from
acquisition-related debt, and an increase in the weighted average
shares outstanding. This pro forma information does not necessarily
reflect the results of operations that would have occurred had the
acquisition taken place at the beginning of 1998 and is not
necessarily indicative of results that may be obtained in the future.
The results of operations of the acquisitions have been included in
the consolidated financial statements from their respective dates of
acquisition. The excess of the purchase price and expenses associated
with each acquisition over the estimated fair value of the net assets
acquired has been recorded as goodwill.
(2) Summary of Significant Accounting Policies
(a) Basis of Presentation
The accompanying consolidated financial statements have been prepared
by the Company without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. In the opinion of the Company,
these consolidated financial statements contain all adjustments
(consisting of only normal, recurring adjustments) necessary to
present fairly the financial position of Sight Resource Corporation as
of June 26, 1999 and the results of its operations and cash flows for
the three and six months ended June 26, 1999 and June 30, 1998.
7
<PAGE>
Sight Resource Corporation
Notes to Consolidated Financial Statements
(In thousands, except share and per share data)
The Company's fiscal year ends on the last Saturday in December. Each
quarter represents a 13 week period, except during a 53-week year.
Fiscal years 1999 and 1998 are 52 weeks. Previously, for convenience,
the Company reported the quarter and year ending dates as the month
end date. Beginning with the first quarter of 1999 and henceforth, the
Company will report the fiscal period end date, not the month end
date.
The accompanying consolidated financial statements and related notes
should be read in conjunction with the audited consolidated financial
statements which are contained in the Company's Annual Report on Form
10-K for the year ended December 31, 1998.
(b) Principles of Consolidation
The Company's results of operation include the accounts of the
Company, its wholly-owned subsidiaries and three professional
corporations ("PCs") in which the Company's subsidiaries assume the
financial risks and rewards of such entities. The Company has no
direct equity ownership in the PCs since the outstanding voting
capital stock of each of the PCs is 100% owned by a licensed
optometrist (the "nominee shareholder") who has, in turn, executed a
Stock Restrictions and Pledge Agreement (a "Pledge Agreement") in
favor of a subsidiary of the Company. Each Pledge Agreement contains
provisions that provide the Company with the ability at all times to
cause a change in the nominee shareholder and for an unlimited number
of times, at nominal cost. Under the pledge agreement, the purchase
price for a sale of the stock of each PC is equal to the aggregate
book value of such PC, which will always be a nominal cost because
each PC operates at an almost break-even level generating a nominal
profit, if any at all. All significant intercompany balances and
transactions have been eliminated.
In preparation of these consolidated financial statements in
conformity with generally accepted accounting principles, management
of the Company has made estimates and assumptions that affect the
reported amounts of assets and liabilities, such as accounts
receivable, inventory, impairment of property and equipment, and
intangibles. Actual results could differ from those estimates.
(c) Statement of Cash Flows
Cash and cash equivalents consist of cash in banks and short-term
investments with original maturities of three months or less.
(d) Financial Instruments
The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses approximate fair value because
of the short maturity of these items. The carrying amount of other
long-term maturities approximates fair value. The carrying amount of
the Company's revolving line of credit approximates fair value because
the borrowing rate changes with market interest rates.
8
<PAGE>
Sight Resource Corporation
Notes to Consolidated Financial Statements
(In thousands, except share and per share data)
(e) Revenue Recognition
Revenue and the related costs from the sale of eyewear are recognized
at the time an order is complete. Revenue from eye care services is
recognized when the service is performed. The Company has fee for
service arrangements with most of its third party payers. Revenue is
reported net of contractual allowances.
Under revenue sharing arrangements for refractive surgery where the
Company is not responsible for patient billing, the Company receives a
specified payment from the hospital or center for each refractive
surgical procedure performed. Accordingly, the Company recognizes
revenue on a per procedure basis at the time procedures are performed.
Under revenue sharing arrangements for refractive surgery where the
Company is responsible for the collection from the patient and payment
to the ophthalmologist and other operating costs, the total patient
charge is recorded as revenue with the corresponding expenses recorded
in cost of revenue.
(f) Inventories
Inventories primarily consist of the costs of eyeglass frames, contact
lenses, ophthalmic lenses, sunglasses and other optical products and
are valued at the lower of cost (using the first-in, first-out method)
or market.
(g) Property and Equipment
Property and equipment is stated at cost. The Company provides for
depreciation at the time the property and equipment is placed in
service. The straight-line method is used over the estimated useful
life of the assets. The Company assesses the recoverability of the
undepreciated property and equipment when factors indicate that
impairment may have occurred by comparing anticipated profits and
future, undiscounted cash flows to net book value. In performing this
analysis, management considers such factors as current results,
trends, and future prospects, in addition to other economic factors.
(h) Advertising
Advertising costs are expensed as incurred.
(i) Intangible Assets
Intangible assets resulting from the acquisition of businesses consist
of patient lists, trademarks, non-compete agreements, work force in
place and the excess cost of the acquisition over the fair value of
the net assets acquired (goodwill). Certain values assigned are based
upon independent appraisals and are amortized on a straight-line basis
over a period of 5 to 25 years. The Company assesses the
recoverability of unamortized intangible assets on an ongoing basis by
comparing anticipated operating profits and future, undiscounted cash
flows to net book value. If anticipated operating profits and future,
undiscounted cash flows are less than the net book value, then an
impairment charge is recorded to reduce the carrying value of the
assets to fair value. In performing this analysis, management
considers such factors as current results, trends, and future
prospects, in addition to other economic factors.
9
<PAGE>
Sight Resource Corporation
Notes to Consolidated Financial Statements
(In thousands, except share and per share data)
(j) Income Taxes
The Company follows the asset and liability method of accounting for
income taxes and records deferred tax assets and liabilities based on
temporary differences between the tax bases of assets and liabilities
and their carrying amounts for financial statement purposes.
(k) Deferred Revenue
The Company offers a contact lens purchasing program in which, for a
set fee, customers may purchase contact lenses at discounted rates for
a 12 month period. The Company recognizes revenue from the sales of
its contact lens purchasing program on a monthly basis over the life
of the program.
(l) Net Earnings Per Share
Earnings per share are computed based on Statement of Financial
Accounting Standards No. 128 "Earnings per Share" ("SFAS 128"). SFAS
128 requires presentation of basic earnings per share ("Basic EPS")
and diluted earnings per share ("Diluted EPS") by all entities that
have publicly traded common stock or potential common stock (options,
warrants, convertible securities or contingent stock arrangements).
Basic EPS is computed by dividing income available to common
stockholders by the weighted average number of common shares
outstanding during the period. The computation of Diluted EPS does not
assume conversion, exercise or contingent exercise of securities that
would have an antidilutive effect on earnings.
The following table provides a reconciliation of the numerators and
denominators of the basic and diluted earnings per share computations
for the three months and six months ended June 26, 1999 and June 30,
1998:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 26, June 30, June 26, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic Income Per Share
Net income $ 288 $ 77 $ 461 $ 90
-------------- -------------- -------------- --------------
Net income available to common shareholders 288 77 461 90
============== ============== ============== ==============
Weighted average common shares outstanding 9,214,000 8,885,000 9,137,000 8,791,000
Net income per share $ 0.03 $ 0.01 $ 0.05 $ 0.01
============== ============== ============== ==============
Diluted Income Per Share
Net income $ 288 $ 77 $ 461 $ 90
-------------- -------------- -------------- --------------
Net income available to common shareholders 288 77 461 90
============== ============== ============== ==============
Weighted average common shares outstanding 9,214 8,885 9,137 8,791
Convertible preferred stock 1,452 1,452 1,452 1,452
Options and warrants 105 55 74 63
-------------- -------------- -------------- --------------
Weighted average common shares outstanding and
potential diluted shares 10,771,000 10,392,000 10,663,000 10,306,000
============== ============== ============== ==============
Net income per share $ 0.03 $ 0.01 $ 0.04 $ 0.01
============== ============== ============== ==============
</TABLE>
10
<PAGE>
Sight Resource Corporation
Notes to Consolidated Financial Statements
(In thousands, except share and per share data)
(3) Debt
<TABLE>
<CAPTION>
June 26, December 31,
1999 1998
----------------- ----------------
<S> <C> <C>
Short-term borrowings consist of the following:
Bank revolver loan payable, variable interest rate
(7% at 6/26/99), interest due monthly $ 975 $ 0
Bank line of credit note payable, 8.75% interest
rate, principal and interest due monthly until
November, 1999 28 0
----------------- ----------------
$ 1,003 $ 0
================= ================
Long-term debt consists of the following:
Bank term loan payable, variable interest rate
(7.24% at 6/26/99), principal due monthly
beginning October, 1999, and interest due monthly
until April, 2006 $ 7,000 $ 0
Unsecured notes payable, 7.5% interest rate,
principal due annually and interest due quarterly
until April, 2002 1,000 0
Unsecured notes payable, 7.5% interest rate,
principal due annually and interest due quarterly
until January, 2002 300 0
Unsecured notes payable, with interest rates of
between 8 and 9 %, principal and interest due
monthly until June, 2010 219 20
Unsecured note payable, 7% interest rate, principal
and interest due quarterly until March 31, 2001 204 263
Unsecured note payable, 12% interest rate,
principal and interest due monthly until January,
2001 52 67
----------------- ----------------
8,775 330
Less current maturities 1,353 146
----------------- ----------------
Long term debt, less current maturities $ 7,422 $ 184
================= ================
</TABLE>
On April 22, 1999, as part of the acquisition of Kent, the Company issued three-
year notes to the sellers in the aggregate amount of $1,000. The annual
interest rate is 7.5%. Principal is due in three annual substantially equal
installments beginning April, 2000 and continuing until April, 2002. Interest
is due quarterly in arrears beginning July, 1999 and continuing until April,
2002.
11
<PAGE>
Sight Resource Corporation
Notes to Consolidated Financial Statements
(In thousands, except share and per share data)
On April 15, 1999, the Company entered into a Credit Agreement (the "1999
Agreement") with a bank pursuant to which the Company can borrow $10,000 on an
acquisition line of credit, $7,000 on a term loan basis and $3,000 on a
revolving line of credit basis, subject to certain performance criteria and an
asset-related borrowing base for the revolver. The performance criteria
include, among others, financial condition covenants such as net worth
requirements, indebtedness to net worth ratios, debt service coverage ratios,
funded debt coverage ratios, and pretax profit, net profit and EBITDA
requirements. The acquisition line facility bears interest at either the bank's
prime rate, or LIBOR plus 2.25%, or at a comparable interest swap rate at the
Company's election.
The term loan facility bears interest at LIBOR plus 2.25% or at a comparable
interest swap rate at the Company's election. The revolving credit facility
bears interest at the bank's prime rate or LIBOR plus 2.0% at the Company's
election. Amounts borrowed under the 1999 Agreement will be used to finance
future acquisitions, retire existing bank debt, provide ongoing working capital
and/or for other general corporate purposes. As of June 26, 1999, $7,000 was
borrowed on the term loan and $975 was borrowed on the revolving credit
facility.
On January 22, 1999, as part of the acquisition of Shawnee, the Company issued
three-year notes to the sellers in the aggregate amount of $300. The annual
interest rate is 7.5%. Principal is due in three annual substantially equal
installments beginning January, 2000 and continuing until January, 2002.
Interest is due quarterly in arrears beginning March, 1999 and continuing until
January, 2002.
On April 8, 1998, as part of the acquisition of Eyeglass Emporium, the Company
issued a three-year $350 note to the seller. The annual interest rate is 7.0%.
Principal and interest are due quarterly in arrears from June 30, 1998 through
March 31, 2001.
In January 1996, one of the Company's subsidiaries entered into a five-year,
$140 construction note payable relating to one of its mall locations. The
annual interest rate is 12%. Principal and interest payments are due monthly
until January 2001.
In 1995 and 1996, as part of acquisitions made, one of the Company's
subsidiaries issued a note bearing interest at 8% and two non-interest bearing
notes to the sellers. For financial reporting purposes, interest of 9% has been
imputed on the non-interest bearing notes. The interest bearing note with a
value at June 26, 1999 of $42 will be due in August, 2006. The other non-
interest bearing notes have principal and interest payments due monthly until
June, 2010.
One of the Company's subsidiaries has a bank line of credit secured by accounts
receivable, inventory and equipment. As of June 26, 1999, $28 was borrowed
under this facility. No additional borrowings will be made on this credit
facility. Principal payments of approximately $6 and interest at 8.75% annually
are due monthly until November, 1999.
12
<PAGE>
Sight Resource Corporation
Notes to Consolidated Financial Statements
(In thousands, except share and per share data)
(4) Segment Reporting
The following table presents certain operating segment information.
For the three months ended June 26, 1999 and June 30, 1998:
<TABLE>
<CAPTION>
Eye Care Laser Vision Consolidated
Centers Correction All Others Totals
1999 1998 1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
External Customers $16,927 $14,159 $ 655 $ 339 $ 0 $ 0 $17,582 $14,498
Interest:
Interest income 0 0 0 0 19 57 19 57
Interest expense (8) (11) (1) 0 (153) (34) (162) (45)
------- ------- ----- ---- ------- ------ ------- -------
Net interest income/ (8) (11) (1) 0 (134) 23 (143) 12
(expense)
Depreciation and
Amortization 875 620 34 14 37 11 946 645
Income/(loss) from
operations 1,194 630 273 18 (1,012) (532) 455 116
Identifiable assets 31,522 26,635 651 519 10,329 6,412 42,503 33,566
Capital expenditures 145 327 0 128 62 0 207 455
</TABLE>
For the six months ended June 26, 1999 and June 30, 1998:
<TABLE>
<CAPTION>
Eye Care Laser Vision Consolidated
Centers Correction All Others Totals
1999 1998 1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
External Customers $32,027 $27,314 $1,319 $764 $ 0 $ 0 $33,346 $28,078
Interest:
Interest income 0 0 0 0 61 128 61 128
Interest expense (33) (16) (3) 0 (208) (80) (244) (96)
------- ------- ------ ---- ------- ------- ------- -------
Net interest income/ (33) (16) (3) 0 (147) 48 (183) 32
(expense)
Depreciation and
Amortization 1,616 1,179 67 38 72 20 1,755 1,237
Income/(loss) from 2,627 1,245 516 30 (2,131) (1,226) 1,012 49
operations
Identifiable assets 31,522 26,635 651 519 10,329 6,412 42,503 33,566
Capital expenditures 338 475 0 128 62 0 400 603
</TABLE>
13
<PAGE>
Sight Resource Corporation
Notes to Consolidated Financial Statements
(In thousands, except share and per share data)
Each operating segment is individually managed and has separate financial
results that are reviewed by the Company's chief operating decision-makers. Each
segment contains closely related products that are unique to the particular
segment.
The principal products of the Company's eye care centers are eyeglasses, frames,
ophthalmic lenses and contact lenses. The Company also operates two laser vision
correction centers.
Income from operations is net sales less cost of sales and selling, general and
administrative expenses, but is not affected by nonoperating charges/income or
by income taxes. Nonoperating charges/income consists principally of net
interest expense.
In calculating income from operations for individual operating segments, certain
administrative expenses incurred at the operating level that are common to more
than one segment are not allocated on a net sales basis.
All intercompany transactions have been eliminated, and intersegment revenues
are not significant.
14
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995 Statements contained in this document which are not historical fact are
forward-looking statements based upon management's current expectations that are
subject to risks and uncertainties that could cause actual results to differ
materially from those set forth in or implied by forward-looking statements.
These risks are described in the Company's Form 10-K for the fiscal year ended
December 31, 1998 filed with the Securities and Exchange Commission.
Overview
Sight Resource Corporation (the "Company") manufactures, distributes and sells
eyewear and related products and services. As of June 26, 1999, the Company's
operations consisted of 130 eye care centers, with four regional optical
laboratories and distribution centers, making the Company one of the sixteen
largest providers in the United States' primary eye care industry based upon
sales. The Company's eye care centers operate primarily under the brand names
Cambridge Eye Doctors, E.B. Brown Opticians, Eyeglass Emporium, Kent Optical,
Shawnee Optical, Vision Plaza, and Vision World. The Company also provides, or
where necessary to comply with applicable law administers the business functions
of optometrists, ophthalmologists and professional corporations that provide,
vision related professional services. In addition, as of June 26, 1999 the
Company operated two laser vision correction ("LVC") centers.
The Company operates four regional optical laboratories and distribution
centers. The regional optical laboratories provide complete laboratory services
to the Company's eye care centers, including polishing, cutting and edging,
tempering, tinting and coating of ophthalmic lenses. The distribution centers
provide and maintain an inventory of all accessories and supplies necessary to
operate the primary eye care centers in their regions, as well as "ready made"
eye care products, including contact lenses and related supplies. The inventory
of eyeglass lenses, frames, contact lenses, accessories and supplies is acquired
through a number of sources, domestic and foreign. Management believes that the
regional optical laboratories and distribution centers have the capacity to
accommodate additional multi-site eye care centers.
Results of Operations
Three Months and Six Months Ended June 26, 1999 and June 30, 1998
Net Revenue. During the three months ended June 26, 1999, the Company generated
net revenue of approximately $16.9 million and $0.7 million from the operation
of its 130 eye care and two LVC centers, respectively, as compared to net
revenue of approximately $14.2 million and $0.3 million from its 93 eye care and
three LVC centers, respectively, for the three months ended June 30, 1998.
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<PAGE>
Net revenue for the first six months of fiscal 1999 were $32.0 million and $1.3
million from the operations of its eye care centers and LVC centers,
respectively, as compared to the net revenue of $27.3 million and $0.8 million
from its eye care centers and LVC centers for the comparable period of fiscal
1998. The $3.1 million or 21.3% increase in total net revenue for the three
months ended June 26, 1999 relates primarily to the additional 37 eye care
centers acquired since January, 1999. The $5.3 million or 18.8% increase in
total net revenue for the first six months of fiscal 1999 relates primarily to
the additional 37 eye care centers acquired since January 1999 and to the nine
eye care centers acquired effective April 1, 1998.
Cost of Revenue. Cost of revenue increased from approximately $4.9 million and
$0.2 million from the operation of the 93 eye care and three LVC centers,
respectively, for the three months ended June 30, 1998 to approximately $5.5
million and $0.3 million from the operation of the 130 eye care and two LVC
centers, respectively, for the three months ended June 26, 1999. Total cost of
revenue as a percentage of net revenue decreased from 35.0% for the three months
ended June 30, 1998 to 33.1% for the three months ended June 26, 1999. Cost of
revenue increased from $9.4 million and $0.4 million from operations of the eye
care centers and LVC centers for the first six months of 1998 to $10.1 million
and $0.7 million for the first six months of 1999. Cost of revenue as a
percentage of net revenue decreased from 35% for the six months ended June 30,
1998, to 32.5% for the six months ended June 26, 1999. The improvement as a
percentage of net revenue primarily reflects the realization of purchase
economies, less sales price discounting, and, to a lesser extent, some small
retail price increases. Cost of revenue principally consisted of (i) the cost of
manufacturing, purchasing and distributing optical products to customers of the
Company and (ii) the cost of delivering LVC services, including depreciation and
maintenance on excimer lasers.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were approximately $11.3 million and $21.5 million for
the three months and six months ended June 26, 1999 as compared to approximately
$9.3 million and $18.2 million for the three and six months ended June 30, 1998.
The increase primarily relates to payroll and facility costs incurred in
operating additional eye care centers in the first and second quarters of fiscal
1999 as compared to the same periods in fiscal 1998. Selling, general and
administrative expense, as a percentage of net revenue, increased slightly from
64.2% to 64.3% for the three months ended June 26, 1999, and decreased from
64.8% to 64.5% for the six months ended June 26, 1999, as compared to the same
periods in 1998.
Other Income and Expense. Interest income totaled $19,000 and $61,000 for the
three and six months ended June 26, 1999, respectively, as compared to $57,000
and $128,000 for the three and six months ended June 30, 1998, respectively.
This decrease resulted from the investment of a lower average cash and cash
equivalents balance during the first and second quarters of 1999 as compared to
the same period in 1998. Interest expense totaled $162,000 and $244,000 for the
three and six months ended June 26, 1999, respectively, as compared to $45,000
and $96,000 for the three and six months ended June 30, 1998, respectively. The
increase is associated with a higher average balance of debt outstanding during
the first and second quarters of 1999 as compared to the same periods in 1998.
The sale of certain ophthalmic equipment during the six months ended
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<PAGE>
June 30, 1998 generated a gain of approximately $69,000. During the six months
ended June 26, 1999, there were no gains or losses from the sale of equipment.
Income Taxes. The effective tax rate includes the utilization of net operating
loss carry forwards and the amounts for state income taxes. The effective tax
rate at June 26, 1999 was lower than the effective rate at June 30, 1998 due to
a lower effective state tax rate.
Net Income. The Company realized net income of $288,000 or $0.03 per share on a
basic and diluted basis for the three months ended June 26, 1999, as compared to
net income of $77,000 or $0.01 per share on a basic and diluted basis for the
same period last year. The Company realized net income of $461,000 or $0.05 per
share basic and $0.04 per share diluted for the six months ended June 26, 1999,
as compared to net income of $90,000 or $0.01 per share on a basic and diluted
basis for the same period last year.
Liquidity and Capital Resources
At June 26, 1999, the Company had approximately $1.0 million in cash and cash
equivalents and working capital of approximately $3.5 million, in comparison to
approximately $1.9 million in cash and cash equivalents and working capital of
approximately $3.2 million as of December 31, 1998. As compared to December 31,
1998, current assets have increased by $2.2 million and current liabilities have
increased by $1.9 million. The overall increase in working capital is primarily
due to the net effect of the purchases of the 9 Shawnee Optical eye care centers
effective January 1, 1999, and the 28 Kent Optical eye care centers effective
April 1, 1999.
Effective April 1, 1998, the Company acquired one hundred percent of the
outstanding shares of stock of Eye Glass Emporium, Inc. ("Eyeglass Emporium").
The purchase price paid in connection with this acquisition was $2.3 million in
cash, $0.4 million in notes payable in twelve equal quarterly installments
commencing June 30, 1998, and 87,940 shares of common stock. Eyeglass Emporium
operated nine eye care centers in Indiana. The acquisition was accounted for
using the purchase method of accounting.
Effective January 1, 1999, the Company acquired one hundred percent of the
outstanding shares of stock of Shawnee Optical, Inc. ("Shawnee"). The purchase
price paid in connection with this acquisition was $1.8 million in cash, $0.3
million in notes payable over three years and 70,000 shares of common stock.
Shawnee operated nine eye care centers in Pennsylvania and Ohio. The acquisition
was accounted for using the purchase method of accounting.
Effective April 1, 1999, the Company acquired one hundred percent of the
outstanding shares of stock of Kent Optical Company and its affiliates ("Kent
Optical"). The purchase price of this acquisition was $5.2 million in cash, $1.0
million in notes payable in annual substantially equal installments commencing
April, 2000 and continuing until April, 2002, and 160,000 shares of common
stock. Kent Optical operated 28 eye care centers in central and southwest
Michigan. The acquisition was accounted for using the purchase method of
accounting.
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<PAGE>
As of June 26, 1999, the Company had securities outstanding which provide it
with potential sources of financing as outlined below:
<TABLE>
<CAPTION>
Securities Securities Potential
Outstanding Proceeds
--------------------------------------------------------------------------------------
<S> <C> <C>
Warrants 2,472,100 $14,800,000
Unit Purchase Options 215,000 3,700,000
Class II Warrants 290,424 2,032,968
Bank Austria AG (f/k/a Creditanstalt) Warrants 150,000 694,000
Representative Warrants 170,000 1,400,000
------------
$22,626,968
============
</TABLE>
As of June 26, 1999, the Company also has outstanding 895,623 Class I Warrants.
The Class I Warrants entitle the holder to purchase an amount of shares of the
Company's common stock equal to an aggregate of up to 19.9% of the shares of
common stock purchasable under the Company's outstanding warrants and options on
the same terms and conditions of such outstanding existing warrants and options.
The holder of the Class I Warrants is obligated to exercise such Class I
Warrants at the same time the options and warrants of existing holders are
exercised, subject to certain limitations. The amount of proceeds from the
exercise of the Class I Warrants cannot be estimated at this time.
There can be no assurance that the Company will obtain any such potential
proceeds from the exercise of the above securities.
On February 20, 1997, the Company entered into a Credit Agreement (the "1997
Agreement") with a bank pursuant to which the Company could borrow up to $5.0
million on a term loan basis and up to $5.0 million on a revolving credit basis,
subject to certain performance criteria. As part of the 1997 Agreement, the
Company issued to the bank warrants to purchase 150,000 shares of the common
stock at a purchase price of $4.625 per share. The warrants expire December 31,
2003. As noted in the following paragraph, the Company has entered into a new
credit facility and retired the 1997 Agreement.
On April 15, 1999, the Company entered into a Credit Agreement (the "1999
Agreement") with a bank pursuant to which the Company can borrow $10.0 million
on an acquisition line of credit, $7.0 million on a term loan basis and $3.0
million on a revolving line of credit basis, subject to certain performance
criteria and a asset-related borrowing base for the revolver. The performance
criteria include, among others, financial condition covenants such as net worth
requirements, indebtedness to net worth ratios, debt service coverage ratios,
funded debt coverage ratios, and pretax profit, net profit and EBITDA
requirements. The acquisition line facility bears interest at either the bank's
prime rate, or LIBOR plus 2.25%, or at a comparable interest swap rate at the
Company's election. The term loan facility bears interest at LIBOR plus 2.25% or
at a comparable interest swap rate at the Company's election. The revolving
credit facility bears interest at the bank's prime rate or LIBOR plus 2.0% at
the Company's election. Amounts borrowed under the 1999 Agreement will be used
to finance future acquisitions, retire existing bank debt, provide ongoing
working capital and/or for other general
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<PAGE>
corporate purposes. As of June 26, 1999 $7.0 million was borrowed on the term
loan and $0.975 million was borrowed on the revolving credit facility.
The Company has an acquisition strategy to acquire and integrate the assets of
multi-site eye care centers and the practices of eye care professionals and to
employ or enter into management services contracts with these professionals.
This strategy includes both expanding existing regional markets and entering new
regional markets. The Company will also target acquisitions in strategic markets
that will serve as platforms from which the Company can consolidate a given
service area by making and integrating additional "in-market" acquisitions. The
Company is currently evaluating potential acquisition candidates.
The Company anticipates that its working capital and sources of capital, such as
the existing credit facility, will be adequate to fund the Company's currently
proposed activities for at least the next twelve months. The Company anticipates
using financing vehicles such as bank debt and other sources of funding, such as
additional equity offerings, to achieve its business plan, including the
acquisition of eye care centers.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
"derivatives") and for hedging activities. SFAS No. 133, which becomes effective
for the Company in its fiscal year ending December 30, 2000 is not expected to
have a material impact on the consolidated financial statements of the Company.
In June 1999, the Financial Accounting Standards Board issued SFAS No. 137
"Accounting for Derivative Instruments and Hedging Activities", which amended
the effective date of SFAS No. 133. SFAS No. 137 is effective for all fiscal
quarters of fiscal years beginning after June 15,2000.
Year 2000 Issue
When used in this section, the words or phrases "plans to", "expects to",
"believes" or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are subject to certain risks and uncertainties,
including those discussed below, that could cause actual results to differ
materially from historical results and those presently anticipated or projected.
The Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. The Company
will not undertake and specifically declines any obligation to publicly release
the result of any revisions which may be made to any forward-looking statements
to reflect events or circumstances after the date of such statements or to
reflect the occurrence of anticipated or unanticipated events.
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<PAGE>
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 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 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 has substantially completed the remediation phase of its critical
internal systems and plans to complete the applicable testing and verification
phase by the end of the third quarter of fiscal year 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
restricting vacation schedules in January, 2000, increasing inventory levels and
manually processing key financial documents and other operations. Contingency
plan testing will be completed by the end of the third quarter of 1999.
The Company estimates costs to become Year 2000 compliant will be approximately
$75,000, however, no assurance can be given that the ultimate costs required to
address the Year 2000 issue will not exceed such amount.
The Company expects to convert all of its existing eye care centers to the new
point of sale system, which the Company has received written confirmation is
Year 2000 compliant, by the third quarter of 1999, except for the nine recently
acquired Shawnee and 28 recently acquired Kent locations. The Company expects to
convert the Shawnee and Kent locations to the new point-of-sale system during
2000. Currently, Shawnee's and Kent's order-entry system is manual.
The Company believes that there are multiple sources of supply in the industry
and the failure of some vendors to remediate Year 2000 issues would not disrupt
the supply chain. The Company provides managed primary eye care benefits to more
than fifty organizations. Presently, the Company manually files paper claims
with these organizations. However, during 1999 the Company intends to convert to
electronic filing for some of these organizations. If Year 2000 issues do not
permit electronic filing, the Company believes that it can revert back to
manually processing paper claims.
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<PAGE>
The Company currently believes that its most reasonably likely worst case Year
2000 scenario would relate to problems with systems of third parties which could
create great risks with infrastructure, including water and sewer services,
electricity, transportation, telecommunications and critical supplies, or raw
materials and spare parts. The Company's ability to eliminate or control these
potential third party problems is limited. Therefore, contingency plans are
limited to ensuring that store operations, eye examinations and optical
laboratory operations can be performed manually, if necessary.
No assurance can be given that the impact of any failure to achieve substantial
Year 2000 compliance will not have a material adverse effect on the Company's
financial condition.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company has no significant fixed rate debt obligations or related interest
rate swap and cap agreements.
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<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(a) Not applicable.
(b) Not applicable.
(c) (1) Securities sold. On April 1, 1999 the Company issued an
aggregate of 160,000 shares (the "Kent Shares") of its Common
Stock, par value $.01 per share.
(2) Underwriters and other purchasers. No underwriters were
involved in the transaction listed above. The Company issued
80,000 Kent Shares to each of Timothy D. Westra and John C. Cress,
O.D.
(3) Consideration. The Kent Shares were issued to Mr. Westra and
Dr. Cress as partial payment of the consideration due in
connection with the acquisition by the Company of all of the
issued and outstanding capital stock of Kent Optical, Inc.
(4) Exemption from registration claimed. The Company relied upon
Section 4(2) of the Securities Act of 1933, as amended, because
each of the above transactions did not involve any public offering
by the Company.
(5) Terms of conversion or exercise. Not applicable.
(6) Use of proceeds. Not applicable.
(d) Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders was held on May 20, 1999. Of the
10,513,071 shares issued and outstanding and eligible to vote as of
the record date of March 24, 1999, a quorum of 8,710,985 shares or
82.9% of the eligible shares were present in person or represented by
proxy.
The following actions were taken at such meeting:
(a) The reelection of the following Class C Directors:
<TABLE>
<CAPTION>
Number of Shares
--------------------------------
For Withheld Authority
------- ------------------
<S> <C> <C>
Christian E. Callsen 8,177,624 533,361
William G. McLendon 8,177,230 533,755
J. Mitchell Reese 8,177,730 533,255
</TABLE>
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<PAGE>
Continuing Class A Directors (terms to expire 2000):
Stephen M. Blinn
George B. Clairmont
Richard G. Darman
Continuing Class B. Directors (terms to expire 2001):
Gary Jacobson, M.D.
Russell E. Taskey
William T. Sullivan
(b) The approval of the proposal to amend the Company's 1992
Employee, Director and Consultant Stock Option Plan to increase
shares the aggregate number of shares for which stock options
may be granted from 1,500,000 shares to 1,850,000 shares
(7,901,688 shares for approval, 747,555 shares against
approval, and 61,741 shares abstaining).
(c) The ratification of the appointment of KPMG,LLP as the
Company's independent public accountants for the fiscal year
ending December 25, 1999 (8,644,588 shares for approval, 45,225
shares against approval, and 21,172 shares abstaining).
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
No. Title
---- -----
27* Financial Data Schedule
---------------------
* Previously filed with the Commission on August 9, 1999.
(b) Reports on Form 8-K
A Current Report on Form 8-K dated April 15, 1999 was filed on
May 6, 1999 to report (i) the acquisition by the Company of
Kent Optical, Inc. and its affiliated companies, (ii) the entry
by the Company into a new loan agreement, and (iii) a change in
the Company's fiscal year end.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Sight Resource Corporation
Date: August 26, 1999 By: /S/ WILLIAM T. SULLIVAN
--------------- -------------------------------------
William T. Sullivan
President and Chief Executive Officer
(principal executive officer)
24
