<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 March 27, 1999 Commission File Number 0-21068
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Sight Resource Corporation
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 04-3181524
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Jeffrey Avenue
Holliston, MA 01746
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(Address of principal executive offices)
508-429-6916
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(Issuer's telephone number)
N/A
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(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 May 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 21
EXHIBIT INDEX AT PAGE 20
1
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Sight Resource Corporation
Index
PART I. FINANCIAL INFORMATION Page
----
Item 1 Financial Statements
Consolidated Balance Sheets as of March 27, 1999 and
December 31, 1998 3
Consolidated Statements of Operations for the Three
Months Ended March 27, 1999 and March 31, 1998 4
Consolidated Statements of Cash Flows for the Three
Months Ended March 27, 1999 and March 31, 1998 5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
PART II. OTHER INFORMATION
Item 2 Changes in Securities and Use of Funds 19
Item 6 Exhibits and Reports on Form 8-K 20
Signatures 21
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>
March 27, December 31,
1999 1998
----------- ------------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 954 $ 1,860
Accounts receivable, net of allowance
of $1,138 and $748, respectively 3,386 2,658
Inventories 5,007 4,584
Prepaid expenses and other current assets 560 377
-------- --------
Total current assets 9,907 9,479
-------- --------
Property and equipment 14,748 13,217
Less accumulated depreciation (8,700) (7,077)
-------- --------
Net property and equipment 6,048 6,140
-------- --------
Other assets:
Intangible assets, net 17,278 15,337
Other assets 967 1,189
-------- --------
Total other assets 18,245 16,526
-------- --------
$ 34,200 $ 32,145
======== ========
Liabilities & Stockholders' Equity
Current liabilities:
Revolver notes payable $ 745 $ 0
Current portion of long term debt 388 146
Current portion of capital leases 49 34
Accounts payable 2,618 2,870
Accrued expenses 3,540 3,253
-------- --------
Total current liabilities 7,340 6,303
-------- --------
Non-current liabilities:
Long term debt, less current maturities 763 184
Capital leases 19 13
Other liabilities 166 151
-------- --------
Total non-current liabilities 948 348
-------- --------
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 9,091,552 at March 27, 1999
and 8,936,330 at December 31, 1998 91 90
Additional paid-in capital 37,518 36,847
Common stock issuable, 71,181 shares at December 31, 1998 0 432
Treasury stock at cost, 30,600 shares at March 27,
1999 and December 31, 1998 (137) (137)
Unearned compensation (17) (22)
Accumulated deficit (18,078) (18,251)
-------- --------
Total stockholders' equity 19,377 18,959
-------- --------
$ 34,200 $ 32,145
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
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SIGHT RESOURCE CORPORATION
Consolidated Statements of Operations
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------
March 27, March 31,
1999 1998
------------ ------------
(unaudited)
<S> <C> <C>
Net revenue $ 15,764 $ 13,580
Cost of revenue 5,013 4,752
------------ ------------
Gross profit 10,751 8,828
Selling, general and administrative expenses 10,194 8,895
------------ ------------
Income (loss) from operations 557 (67)
------------ ------------
Other income (expense)
Interest income 42 71
Interest expense (82) (51)
Gain on sale of assets 0 69
Write off of deferred financing costs (323) 0
------------ ------------
Total other income (expense) (363) 89
------------ ------------
Income before income tax expense 194 22
Income tax expense 21 9
------------ ------------
Net income $ 173 $ 13
============ ============
Net earnings per common share:
Basic $ 0.02 $ 0.00
============ ============
Diluted $ 0.02 $ 0.00
============ ============
Number of shares used to compute net
earnings per common share:
Basic 9,061,000 8,785,000
============ ============
Diluted 10,564,000 10,266,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
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SIGHT RESOURCE CORPORATION
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 27, March 31,
1999 1998
------- -------
(unaudited)
<S> <C> <C>
Operating activities:
Net income $ 173 $ 13
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 809 592
Amortization and write off of deferred financing costs 344 21
Amortization of unearned compensation 5 0
Gain on sale of assets 0 (69)
Changes in operating assets and liabilities:
Accounts receivable (607) (444)
Inventories (94) 69
Prepaid expenses and other current assets (162) (213)
Accounts payable and accrued expenses (919) (756)
------- -------
Net cash used in operating activities (451) (787)
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Investing activities:
Purchases of property and equipment (193) (148)
Payments for acquisitions (1,750) (12)
Proceeds from sale of assets 0 99
Notes issued for acquisition 300 0
Other assets (74) 17
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Net cash used in investing activities (1,717) (44)
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Financing activities:
Principal payments (60) (1,000)
Proceeds from notes 1,259 0
Proceeds from issuance of stock 0 121
Other liabilities 63 (7)
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Net cash provided by (used in) financing activities 1,262 (886)
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Net decrease in cash and cash equivalents (906) (1,717)
Cash and cash equivalents, beginning of period 1,860 6,076
------- -------
Cash and cash equivalents, end of period $ 954 $ 4,359
======= =======
</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.
Total acquisition reserves at March 27, 1999 are $450.
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 March 27, 1999 and the results of its operations and cash flows for
the periods presented.
The Company's fiscal year ends on the Saturday closest to the last day
of December. Each quarter represents a thirteen 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. As noted above, the first quarter of
1999 ended March 27, 1999.
6
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Sight Resource Corporation
Notes to Consolidated Financial Statements
(In thousands, except share and per share data)
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. The purchase price for a sale of a PCs
stock is equal to the aggregate book value of the PC, which will
always be a nominal cost because each PC operates at an almost
break-even level generating a nominal profit, if any at all. All
significant intercompany balances and transactions have been
eliminated.
In preparation of these consolidated financial statements in
conformity with generally accepted accounting principles, management
of the Company has made estimates and assumptions that affect the
reported amounts of assets and liabilities, such as accounts
receivable, inventory, impairment of property and equipment, and
intangibles. Actual results could differ from those estimates.
(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 payors. Revenue is
reported net of contractual allowances.
7
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Sight Resource Corporation
Notes to Consolidated Financial Statements
(In thousands, except share and per share data)
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 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.
8
<PAGE>
Sight Resource Corporation
Notes to Consolidated Financial Statements
(In thousands, except share and per share data)
(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.
The following table provides a reconciliation of the numerators and denominators
of the basic and diluted earnings per share computations for the three months
ended March 27, 1999 and March 31, 1998:
<TABLE>
<CAPTION>
Three Months Ended
March 27, March 31,
1999 1998
---------- ----------
<S> <C> <C>
Basic Income Per Share
Net income 173 13
---------- ----------
Net income available to common shareholders 173 13
========== ==========
Weighted average common shares outstanding 9,061,000 8,785,000
Net income per share $0.02 $0.00
========== ==========
Diluted Income Per Share
Net income 173 13
---------- ----------
Net income available to common shareholders 173 13
========== ==========
Weighted average common shares outstanding 9,061,000 8,785,000
Convertible preferred stock 1,452,000 1,452,000
Options 51,000 29,000
---------- ----------
Weighted average common shares outstanding and
potential shares 10,564,000 10,266,000
========== ==========
Net income per share $0.02 $0.00
========== ==========
</TABLE>
9
<PAGE>
Sight Resource Corporation
Notes to Consolidated Financial Statements
(In thousands, except share and per share data)
(3) Debt
Debt consists of the following:
<TABLE>
<CAPTION>
March 27, December 31,
1999 1998
--------- ------------
<S> <C> <C>
Bank term loan payable, 9.25% interest rate, principal and interest due
quarterly until December 31, 2002 $ 559 $ 0
Unsecured notes payable, 7.5% interest rate, principal due annually and
interest due quarterly until January, 2002 300 0
Unsecured note payable, 7% interest rate, principal and
interest due quarterly until March 31, 2001 233 263
Unsecured note payable, 12% interest rate, principal and interest due
monthly until January, 2001 59 67
------ ----
1,151 330
Less current maturities 388 146
====== ====
Long term debt, less current maturities $ 763 $184
====== ====
</TABLE>
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.
On February 20, 1997, the Company entered into a Credit Agreement (the "1997
Agreement") with a bank pursuant to which the Company can borrow $5,000 on a
term loan basis and $5,000 on a revolving credit basis, subject to certain
performance criteria. The term loan facility bears interest at the bank's prime
rate plus 1.5% (9.25% at March 27, 1999) or LIBOR plus 3% at the Company's
election and the revolving credit facility bears interest at the bank's prime
rate plus 1.25% (9.0% at March 27, 1999) or LIBOR plus 2.75% at the Company's
election. These loans are secured by all assets of the Company and its wholly
owned subsidiaries. As of March 27, 1999, $559 was borrowed on the term loan and
$700 was borrowed on the revolving credit facility.
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.
10
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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 March 27, 1999 and March 31, 1998.
<TABLE>
<CAPTION>
Eye Care Laser Vision All Consolidated
Centers Correction Other Totals
1999 1998 1999 1998 1999 1998 1999 1998
-------- -------- ----- ---- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
External Customers $ 15,100 $ 13,155 $ 664 $425 $ 0 $ 0 $ 15,764 $ 13,580
Interest:
Interest income 0 0 0 0 42 71 42 71
Interest expense (25) (25) (2) 0 (55) (26) (82) (51)
-------- -------- ----- ---- ------- ------- -------- --------
Net interest income/(expense) (25) (25) (2) 0 (13) 45 (40) 20
Depreciation and amortization 741 559 33 24 35 9 809 592
Income/(loss) from operations 1,433 615 243 12 (1,119) (694) 557 (67)
Identifiable assets 29,766 26,925 614 600 3,790 5,340 34,170 32,865
Capital expenditures 193 148 0 0 0 0 193 148
</TABLE>
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.
11
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Sight Resource Corporation
Notes to Consolidated Financial Statements
(In thousands, except share and per share data)
(5) Subsequent Events
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 $5,200 in cash, $1,000 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 operates twenty-eight eye care centers in central and southwest
Michigan. The acquisition will be accounted for using the purchase method of
accounting.
The following unaudited pro forma financial information gives effect to the
acquisition as if the acquisition of Kent was effective January 1, 1998:
<TABLE>
<CAPTION>
(in thousands except for per share data) Three Months Ended
March 27, 1999 March 31, 1998
-------------- --------------
<S> <C> <C>
Revenue $18,329 $16,264
Income $ 219 $ 118
Basic and Diluted Earnings per Share $ 0.02 $ 0.01
Number of Shares Used to Compute
Earnings per Share:
Basic 9,221 8,945
Diluted 10,724 10,426
</TABLE>
The above unaudited pro forma financial information reflects certain
adjustments, including amortization of goodwill, and an increase in the weighted
average shares outstanding. This pro forma information does not necessarily
reflect the results of operations that would have occurred had the acquisition
taken place at the beginning of 1998 and is not necessarily indicative of
results that may be obtained in the future.
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 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 for other general corporate purposes. As of April 23, 1999 $7,000
was borrowed on the term loan and $975 was borrowed on the revolving credit
facility.
12
<PAGE>
PART I:
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 March 27, 1999, the Company's
operations consisted of 102 eye care centers, with three regional optical
laboratories and distribution centers, making the Company one of the seventeen
largest providers in the United States' primary eye care industry based upon
sales. After giving effect of the Kent Optical acquisition of April 23, 1999,
operations consisted of 130 eye care centers. The Company's eye care centers
operate primarily under the brand names Cambridge Eye Doctors, E. B. Brown
Opticians, Eyeglass Emporium, 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 March 27, 1999 the Company operated two laser vision correction
("LVC") centers.
The Company operates three regional optical laboratories and distribution
centers. The regional optical laboratories provide complete laboratory services
to the Company's eye care centers, including polishing, cutting and edging,
tempering, tinting and coating of ophthalmic lenses. The distribution centers
provide and maintain an inventory of all accessories and supplies necessary to
operate the primary eye care centers in their regions, as well as "ready made"
eye care products, including contact lenses and related supplies. The inventory
of eyeglass lenses, frames, contact lenses, accessories and supplies is acquired
through a number of sources, domestic and foreign. Management believes that the
regional optical laboratories and distribution centers have the capacity to
accommodate additional multi-site eye care centers.
Results of Operations
Three Months Ended March 27, 1999 and March 31, 1998
Net Revenue. The Company generated net revenue of approximately $15.1 and $0.7
million during the three months ended March 27, 1999 from the operation of its
102 eye care and two LVC centers, respectively, as compared to net revenue of
approximately $13.2 and $0.4 million from its 84 eye care and three LVC centers,
respectively, for the
13
<PAGE>
three months ended March 31, 1998. The $2.2 million, or 16.2%, increase in total
net revenue primarily relates to the additional eighteen eye care centers
acquired since March, 1998.
Cost of Revenue. Cost of revenue increased from approximately $4.5 and $0.3
million from the operation of the 84 eye care and three LVC centers,
respectively, for the three months ended March 31, 1998 to approximately $4.7
and $0.4 million from the operation of the 102 eye care and two LVC centers,
respectively, for the three months ended March 27, 1999. Total cost of revenue
as a percentage of net revenue decreased from 35.0% for the three months ended
March 31, 1998 to 31.8% for the three months ended March 27, 1999. The
improvement as a percentage of net revenue 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 its customers 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 $10.2 million for the three months
ended March 27, 1999 as compared to approximately $8.9 million for the three
months ended March 31, 1998. The increase primarily relates to payroll and
facility costs incurred in operating the nine additional eye care centers
acquired effective April 1, 1998 and the nine additional eye care centers
acquired effective January 1, 1999. Selling, general and administrative
expenses, as a percentage of net revenue, declined from 65.5% for the three
months ended March 31, 1998 to 64.7% for the three months ended March 27, 1999.
The decrease is primarily a result of (i) the nine eye care centers acquired
effective April 1, 1998 and the nine eye care centers acquired effective January
1, 1999, which operate with a level of selling, general and administrative
expenses as a percentage of net revenue that is lower than that of the Company
and its other subsidiaries, and (ii) the Company's ability to better leverage
its fixed expenses in connection with the acquisition of multi-site eye care
centers.
Other Income and Expense. Interest income totaled $42,000 for the three months
ended March 27, 1999 as compared to $71,000 for the three months ended March 31,
1998. This decrease resulted from the investment of a lower average cash and
cash equivalents balance during the first three months of 1999 as compared to
the same period in 1998. Interest expense totaled $82,000 for the three months
ended March 27, 1999 as compared to $51,000 for the three months ended March 31,
1998. The increase is associated with a higher average balance of debt
outstanding during the first three months of 1999 as compared to the same period
in 1998. The sale of certain ophthalmic equipment during the three months ended
March 31, 1998 generated a one-time gain of approximately $69,000. The non-cash
write off of deferred financing costs for the three months ended March 27, 1999
results from the costs associated with the company's prior credit facility.
Net Income. The Company realized net income of $173,000, or $0.02 per share on a
basic and diluted weighted average basis, for the three months ended March 27,
1999 as compared to net income of $13,000, or $0.00 per share on a basic and
diluted weighted average basis, for the three months ended March 31, 1998.
14
<PAGE>
Liquidity and Capital Resources
At March 27, 1999, the Company had approximately $1.0 million in cash and cash
equivalents and working capital of approximately $2.6 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. The decrease in working
capital is primarily due to the purchase of the nine Shawnee Optical eye care
centers effective January 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 $2,309 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.
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 $5,200 in cash, $1,000 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 operates twenty-eight eye care centers in central and southwest
Michigan. The acquisition was accounted for using the purchase method of
accounting.
As of March 27, 1999, the Company had securities outstanding which provide it
with potential sources of financing as outlined below:
<TABLE>
<CAPTION>
Securities Potential
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>
The Company also has outstanding 891,942 Class I Warrants. The Class I Warrants
entitle the holder to purchase an amount of shares of the Company's common stock
equal to an aggregate of up to 19.9% of the shares of common stock purchasable
under the Company's outstanding warrants and options on the same terms and
conditions of existing warrant and option holders. The purchaser is obligated to
exercise these warrants
15
<PAGE>
at the same time the options and warrants of existing holders are exercised,
subject to certain limitations. The amount of proceeds from the exercise of
these warrants cannot be estimated at this time.
There can be no assurance that the Company will obtain any such 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 next paragraph below, 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 $10,000 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 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 for other general corporate purposes. As of April 23, 1999 $7,000
was borrowed on the term loan and $975 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.
16
<PAGE>
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.
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 four phases in its Year
2000 compliance efforts: discovery, assessment, remediation and applicable
testing and verification.
The Company has substantially completed its assessment of critical internal
systems which include customer service, customer order entry, lab operations,
purchasing and financial situations. The Company has surveyed, by written
questionnaire, its principal vendors, customers and others on whom it relies to
assure that their systems will be Year 2000 compliant, and that they will be
able to continue their business with the Company without interruption. The
Company has received written confirmation of Year 2000 compliance from vendors
and suppliers of its (i) point of sale system, (ii) general ledger software
system, (iii) laser vision correction equipment, (iv) laboratory finishing
equipment, and (v) corporate headquarters telecommunications systems. The
Company identified that some early versions of the software (RX calc) used in
two of its regional optical laboratories is not Year 2000 compliant. However,
Year 2000 compliant upgraded versions of that same software are available and
the Company plans to upgrade this software by the end of the third quarter of
1999.
The Company plans to complete the remediation phase of its critical internal
systems by the end of the second quarter of 1999 and complete the applicable
testing and verification phase by the end of the third quarter of fiscal year
1999, however no assurance can be
17
<PAGE>
given that any or all of the Company's systems are or will be Year 2000
compliant. The Company has drafted a tentative 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. The plan is
expected to be completed during the second quarter of 1999. Contingency plan
testing will be completed by the end of the third quarter of 1999.
The Company estimates costs to become Year 2000 compliant will be approximately
$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 locations. The Company believes that the Shawnee centers, which
currently process transactions manually, will be converted to the new point of
sale system by December 31, 1999. However, the Company has not completed its
assessment of the integration plan timetable for Shawnee.
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.
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.
Qualitative and Quantitative Disclosures About Market Risk
The Company has no significant fixed rate debt obligations or related interest
rate swap and cap agreements.
18
<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(a) Not applicable.
(b) Not applicable.
(c) (1) Securities sold. (i) On January 1, 1999 the Company
issued an aggregate of 70,000 shares (the "Shawnee Shares")
of its Common Stock, par value $.01 per share, and (ii) also
on January 1, 1999 the Company issued an aggregate of 85,222
shares (the "E.B. Brown Shares") of its Common Stock, par
value $.01 per share.
(2) Underwriters and other purchasers. No underwriters were
involved in either of the transactions listed above. (i) The
Company issued 3,043 Shawnee Shares to Robert U. Leonardi,
3,044 Shawnee Shares to Judith R. Servis, and 63,913 Shawnee
Shares to Christopher J. Wolf, O.D. (ii) The Company issued
71,171 E.B. Brown Shares to Stephen A. Schlein and 14,051
E.B. Brown Shares to James Kulway.
(3) Consideration. (i) The Shawnee Shares were issued to Mr.
Leonardi, Ms. Servis, and Dr. Wolf 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 Shawnee Optical, Inc. (ii) The E.B. Brown Shares were
issued to Mr. Schlein and Mr. Kulway in connection with the
acquisition by the Company of assets for its subsidiary E.B.
Brown Opticians, 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.
19
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
No. Title
-----------------------------------------------------------------
10+ 1992 Employee, Director and Consultant
Stock Option Plan, as amended
27 Financial Data Schedule
+ Management contract or compensatory plan, contract or
arrangement
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter covered by
this report.
20
<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: May 11, 1999 By: /S/ WILLIAM T. SULLIVAN
------------ ----------------------------
William T. Sullivan
President and Chief Executive Officer
(principal executive officer)
Date: May 11, 1999 By: /S/ JAMES NORTON
------------ ---------------------
James Norton
Chief Financial Officer
(principal financial officer)
21
<PAGE>
EXHIBIT 10
SIGHT RESOURCE CORPORATION
1992 EMPLOYEE, DIRECTOR AND CONSULTANT STOCK OPTION PLAN
(As Amended February 1999)
1. DEFINITIONS AND PURPOSES.
------------------------
A. Definitions
Unless otherwise specified or unless the context otherwise requires,
the following terms, as used in this Sight Resource Corporation 1992
Employee, Director and Consultant Stock Option Plan, have the following
meanings:
1. Administrator means the Board of Directors, unless it has delegated
-------------
power to act on its behalf to a committee. (See Article 3)
2. Affiliate means a corporation which, for purposes of Section 424 of
---------
the Code, is a parent or subsidiary of the Company, direct or
indirect.
3. Board of Directors means the Board of Directors of the Company.
------------------
4. Code means the United States Internal Revenue Code of 1986, as
----
amended.
5. Committee means the Committee to which the Board of Directors has
---------
delegated power to act under or pursuant to the provisions of the
Plan.
6. Company means Sight Resource Corporation, a Delaware corporation.
-------
7. Disability or Disabled means permanent and total disability as defined
---------- --------
in Section 22(e)(3) of the Code.
8. Fair Market Value of a Share of Common Stock means:
-----------------
(a) If such Shares are then listed on any national securities
exchange, the fair market value shall be the last sale price, if any,
on the largest such exchange on the date of the grant of the Option,
or, if none, on the most recent trade date thirty (30) days or less
prior to the date of the grant of the Option;
(b) If the Shares are not then listed on any such exchange, the fair
market value of such Shares shall be the last sale price, if any, as
reported in the National Association of Securities Dealers Automated
<PAGE>
Quotation System (NASDAQ) for the date of the grant of the Options, or
if none, for the most recent trade date thirty (30) days or less prior
to the date of the grant of the Option;
(c) If the Shares are not then either listed on any such exchange or
quoted in NASDAQ, the fair market value shall be the mean between the
average of the "Bid" and the average of the "Ask" prices, if any, as
reported in the National Daily Quotation Service for the date of the
grant of the option, or, if none, for the most recent trade date
thirty (30) days or less prior to the date of the grant of the Option
for which such quotations are reported; and
(d) If the market value cannot be determined under the preceding
three paragraphs, it shall be determined in good faith by the Board of
Directors.
9. ISO means an option meant to qualify as an incentive stock option
---
under Code Section 422.
10. Key Employee means an employee of the Company or of an Affiliate
------------
(including, without limitation, an employee who is also serving as an
officer or director of the Company or of an Affiliate), designated by
the Administrator to be eligible to be granted one or more Options
under the Plan.
11. Non-Qualified Option means an option which is not intended to qualify
--------------------
as an ISO.
12. Option means an ISO or Non-Qualified Option granted under the Plan.
------
13. Option Agreement means an agreement between the Company and a
----------------
Participant executed and delivered pursuant to the Plan, in such form
as the Administrator shall approve.
14. Participant means a Key Employee, director or consultant to whom one
-----------
or more Options are granted under the Plan.
15. Participant's Survivors means a deceased Participant's legal
-----------------------
representatives and/or any person or persons who acquired the
Participant's rights to an Option by will or by the laws of descent
and distribution.
16. Plan means this Restated Stock Option Plan.
----
-2-
<PAGE>
17. Shares means shares of the common stock, $.01 par value, of the
------
Company ("Common Stock") as to which Options have been or may be
granted under the Plan or any shares of capital stock into which the
Shares are changed or for which they are exchanged within the
provisions of Article 2 of the Plan. The shares issued upon exercise
of Options granted under the Plan may be authorized and unissued
shares or shares held by the Company in its treasury, or both.
B. Purposes of the Plan
The Plan is intended to encourage ownership of Shares by Key Employees,
non-employee directors and certain consultants of the Company in order to
attract such people, to induce them to work for the benefit of the Company or of
an Affiliate and to provide additional incentive for them to promote the success
of the Company or of an Affiliate. The Plan provides for the issuance of ISOs
and Non-Qualified Options.
2. SHARES SUBJECT TO THE PLAN.
--------------------------
The number of Shares subject to this Plan as to which Options may be
granted from time to time shall be 1,850,000, or the equivalent of such number
of Shares after the Administrator, in its sole discretion, has interpreted the
effect of any stock split, stock dividend, combination, recapitalization or
similar transaction effected after such date in accordance with Paragraph 16 of
the Plan.
If an Option ceases to be "outstanding", in whole or in part, the Shares
which were subject to such Option shall be available for the granting of other
Options under the Plan. Any Option shall be treated as "outstanding" until such
Option is exercised in full, or terminates or expires under the provisions of
the Plan, or by agreement of the parties to the pertinent Option Agreement.
-3-
<PAGE>
3. ADMINISTRATION OF THE PLAN.
--------------------------
The Administrator of the Plan will be the Board of Directors, except to the
extent the Board of Directors delegates its authority to a Committee of the
Board of Directors. The Plan is intended to comply with Rule 16b-3 or its
successors, promulgated pursuant to Section 16 of the Securities Exchange Act of
1934, as amended (the "1934 Act") with respect to Participants who are subject
to Section 16 of the 1934 Act, and any provision in this Plan with respect to
such persons contrary to Rule 16b-3 shall be deemed null and void to the extent
permissible by law and deemed appropriate by the Administrator. Subject to the
provisions of the Plan, the Administrator is authorized to:
a. Interpret the provisions of the Plan or of any Option or Option
Agreement and to make all rules and determinations which it deems
necessary or advisable for the administration of the Plan;
b. Determine which employees of the Company or of an Affiliate shall be
designated as Key Employees and which of the Key Employees, directors
and consultants shall be granted Options;
c. Determine the number of Shares for which an Option or Options shall be
granted; and
d. Specify the terms and conditions upon which an Option or Options may
be granted;
provided, however, that all such interpretations, rules, determinations,
terms and conditions shall be made and prescribed in the context of
preserving the tax status under Code Section 422 of those Options which are
designated as ISOs. Subject to the foregoing, the interpretation and
construction by the Administrator of any provisions of the Plan or of any
Option granted under it shall be final, unless otherwise determined by the
Board of Directors, if the Administrator is other than the Board of
Directors.
4. ELIGIBILITY FOR PARTICIPATION.
-----------------------------
The Administrator will, in its sole discretion, name the Participants in
the Plan, provided, however, that each Participant must be a Key Employee,
director or consultant of the Company or of an Affiliate at the time an Option
is granted. Notwithstanding any of the foregoing provisions, the Administrator
may authorize the grant of an Option to a person not then an employee, director
or consultant of the Company or of
-4-
<PAGE>
an Affiliate. The actual grant of such Option, however, shall be conditioned
upon such person becoming eligible to become a Participant at or prior to the
time of the execution of the Option Agreement evidencing such Option. ISOs may
be granted only to Key Employees. Non-Qualified Options may be granted to any
Key Employee, director or consultant of the Company or an Affiliate. Granting of
any Option to any individual shall neither entitle that individual to, nor
disqualify him or her from, participation in any other grant of Options. In no
event shall any Participant be granted, in any consecutive three year period,
options to purchase more than 350,000 shares pursuant to the Plan.
5. TERMS AND CONDITIONS OF OPTIONS.
-------------------------------
Each Option shall be set forth in an Option Agreement, duly executed by the
Company and by the Participant. The Option Agreements, which may be changed in
the Administrator's discretion for any particular Participant (provided that any
change in the Incentive Stock Option Agreement is not inconsistent with Code
Section 422), shall be subject to the following terms and conditions:
Non-Qualified Options: Each Option intended to be a Non- Qualified Option
---------------------
shall be subject to the terms and conditions which the Administrator
determines to be appropriate and in the best interest of the Company,
subject to the following minimum standards for any such Non-Qualified
Option:
a. The Option Agreement shall be in writing in the form approved by the
Administrator, with such modifications to such form as the
Administrator shall approve;
b. Option Price: The option price (per share) of the Shares covered by
each Option shall be determined by the Administrator but shall not be
less than the par value per share of the Shares on the date of the
grant of the Option.
c. Each Option Agreement shall state the number of Shares to which it
pertains; and
d. Each Option Agreement shall state the date on which it first is
exercisable and the date after which it may no longer be exercised.
Except as otherwise determined by the Administrator, each Option
granted hereunder shall become cumulatively exercisable in four (4)
equal annual installments of twenty-five percent (25%) each,
commencing on the first anniversary date of the Option
-5-
<PAGE>
Agreement executed by the Company and the Participant with respect to
such Option, and continuing on each of the next three (3) anniversary
dates.
e. Each Option shall terminate not more than 10 (ten) years from the date
of grant thereof or at such earlier time as the Option Agreement may
provide.
f. Directors' Options: Each director of the Company who is not an
------------------
employee of the Company or any Affiliate, immediately after each
Annual Meeting of Stockholders of the Company, provided that on such
dates such director has been in the continued and uninterrupted
service of the Company as a director for a period of at least one year
prior to the date of such annual meeting and is and was a director and
was and is not an employee of the Company at such times, shall be
granted a Non-Qualified Option to purchase 5,000 Shares. Each such
Option shall (i) have an exercise price equal to the Fair Market Value
(per share) of the Shares on the date of grant of the Option, (ii)
have a term of ten (10) years, and (iii) shall become cumulatively
exercisable in two (2) equal annual installments of fifty percent
(50%) each, upon the first and second anniversary of the date of
grant, provided that on such dates such director has been in the
continued and uninterrupted service of the Company as a director and
not an employee since the date of grant. Any director entitled to
receive an Option grant under this subparagraph (f) may elect to
decline the Option. Notwithstanding the provisions of Paragraph 23
concerning amendment of the Plan, the provisions of this subparagraph
(f) shall not be amended more than once every six months, other than
to comport with changes in the Code, the Employee Retirement Income
Security Act, or the rules thereunder. The provisions of Articles 9,
10, 11 and 12 below shall not apply to Options granted pursuant to
this subparagraph (f).
ISOs: Each Option intended to be an ISO shall be issued only to a Key
----
Employee and be subject to at least the following terms and conditions,
with such additional restrictions or changes as the Administrator
determines are appropriate but not in conflict with Code Section 422 and
relevant regulations and rulings of the Internal Revenue Service:
a. Minimum standards: The ISO shall meet the minimum standards for Non-
Qualified Options, as described above, except clauses (a), (b) and (e)
thereunder.
-6-
<PAGE>
b. Option Agreement: The Option Agreement for an ISO shall be in writing
in substantially the form as approved by the Administrator, with such
changes to such form as the Administrator shall approve, provided any
changes are not inconsistent with Code Section 422.
c. Option Price: Immediately before the Option is granted, if the
Participant owns, directly or by reason of the applicable attribution
rules in Code Section 424(d):
i. Ten percent (10%) or less of the total combined voting power of
-------
all classes of share capital of the Company or an Affiliate,
the Option price per share of the Shares covered by each Option
shall not be less than one hundred percent (100%) of the Fair
Market Value per share of the Shares on the date of the grant
of the Option.
ii. More than ten percent (10%) of the total combined voting power
of all classes of share capital of the Company or an Affiliate,
the Option price per share of the Shares covered by each Option
shall be not less than one hundred ten percent (110%) of the
said Fair Market Value on the date of grant.
d. Term of Option: For Participants who own
i. Ten percent (10%) or less of the total combined voting power of
-------
all classes of share capital of the Company or an Affiliate,
each Option shall terminate not more than ten (10) years from
the date of the grant or at such earlier time as the Option
Agreement may provide;
ii. More than ten percent (10%) of the total combined voting power
of all classes of share capital of the Company or an Affiliate,
each Option shall terminate not more than five (5) years from
the date of the grant or at such earlier time as the Option
Agreement may provide.
e. Limitation on Yearly Exercise: The Option Agreements shall restrict
the amount of Options which may be exercisable in any calendar year
(under this or any other ISO plan of the Company or an Affiliate) so
that the aggregate Fair Market Value (determined at the time each ISO
is granted) of the stock with respect to which ISOs are exercisable
for the first time by the Participant in any calendar year does not
exceed one hundred thousand dollars ($100,000), provided that this
-7-
<PAGE>
subparagraph (e) shall have no force or effect if its inclusion in the
Plan is not necessary for Options issued as ISOs to qualify as ISOs
pursuant to Section 422(d) of the Code.
f. Limitation on Grant of ISOs: No ISOs shall be granted after the
expiration of the earlier of ten (10) years from the date of the
-------
adoption of the Plan by the Company or the approval of the Plan by the
shareholders of the Company.
6. EXERCISE OF OPTION AND ISSUE OF SHARES.
--------------------------------------
An Option (or any part or installment thereof) shall be exercised by giving
written notice to the Company at its principal office address, together with
provision for payment of the full purchase price in accordance with this
paragraph for the shares as to which such Option is being exercised, and upon
compliance with any other condition(s) set forth in the Option Agreement. Such
written notice shall be signed by the person exercising the Option, shall state
the number of Shares with respect to which the Option is being exercised and
shall contain any representation required by the Plan or the Option Agreement.
Payment of the purchase price for the shares as to which such Option is being
exercised shall be made (a) in United States dollars in cash or by check, or (b)
at the discretion of the Administrator, through delivery of shares of Common
Stock having a Fair Market Value equal as of the date of the exercise to the
cash exercise price of the Option, (c) at the discretion of the Administrator,
by delivery of the grantee's personal recourse note bearing interest payable not
less than annually at no less than 100% of the applicable Federal rate, as
defined in Section 1274(d) of the Code, (d) at the discretion of the
Administrator, in accordance with a cashless exercise program established with a
securities brokerage firm, and approved by the Administrator, or (e) at the
discretion of the Administrator, by any combination of (a), (b), (c) and (d)
above. Notwithstanding the foregoing, the Administrator shall accept only such
payment on exercise of an ISO as is permitted by Section 422 of the Code.
The Company shall then reasonably promptly deliver the Shares as to which
such Option was exercised to the Participant (or to the Participant's Survivors,
as the case may be). In determining what constitutes "reasonably promptly," it
is expressly understood that the delivery of the Shares may be delayed by the
Company in order to comply with any law or regulation which requires the Company
to take any action with respect to the Shares prior to their issuance. The
Shares shall, upon delivery, be evidenced by an appropriate certificate or
certificates for paid-up non-assessable Shares.
-8-
<PAGE>
The Administrator shall have the right to accelerate the date of exercise
of any installment of any Option; provided that the Administrator shall not
accelerate the exercise date of any installment of any Option granted to any Key
Employee as an ISO (and not previously converted into a Non-Qualified Option
pursuant to Article 18) if such acceleration would violate the annual vesting
limitation contained in Section 422(d) of the Code, as described in paragraph
5(e).
7. RIGHTS AS A SHAREHOLDER.
-----------------------
No Participant to whom an Option has been granted shall have rights as a
shareholder with respect to any Shares covered by such Option, except after due
exercise of the Option and provision for payment of the full purchase price for
the Shares being purchased pursuant to such exercise.
8. ASSIGNABILITY AND TRANSFERABILITY OF OPTIONS.
--------------------------------------------
By its terms, an Option granted to a Participant shall not be transferable
by the Participant other than by will or by the laws of descent and distribution
or pursuant to a qualified domestic relations order as defined by the Code or
Title I of the Employee Retirement Income Security Act or the rules thereunder,
and shall be exercisable, during the Participant's lifetime, only by such
Participant (or by his or her legal representative). Such Option shall not be
assigned, pledged or hypothecated in any way (whether by operation of law or
otherwise) and shall not be subject to execution, attachment or similar process.
Any attempted transfer, assignment, pledge, hypothecation or other disposition
of any Option or of any rights granted thereunder contrary to the provisions of
this Plan, or the levy of any attachment or similar process upon an Option,
shall be null and void.
9. EFFECT OF TERMINATION OF SERVICE OTHER THAN "FOR CAUSE".
-------------------------------------------------------
Except as otherwise provided in the pertinent Option Agreement, in the
event of a termination of service (whether as an employee or consultant) before
the Participant has exercised all Options, the following rules apply:
a. A Participant who ceases to be an employee or consultant of the
Company or of an Affiliate (for any reason other than termination "for
cause", Disability, or death for which events there are special rules
in Articles 10, 11, and 12, respectively), may exercise
-9-
<PAGE>
any Option granted to him or her to the extent that the right to
purchase Shares has accrued on the date of such termination of
service, but only within such term as the Administrator has designated
in the pertinent Option Agreement.
b. In no event may an Option Agreement provide, if the Option is intended
to be an ISO, that the time for exercise be later than three (3)
months after the Participant's termination of employment.
c. The provisions of this paragraph, and not the provisions of Article 11
or 12, shall apply to a Participant who subsequently becomes disabled
or dies after the termination of employment, or consultancy, provided,
however, in the case of a Participant's death, the Participant's
survivors may exercise the Option within six (6) months after the date
of the Participant's death, but in no event after the date of
expiration of the term of the Option.
d. Notwithstanding anything herein to the contrary, if subsequent to a
Participant's termination of employment or consultancy, but prior to
the exercise of an Option, the Board of Directors determines that,
either prior or subsequent to the Participant's termination, the
Participant engaged in conduct which would constitute "cause", then
such Participant shall forthwith cease to have any right to exercise
any Option.
e. A Participant to whom an Option has been granted under the Plan who is
absent from work with the Company or with an Affiliate because of
temporary disability (any disability other than a permanent and total
Disability as defined in Article 1 hereof), or who is on leave of
absence for any purpose, shall not, during the period of any such
absence, be deemed, by virtue of such absence alone, to have
terminated such Participant's employment or consultancy with the
Company or with an Affiliate, except as the Administrator may
otherwise expressly provide.
f. Options granted under the Plan shall not be affected by any change of
employment or other service within or among the Company and any
Affiliates, so long as the Participant continues to be an employee or
consultant of the Company or any Affiliate, provided, however, if a
Participant's employment by either the Company or an Affiliate should
cease (other than to become an employee of an Affiliate or the
Company), such termination shall affect the Participant's rights under
-10-
<PAGE>
any Option granted to such Participant in accordance with the terms of
the Plan and the pertinent Option Agreement.
10. EFFECT OF TERMINATION OF SERVICE "FOR CAUSE".
--------------------------------------------
Except as otherwise provided in the pertinent Option Agreement, the
following rules apply if the Participant's service (whether as an employee or
consultant) is terminated "for cause" prior to the time that all of his or her
outstanding Options have been exercised:
a. All outstanding and unexercised Options as of the date the Participant
is notified his or her service is terminated "for cause" will
immediately be forfeited, unless the Option Agreement provides
otherwise.
b. For purposes of this Article, "cause" shall include (and is not
limited to) dishonesty with respect to the employer, insubordination,
substantial malfeasance or non-feasance of duty, unauthorized
disclosure of confidential information, and conduct substantially
prejudicial to the business of the Company or any Affiliate. The
determination of the Administrator as to the existence of cause will
be conclusive on the Participant and the Company.
c. "Cause" is not limited to events which have occurred prior to a
Participant's termination of service, nor is it necessary that the
Administrator's finding of "cause" occur prior to termination. If the
Administrator determines, subsequent to a Participant's termination of
service but prior to the exercise of an Option, that either prior or
subsequent to the Participant's termination the Participant engaged in
conduct which would constitute "cause", then the right to exercise any
Option is forfeited.
d. Any definition in an agreement between the Participant and the Company
or an Affiliate, which contains a conflicting definition of "cause"
for termination and which is in effect at the time of such
termination, shall supersede the definition in this Plan with respect
to such Participant.
11. EFFECT OF TERMINATION OF SERVICE FOR DISABILITY.
-----------------------------------------------
Except as otherwise provided in the pertinent Option Agreement, a
Participant who ceases to be an employee of or
-11-
<PAGE>
consultant to the Company or of an Affiliate by reason of Disability may
exercise any Option granted to such Participant:
a. To the extent that the right to purchase Shares has accrued on the
date of his Disability; and
b. In the event rights to exercise the Option accrue periodically, to the
extent of a pro rata portion of such rights based upon the number of
days prior to such Participant's Disability and during the accrual
period which next ends following the date of Disability.
A Disabled Participant may exercise such rights only within a period of not
more than one (1) year after the date that the Participant became Disabled or,
if earlier, within the originally prescribed term of the Option.
The Administrator shall make the determination both of whether Disability
has occurred and the date of its occurrence (unless a procedure for such
determination is set forth in another agreement between the Company and such
Participant, in which case such procedure shall be used for such determination).
If requested, the Participant shall be examined by a physician selected or
approved by the Administrator, the cost of which examination shall be paid for
by the Company.
12. EFFECT OF DEATH WHILE AN EMPLOYEE OR CONSULTANT.
-----------------------------------------------
Except as otherwise provided in the pertinent Option Agreement, in the
event of the death of a Participant to whom an Option has been granted while the
Participant is an employee or consultant of the Company or of an Affiliate, such
Option may be exercised by the Participant's Survivors:
a. To the extent exercisable but not exercised on the date of death; and
b. In the event rights to exercise the Option accrue periodically, to the
extent of a pro rata portion of such rights based upon the number of
days prior to the Participant's death and during the accrual period
which next ends following the date of death;
If the Participant's Survivors wish to exercise the Option, they must take
all necessary steps to exercise the Option within one (1) year after the date of
death of such Participant, notwithstanding that the decedent might have been
able to exercise the Option as to some or all of the Shares on a later date if
he or she had not died and had continued to be an employee or consultant or, if
earlier, within the originally prescribed term of the Option.
-12-
<PAGE>
13. TERMINATION OF DIRECTORS' OPTION RIGHTS.
---------------------------------------
Except as otherwise provided in the pertinent Non-Qualified Option
Agreement, if a director who receives Options pursuant to Article 5,
subparagraph (f):
a. ceases to be a member of the Board of Directors of the Company for any
reason other than death or disability, any then unexercised Options
granted to such Director may be exercised by the director within a
period of ninety (90) days after the date the director ceases to be a
member of the Board of Directors, but only to the extent of the number
of shares with respect to which the Options are exercisable on the
date the director ceases to be a member of the Board of Directors, and
in no event later than the expiration date of the Option; or,
b. ceases to be a member of the Board of Directors of the Company by
reason of his or her death or Disability, any then unexercised Options
granted to such Director may be exercised by the director (or by the
director's personal representative, heir or legatee, in the event of
death) within a period of one hundred eighty (180) days after the date
the director ceases to be a member of the Board of Directors, but only
to the extent of the number of Shares with respect to which the
Options are exercisable on the date the director ceases to be a member
of the Board of Directors, and in no event later than the expiration
date of the Option.
14. PURCHASE FOR INVESTMENT.
-----------------------
Unless the offering and sale of the Shares to be issued upon the particular
exercise of an Option shall have been effectively registered under the
Securities Act of 1933, as now in force or hereafter amended (the "Act"), the
Company shall be under no obligation to issue the Shares covered by such
exercise unless and until the following conditions have been fulfilled:
a. The person(s) who exercise such Option shall warrant to the Company,
prior to receipt of the Shares, that such person(s) are acquiring such
Shares for their own respective accounts, for investment, and not with
a view to, or for sale in connection with, the distribution of any
such Shares, in which event the person(s) acquiring such Shares shall
be bound by the
-13-
<PAGE>
provisions of the following legend which shall be endorsed upon the
certificate(s) evidencing their Shares issued pursuant to such
exercise or such grant:
"The shares represented by this certificate have been taken for
investment and they may not be sold or otherwise transferred by
any person, including a pledgee, in the absence of an effective
registration statement of the shares under the Securities Act of
1933 or an opinion of counsel satisfactory to the Company that an
exemption from registration is then available."
b. The Company shall have received an opinion of its counsel that the
Shares may be issued upon such particular exercise in compliance with
the Act without registration thereunder.
The Company may delay issuance of the Shares until completion of any action
or obtaining of any consent which the Company deems necessary under any
applicable law (including, without limitation, state securities or "blue sky"
laws).
15. DISSOLUTION OR LIQUIDATION OF THE COMPANY.
-----------------------------------------
Upon the dissolution or liquidation of the Company, all Options granted
under this Plan which as of such date shall not have been exercised will
terminate and become null and void; provided, however, that if the rights of a
Participant or a Participant's Survivors have not otherwise terminated and
expired, the Participant or the Participant's Survivors will have the right
immediately prior to such dissolution or liquidation to exercise any Option to
the extent that the right to purchase Shares has accrued under the Plan as of
the date immediately prior to such dissolution or liquidation.
16. ADJUSTMENTS.
-----------
Upon the occurrence of any of the following events, a Participant's rights
with respect to any Option granted to him or her hereunder which have not
previously been exercised in full shall be adjusted as hereinafter provided,
unless otherwise specifically provided in the written agreement between the
optionee and the Company relating to such Option:
A. Stock Dividends and Stock Splits. If the shares of Common Stock shall
--------------------------------
be subdivided or combined into a greater or smaller number of shares or if the
Company shall issue any shares of Common Stock as a stock dividend on its
outstanding Common Stock, the number of shares of Common Stock deliverable upon
the
-14-
<PAGE>
exercise of such Option shall be appropriately increased or decreased
proportionately, and appropriate adjustments shall be made in the purchase price
per share to reflect such subdivision, combination or stock dividend.
B. Consolidations or Mergers. If the Company is to be consolidated with
-------------------------
or acquired by another entity in a merger, sale of all or substantially all of
the Company's assets or otherwise (an "Acquisition"), the Administrator or the
board of directors of any entity assuming the obligations of the Company
hereunder (the "Successor Board"), shall, as to outstanding Options, either (i)
make appropriate provision for the continuation of such Options by substituting
on an equitable basis for the shares then subject to such Options the
consideration payable with respect to the outstanding shares of Common Stock in
connection with the Acquisition or securities of any successor or acquiring
entity; or (ii) upon written notice to the optionees, provide that all Options
must be exercised, to the extent then exercisable, within a specified number of
days of the date of such notice, at the end of which period the Options shall
terminate; or (iii) terminate all Options in exchange for a cash payment equal
to the excess of the fair market value of the shares subject to such Options (to
the extent then exercisable) over the exercise price thereof.
C. Recapitalization or Reorganization. In the event of a recapitalization
----------------------------------
or reorganization of the Company (other than a transaction described in
subparagraph B above) pursuant to which securities of the Company or of another
corporation are issued with respect to the outstanding shares of Common Stock,
an optionee upon exercising an Option shall be entitled to receive for the
purchase price paid upon such exercise the securities he or she would have
received if he or she had exercised such Option prior to such recapitalization
or reorganization.
D. Modification of ISOs. Notwithstanding the foregoing, any adjustments
--------------------
made pursuant to subparagraphs A, B or C with respect to ISOs shall be made only
after the Administrator, after consulting with counsel for the Company,
determines whether such adjustments would constitute a "modification" of such
ISOs (as that term is defined in Section 424(h) of the Code) or would cause any
adverse tax consequences for the holders of such ISOs. If the Administrator
determines that such adjustments made with respect to ISOs would constitute a
modification of such ISOs, it may refrain from making such adjustments, unless
the holder of an ISO specifically requests in writing that such adjustment be
made and such writing indicates that the holder has full knowledge of the
consequences of such "modification" on his or her income tax treatment with
respect to the ISO.
-15-
<PAGE>
17. ISSUANCES OF SECURITIES.
-----------------------
Except as expressly provided herein, no issuance by the Company of shares
of stock of any class, or securities convertible into shares of stock of any
class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares subject to Options. Except as
expressly provided herein, no adjustments shall be made for dividends paid in
cash or in property (including without limitation, securities) of the Company.
18. FRACTIONAL SHARES.
-----------------
No fractional share shall be issued under the Plan and the person
exercising such right shall receive from the Company cash in lieu of such
fractional share equal to the Fair Market Value thereof.
19. CONVERSION OF ISOs INTO NON-QUALIFIED OPTIONS: TERMINATION OF ISOs.
------------------------------------------------------------------
The Administrator, at the written request of any optionee, may in its
discretion take such actions as may be necessary to convert such optionee's ISOs
(or any installments or portions of installments thereof) that have not been
exercised on the date of conversion into Non-Qualified Options at any time prior
to the expiration of such ISOs, regardless of whether the optionee is an
employee of the Company or an Affiliate at the time of such conversion. Such
actions may include, but not be limited to, extending the exercise period or
reducing the exercise price of the appropriate installments of such Options. At
the time of such conversion, the Administrator (with the consent of the
optionee) may impose such conditions on the exercise of the resulting Non-
Qualified Options as the Administrator in its discretion may determine, provided
that such conditions shall not be inconsistent with this Plan. Nothing in the
Plan shall be deemed to give any optionee the right to have such optionee's
ISO's converted into Non-Qualified Options, and no such conversion shall occur
until and unless the Administrator takes appropriate action. The Administrator,
with the consent of the optionee, may also terminate any portion of any ISO that
has not been exercised at the time of such termination.
20. WITHHOLDING.
-----------
Upon the exercise of a Non-Qualified Option for less than its fair market
value, the making of a Disqualifying Disposition (as defined in paragraph 21) or
the vesting of restricted Common Stock acquired on the exercise of an Option
hereunder, the
-16-
<PAGE>
Company may withhold from the optionee's wages, if any, or other remuneration,
or may require the optionee to pay additional federal, state, and local income
tax withholding and employee contributions to employment taxes in respect of the
amount that is considered compensation includible in such person's gross income.
Such amounts may be payable in Common Stock at the discretion of the Committee
(if permitted by law), provided that with respect to persons subject to Section
16 of the 1934 Act, any such withholding arrangement shall be in compliance with
any applicable provisions of Rule 16b-3 promulgated under Section 16 of the 1934
Act. The Administrator in its discretion may condition the exercise of an Option
for less than its fair market value or the vesting of restricted Common Stock
acquired by exercising an Option on the grantee's payment of such additional
income tax withholding and employee contributions to employment taxes.
21. NOTICE TO COMPANY OF DISQUALIFYING DISPOSITION.
----------------------------------------------
Each Key Employee who receives an ISO must agree to notify the Company in
writing immediately after the Key Employee makes a Disqualifying Disposition of
any shares acquired pursuant to the exercise of an ISO. A Disqualifying
Disposition is any disposition (including any sale) of such shares before the
later of (a) two years after the date the Key Employee was granted the ISO, or
(b) one year after the date the Key Employee acquired shares by exercising the
ISO. If the Key Employee has died before such stock is sold, these holding
period requirements do not apply and no Disqualifying Disposition can occur
thereafter.
22. TERMINATION OF THE PLAN.
-----------------------
Except as provided in the following sentence, the Plan will terminate on
November 30, 2002. The Plan may be terminated at an earlier date by vote of the
stockholders of the Company; provided, however, that any such earlier
termination will not affect any Options granted or Option Agreements executed
prior to the effective date of such termination.
23. AMENDMENT OF THE PLAN.
---------------------
The Plan may be amended by the stockholders of the Company. The Plan may
also be amended by the Administrator, including, without limitation, to the
extent necessary to qualify any or all outstanding ISOs granted under the Plan
or ISOs to be granted under the Plan for favorable federal income tax treatment
(including deferral of taxation upon exercise) as may be afforded incentive
stock options under Section 422 of the Code, to the
-17-
<PAGE>
extent necessary to ensure the compliance of the Plan with Rule 16b-3 under the
1934 Act, and to the extent necessary to qualify the shares issuable upon
exercise of any outstanding options granted, or options to be granted, under the
Plan for listing on any national securities exchange or quotation in any
national automated quotation system of securities dealers. Any amendment
approved by the Administrator which is of a scope that requires stockholder
approval in order to ensure favorable federal income tax treatment for any
incentive stock options or requires stockholder approval in order to ensure the
qualification of the Plan under Rule 16b-3 shall be subject to obtaining such
stockholder approval. Any modification or amendment of the Plan shall not,
without the consent of an optionee, adversely affect his or her rights under an
option previously granted to him or her. With the consent of the optionee
affected, the Administrator may amend outstanding option agreements in a manner
not inconsistent with the Plan.
24. EMPLOYMENT OR OTHER RELATIONSHIP.
--------------------------------
Nothing in this Plan or any Option Agreement shall be deemed to prevent the
Company or an Affiliate from terminating the employment, consultancy or director
status of a Participant, nor to prevent a Participant from terminating his or
her own employment, consultancy or director status or to give any Participant a
right to be retained in employment or other service by the Company or any
Affiliate for any period of time.
25. GOVERNING LAW.
-------------
This Agreement shall be construed and enforced in accordance with the law
of the State of Delaware.
-18-
<TABLE> <S> <C>
<PAGE>
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-25-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-27-1999
<CASH> 954
<SECURITIES> 0
<RECEIVABLES> 4,524
<ALLOWANCES> 1,138
<INVENTORY> 5,007
<CURRENT-ASSETS> 9,907
<PP&E> 14,748
<DEPRECIATION> 8,700
<TOTAL-ASSETS> 34,200
<CURRENT-LIABILITIES> 7,340
<BONDS> 0
0
6,535
<COMMON> 91
<OTHER-SE> 19,286
<TOTAL-LIABILITY-AND-EQUITY> 34,200
<SALES> 15,764
<TOTAL-REVENUES> 15,764
<CGS> 5,013
<TOTAL-COSTS> 5,013
<OTHER-EXPENSES> 10,517
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<INTEREST-EXPENSE> 40
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