<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended September 25, 1999 Commission File Number 0-21068
------------------ -------
Sight Resource Corporation
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 04-3181524
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Jeffrey Avenue
Holliston, MA 01746
- --------------------------------------------------------------------------------
(Address of principal executive offices)
508-429-6916
- --------------------------------------------------------------------------------
(Issuer's telephone number)
N/A
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since the last
report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the issuer was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No ______
------
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
On October 23, 1999, 9,225,952 shares (does not include 30,600 shares held as
treasury stock) of common stock, par value $0.01 per share, were outstanding.
TOTAL PAGES 23
EXHIBIT INDEX AT PAGE 22
1
<PAGE>
Sight Resource Corporation
Index
PART I. FINANCIAL INFORMATION Page
----
Item 1 Financial Statements
Consolidated Balance Sheets as of September 25, 1999 and
December 31, 1998 3
Consolidated Statements of Operations for the Three
and Nine Months Ended September 25, 1999 and September 30, 1998 4
Consolidated Statements of Cash Flows for the Nine
Months Ended September 25, 1999 and September 30, 1998 5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 15
Item 3 Quantitative and Qualitative Disclosures About Market Risk 21
PART II. OTHER INFORMATION
Item 2 Changes in Securities and Use of Proceeds 22
Item 6 Exhibits and Reports on Form 8-K 22
Signatures 23
2
<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>
September 25 December 31,
1999 1998
-------------- --------------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 774 $ 1,860
Accounts receivable, net of allowance
of $1,750 and $748, respectively 3,995 2,658
Inventories 6,815 4,584
Prepaid expenses and other current assets 559 377
-------------- --------------
Total current assets 12,143 9,479
-------------- --------------
Property and equipment 14,337 13,217
Less accumulated depreciation (8,541) (7,077)
-------------- --------------
Net property and equipment 5,796 6,140
-------------- --------------
Other assets:
Intangible assets, net 23,741 15,337
Other assets 918 1,189
-------------- --------------
Total other assets 24,659 16,526
-------------- --------------
$ 42,598 $ 32,145
============== ==============
Liabilities & Stockholders' Equity
Current liabilities:
Revolver notes payable $ 986 $ ---
Current portion of long term debt 1,585 146
Current portion of capital leases 37 34
Accounts payable 3,426 2,870
Accrued expenses 2,520 3,253
-------------- --------------
Total current liabilities 8,554 6,303
-------------- --------------
Non-current liabilities:
Long term debt, less current maturities 7,151 184
Capital leases 9 13
Other liabilities 34 151
-------------- --------------
Total non-current liabilities 7,194 348
-------------- --------------
Series B redeemable convertible preferred stock
1,452,119 shares issued 6,535 6,535
Stockholders' equity:
Preferred Stock, $.01 par value. Authorized 5,000,000
shares; no shares of Series A issued and outstanding --- ---
Common Stock, $.01 par value. Authorized 20,000,000
shares; issued 9,225,952 at September 25, 1999
and 8,936,330 at December 31, 1998 93 90
Additional paid-in capital 38,153 36,847
Common stock issuable, 71,181 shares at December 31, 1998 --- 432
Treasury stock at cost, 30,600 shares at September 25,
1999 and December 31, 1998 (137) (137)
Unearned compensation (7) (22)
Accumulated deficit (17,787) (18,251)
-------------- --------------
Total stockholders' equity 20,315 18,959
-------------- --------------
$ 42,598 $ 32,145
============== ==============
</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 Nine Months Ended
-------------------------------------- -------------------------------------
September 25, September 30, September 25, September 30,
1999 1998 1999 1998
-------------------------------------- -------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net revenue $ 18,160 $ 14,299 $ 51,506 $ 42,377
Cost of revenue 5,871 4,877 16,711 14,700
---------------- ---------------- ----------------- ---------------
Gross profit 12,289 9,422 34,795 27,677
Selling, general and administrative expenses 12,136 9,265 33,630 27,471
---------------- ---------------- ----------------- ---------------
Income from operations 153 157 1,165 206
---------------- ---------------- ----------------- ---------------
Other income (expense)
Interest income 16 34 77 162
Interest expense (203) (45) (447) (141)
Gain on sale of assets 58 --- 58 69
Write off of deferred financing costs --- --- (323) ---
---------------- ---------------- ----------------- ---------------
Total other income (expense) (129) (11) (635) 90
---------------- ---------------- ----------------- ---------------
Income before income tax expense 24 146 530 296
Income tax expense 21 3 66 63
---------------- ---------------- ----------------- ---------------
Net income $ 3 $ 143 $ 464 $ 233
================ ================ ================= ===============
Net earnings per common share:
Basic $ 0.00 $ 0.02 $ 0.05 $ 0.03
================ ================ ================= ===============
Diluted $ 0.00 $ 0.01 $ 0.04 $ 0.02
================ ================ ================= ===============
Weighted average number of common shares
outstanding used to compute net earnings per
common share:
Basic 9,224,008 8,890,000 9,166,081 8,853,000
================ ================ ================= ===============
Diluted 10,799,716 10,380,000 10,703,908 10,352,000
================ ================ ================= ===============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
SIGHT RESOURCE CORPORATION
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 25, September 30,
1999 1998
--------------------------------------
(unaudited)
<S> <C> <C>
Operating activities:
Net income $ 464 $ 233
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 2,688 1,952
Amortization and write off of deferred 347 --
financing costs
Amortization of unearned compensation 15 --
Adjustments to goodwill 111 --
Gain on sale of assets (58) (69)
Changes in operating assets and liabilities:
Accounts receivable 25 (1,408)
Inventories (1,103) 270
Prepaid expenses and other current assets (149) 176
Accounts payable and accrued expenses (2,866) (1,350)
--------------- --------------
Net cash used in operating activities (526) (196)
--------------- --------------
Investing activities:
Purchases of property and equipment (855) (1,183)
Net payments for acquisitions (6,419) (2,351)
Proceeds from sale of assets --- 112
Other assets 370 48
--------------- --------------
Net cash used in investing activities (6,904) (3,374)
--------------- --------------
Financing activities:
Principal payments (2,770) (1,058)
Proceeds from notes 9,234 ---
Proceeds from issuance of stock 2 127
Other liabilities (122) (7)
--------------- --------------
Net cash provided by (used in) financing activities 6,344 (936)
--------------- --------------
Net decrease in cash and cash equivalents (1,086) (4,506)
Cash and cash equivalents, beginning of period 1,860 6,076
--------------- --------------
Cash and cash equivalents, end of period $ 774 $ 1,570
=============== ==============
Supplemental cash flow information:
Interest paid $ 351 $ 162
Income taxes paid 102 42
</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 September 25, 1999, no
amounts have been charged against the acquisition reserves. Thus, the
preliminary acquisition reserves at September 25, 1999 are $10 relating
to a reserve for potential costs to sever administrative personnel. The
Company will finalize its plan by December 26, 1999.
Effective April 1, 1999, the Company acquired one hundred percent of
the outstanding shares of stock of Kent Optical, Inc. and its
associated companies (collectively "Kent"). The purchase price paid in
connection with this acquisition was $5,209 in cash, $1,000 in notes
payable over three years and 160,000 shares of common stock. Kent
operated 28 eye care centers in Michigan. The acquisition was accounted
for using the purchase method of accounting. In connection with the
acquisition, the Company recorded purchase accounting adjustments to
increase liabilities and establish reserves for the closing of
facilities and related restructuring costs, including lease commitments
and severance costs. Total preliminary acquisition reserves at
September 25, 1999 are $115, of which the Company provided a reserve of
$85 for the potential costs to sever administrative or store personnel
and $30 for the potential closing of two stores. At September 25, 1999,
no amounts have been charged against the acquisition reserves. The
Company intends to finalize its plan by March 25, 2000.
6
<PAGE>
Sight Resource Corporation
Notes to Consolidated Financial Statements
(In thousands, except share and per share data)
Any further revisions to the plan will adjust the acquisition reserves
allocated to goodwill.
(2) Summary of Significant Accounting Policies
(a) Basis of Presentation
The accompanying consolidated financial statements have been prepared
by the Company without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. In the opinion of the Company,
these consolidated financial statements contain all adjustments
(consisting of only normal, recurring adjustments) necessary to present
fairly the financial position of Sight Resource Corporation as of
September 25, 1999 and the results of its operations and cash flows for
the three and nine months ended September 25, 1999 and September 30,
1998.
The Company's fiscal year ends on the last Saturday in December. Each
quarter represents a 13 week period, except during a 53-week year.
Fiscal years 1999 and 1998 are 52 weeks. Prior to 1999, for
convenience, the Company reported the quarter and year ending dates as
the month end date. Beginning with the first quarter of 1999 and
henceforth, the Company has and will continue to report the fiscal
period end date, not the month end date.
The accompanying consolidated financial statements and related notes
should be read in conjunction with the audited consolidated financial
statements which are contained in the Company's Annual Report on Form
10-K for the year ended December 31, 1998.
(b) Principles of Consolidation
The Company's results of operations include the accounts of the
Company, its wholly-owned subsidiaries and three professional
corporations ("PCs") in which the Company's subsidiaries assume the
financial risks and rewards of such entities. The Company has no direct
equity ownership in the PCs since the outstanding voting capital stock
of each of the PCs is 100% owned by a licensed optometrist (the
"nominee shareholder") who has, in turn, executed a Stock Restrictions
and Pledge Agreement (a "Pledge Agreement") in favor of a subsidiary of
the Company. Each Pledge Agreement contains provisions that provide the
Company with the ability at all times to cause a change in the nominee
shareholder and for an unlimited number of times, at nominal cost.
Under the Pledge Agreement, the purchase price for a sale of the stock
of each PC is equal to the aggregate book value of such PC, which will
always be a nominal cost because each PC operates at an almost break-
even level generating a nominal profit, if any at all. All significant
intercompany balances and transactions have been eliminated.
In preparation of these consolidated financial statements in conformity
with generally accepted accounting principles, management of the
Company has made estimates and assumptions that affect the reported
amounts of assets and liabilities, such as accounts receivable,
inventory, impairment of property and equipment, and intangibles.
Actual results could differ from those estimates.
7
<PAGE>
Sight Resource Corporation
Notes to Consolidated Financial Statements
(In thousands, except share and per share data)
(c) Statement of Cash Flows
Cash and cash equivalents consist of cash in banks and short-term
investments with original maturities of three months or less.
(d) Financial Instruments
The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses approximate fair value because of
the short maturity of these items. The carrying amount of other long-
term maturities approximates fair value. The carrying amount of the
Company's revolving line of credit approximates fair value because the
borrowing rate changes with market interest rates.
(e) Revenue Recognition
Revenue and the related costs from the sale of eyewear are recognized
at the time an order is complete. Revenue from eye care services is
recognized when the service is performed. The Company has fee for
service arrangements with most of its third party payers. Revenue is
reported net of contractual allowances.
Under revenue sharing arrangements for refractive surgery where the
Company is not responsible for patient billing, the Company receives a
specified payment from the hospital or center for each refractive
surgical procedure performed. Accordingly, the Company recognizes
revenue on a per procedure basis at the time procedures are performed.
Under revenue sharing arrangements for refractive surgery where the
Company is responsible for the collection from the patient and payment
to the ophthalmologist and other operating costs, the total patient
charge is recorded as revenue with the corresponding expenses recorded
in cost of revenue.
(f) Inventories
Inventories primarily consist of the costs of eyeglass frames, contact
lenses, ophthalmic lenses, sunglasses and other optical products and
are valued at the lower of cost (using the first-in, first-out method)
or market.
(g) Property and Equipment
Property and equipment is stated at cost. The Company provides for
depreciation at the time the property and equipment is placed in
service. The straight-line method is used over the estimated useful
life of the assets. The Company assesses the recoverability of the
undepreciated property and equipment when factors indicate that
impairment may have occurred by comparing anticipated profits and
future, undiscounted cash flows to net book value. In performing this
analysis, management considers such factors as current results, trends,
and future prospects, in addition to other economic factors.
(h) Advertising
Advertising costs are expensed as incurred.
8
<PAGE>
Sight Resource Corporation
Notes to Consolidated Financial Statements
(In thousands, except share and per share data)
(i) Intangible Assets
Intangible assets resulting from the acquisition of businesses consist
of patient lists, trademarks, non-compete agreements, work force in
place and the excess cost of the acquisition over the fair value of the
net assets acquired (goodwill). Certain values assigned are based upon
independent appraisals and are amortized on a straight-line basis over
a period of 5 to 25 years. The Company assesses the recoverability of
unamortized intangible assets on an ongoing basis by comparing
anticipated operating profits and future, undiscounted cash flows to
net book value. If anticipated operating profits and future,
undiscounted cash flows are less than the net book value, then an
impairment charge is recorded to reduce the carrying value of the
assets to fair value. In performing this analysis, management considers
such factors as current results, trends, and future prospects, in
addition to other economic factors.
(j) Income Taxes
The Company follows the asset and liability method of accounting for
income taxes and records deferred tax assets and liabilities based on
temporary differences between the tax bases of assets and liabilities
and their carrying amounts for financial statement purposes.
(k) Deferred Revenue
The Company offers a contact lens purchasing program in which, for a
set fee, customers may purchase contact lenses at discounted rates for
a 12 month period. The Company recognizes revenue from the sales of its
contact lens purchasing program on a monthly basis over the life of the
program. Company recognizes revenue from the sales of its contact lens
purchasing program on a monthly basis over the life of the program.
(l) Net Earnings Per Share
Earnings per share are computed based on Statement of Financial
Accounting Standards No. 128 "Earnings per Share" ("SFAS 128"). SFAS
128 requires presentation of basic earnings per share ("Basic EPS") and
diluted earnings per share ("Diluted EPS") by all entities that have
publicly traded common stock or potential common stock (options,
warrants, convertible securities or contingent stock arrangements).
Basic EPS is computed by dividing income available to common
stockholders by the weighted average number of common shares
outstanding during the period. The computation of Diluted EPS does not
assume conversion, exercise or contingent exercise of securities that
would have an antidilutive effect on earnings.
9
<PAGE>
Sight Resource Corporation
Notes to Consolidated Financial Statements
(In thousands, except share and per share data)
The following table provides a reconciliation of the numerators and
denominators of the computations of Basic EPS and Diluted EPS for the
three months and nine months ended September 25, 1999 and September 30,
1998:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 25, September 30, September 25, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic Income Per Share
Net income $ 3 $ 143 $ 464 $ 233
------------ ------------- -------------- -------------
Net income available to common shareholders $ 3 $ 143 $ 464 $ 233
============ ============= ============== =============
Weighted average common shares outstanding 9,224,000 8,890,000 9,166,000 8,853,000
Net income per share $ 0.00 $ 0.02 $ 0.05 $ 0.03
============ ============= ============== =============
Diluted Income Per Share
Net income $ 3 $ 143 $ 464 $ 233
------------ ------------- -------------- -------------
Net income available to common shareholders $ 3 $ 143 $ 464 $ 233
============ ============= ============== =============
Weighted average common shares outstanding 9,224,000 8,890,000 9,166,000 8,853,000
Convertible preferred stock 1,452,000 1,452,000 1,452,000 1,452,000
Options and warrants 124,000 38,000 88,000 47,000
------------ ------------- -------------- -------------
Weighted average common shares outstanding and
potential diluted shares 10,800,000 10,380,000 10,704,000 10,352,000
============ ============= ============== =============
Net income per share $ 0.00 $ 0.01 $ 0.04 $ 0.02
============ ============= ============== =============
</TABLE>
10
<PAGE>
Sight Resource Corporation
Notes to Consolidated Financial Statements
(In thousands, except share and per share data)
(3) Debt
<TABLE>
<CAPTION>
September 25, December 31,
1999 1998
----------------- ----------------
<S> <C> <C>
Short-term borrowings consist of the following:
Bank revolver loan payable, variable interest rate
(7.31% at 9/25/99), interest due monthly $ 975 $ 0
Bank line of credit note payable, 8.75% interest
rate, principal and interest due monthly until
November, 1999 11 0
----------------- ----------------
$ 986 $ 0
================= ================
Long-term debt consists of the following:
Bank term loan payable, variable interest rate
(7.63% at 9/25/99), principal due monthly beginning
October, 1999, and interest due monthly until April,
2006 $ 7,000 $ 0
Unsecured notes payable, 7.5% interest rate,
principal due annually and interest due quarterly
until April, 2002 1,000 0
Unsecured notes payable, 7.5% interest rate,
principal due annually and interest due quarterly
until January, 2002 300 0
Unsecured notes payable, with interest rates of
between 8 and 9%, principal and interest due
monthly until June, 2010 217 20
Unsecured note payable, 7% interest rate, principal
and interest due quarterly until March 31, 2001 175 263
Unsecured note payable, 12% interest rate, principal
and interest due monthly until January, 2001 44 67
----------------- ----------------
8,736 330
Less current maturities 1,585 146
----------------- ----------------
Long term debt, less current maturities $ 7,151 $ 184
================= ================
</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
11
<PAGE>
Sight Resource Corporation
Notes to Consolidated Financial Statements
(In thousands, except share and per share data)
until April, 2002. Interest is due quarterly in arrears beginning July, 1999 and
continuing until April, 2002.
On April 15, 1999, the Company entered into a Credit Agreement (the "1999
Agreement") with a bank pursuant to which the Company can borrow $10,000 on an
acquisition line of credit, $7,000 on a term loan basis and $3,000 on a
revolving line of credit basis, subject to certain performance criteria and an
asset-related borrowing base for the revolver. The performance criteria include,
among others, financial condition covenants such as net worth requirements,
indebtedness to net worth ratios, debt service coverage ratios, funded debt
coverage ratios, and pretax profit, net profit and EBITDA requirements. The
acquisition line facility bears interest at either the bank's prime rate, or
LIBOR plus 2.25%, or at a comparable interest swap rate at the Company's
election.
The term loan facility bears interest at LIBOR plus 2.25% or at a comparable
interest swap rate at the Company's election. The revolving credit facility
bears interest at the bank's prime rate or LIBOR plus 2.0% at the Company's
election. Amounts borrowed under the 1999 Agreement will be used to finance
future acquisitions, retire existing bank debt, provide ongoing working capital
and/or for other general corporate purposes. As of September 25, 1999, $7,000
was borrowed on the term loan and $975 was borrowed on the revolving credit
facility.
On January 22, 1999, as part of the acquisition of Shawnee, the Company issued
three-year notes to the sellers in the aggregate amount of $300. The annual
interest rate is 7.5%. Principal is due in three annual substantially equal
installments beginning January, 2000 and continuing until January, 2002.
Interest is due quarterly in arrears beginning March, 1999 and continuing until
January, 2002.
On April 8, 1998, as part of the acquisition of Eyeglass Emporium, the Company
issued a three-year $350 note to the seller. The annual interest rate is 7.0%.
Principal and interest are due quarterly in arrears from June 30, 1998 through
March 31, 2001.
In January 1996, one of the Company's subsidiaries entered into a five-year,
$140 construction note payable relating to one of its mall locations. The annual
interest rate is 12%. Principal and interest payments are due monthly until
January 2001.
In 1995 and 1996, as part of acquisitions made, one of the Company's
subsidiaries issued a note bearing interest at 8% and two non-interest bearing
notes to the sellers. For financial reporting purposes, interest of 9% has been
imputed on the non-interest bearing notes. The interest bearing note with a
value at September 25, 1999 of $43 will be due in August, 2006. The other non-
interest bearing notes have principal and interest payments due monthly until
June, 2010.
One of the Company's subsidiaries has a bank line of credit secured by accounts
receivable, inventory and equipment. As of September 25, 1999, $11 was borrowed
under this facility.
12
<PAGE>
Sight Resource Corporation
Notes to Consolidated Financial Statements
(In thousands, except share and per share data)
No additional borrowings will be made on this credit facility. Principal
payments of approximately $6 and interest at 8.75% annually are due monthly
until November, 1999.
(4) Segment Reporting
The following tables present certain operating segment information.
For the three months ended September 25, 1999 and September 30, 1998:
<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 $ 17,619 $ 13,713 $ 541 $ 586 $ 0 $ 0 $ 18,160 $ 14,299
Interest:
Interest income 0 0 0 0 16 34 16 34
Interest expense (9) (30) (2) 0 (192) (15) (203) (45)
-------- -------- -------- -------- -------- -------- -------- --------
Net interest
income/(expense) (9) (30) (2) 0 (173) 19 (187) (11)
Depreciation and
Amortization 865 669 29 36 39 12 933 717
Income/(loss) from
operations 1,236 564 173 139 (1,256) (546) 153 157
Identifiable assets 31,703 30,495 437 793 10,458 2,605 42,598 33,893
Capital expenditures 404 433 0 109 50 38 454 580
</TABLE>
For the nine months ended September 25, 1999 and September 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 $ 49,646 $ 41,028 $ 1,860 $ 1,349 $ 0 $ 0 $ 51,506 $ 42,377
Interest:
Interest income 0 0 0 0 77 162 77 162
Interest expense (41) (80) (5) 0 (401) (61) (447) (141)
-------- -------- -------- -------- -------- -------- -------- --------
Net interest
income/(expense) (41) (80) (5) 0 (324) 101 (370) 21
Depreciation and
Amortization 2,480 1,846 97 75 111 31 2,688 1,952
Income/(loss) from
operations 3,861 1,808 690 170 (3,386) (1,772) 1,165 206
Identifiable assets 31,703 30,495 437 793 10,458 2,605 42,598 33,893
Capital expenditures 743 907 0 238 112 38 855 1,183
</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 September 25, 1999, the
Company's operations consisted of 131 eye care centers, with four regional
optical laboratories and distribution centers, making the Company one of the
fifteen largest providers in the United States' primary eye care industry based
upon sales. The Company's eye care centers operate primarily under the brand
names Cambridge Eye Doctors, E.B. Brown Opticians, Eyeglass Emporium, Kent
Optical, Shawnee Optical, Vision Plaza, and Vision World. The Company also
provides, or where necessary to comply with applicable law administers the
business functions of optometrists, ophthalmologists and professional
corporations that provide, vision related professional services. In addition, as
of September 25, 1999 the Company operated one laser vision correction ("LVC")
center.
The Company operates four regional optical laboratories and distribution
centers. The regional optical laboratories provide complete laboratory services
to the Company's eye care centers, including polishing, cutting and edging,
tempering, tinting and coating of ophthalmic lenses. The distribution centers
provide and maintain an inventory of all accessories and supplies necessary to
operate the primary eye care centers in their regions, as well as "ready made"
eye care products, including contact lenses and related supplies. The inventory
of eyeglass lenses, frames, contact lenses, accessories and supplies is acquired
through a number of sources, domestic and foreign. Management believes that the
regional optical laboratories and distribution centers have the capacity to
accommodate additional multi-site eye care centers.
Results of Operations
Three Months and Nine Months Ended September 25, 1999 and September 30, 1998
Net Revenue. During the three months ended September 25, 1999, the Company
generated net revenue of approximately $17.6 million and $0.5 million from the
operation of its 131 eye care and two LVC centers, respectively, as compared to
net revenue of approximately $13.7 million and $0.6 million from its 93 eye care
and three LVC centers, respectively, for the three months ended September 30,
1998.
15
<PAGE>
Net revenues for the first nine months of fiscal 1999 were $49.6 million and
$1.9 million from the operations of its eye care centers and LVC centers,
respectively, as compared to the net revenue of $41.0 million and $1.3 million
from its eye care centers and LVC centers for the comparable period of fiscal
1998. The $3.9 million or 27.0% increase in total net revenue for the three
months ended September 25, 1999 relates primarily to the additional 38 eye care
centers acquired since January, 1999. The $9.1 million or 21.5% increase in
total net revenue for the first nine months of fiscal 1999 relates primarily to
the additional 38 eye care centers acquired since January 1999 and to the nine
eye care centers acquired effective April 1, 1998.
Cost of Revenue. Cost of revenue increased from approximately $4.6 million and
$0.3 million from the operation of the 93 eye care and three LVC centers,
respectively, for the three months ended September 30, 1998 to approximately
$5.6 million and $0.3 million from the operation of the 131 eye care and two LVC
centers, respectively, for the three months ended September 25, 1999. Total
cost of revenue as a percentage of net revenue decreased from 34.1% for the
three months ended September 30, 1998 to 32.3% for the three months ended
September 25, 1999. Cost of revenue increased from $13.9 million and $0.8
million from operations of the eye care centers and LVC centers for the first
nine months of 1998 to $15.7 million and $1.0 million for the first nine months
of 1999. Cost of revenue as a percentage of net revenue decreased from 34.7% for
the nine months ended September 30, 1998, to 32.4% for the nine months ended
September 25, 1999. The improvement as a percentage of net revenue primarily
reflects the realization of purchase economies, less sales price discounting,
and, to a lesser extent, some small retail price increases. Cost of revenue
principally consisted of (i) the cost of manufacturing, purchasing and
distributing optical products to customers of the Company and (ii) the cost of
delivering LVC services, including depreciation and maintenance on excimer
lasers.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to approximately $12.1 million and $33.6
million for the three months and nine months ended September 25, 1999 from
approximately $9.3 million and $27.5 million for the three and nine months ended
September 30, 1998. The increase primarily relates to payroll and facility
costs incurred in operating additional eye care centers in the first three
quarters of fiscal 1999 as compared to the same periods in fiscal 1998.
Selling, general and administrative expense, as a percentage of net revenue,
increased from 64.8% for the three months ended September 25, 1999, to 66.8% for
the comparable period in 1998, and from 64.8% for the nine months ended
September 25, 1999, to 65.3% for the comparable period in 1998.
Other Income and Expense. Interest income decreased from $16,000 and $77,000
for the three and nine months ended September 25, 1999, respectively, to
$34,000 and $162,000 for the three and nine months ended September 30, 1998,
respectively. This decrease resulted from the investment of a lower average
cash and cash equivalents balance during the first three quarters of 1999 as
compared to the same period in 1998. Interest expense increased to $203,000 and
$447,000 for the three and nine months ended September 25, 1999, respectively,
from $45,000 and $141,000 for the three and nine months ended September 30,
1998, respectively. The increase is primarily associated with a higher average
balance of debt outstanding during the first three quarters of 1999 as compared
to the same periods in 1998. The sale of certain ophthalmic equipment during the
nine months ended September 30, 1998 generated a gain of approximately $69,000.
Disposals of
16
<PAGE>
equipment during the three and nine months ended September 25, 1999, generated a
gain of approximately $58,000.
Income Taxes. The effective tax rate includes the utilization of net operating
loss carry forwards and the amounts for state income taxes. The effective tax
rate for the three quarters ended September 25, 1999 was lower than the
effective rate for the same period in 1998 due to a lower effective state tax
rate.
Net Income. The Company realized net income of $3,000 or $0.00 per share on a
basic and diluted basis for the three months ended September 25, 1999, as
compared to net income of $143,000 or $0.02 per share on a basic basis and
$0.01 per share on a diluted basis for the comparable period last year. The
Company realized net income of $464,000 or $0.05 per share basic and $0.04 per
share diluted for the nine months ended September, 1999, as compared to net
income of $233,000 or $0.03 per share on a basic basis and $0.02 per share on a
diluted basis for the comparable period last year.
Liquidity and Capital Resources
At September 25, 1999, the Company had approximately $0.8 million in cash and
cash equivalents and working capital of approximately $3.6 million, in
comparison to approximately $1.9 million in cash and cash equivalents and
working capital of approximately $3.2 million as of December 31, 1998. As
compared to December 31, 1998, current assets have increased by $2.7 million and
current liabilities have increased by $2.3 million. The overall increase in
working capital is primarily due to the net effect of the purchases of the nine
Shawnee Optical eye care centers effective January 1, 1999, and the 28 Kent
Optical eye care centers effective April 1, 1999.
Effective April 1, 1998, the Company acquired one hundred percent of the
outstanding shares of stock of Eye Glass Emporium, Inc. ("Eyeglass Emporium").
The purchase price paid in connection with this acquisition was $2.3 million in
cash, $0.4 million in notes payable in twelve equal quarterly installments
commencing June 30, 1998, and 87,940 shares of common stock. Eyeglass Emporium
operated nine eye care centers in Indiana. The acquisition was accounted for
using the purchase method of accounting.
Effective January 1, 1999, the Company acquired one hundred percent of the
outstanding shares of stock of Shawnee Optical, Inc. ("Shawnee"). The purchase
price paid in connection with this acquisition was $1.8 million in cash, $0.3
million in notes payable over three years and 70,000 shares of common stock.
Shawnee operated nine eye care centers in Pennsylvania and Ohio. The
acquisition was accounted for using the purchase method of accounting.
Effective April 1, 1999, the Company acquired one hundred percent of the
outstanding shares of stock of Kent Optical Company and its affiliates ("Kent
Optical"). The purchase price of this acquisition was $5.2 million in cash,
$1.0 million in notes payable in annual substantially equal installments
commencing April, 2000 and continuing until April, 2002, and 160,000 shares of
common stock. Kent Optical operated 28 eye care centers in central and
southwest Michigan. The acquisition was accounted for using the purchase method
of accounting.
17
<PAGE>
As of September 25, 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>
Class II Warrants 290,424 2,032,968
Bank Austria AG (f/k/a Creditanstalt) Warrants 150,000 694,000
Representative Warrants 170,000 1,400,000
------------
$ 4,126,968
============
</TABLE>
As of September 25, 1999, the Company also has outstanding 350,124 Class I
Warrants. The Class I Warrants entitle the holder to purchase an amount of
shares of the Company's common stock equal to an aggregate of up to 19.9% of the
shares of common stock purchasable under the Company's outstanding warrants and
options on the same terms and conditions of such outstanding existing warrants
and options. The holder of the Class I Warrants is obligated to exercise such
Class I Warrants at the same time the options and warrants of existing holders
are exercised, subject to certain limitations. The amount of proceeds from the
exercise of the Class I Warrants cannot be estimated at this time.
There can be no assurance that the Company will obtain any such potential
proceeds from the exercise of the above securities.
On February 20, 1997, the Company entered into a Credit Agreement (the "1997
Agreement") with a bank pursuant to which the Company could borrow up to $5.0
million on a term loan basis and up to $5.0 million on a revolving credit basis,
subject to certain performance criteria. As part of the 1997 Agreement, the
Company issued to the bank warrants to purchase 150,000 shares of the common
stock at a purchase price of $4.625 per share. The warrants expire December 31,
2003. As noted in the following paragraph, the Company has entered into a new
credit facility and retired the 1997 Agreement.
On April 15, 1999, the Company entered into a Credit Agreement (the "1999
Agreement") with a bank pursuant to which the Company can borrow $10.0 million
on an acquisition line of credit, $7.0 million on a term loan basis and $3.0
million on a revolving line of credit basis, subject to certain performance
criteria and a asset-related borrowing base for the revolver. The performance
criteria include, among others, financial condition covenants such as net worth
requirements, indebtedness to net worth ratios, debt service coverage ratios,
funded debt coverage ratios, and pretax profit, net profit and EBITDA
requirements. The acquisition line facility bears interest at either the bank's
prime rate, or LIBOR plus 2.25%, or at a comparable interest swap rate at the
Company's election. The term loan facility bears interest at LIBOR plus 2.25%
or at a comparable interest swap rate at the Company's election. The revolving
credit facility bears interest at the bank's prime rate or LIBOR plus 2.0% at
the Company's election. Amounts borrowed under the 1999 Agreement will be used
to finance future acquisitions, retire existing bank debt, provide ongoing
working capital and/or for other general corporate purposes. As of September
25, 1999, $7.0 million was borrowed on the term loan and $0.975 million was
borrowed on the revolving credit facility.
18
<PAGE>
The Company has an acquisition strategy to acquire and integrate the assets of
multi-site eye care centers and the practices of eye care professionals and to
employ or enter into management services contracts with these professionals.
This strategy includes both expanding existing regional markets and entering new
regional markets. The Company will also target acquisitions in strategic markets
that will serve as platforms from which the Company can consolidate a given
service area by making and integrating additional "in-market" acquisitions. The
Company is currently evaluating potential acquisition candidates.
The Company anticipates that its working capital and sources of capital, such as
the existing credit facility, will be adequate to fund the Company's currently
proposed activities for at least the next twelve months. The Company
anticipates using financing vehicles such as bank debt and other sources of
funding, such as additional equity offerings, to achieve its business plan,
including the acquisition of eye care centers.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
"derivatives") and for hedging activities. SFAS No. 133, which becomes
effective for the Company in its fiscal year ending December 30, 2000 is not
expected to have a material impact on the consolidated financial statements of
the Company. In June 1999, the Financial Accounting Standards Board issued SFAS
No. 137 "Accounting for Derivative Instruments and Hedging Activities", which
amended the effective date of SFAS No. 133. SFAS No. 137 is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000.
Year 2000 Issue
When used in this section, the words or phrases "plans to", "expects to",
"believes" or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are subject to certain risks and uncertainties,
including those discussed below, that could cause actual results to differ
materially from historical results and those presently anticipated or projected.
The Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. The Company
will not undertake and specifically declines any obligation to publicly release
the result of any revisions which may be made to any forward-looking statements
to reflect events or circumstances after the date of such statements or to
reflect the occurrence of anticipated or unanticipated events.
The "Year 2000" issue refers to the inability of certain computer systems, as
well as certain hardware and equipment containing embedded microprocessors with
date sensitive data, to recognize accurate dates commencing on or after January
1, 2000. This has the potential to affect the operation of these systems
adversely and materially. The Company has identified
19
<PAGE>
four phases in its Year 2000 compliance efforts: discovery, assessment,
remediation and applicable testing and verification.
The Company has completed its assessment of critical internal systems, which
include customer service, customer order entry, lab operations, purchasing and
financial situations. The Company has surveyed, by written questionnaire, its
principal vendors, customers and others on whom it relies to assure that their
systems will be Year 2000 compliant, and that they will be able to continue
their business with the Company without interruption. The Company has received
written confirmation of Year 2000 compliance from vendors and suppliers of its
(i) point of sale system, (ii) general ledger software system, (iii) laser
vision correction equipment, (iv) laboratory finishing equipment, and (v)
corporate headquarters telecommunications systems.
The Company has completed the remediation phase of its critical internal systems
and has substantially completed the applicable testing and verification phase,
however no assurance can be given that any or all of the Company's systems are
or will be Year 2000 compliant. The Company has drafted a contingency plan in
the event normal operations are interrupted as a result of Year 2000 issues.
Certain precautionary measures are considered in the contingency plan, including
restricting vacation schedules in January, 2000, increasing inventory levels and
manually processing key financial documents and other operations. Contingency
plan testing has been completed. Policy and procedure manuals will be
distributed during the fourth quarter.
The Company estimates costs to become Year 2000 compliant will be approximately
$75,000, however, no assurance can be given that the ultimate costs required to
address the Year 2000 issue will not exceed such amount.
The Company has converted all of its existing eye care centers to the new point
of sale system, which the Company has received written confirmation is Year 2000
compliant, except for the nine recently acquired Shawnee and 28 recently
acquired Kent locations. The Company expects to convert the Shawnee and Kent
locations to a point-of-sale system during 2000, however, because Shawnee's and
Kent's order-entry system is currently manual, the Year 2000 issue will not
impact operations at these locations.
The Company believes that there are multiple sources of supply in the industry
and the failure of some vendors to remediate Year 2000 issues would not disrupt
the supply chain. The Company provides managed primary eye care benefits to more
than fifty organizations. Presently, the Company files electronically with one
of its largest third party providers. The Company manually files paper claims
with the other organizations. Where possible, the Company intends to file
electronically with these other companies. If Year 2000 issues do not permit
electronic filing, the Company believes that it can revert back to manually
processing paper claims.
The Company currently believes that its most reasonably likely worst case Year
2000 scenario would relate to problems with systems of third parties which could
create great risks with infrastructure, including water and sewer services,
electricity, transportation, telecommunications and critical supplies, or raw
materials and spare parts. The Company's ability to eliminate or control these
potential third party problems is limited. Therefore,
20
<PAGE>
contingency plans are limited to ensuring that store operations, eye
examinations and optical laboratory operations can be performed manually, if
necessary.
No assurance can be given that the impact of any failure to achieve substantial
Year 2000 compliance will not have a material adverse effect on the Company's
financial condition.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company has no significant fixed rate debt obligations or related interest
rate swap and cap agreements.
21
<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 September 9, 1999 the Company issued a
total of 5,000 shares (the "Option Shares") of its Common
Stock, par value $0.01 per share.
(2) Underwriters and other purchasers. No underwriters were
involved in the transaction listed above. The Company issued
the Option Shares pursuant to the exercise of a stock option
held by a former employee.
(3) Consideration. The Option Shares were issued at an exercise
price of $0.43 per share for an aggregate exercise price of
$2,150.
(4) Exemption from registration claimed. The Option Shares were
issued in reliance upon Section 4(2) of the Securities Act of
1933, as amended, because the above transaction did not
involve any public offering by the Company.
(5) Terms of conversion or exercise. Not applicable. Use of
proceeds. Not applicable.
(6) Use of proceeds. Not applicable.
(d) Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
No. Title
--- -----
27 Financial Data Schedule
(b) Reports on Form 8-K.
An amendment on Form 8-K/A was filed on July 6, 1999 to amend the
Current Report on Form 8-K, dated April 15, 1999, to provide the
audited financial statements and pro forma financial information
required in connection with the acquisition by the Company of Kent
Optical, Inc. and its affiliated companies.
A second amendment on Form 8-K/A was filed on August 27, 1999 to
further amend the Current Report on Form 8-K, dated April 15, 1999, to
revise the audited financial statements and pro forma financial
information previously provided in connection with the acquisition by
the Company of Kent Optical, Inc. and its affiliated companies.
22
<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: November 8, 1999 By: /s/ William T. Sullivan
________________ __________________________
William T. Sullivan
President and Chief Executive Officer
(principal executive officer)
Date: November 8, 1999 By: /s/ James W. Norton
________________ __________________________
James W. Norton
Chief Financial Officer
(principal financial officer)
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SIGHT
RESOURCE CORPORATION'S BALANCE SHEET AND STATEMENT OF OPERATIONS AS OF AND FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 25, 1999 AS REPORTED ON FORM 10-Q FOR
THE QUARTER ENDED SEPTEMBER 25, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-25-1999 DEC-25-1999
<PERIOD-START> JUN-27-1999 JAN-01-1999
<PERIOD-END> SEP-25-1999 SEP-25-1999
<CASH> 774 774
<SECURITIES> 0 0
<RECEIVABLES> 5,745 5,745
<ALLOWANCES> 1,750 1,750
<INVENTORY> 6,815 6,815
<CURRENT-ASSETS> 12,143 12,143
<PP&E> 14,337 14,337
<DEPRECIATION> 8,541 8,541
<TOTAL-ASSETS> 42,598 42,598
<CURRENT-LIABILITIES> 8,554 8,554
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 20,315 20,315
<TOTAL-LIABILITY-AND-EQUITY> 42,598 42,598
<SALES> 18,160 51,506
<TOTAL-REVENUES> 18,160 51,506
<CGS> 5,871 16,711
<TOTAL-COSTS> 5,871 16,711
<OTHER-EXPENSES> 12,136 33,630
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 203 447
<INCOME-PRETAX> 24 530
<INCOME-TAX> 21 66
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 3 464
<EPS-BASIC> 0.00 0.05
<EPS-DILUTED> 0.00 0.04
</TABLE>
