Back to GetFilings.com
1
DRAFT DATED MAY 16, 2001
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ________________.
COMMISSION FILE NUMBER: 0-23001
SIGNATURE EYEWEAR, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 95-3876317
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
498 NORTH OAK STREET 90302
INGLEWOOD, CALIFORNIA
ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 330-2700
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON
WHICH REGISTERED
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes No.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulations S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
On June 12, 2001, the Registrant had 5,083,989 outstanding shares of
Common Stock, $.001 par value. The aggregate market value of the 2,532,868
shares of Common Stock held by non-affiliates of the Registrant as of June 12,
2001 was $1,899,651.
2
PART I
The discussions in this Form 10-K contain forward-looking statements that
involve risks and uncertainties. Important factors that could cause actual
results to differ materially from the Company's expectations are set forth in
"Factors That May Affect Future Results" in Item 7, as well as elsewhere in this
Form 10-K. All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by "Factors That May Affect Future Results." Those
forward-looking statements relate to, among other things, the Company's plans
and strategies, new product lines, relationships with licensors, distributors
and customers, and the business environment in which the Company operates.
ITEM 1--BUSINESS
GENERAL
Signature Eyewear, Inc. and its subsidiaries ("Signature" or the "Company")
design, market and distribute prescription eyeglass frames and sunglasses,
primarily under exclusive licenses for Laura Ashley Eyewear, Eddie Bauer
Eyewear, Hart Schaffner & Marx Eyewear, Nicole Miller Eyewear and bebe eyes, as
well as its proprietary brands, including Dakota Smith, Camelot and the
Signature line. The Company attributes its success to its brand-name development
process, high quality, creative frame designs and its innovative sales programs.
The Company's brand-name development process includes identifying a market
niche, obtaining the rights to a carefully selected brand name, producing a
comprehensive marketing plan, developing unique in-store displays and creating
innovative sales and merchandising programs for independent optical retailers
and retail chains.
The Company's best-selling product lines are Laura Ashley Eyewear and Eddie
Bauer Eyewear. Frames in the Laura Ashley Eyewear line are feminine and classic,
and are positioned in the medium to mid-high price range. The Eddie Bauer
Eyewear collection offers men's and women's styles, and is positioned in the
medium-price segment of the brand-name prescription eyewear market. Net sales of
Laura Ashley Eyewear and Eddie Bauer Eyewear together accounted for 77%, 75% and
60% of the Company's net sales in fiscal 1998, fiscal 1999 and fiscal 2000,
respectively.
To promote sales, Signature produces "turnkey" marketing, merchandising and
sales promotion programs, and provides innovative loyalty programs benefiting
the Company and its participating retailers. Under the loyalty programs, each
participating retailer agrees to purchase a specified quantity of frames of new
styles released during the program period, although the participant may cancel
at any time. These "automatic" sales programs have facilitated the widespread
placement of new styles in optical retail stores. The Company estimates that
over 15% of the independent optical retailers in the United States participated
in one or more of the Company's Loyalty Programs in fiscal 2000.
The Company distributes its products (1) to independent optical retailers
in the United States, primarily through its national direct sales force and
independent sales representatives, (2) internationally, primarily through
exclusive distributors in foreign countries and a direct sales force in Western
Europe; (3) through its own account managers to major optical retail chains,
including EyeCare Centers of America, Cole Vision Corp. and its subsidiary
Pearle Vision, LensCrafters and U.S. Vision; (4) through selected distributors
in the United States; and (5) through telemarketing.
INDUSTRY OVERVIEW (1)
The Optical Market. After several years of steady growth in the 1990s,
optical retail sales in the United States have slowed in the last three years.
Retail sales of all eyewear products - including contact lenses, sunglasses,
clip-ons, lenses, lens treatments, and prescription frames - totaled $16.5
billion in 2000, an increase of 3% over $16.0 billion in 1999, and 5% over $15.7
billion in 1998.
Correspondingly, the frame segment of the optical market has slowed, as
well: frames sales in 2000 reached $5.5 billion in 2000, up 3% from $5.3 billion
in 1999. Average retail prices for frames rose slightly in 2000
2
3
to $84.00 from $83.59 in 1999, while average sunwear prices rose to $82.47 from
$80.42 in 1999. Despite this increase in average retail frame prices, the frame
category's share of the optical sales remained flat at 33.3%
Despite slowing growth, the number of potential eyewear customers remains
large. Approximately 164 million out of a total United States population of 272
million required some type of vision correction in 1999. Out of these 164
million people, 86 million people purchased eyewear in 1999 - about 31.7% of the
total population.
Additionally, more than 93% of people over the age of 45 need corrective
eyewear, many due to presbyopia, a condition which makes it difficult to focus
on nearby objects such as small newspaper print. The table below demonstrates
how the number of people needing vision correction increases with age.
AGE BREAKDOWN OF U.S. POPULATION NEEDING VISION CORRECTION
AGE GROUP OF
PURCHASERS AS
1999 % OF TOTAL % OF AGE GROUP
POPULATION PURCHASERS OF NEEDING VISION
AGE (IN MILLIONS) VISION CORRECTION CORRECTION
- ---------------- ---------------- ----------------- ---------------
0-14 58.8 5.7% 16.5%
15-24 37.5 9.3 41.2
25-44 82.5 32.2 62.7
45-64 59.1 33.4 93.4
65 and up 34.5 19.4 93.5
-------- ------
Total 272.4 100.0%
======== ======
(1) Unless otherwise noted, all the data in this Industry Overview section
relates to the eyewear market in the United States. The source for this
data is the 2000 U.S. Optical Industry Handbook published by Jobson
Publishing Corporation in March, 2000.
The average age of the United States population is expected to increase
over the next 25 years, due to the aging of the "baby-boomers" born between 1946
and 1964. As more of the baby-boomers exceed age 45, the Company believes more
people will have vision impairment, and sales of corrective eyewear should
increase.
Perhaps the key factor contributing to growth in the frame and sunglass
market is recognizing the increasing sophistication of the consumer. Until the
mid-1970s, eyeglass frames were viewed as medical implements, which were
"dispensed" but never "sold." Because styling was not emphasized, successful
frames often remained popular for years, and sometimes for decades. In the
mid-1970s, experts from other industries introduced designer names and consumer
advertising to the optical industry, as well as sweeping design changes. These
changes resulted in increased consumer demand for the new products. Today,
eyewear is a true fashion accessory that wearers expect to coordinate with and
enhance their wardrobes and lifestyles. It is the only medical device with such
style status. The Company believes that recognizing this sophistication and
style status is key to competing successfully in the frame market.
Alternative Vision Correction Methods. Currently, there are two methods of
correcting vision impairment which compete with prescription eyeglasses: contact
lenses and surgery. Although retail sales of contact lenses remained flat from
1995 ($1.9 billion) through 2000 ($2.0 billion), their sales as a percentage of
total retail sales decreased from 13.5% in 1995 to 12.3% in 2000. The Company
believes that sales of contact lenses do not currently materially threaten
eyeglass frame sales because many people who wear contact lenses need a pair of
eyeglasses for night time and for the days when they decide not to wear their
contact lenses.
A number of surgical techniques have been developed to correct vision
problems such as myopia (nearsightedness), hyperopia (farsightedness) and
astigmatism. Vision correction surgery by laser has recently become increasingly
popular, with nearly 1 million procedures performed in the U.S. in 1999, and an
estimated 1.5 million in 2000. While the Company does not believe that these
techniques will materially and adversely affect sales of prescription eyewear in
the near future, it cannot predict the long-term competitive impact of these
techniques. The Company believes that a number of people who have had successful
eye surgery may still need
3
4
some form of corrective eyeglasses, and others may need eyeglasses at a later
date due to the onset of presbyopia. See "Management's Discussion and Analysis
of Results of Operations and Financial Condition--Factors That May Affect Future
Results--Availability of Vision Correction Alternatives."
Optical Retail Outlets. Optical retailers consist of optometrists,
opticians and ophthalmologists. There are three main types of optical retailers:
(1) independents, with one or two stores, (2) optical chains, including national
optical retailers such as LensCrafters, Cole Vision Corp. and its subsidiary
Pearle Vision, and EyeCare Centers of America; and (3) optical departments
within major mass merchandisers, including Wal-Mart and Costco. In 2000,
independent optical retailers had a 59.8% market share, national optical chain
retailers had a 33% market share, and mass merchandisers had a 5% market share.
The remaining 2.2% market share went to managed care organizations such as
Kaiser Permanente.
2001 STRATEGY
In fiscal 2000, the Company suffered a material operating loss, causing a
significant deterioration in its financial condition. In addition, during the
latter part of the year and thereafter, the Company has had a lack of liquidity.
The Company will employ a "turnaround" strategy in 2001 designed to return it to
profitability and to increase working capital. This strategy will encompass the
following activities:
Refinance Credit Facility. The Company will attempt to refinance its
existing credit facility. It is currently operating under a forbearance
agreement with its commercial bank which expires August 31, 2001. See
"Management's Discussion Analysis of Financial Condition and Results of
Operations - Financial Condition, Liquidity and Capital Resources." The Company
has received a written proposal from a new lender to refinance the credit
facility with a two-year revolving line of credit for up to $13.5 million. The
line of credit would be secured by the assets of the Company with availability
tied to eligible accounts receivable and inventory. Closing of the line of
credit is subject to satisfy to completion of due diligence and other
conditions. No assurance can be given that the Company will obtain this or any
other facility to refinance its existing bank credit facility.
Negotiate Discounts and Payment Plans with Vendors. The Company will
attempt to negotiate discounts and/or extended payment plans and improved terms
with its vendors and other obligees. In the first quarter of fiscal 2001, the
Company negotiated over $400,000 of discounts of outstanding accounts payable
and entered in extended payment programs with more than 20 vendors.
Increase Gross Profit. To increase its gross profit, the Company has
increased prices of most of its frames, will attempt to negotiate lower prices
and will use lower cost manufacturers to the extent the Company believes such
manufacturers can meet the Company's quality requirements.
Reduce Inventory and Increase Inventory Turnover Rates. The Company will
attempt to reduce its inventory to improve its cash position and will attempt to
improve inventory turnover by better matching frame purchases with customer
orders. The Company also intends to maintain a lower on-hand number of days of
selected frames, cases and point-of-purchase materials. The reduction of
inventory may adversely affect the Company's gross profit margin if it sells
inventory at lower prices.
Staff Reductions. The Company has decreased the number of full-time
employees from a high of 288 in fiscal 2000 to 204 at February 28, 2001 and has
also decreased its use of temporary employees.
Improve Performance of Direct Sales Force. The Company will attempt to
improve the performance of its direct sales force by reducing the sales
representatives' guaranteed draws and commission structure. The Company has also
terminated a number of less productive sales representatives since the end of
the fiscal year.
Reduce Selling Expenses. The Company will reduce its selling expenses by
reducing trade and consumer advertising programs, promotional expenses and trade
show participation. The Company will spend the amounts necessary to comply with
any promotional expenditure requirements under its brand licenses.
Reduce Overhead Expenses. The Company will attempt to reduce overhead by
subleasing excess space and eliminating sales support offices. The Company
subleased approximately 42,000 square feet of space from December 2000 through
March 2001.
4
5
Improve Accounts Receivable Collections. The Company will attempt to
shorten the time period for collecting accounts receivable by tightening its
credit policy, reducing credit terms to retailers and reducing the number of
retailer programs with extended credit terms.
Reduce Number of Brand Name Lines. In order to concentrate its resources,
the Company will have fewer brand name lines in 2001 due to the termination of
the Coach Eyewear line in December 2000.
No assurance can be given the Company will be able to successfully
implement any or all of the components of its turnaround strategy, that it will
return to profitability or will be able to refinance its credit facility.
BRAND DEVELOPMENT
The Company attributes its success to its brand-name development process,
its frame designs, and its innovative sales techniques, he Company's brand-name
development process includes identifying a market niche, obtaining the rights to
a carefully selected brand name, producing a comprehensive marketing plan,
designing frames consistent with each brand image, developing unique in-store
displays, and creating innovative sales and merchandising programs for
independent optical retailers and retail chains.
Identifying a Market Niche and Obtaining the Rights to a Brand Name.
Signature's brand-name development process begins with identifying an eyewear
market niche. The Company characterizes a market niche by referring to the
target customer's gender and age (e.g., adult, child, teenage), the niche's
general image and styling (e.g., feminine, masculine, casual), its price range,
and the applicable channels of distribution. Once the Company chooses a market
niche, a brand name is identified which the Company believes will appeal to the
target customer in that niche. The Company believes that for a brand name to
have the potential for widespread sales in the optical industry, the name must
have strong, positive consumer awareness, a distinctive personality and an image
of enduring quality. Brands that are aimed at narrower niches can also have
optical industry impact (albeit smaller), so long as consumer awareness exists
within the targeted niche. The Company's existing license agreements contain
terms limiting the ability of the Company to market competing brand names. See
Item 7--"Management's Discussion and Analysis of Results of Operation and
Financial Conditions--Factors That May Affect Future Results-Limitations on
Ability to Distribute Other Brand-Name Eyeglass Frames."
After the Company has determined that a targeted brand name is available,
the Company develops (1) an in-depth understanding of the potential licensor's
market position, (2) innovative strategies for extending the brand's image to
the eyewear market, (3) preliminary plans for merchandising, advertising and
sales promotion, and (4) broad concepts for frame design. Once the Company has
acquired an exclusive eyewear license for a brand name, it develops detailed
concepts for frame designs, establishes the brand's identity within the optical
industry, and sets forth the first year's merchandising, advertising and sales
promotion plans.
Frame Design. The Company's frame styles are developed by its in-house
design team, which works in close collaboration with many respected frame
manufacturers throughout the world to develop unique designs and technologies.
Initially, each of the Company's frame designers works individually with a
factory to develop new design concepts. Once the factory develops a prototype,
the designer presents the style to the Company's frame committee for approval.
Once approved, Signature then contracts with the factory partner to manufacture
the style. By these methods, Signature is able to choose the strengths of a
variety of factories worldwide, and to avoid reliance on any one factory. To
assure quality, Signature's designers continue to work closely with the factory
at each stage of a style's manufacturing process.
The Company's metal frames generally require over 200 production steps to
manufacture, including hand soldering of bridges, fronts and endpieces. Many of
the Company's metal frames take advantage of modem technical advances, such as
thinner spring hinges (which flex outward and spring back) and lighter metal
alloys, both of which permit the manufacture of frames which are thinner and
lighter while retaining strength. The Company also takes advantage of technical
advances in plastic frames, such as laminated plastics that are layered in
opposing or complementary colors, and extra-strong plastics that can be cut
super thin.
5
6
Quality Control. The Company uses only manufacturers it believes capable of
meeting its criteria for quality, delivery and attention to design detail.
Signature specifies the materials to be used in the frames, and approves
drawings and prototypes before committing to production. The Company places its
initial orders for each style at least six months before the style is released,
and requires the factory to deliver several advance shipments of samples. The
Company's quality committee examines all sample shipments. This process provides
sufficient time to resolve problems with a style's quality before its release
date. The Company's quality committee selectively examines frames in subsequent
shipments to ensure ongoing quality standards. If, at any stage of the quality
control process, frames do not meet the Company's quality standards, then the
Company returns them to the factory with instructions to improve the specific
quality problems. If the quality does not meet the Company's standards before a
style's release date, the Company returns all frames in a style to the factory,
and the style is not released.
Marketing, Merchandising and Sales Programs. Signature produces "turnkey"
marketing, merchandising and sales promotion programs to help optical retailers,
as well as the Company's sales representatives, promote sales. For optical
retailers, the Company develops unique in-store displays, such as its Laura
Ashley Eyewear "store within a store" environments. For the sales
representatives who call on retail accounts, the Company creates presentation
materials, marketing bulletins, motivational audio and video tapes and other
sales tools to facilitate professional presentations.
Loyalty Programs. The Company attributes a significant portion of its
success with independent optical retailers in the United States to its loyalty
programs. The Company's loyalty programs benefit the Company through the
automatic sales and the reorders they generate, and benefit participating
optical retailers through early access to new styles, program-ending gifts and
from special in-store merchandising. Each domestic loyalty partner agrees to
automatically purchase or display between 30 and 200 Company frames depending on
the partner's desired participation level. There is no minimum term, and a
partner may terminate participation at any time. At October 31, 2000, the
Company's loyalty programs had approximately 4,000 domestic and approximately
500 international partners. The Company estimates that over 15% of the
independent optical retailers in the United States participated in one or more
of the Company's 2000 loyalty programs.
PRODUCTS
The Company's principal products during fiscal 2000 were eyeglass frames
sold under the brand names Laura Ashley Eyewear, Eddie Bauer Eyewear, Hart
Schaffner & Marx Eyewear, Nicole Miller Eyewear, bebe eyes, Coach Eyewear,
Dakota Smith Eyewear, Camelot and Signature.
The following table provides certain information about the market segments,
introduction dates and approximate retail prices of the Company`s products.
APPROXIMATE RETAIL
BRAND NAME/SEGMENT CUSTOMER GENDER/AGE INTRODUCTION DATE PRICES(1)
------------------ ------------------- ----------------- ------------------
Licensed Brands
bebe eyes.......................... Women May 2000
Prescription.................... $90-$125
Sunwear......................... $60-$ 75
COACH Eyewear (2).................. Unisex April 2000
Prescription.................... $170-$215
Sunwear......................... $120-$180
Eddie Bauer........................ Men/Women
Prescription.................... 1998 $100- 135
Performance Sunwear with Oakley's
patented Lenses................. Spring 2000 $ 90-140
Hart Schaffner & Marx.............. Men 1996 $125-170
6
7
APPROXIMATE RETAIL
BRAND NAME/SEGMENT CUSTOMER GENDER/AGE INTRODUCTION DATE PRICES(1)
------------------ ------------------- ----------------- ------------------
Laura Ashley
Prescription.................... Women 1992 $125 - 180
Sunwear......................... Women 1993 $ 90 - 100
Petites......................... Girls/Women 1993 $ 80- 125
Nicole Miller (3).................. Women
Prescription.................... 1993 $90-$138
Sunwear......................... 1993 $75-$95
House Brands
Camelot............................ Men/Women 1986 $70-$130
Unisex 1987 $70-$130
Boys/Girls 1987 $60-$90
Dakota Smith (3)
Prescription.................... Unisex 1992 $90-$125
Sunwear......................... Unisex 1992 $80-$100
Signature Collection
Brand X......................... Unisex 2000 $85-$95
Bravado......................... Men 1999 $80-$90
Intuition....................... Women 1999 $80-$90
Lifescape....................... Women 1999 $60-$70
Open Road....................... Unisex 2000 $80-$90
Search.......................... Unisex 1999 $80-$140
Small Print..................... Men/Women 2000 $80-$90
(1) Retail prices are established by retailers, not the Company.
(2) The Company's license with Coach Eyewear terminated in December 2000.
(3) Obtained by the Company in June 1999 in connection with its acquisition of
California Design Studio, Inc.
Laura Ashley Eyewear
The Company's first major eyewear line, and still its largest, is Laura
Ashley Eyewear, which was introduced in 1992. With net sales of $16.0 million in
fiscal 2000, The Laura Ashley Eyewear Collection remains one of the leading
women's brand-name collections in the United States.
Like Laura Ashley clothing and home furnishings, Laura Ashley Eyewear has
been designed to be feminine and classic, and fashionable without being trendy.
The hallmark of Laura Ashley Eyewear is its attention to detail, and the
collection is known for its unique designs on the styles' temples, fronts and
end pieces. The collection's new strategy will be to extend its product
selection to reach a broader audience within the feminine eyewear niche. This is
accomplished by segmenting the collection into four distinct product areas. The
"Laura Ashley Traditional Collection" is the truest interpretation of the Laura
Ashley brand. The "City Collection" is more fashion-forward, aimed at a slightly
younger women's market. The "Laura Ashley Petite Collection" come in smaller
sizes, and is aimed to reach women and girls with smaller faces, regardless of
age. Finally, the "Laura Ashley Sunwear Collection" offers sunwear styles with
distinctive Laura Ashley feminine detailing.
Signature's in-house merchandising team has conceptualized and designed
unique in-store "environments" to attract the target customer to the frames.
These "environments" are modular, so that a small display is an integral
7
8
part of a larger one, and they can be customized for large customers. Most Laura
Ashley Eyewear environments are covered with colorful Laura Ashley textured
floral-print fabric, providing the retailer with, in effect, a Laura Ashley
"store within a store."
The Company has the exclusive right to market and sell Laura Ashley Eyewear
through a license with Laura Ashley entered into in May 1991. The license covers
a specified territory including the United States, Canada, the United Kingdom,
Australia, New Zealand, Colombia, France, Belgium, Germany, Japan and the
Netherlands. The Company also has a right of first refusal to distribute Laura
Ashley Eyewear in Mexico and all other European countries. The Laura Ashley
license is automatically renewed annually so long as the Company is not in
breach of the license agreement and generates the required amount of minimum net
sales. Laura Ashley may terminate the license before its term expires under
certain circumstances, including if a material breach of the license agreement
by the Company or if the management or control of the Company passes from
Bernard Weiss and Julie Heldman to other parties whom Laura Ashley may
reasonably regard as unsuitable.
Eddie Bauer Eyewear
The Eddie Bauer Eyewear collection includes men's and women's prescription
eyewear styles that are designed to capture the Eddie Bauer casual lifestyle,
offering versatility and comfort with unsurpassed quality. Eddie Bauer Eyewear's
frame designs will evolve to meet the personality of today's Eddie Bauer
customer, with frames that are appropriate for life's everyday experiences - not
just casual weekends. The style assortment remains broad in its appeal by
expressing many facets of the Eddie Bauer lifestyle. It is the intent to design
product for every Eddie Bauer customer. Several newer Eddie Bauer Eyewear styles
have been produced using high-density plastics as well as titanium, a
lightweight, extremely strong and long-lasting metal.
Along with its marketing, merchandising and sales promotion programs, the
Company has designed point-of-sale graphic displays that are also inspired by
Eddie Bauer's casual lifestyle image and use the same models shown in Eddie
Bauer catalogs to bring the Eddie Bauer image into retail optical stores. In
keeping with Eddie Bauer's commitment to value, the collection consists of
medium priced frames. Although there are now several competitor eyewear brands
competing in this niche - including Hush Puppies, Nautica, Timberland, Woolrich,
Ocean Pacific, and Sperry - Eddie Bauer Eyewear is considered to be one of the
leading eyewear collections in the casual niche.
The Company has the exclusive worldwide right to market and sell Eddie
Bauer Eyewear through a license agreement with Eddie Bauer entered into in June
1997. Without the prior written consent of Eddie Bauer, however, the Company may
market and sell Eddie Bauer Eyewear only in the United States and in the other
countries specified in the license agreement, most notably Japan, the United
Kingdom, Germany, France, Australia and New Zealand. The license agreement
terminates in December 2002, but the Company may renew it for two three-year
terms, provided the Company meets certain minimum net sales and royalty
requirements and is not in material default. Eddie Bauer may terminate the
license before the expiration of its term under certain circumstances, including
if (1) a person or entity acquires more than 30% of the Company's outstanding
voting securities, and thereby becomes the largest shareholder and owns more
shares than Bernard L. Weiss, Julie Heldman, Robert Fried, Robert Zeichick,
Michael Prince and Daniel Warren (all of whom are current or former directors
and/or officers of the Company), or (2) the Company commits a material breach of
the license agreement.
Hart Schaffner & Marx Eyewear
The Hart Schaffner & Marx Eyewear is the distinctively masculine collection
targeted at men who are interested in quality, comfort and craftsmanship. Hart
Schaffner & Marx, a subsidiary of Hartmarx Corporation and a leading
manufacturer of tailored clothing, has an image of enduring quality, and is a
recognized name among men who purchase apparel in the medium to high price
range. Because men are generally concerned about both function and fashion, the
frames contain features that enhance their durability - the highest quality
screws, nosepads and spring hinges - and come with a warranty. The collection is
designed to fit a broad spectrum of men, and selected styles have longer temples
and larger sizes than those generally available.
The Company has the exclusive right to market and sell Hart Schaffner &
Marx Eyewear in the United States through a license with Hart Schaffner & Marx
entered into in January 1996. The license agreement gives the
8
9
Company the right of first refusal to sell Hart Schaffner & Marx in any
additional countries. The Hart Schaffner & Marx license was renewed in April
1999, and maybe renewed for three-year terms by the Company in perpetuity
provided the Company is not in default under the license agreement. Hart
Schaffner & Marx may terminate its license with the Company before the
expiration of its term if (1) someone other than Bernard Weiss, Julie Heldman,
Robert Fried or Robert Zeichick acquires more than 50% of the Company's
outstanding voting securities, or (2) the Company fails to perform its material
obligations under the license agreement.
Nicole Miller Eyewear
In June 1999, in connection with its acquisition of California Design
Studio, Inc., the Company acquired the exclusive license to design and market
Nicole Miller Eyewear, a collection of women's and men's prescription eyewear
frames and sunwear. California Design Studio had held the Nicole Miller Eyewear
license since 1993.
Nicole Miller Eyewear is targeted at the sophisticated, style-conscious
modern woman who creates her own fashion trends in a fun, whimsical way. Nicole
Miller clothing designs feature colorful designs with interesting shapes,
without being pretentious or extreme. The Nicole Miller Eyewear collection also
features colorful designs with interesting shapes that represent a balanced
blend of youthful energy and sophistication. Most styles of Nicole Miller
Eyewear prescription eyewear frames are available either as prescription eyewear
or as sunwear, and many are available with lenses in designer colors.
The license for Nicole Miller Eyewear expires in March 2003. The licensor
may terminate the license before its stated term expires if the Company
materially breaches the license agreement.
bebe eyes
Like the bebe clothing, the "bebe eyes" collection features hip,
flirtatious styling for the discriminating bebe customer. bebe eyes also offers
sunwear, which is designed for women who take pride in their appearance, while
seeking quality and contemporary fashion at a competitive price.
The Company has the exclusive right to market and sell bebe eyes in the
United States, Canada and a number of other countries pursuant to a license
agreement the Company entered into in September 1999 with bebe stores, inc. The
license expires in March 2003. The Company may renew the license for two
consecutive three-year terms provided it meets certain minimum net sales and
royalty requirements during the preceding term. bebe may terminate the license
before its stated term expires under certain circumstances, including if the
Company materially breaches the license agreement or if, without the prior
approval of bebe, 50% or more or the outstanding common stock of the Company is
acquired by either: (A) a women's apparel company or (B) another person and the
financial and operational condition of the Company is impaired or such other
person makes or proposes to make material changes in the key management
personnel in charge of the license.
House Brands
The cost to retailers of frames in Signature's own lines is generally less
than frames with brand names, because the latter command greater retail prices,
and there are no licensing fees payable on the Company's own lines. Moreover,
the styling of Signature's own lines can be more flexible, because the Company
will be able to change the styling--as well as its merchandising--more rapidly
without the often time-consuming requirement of submitting them to the licensor
for its approval.
Dakota Smith Eyewear. Signature obtained its proprietary Dakota Smith brand
in 1999 in connection with its acquisition of California Design Studio Inc.,
which had introduced the line in 1992. Dakota Smith Eyewear targets men and
women with spirited designs capturing the diversity and mystique of the American
lifestyle.
Camelot Collection. The Company first introduced its own styles for
manufacture overseas in 1986. Those styles became the Camelot collection, which
contains a broad range of high-quality men's, women's, unisex, girls' and boys'
styles. To date, the Company has sold the Camelot collection primarily through
USA Optical, a division of Signature.
9
10
Signature Collections. The Company established its own line, Signature
Collections, in fiscal 1999. The line comprises multiple segments, each
targeting niches not otherwise filled by the Company's brand-name collections.
The Company's goals related to that line are: to position Signature to compete
more effectively against other optical companies that have direct sales forces;
to enable the Company to offer products in segments not served by the Company's
licensed collections; and to allow the Company to develop products more quickly;
and to reach different markets by offering good quality, low-cost styles.
DISTRIBUTION
The Company distributes its products (1) to independent optical retailers
in the United States, primarily through its national direct sales force, (2)
internationally, primarily through exclusive distributors in foreign countries
and through a direct sales force in Western Europe; (3) to major optical retail
chains, including EyeCare Centers of America, Cole Vision Corp. and its
subsidiary, LensCrafters and U.S. Vision, through its own account managers; (4)
through selected distributors in the United States; and (5) through
telemarketing.
The following table sets forth the Company's net sales by distribution
channel for the periods indicated:
YEAR ENDED OCTOBER 31,
---------------------------------------------------------------
1998 1999 2000
---------------- --------------- ----------------
(IN THOUSANDS)
Domestic distributors ........... $ 17,504 $ 12,281 $ 916
Optical retail chains ........... 11,252 15,709 17,041
Telemarketing(1) ................ 5,592 4,863 5,098
International ................... 3,473 3,822 6,634
Direct sales(2) ................. 3,071 7,389 25,243
---------------- --------------- ----------------
$ 40,892 $ 44,064 $ 51,932
================ =============== ================
(1) In fiscal 1998 and 1999, included net sales by Optical Surplus, a division
which sold brand name close-outs. Optical Surplus was discontinued in
fiscal 2000; and therefore net sales of Company close-outs in 2000 are
included by distribution channel.
(2) The Company began selling directly to independent optical retailers
nationally in October 1999.
Direct Sales. Before October 1, 1999, the Company sold to independent
optical retailers through its own direct sales force only in California and
Arizona. In 1999, the Company determined to change its primary method of
distributing its products to independent optical retailers in the United States
from distributors to a national direct sales force, including company and
independent sales representatives. As a result, the Company terminated
substantially all of its domestic distributors as of October 1, 1999 and added
sales representatives commencing the fourth quarter of fiscal 1999. The direct
sales force, including independent sales representatives, numbered 84 at October
31, 2000.
The Company did not increase the size of its direct sales force to the
level it originally had believed desirable due to, among other things, the
inability to attract qualified sales representatives. The Company has seen a
significant reduction in the size of its direct sales force to 55 at February
28, 2001 due to attrition and to the Company's decision to terminate
underperforming sales representatives.
Optical Retail Chains. Signature sells directly to optical retail chains,
including EyeCare Centers of America, Cole Vision Corp. and its subsidiary
Pearle Vision, LensCrafters and U.S. Vision. EyeCare Centers of America and
Pearle Vision each use in-store displays customized by the Company to feature
its products, and have dedicated prime floor space to Laura Ashley Eyewear,
Eddie Bauer Eyewear and other Company-brand eyewear.
International. The Company sells certain of its products internationally
through exclusive distributors and since June 1999 in Western Europe through a
direct sales force including Company and independent sales representatives. The
Company maintains a sales office and warehouse facility in Liege, Belgium. The
Company's international distributors have exclusive agreements for defined
territories. The Company sells to European optical retail chains through its
Belgium office. At February 28, 2001, the Company had 27 international
distributors and
10
11
15 international sales representatives. Historically, the large majority of
Signature's international sales through distributors have been of Laura Ashley
Eyewear sold in England, Canada, Australia and New Zealand.
Domestic Distributors. In connection with its decision in 1999 to
distribute its products to independent optical retailers in the United States
through a direct sales force, the Company terminated all but two of its domestic
distributors in the fourth quarter of fiscal 1999. The Company will continue to
distribute its products through selected distributors in the United States in
areas in which it believes it can achieve better penetration than through direct
sales.
Telemarketing. The Company's USA Optical division sells frames through a
form of telemarketing to optical retailers, focusing on establishing long-term,
ongoing relationships. USA Optical offers its customers premium incentives, such
as first class vacations, electronic equipment and household items for
purchasing specified numbers of frames. Many USA Optical customers buy frames
from the Company on a regular basis in order to earn the premiums and trip
incentives.
CONTRACT MANUFACTURING
The Company's frames are manufactured to its specifications by a number of
contract manufacturers located outside the United States. The manufacture of
high quality metal frames is a labor-intensive process which can require over
200 production steps (including a large number of quality-control procedures)
and from 90 to 180 days of production time. In fiscal 2000, Signature used
manufacturers principally in Hong Kong/China, Japan and Italy. The Company
believes that throughout the world there are a sufficient number of
manufacturers of high-quality frames so that the loss of any particular frame
manufacturer, or the inability to import frames from a particular country, would
not materially and adversely affect the Company's business in the long-term.
However, because lead times to manufacture the Company's eyeglass frames
generally range from 90 to 180 days, an interruption occurring at one
manufacturing site that requires the Company to change to a different
manufacturer could cause significant delays in the distribution of the styles
affected. This could cause the Company not to meet delivery schedules for these
styles, which could materially and adversely affect the Company's business,
operating results and financial condition.
In determining which manufacturer to use for a particular style, the
Company considers manufacturers' expertise (based on type of material and style
of frame), their ability to translate design concepts into prototypes, their
price per frame, their manufacturing capacity, their ability to deliver on
schedule, and their ability to adhere to the Company's quality control and
quality assurance requirements.
The Company is not required generally to pay for any of its frames prior to
shipment. Payment terms for the Company's products currently range from cash
upon shipment to terms ranging between 60 and 90 days on open account. For
frames imported other than from Hong Kong manufacturers, the Company is
obligated to pay in the currency of the country in which the manufacturer is
located. In the case of frames purchased from manufacturers located in Hong
Kong/China, the currency is United States dollars. For almost all of the
Company's other frame purchases, its costs vary based on currency fluctuations,
and it generally cannot recover increased frame costs (in United States dollars)
in the selling price of the frames.
The purchase of goods manufactured in foreign countries is subject to a
number of risks. See "Management's Discussion and Analysis of Result of
Operations and Financial Condition--Factors That May Affect Future Results--
Dependence Upon Contract Manufacturers; Foreign Trade Regulation."
COMPETITION
The markets for prescription eyewear are intensely competitive. There are
thousands of frame styles, including hundreds with brand names. At retail, the
Company's eyewear styles compete with styles that do and do not have brand
names, styles in the same price range, and styles with similar design concepts.
To obtain board space at an optical retailer, the Company competes against many
companies, both foreign and domestic, including Luxottica Group S.p.A.; Safilo
Group S.p.A.; and Marchon Eyewear, Inc., as well as Signature's former
distributors. Signature's largest competitors have significantly greater
financial, technical, sales, manufacturing and other
11
12
resources than the Company. They also employ direct sales forces that have
existed for longer, and are significantly larger than the Company's. At the
major retail chains, the Company competes not only against other eyewear
suppliers, but also against the chains themselves, which license some of their
own brand names for design, manufacture and sale in their own stores. Luxottica,
one of the largest eyewear companies in the world, is vertically integrated, in
that it manufactures frames, distributes them through direct sales forces in the
United States and throughout the world, and owns LensCrafters, one of the
largest United States retail optical chains.
The Company competes in its target markets through the quality of the brand
names it licenses, its marketing and merchandising, the popularity of its frame
designs, the reputation of its styles for quality, and its pricing policies.
BACKLOG
The Company generally ships eyeglass frames upon receipt of orders, and
does not operate with a material backlog.
EMPLOYEES
At October 31, 2000, the Company had 239 full-time employees, including 97
in sales and marketing, 31 in customer service and support, 46 in warehouse
operations and shipping and 65 in general administration and finance. As part of
its turnaround strategy, the Company has reduced its number of full-time
employees to 204 at February 28, 2001. None of the Company's employees are
covered by a collective bargaining agreement. The Company considers its
relationship with its employees to be good.
ITEM 2--DESCRIPTION OF PROPERTIES
The Company leases approximately 109,000 square feet of a building located
in Inglewood, California, where it maintains its principal offices and
warehouse. The Company's lease for this facility expires in 2005, although the
Company has an option to renew the lease for an additional five years.
The Company's international division also leases approximately 2,500 square
feet warehouse and office space in Liege, Belgium, which supports the Company's
sales in Europe.
ITEM 3--LEGAL PROCEEDINGS
The Company is involved in a number of legal proceedings related
principally to its failure to pay certain accounts payable and other
obligations, some of which are in dispute or with respect to which the Company
believes it has counterclaims. While the full stated amounts of these
obligations are reflected as liabilities on the balance sheet of the Company,
the Company will incur costs of defense and may be required to pay other damages
such as interest.
These lawsuits include a lawsuit filed by Coach, Inc in February 2001 for
approximately $900,000 primarily for advertising costs Coach alleges are owed by
the Company (the non-payment of which was the basis of Coach's termination of
the eyewear license). While the Company determined not to contest the
termination of the license due to, among other things, the lack of market
acceptance of the Coach Eyewear line, the Company has responded to Coach's
lawsuit by denying Coach's claims on the basis that such claims were not valid
and its non-payment was excused by Coach's material breach of the license
agreement. In addition, the Company counterclaimed against Coach for damages
based upon such material breaches. The Company is unable to predict the outcome
of this litigation.
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
None.
12
13
PART II
ITEM 5--MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK
The Company's Common Stock was traded on the Nasdaq SmallCap Market under
the symbol "SEYE" during the periods set forth below. The Company's Common Stock
was delisted from trading on the Nasdaq Stock Market effective March 15, 2001.
The following table sets forth, for the period indicated, certain high and low
closing prices for the Common Stock.
HIGH LOW
------------- -------------
FISCAL YEAR ENDED OCTOBER 31, 1999
First Quarter ............................... $ 5.69 $ 3.38
Second Quarter............................... $ 4.72 $ 2.75
Third Quarter................................ $ 4.41 $ 2.88
Fourth Quarter............................... $ 4.19 $ 3.13
FISCAL YEAR ENDED OCTOBER 31, 2000
First Quarter ............................... $ 3.50 $ 2.50
Second Quarter .............................. $ 2.88 $ 1.50
Third Quarter................................ $ 2.00 $ 0.66
Fourth Quarter .............................. $ 2.56 $ 0.59
On June 12, 2001, the last sales price of the Common Stock as reported in
the OTC Bulletin Board was $0.75 per share. As of April 20, 2001, there were 34
holders of record of the Common Stock.
DIVIDENDS
The Company does not currently intend to pay cash dividends on its Common
Stock. Historically, the Company followed a policy of retaining earnings to
finance the growth of its business. The Company paid no dividends in fiscal
2000.
ITEM 6--SELECTED FINANCIAL DATA
The following data should be read in conjunction with the Consolidated
Financial Statements and related notes and with "Management's Discussion and
Analysis of Results of Operations and Financial Condition" appearing elsewhere
in this Form 10-K.
YEAR ENDED OCTOBER 31,
-----------------------------------------------------------------------
1996 1997 1998 1999 2000
------------- ------------- ----------- ------------- -------------
STATEMENT OF INCOME DATA:
Net sales ................................ $ 28,280 $ 33,176 $ 40,892 $ 44,056 $ 51,932
Gross profit ............................. 16,249 19,333 23,247 25,316 30,507
Total operating expenses ................. 13,927 15,323 19,041 27,461 39,709
Income (Loss) from operations ............ 2,322 4,010 4,206 (2,145) (9,202)
Net income (Loss) ........................ 2,012 3,585 2,750 (1,309) (9,439)
Net income (Loss) per share .............. 0.52 (0.26) (1.87)
Pro forma net income (1) ................. 1,265 2,340
Pro forma net income per share ........... 0.36(1) 0.61(1)
Weighted average common shares outstanding 3,546,519(2) 3,829,822 5,254,156 5,095,259 5,058,915
13
14
1996 1997 1998 1999 2000
------------- ------------- ----------- ------------- -------------
BALANCE SHEET DATA:
Current assets ........................... $ 8,989 $ 19,964 $ 23,548 $ 27,474 $ 33,006
Total assets ............................. 10,293 21,175 25,151 35,474 41,435
Current liabilities ...................... 7,207 3,860 5,498 12,334 28,142
Total liabilities ........................ 7,364 3,863 5,736 17,471 32,948
Stockholders' equity ..................... 2,929 17,312 19,415 18,003 8,487
(1) The Company was an S corporation until September 1997. The pro forma
presentation reflects a provision for income taxes as if the Company had
always been a C corporation.
(2) Pro forma.
ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis, which should be read in connection
with the Company's Consolidated Financial Statements and accompanying footnotes,
contain forward-looking statements that involve risks and uncertainties.
Important factors that could cause actual results to differ materially from the
Company's expectations are set forth in "Factors That May Affect Future Results"
in this Item 7 of this Form 10-K, as well as those discussed elsewhere in this
Form 10-K. All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by "Factors That May Affect Future Results." Those
forward-looking statements relate to, among other things, the Company's plans
and strategies, new product lines, and relationships with licensors,
distributors and customers, distribution strategies and the business environment
in which the Company operates.
The following discussion and analysis should be read in connection with the
Company's Consolidated Financial Statements and related notes and other
financial information included elsewhere in this Form 10-K.
OVERVIEW
The Company derives revenues primarily through the sale of eyeglass frames
under licensed brand names, including Laura Ashley Eyewear, Eddie Bauer Eyewear,
Hart Schaffner & Marx Eyewear, bebe eyes and Nicole Miller Eyewear, and under
its proprietary brands Dakota Smith Eyewear, Camelot and Signature.
The Company's best-selling product lines are Laura Ashley Eyewear and Eddie
Bauer Eyewear. Its most successful line is Laura Ashley Eyewear, which was
launched in 1992. Net sales of Laura Ashley Eyewear and Eddie Bauer Eyewear
together accounted for 77%, 75% and 60% of the Company's net sales in fiscal
1998, fiscal 1999 and fiscal 2000, respectively. Although the Company expects
the Laura Ashley Eyewear and Eddie Bauer lines to continue to be the Company's
leading sources of revenue for the near future, the Company expects that
increasing sales of its other licensed brands and its own proprietary brands
will reduce the percentage of total sales represented by sales of Laura Ashley
Eyewear and Eddie Bauer Eyewear in the future.
The Company's cost of sales consists primarily of payments to foreign
contract manufacturers that produce frames and cases to the Company's
specifications. The complete development cycle for a new frame design typically
takes approximately twelve months from the initial design concept to the
release. Generally, at least six months are required to complete the initial
manufacturing process.
In June 1999, the Company acquired substantially all of the assets of
California Design Studio, Inc., a designer and marketer of prescription eyeglass
frames and ready-to-wear sunglasses (the "CDS Acquisition"). Total consideration
for the assets was approximately $7.4 million, which consists of: (1) $1.4
million in cash; (2) a promissory note in the principal amount of $1.25 million
payable in monthly installments of $17,042 maturing in 2002; (3) other deferred
payments of approximately $500,000; and (4) the assumption of approximately $4.7
million of liabilities, including primarily an obligation of $4.1 million
discounted to present value to California Design Studio's principal eyeglass
frame manufacturer, which is payable in monthly installments over a three year
period. The assets acquired primarily consisted of a license to sell flames
under the Nicole Miller brand name, proprietary brand names Dakota Smith, Koko
and Nukes, inventory, machinery, furniture, equipment and accounts receivable.
14
15
California Design Studio's consolidated revenues for its fiscal year ended April
30, 1999 were $8.6 million, and its total assets at April 30, 1999 were
approximately $4.6 million. The acquisition was accounted for as a purchase.
Following many years of profitability, the Company incurred quarterly
operating losses in each of the five fiscal quarters ended October 31, 2000. The
principal reason for these losses was the change, announced in August 1999 and
effected in October 1999, by the Company in its method of distributing its
products to independent optical retailers in the United States from distributors
to a direct sales force. The Company made this conversion to stimulate sales
growth by enabling the Company to work more closely with sales representatives
who are dedicated to selling only the Company's products, and to require its
sales representatives to implement the Company's marketing plans. The Company
had anticipated that its increased gross profit, due to the higher sales prices
of its products, would more than offset increased selling expenses resulting
from the costs of its direct sales force.
The conversion did not result in the anticipated sales growth. The Company
had targeted to have a direct sales force numbering approximately 130 by the end
of fiscal 2000. However, the direct sales force did not exceed 88 during the
fiscal year and numbered 84 at fiscal year-end.
The Company incurred significant expenditures in connection with the
conversion, including the employment of additional sales executives, sales
representatives, customer service and distribution personnel and other support
personnel, and the acquisition of computer hardware and software, telephone and
warehouse distribution infrastructure. Delays and problems in the computer
software conversion resulted in greater than anticipated costs as well as
inefficiencies and delays in processing orders and returns, adversely affecting
customer relations and service and requiring the hiring of additional personnel.
In addition, following the announcement in August 1999 of the conversion,
distributors significantly reduced their selling efforts and returned inventory
and many actively sought inventory returns from their optical retailer
customers. Distributors inventory returns increased from $2.8 million in fiscal
1998 to $6.8 million in fiscal 1999, and the Company's gross sales (sales before
returns) to domestic distributors decreased from $20.3 million in fiscal 1998 to
$19.1 million in fiscal 1999. The Company has also experienced a significantly
higher return rate from independent optical retailers than it did historically
from distributors.
The Company's results of operations were also adversely affected in fiscal
2000 by the delay (of 2 to 5 months) in the launches of Coach Eyewear, bebe eyes
and Eddie Bauer Performance Sunwear. This adversely affected revenues for these
lines during the year (and the Company missed the primary purchasing market for
sunglasses for its Eddie Bauer Performance Sunwear). However, these launch
delays did not delay the launch costs for those products for advertising,
promotion and point-of-purchase displays, which were particularly high for Coach
Eyewear.
The Company has undertaken a turnaround strategy which will encompass the
following activities:
Refinance Credit Facility. The Company will attempt to refinance its
existing credit facility. It is currently operating under a forbearance
agreement with its commercial bank which expires August 31, 2001. See "Financial
Condition, Capital Resources and Liquidity."
Negotiate Discounts and Payment Plans with Vendors. The Company will
attempt to negotiate discounts and/or extended payment plans and improved terms
with its vendors and other obligees. In the first quarter of fiscal 2001, the
Company negotiated over $400,000 of discounts of outstanding accounts payable
and entered in extended payment programs with more than 20 vendors.
Increase Gross Profit. To increase its gross profit, the Company has
increased prices of most of its frames, will attempt to negotiate lower prices
and will use lower cost manufacturers to the extent the Company believes such
manufacturers can meet the Company's quality requirements.
Reduce Inventory and Increase Inventory Turnover Rates. The Company will
attempt to reduce its inventory to improve its cash position and will attempt to
improve inventory turnover by better matching frame purchases with customer
orders. The Company also intends to maintain a lower on-hand number of days of
selected
15
16
frames, cases and point-of-purchase materials. The reduction of inventory may
adversely affect the Company's gross profit margin if it sells inventory at
lower prices.
Staff Reductions. The Company has decreased the number of full-time
employees from a high of 288 in fiscal 2000 to 204 at February 28, 2001 and has
also decreased its use of temporary employees.
Improve Performance of Direct Sales Force. The Company will attempt to
improve the performance of its direct sales force by reducing the sales
representatives' guaranteed draws and commission structure. The Company has also
terminated a number of less productive sales representatives since the end of
the fiscal year.
Reduce Selling Expenses. The Company will reduce its selling expenses by
reducing trade and consumer advertising programs, promotional expenses and trade
show participation. The Company will spend the amounts necessary to comply with
any promotional expenditure requirements under its brand licenses.
Reduce Overhead Expenses. The Company will attempt to reduce overhead by
subleasing excess space and eliminating sales support offices. The Company
subleased approximately 42,000 square feet of space from December 2000 through
March 2001.
Improve Accounts Receivable Collections. The Company will attempt to
shorten the time period for collecting accounts receivable by tightening its
credit policy, reducing credit terms to retailers and reducing the number of
retailer programs with extended credit terms.
Reduce Number of Brand Name Lines. In order to concentrate its resources,
the Company will have fewer brand name lines in 2001 due to the termination of
the Coach Eyewear line in December 2000.
No assurance can be given the Company will be able to successfully
implement any or all of the components of its turnaround strategy, that it will
return to profitability or will be able to refinance its credit facility
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated selected
statements of operations data shown as a percentage of net sales.
YEAR ENDED OCTOBER 31,
-------------------------------------------------------
1998 1999 2000
--------------- -------------- --------------
Net sales.............................. 100.0% 100.0% 100.0%
Cost of sales ......................... 43.1 42.5 41.3
--------------- -------------- --------------
Gross profit........................... 56.9 57.5 58.7
--------------- -------------- --------------
Operating expenses:
Selling............................ 29.4 31.3 41.6
General and administrative ........ 17.2 25.0 34.8
Restructuring Cost ................ 0.0 6.0 0.0
--------------- -------------- --------------
Total operating expenses ....... 46.6 62.3 76.4
--------------- -------------- --------------
Income (Loss) from operations ......... 10.3 (4.8) (17.7)
--------------- -------------- --------------
Other income (expense), net ........... 0.9 0.1 (1.9)
--------------- -------------- --------------
Income (Loss) before income taxes ..... 11.2 (4.7) (19.6)
Provision (Benefit) for income taxes .. 4.5 (1.8) (1.5)
--------------- -------------- --------------
Net income (Loss)...................... 6.7% (2.9)% (18.1)%
=============== ============== ==============
Comparison of Fiscal Years 1998, 1999 and 2000
Net Sales. Net sales increased by 7.8% from $40.9 million in fiscal 1998 to
$44.1 million in fiscal 1999 and by 18% to $51.9 million in fiscal 2000. The
following table shows certain information regarding net sales for the periods
indicated:
16
17
YEAR END OCTOBER 31
-------------------------------------------------------
1998 1999 2000
-------------- -------------- --------------
(IN THOUSANDS)
Laura Ashley Eyewear .................... $ 22,902 $ 19,013 $ 16,079
Eddie Bauer Eyewear ..................... 8,532 14,100 15,136
Other ................................... 9,458 10,943 20,717
-------------- -------------- --------------
$ 40,892 $ 44,056 $ 51,932
============== ============== ==============
Net sales in fiscal 1999 were adversely affected by the Company's
termination of 22 of its domestic distributors announced at the beginning of the
fourth quarter of fiscal 1998, which resulted in materially decreased selling
efforts by the distributors during the period the Company was starting up its
direct sales force. The decrease in Laura Ashley Eyewear net sales from fiscal
1998 to fiscal 1999 was due principally to a reduction in the net number of
units sold and to distributor frame returns (aggregating $2.3 million). The
increase in net sales of Eddie Bauer Eyewear in fiscal 1999 was due to in large
part to the fact that the line was launched in March 1998, and thus was sold for
only eight months in fiscal 1998, and to increasing consumer acceptance of the
line, offset in part by distributor frame returns. The increase in other net
sales from fiscal 1998 to fiscal 1999 was due in part to the addition of the
Dakota Smith Eyewear and Nicole Miller Eyewear lines resulting from the CDS
Acquisition in June 1999.
Net sales in fiscal 2000 were 18% greater than fiscal 1999 due to the
increase in sales of Nicole Miller Eyewear and Dakota Smith Eyewear and sales
from Coach Eyewear and bebe eyewear which were launched during the fiscal year.
Net sales of Laura Ashley continued to decline in units sold in part due to the
higher than anticipated return rate in fiscal 2000, notwithstanding the increase
in price from direct sales as opposed to sales to distributors. A portion of the
returns in fiscal 2000 were attributable to the disruption in the retail market
place from the conversion from sales through distributors to direct sales. Net
sales of Eddie Bauer increased approximately 7% due to the impact of higher
prices in a direct sales distribution mode, which offset a decrease in unit
sales and the launch of Eddie Bauer Performance Sunwear.
Gross Profit and Gross Margin. Gross profit was $23.2 million in fiscal
1998, $25.3 million in fiscal 1999 and $30.5 in fiscal 2000. The increase in
gross profit from fiscal 1998 to fiscal 1999 was attributable to the increase in
net sales. The increase in gross profit from fiscal 1999 to fiscal 2000 was
attributable to the increase in net sales resulting from the higher prices from
direct sales as opposed to distributor sales. The increase in gross margin in
fiscal 2000 was due to an increase in direct sales as a percentage of total net
sales. Gross margins in all three fiscal years were aided by continuing
reductions in import duties and tariffs, a shift towards lower cost
manufacturers and realization of higher prices on close out frames.
Selling Expenses. Selling expenses were $12.0 million in fiscal 1998, $13.8
million in fiscal 1999 and $21.6 million in fiscal 2000. The 15% increase from
fiscal 1998 to fiscal 1999 resulted primarily from an increase of $1.7 million
in compensation expense relating to additional sales representatives and
full-time warehouse personnel hired during fiscal 1999 in connection with the
CDS Acquisition and the Company's decision to sell to independent optical
retailers in the United States through a national direct sales force The 58%
increase from fiscal 1999 to fiscal 2000 resulted primarily from increases of
$4.6 million in commissions and salaries for sales representatives, $1.4 million
in royalty expense, $1.1 million in promotional expenses relating principally to
the introduction of Coach Eyewear and $1.0 million of freight expenses.
General and administrative expenses. General and administrative expenses
were $7.0 million in fiscal 1998, $11.0 in fiscal 1999 and $18.1 in fiscal 2000.
The 56% increase from fiscal 1998 to fiscal 1999 resulted in large part from
increases of $1.1 million in compensation expense and related employee benefits
for middle management and other administrative personnel hired during fiscal
1999 in connection with the transition from distributor sales to direct sales,
and $0.5 million in computer systems and warehouse upgrades. The 67% increase
from fiscal 1999 to fiscal 2000 resulted in large part from increases of: (a)
$3.1 million in compensation expense and related employee benefits for middle
management and other administrative personnel hired during fiscal 1999 and $1.3
million for temporary employees hired in fiscal 2000 in connection with the
transition from distributor sales to direct sales and the Company's expanding
product lines; (b) $1.0 million in computer systems and warehouse upgrades; (c)
$0.4 million of legal, accounting and other professional fees; and (d) $0.4
million of depreciation and
17
18
amortization expense resulting primarily from the CDS Acquisition, which
amortized a full year in fiscal 2000 as opposed to four months in fiscal 1999.
Restructuring Costs. The Company recognized $2.6 million in nonrecurring
restructuring costs in fiscal 1999 relating primarily to the gross profit
previously recognized on sales of $4.4 million of products returned by the
Company's United States distributors following their termination in the fourth
quarter of 1999.
Other Income (Expense), Net. Other income, net, in fiscal 1998 was
$403,000, due primarily to interest income resulting from the Company investing
a portion of the proceeds from its initial public offering in fiscal 1997. Other
income, net, of $53,000 in fiscal 1999 reflected principally declining interest
income offset by interest expense as the Company utilized the proceeds of its
public offering and incurred bank debt. Other expense, net in fiscal 2000 of
$1,009,000 consisted primarily of $1,131,000 of interest expense as the Company
increased its bank borrowings to fund operations.
Provision (Benefit) for Income Taxes. The Company had income taxes of $1.9
million in fiscal 1998, and had income tax benefits of $783,000 in fiscal 1999
and $772,000 in fiscal 2000. As of October 31, 2000 the Company had a federal
net operating loss carryforward of approximately $4,000,000 through 2020.
Net Income (Loss). The Company had net income in fiscal 1998 of $2,750,000,
a net loss in fiscal 1999 of $1,309,000, and a net loss of $9,439,000 in fiscal
2000.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company's accounts receivable increased from $6.6 million at October
31, 1999 to $8.7 million at October 31, 2000 due to an 18% increase in net sales
and the Company's shift to direct sales to optical retailers from distributor
sales, as optical retailers historically have paid more slowly than
distributors.
The Company's inventories increased from $16.6 million at October 31, 1999
to $18.8 million at October 31, 2000. This increase was due principally to a
larger number of frame brands marketed by the Company in fiscal 2000,
lower-than-anticipated net sales and distributor returns resulting from the
conversion from distributor to direct sales to optical retailers in the United
States. The Company is attempting to reduce its inventory to improve its cash
position and is attempting to improve inventory turnover by better matching
frame purchases with customer orders.
The Company had goodwill of $5.5 million at October 31, 2000 resulting
primarily from the CDS Acquisition in 1999. See Note 2 of Notes to Consolidated
Financial Statements.
In June 2000, the Company restructured its credit facility from its
commercial bank into an accounts receivable and inventory revolving credit line
and a term loan which are secured by substantially all of the assets of the
Company. Under the credit line, the Company may obtain advances up to an amount
equal to 60% of eligible accounts receivable and 35% of eligible inventories, up
to a maximum of $5,000,000, which advances bear interest at the bank's prime
rate or 2.5% in excess of the London Interbank Offered Rate ("LIBOR"), at the
Company's option. The term loan was in the amount of $3,500,000, is payable in
monthly installments of $72,917 plus interest at the rate of 8.52% per annum.
The credit facility matured on September 30, 2000.
The Company has defaulted under its bank credit facility for various events
of default including non-payment at maturity as well other non-compliance with
various covenants and conditions. The Company entered into a forbearance
agreement in December 2000, amended in February, May and June 2001, with its
bank. Under the forbearance agreement, as amended, the bank has agreed to
refrain from exercising any rights under the loan agreement for defaults
existing at the time of default until the earliest of August 31, 2001, the
closing of a recapitalization or sale of the Company which in each case results
in the full repayment of the bank loan (a "Transaction") or a default under the
forbearance agreement or default under the loan agreement other than an existing
default. Among other things, under the forbearance agreement, the Company must
provide the bank draft documentation for a Transaction by August 15, 2001 and
definitive documentation for a Transaction by August 31, 2001. The failure to
comply with the forbearance agreement could result in the bank exercising some
or all of its remedies
18
19
under the loan agreement, including foreclosing on the assets of the Company.
The Company is actively attempting to refinance the credit facility.
The Company has received a written proposal from a new lender to refinance
the credit facility with a two-year revolving line of credit for up to $13.5
million. The line of credit would be secured by the assets of the Company with
availability tied to eligible accounts receivable and inventory. Closing of the
line of credit is subject to satisfy to completion of due diligence and other
conditions. No assurance can be given that the Company will obtain this or any
other facility to refinance its existing bank credit facility.
Long-term debt at October 31, 2000 included: (1) a $1.1 million note
payable to California Design Studio, Inc. in connection with the CDS
Acquisition; (2) an obligation to a frame vendor of California Design Studio,
Inc. (present value of $3.3 million) assumed in connection with the CDS
Acquisition; and (3) an obligation to a consultant with a present value
$667,000. See Note 6 of Notes to Consolidated Financial Statements.
Of the Company's accounts payable at October 31, 1999 and October 31, 2000,
$1.5 million and $3.2 million, respectively, were payable in foreign currency.
To monitor risks associated with currency fluctuations, the Company on a weekly
basis assesses the volatility of certain foreign currencies and reviews the
amounts and expected payment dates of its purchase orders and accounts payable
in those currencies. Based on those factors, the Company may from time to time
mitigate some portion of that risk by purchasing forward commitments to deliver
foreign currency to the Company. The Company held forward commitments for
foreign currencies in the amount of $491,000 at October 31, 2000. See Note 1 of
Notes to Consolidated Financial Statements.
The Company's bad debt write-offs were less than 0.2% of net sales for the
1998, 1999 and 2000 fiscal years. As part of the Company's management of its
working capital, the Company performs most customer credit functions internally,
including extensions of credit and collections.
In fiscal 2000 the Company repurchased on the open market 27,100 shares of
its Common Stock at a cost of $78,000 under a stock buyback program initiated in
September 1998. In fiscal 2000 the Company terminated its stock buyback program.
Since the fourth quarter of fiscal 2000 and the Company has experienced a
lack of liquidity. Under its forbearance agreement, it cannot increase its
borrowings from its commercial bank and must refinance the credit facility.
Assuming the Company can refinance the credit facility, reduce its inventory
levels, maintain current sales levels and generally implement the other parts of
its turnaround strategy, the Company believes it will have adequate liquidity
for the next twelve months. However, because of the uncertainties in being able
to successfully implementing the turnaround strategy, the Company may also
attempt to secure debt or equity financing in addition to refinancing its bank
credit facility. Such financing could involve the sale of control of the
Company.
QUARTERLY AND SEASONAL FLUCTUATIONS
The Company's results of operations have fluctuated from quarter to quarter
and the Company expects these fluctuations to continue in the future.
Historically, the Company's net sales in its first fiscal quarter (the quarter
ending January 31) have been lower than net sales in other fiscal quarters. The
Company attributes lower net sales in the first fiscal quarter in part to low
consumer demand for prescription eyeglasses during the holiday season and
year-end inventory adjustments by distributors and independent optical
retailers. In addition, sales were lower in the fourth quarter of fiscal 1999
due principally to distributor returns. A factor which may significantly
influence results of operations in a particular quarter is the introduction of a
new brand-name collection, which results in disproportionate levels of selling
expenses due to additional advertising, promotions, catalogs and in-store
displays. Introduction of a new brand may also generate a temporary increase in
sales due to initial stocking by retailers.
Other factors which can influence the Company's results of operations
include customer demand, the mix of distribution channels through which the
eyeglass frames are sold, the mix of eyeglass frames sold, product returns,
delays in shipment and general economic conditions.
The following table sets forth certain unaudited results of operations for
the twelve fiscal quarters ended October 31, 2000. The unaudited information has
been prepared on the same basis as the audited financial statements appearing
elsewhere in this Form 10-K and includes all normal recurring adjustments which
management considers necessary for a fair presentation of the financial data
shown. The operating results for any quarter are not necessarily indicative of
future period results.
19
20
1998 1999 2000
--------------------------------------------------------------------------------------------------
JAN APRIL JULY OCT. JAN. APRIL 30 JULY OCT. JAN. APRIL JULY OCT.
31. 30 30 31 31. 30 31 31. 30 30 31
------ ------- ------- ------- ------ ------- ------- ------ ------- ------- ------- -------
Net sales.......... $6,722 $12,173 $10,704 $11,292 $9,036 $12,426 $13,228 $9,374 $12,003 $12,390 $17,442 $10,097
Cost of sales...... 2,900 5,196 4,552 4,996 4,216 5,300 5,787 3,444 4,807 5,058 7,076 4,281
Gross profit ...... 3,822 6,977 6,152 6,296 4,820 7,126 7,441 5,930 7,196 7,332 10,366 5,818
Operating
expenses:
Selling ......... 1,771 3,491 3,270 3,477 2,885 3,646 3,461 3,895 3,587 6,066 6,858 5,171
General and
administrative.. 1,511 1,773 1,866 1,884 1,915 2,292 3,020 3,722 3,845 4,708 5,014 4,554
Restructuring
cost............ 0 0 0 0 0 0 0 2,634 0 0 0 0
Total operating
expenses ........ 3,282 5,264 5,136 5,361 4,800 5,938 6,481 10,251 7,432 10,774 11,872 9.725
Income (loss)
from
operations ...... 540 1,713 1,016 935 20 1,188 960 (4,321) (236) (3,442) (1,506) (3,907)
Other expense,
net ............. 114 103 70 116 42 31 18 (31) (184) (265) (320) (136)
Income (loss)
before pro
forma
provision for
income taxes..... 654 1,816 1,086 1,051 62 1,219 978 (4,352) (420) (3,707) (1,826) (4,043)
INFLATION
The Company does not believe its business and operations have been
materially affected by inflation.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The following is a discussion of certain factors that may affect the
Company's financial condition and results of operations.
Need to Refinance Bank Credit Facility
The Company's bank credit facility matured on September 30, 2000. The
Company has defaulted under its bank credit facility by reason of various events
of default, including non-payment at maturity and breach of other covenants .
The Company entered into a forbearance agreement with its bank regarding the
defaults. Under the forbearance agreement, as amended, the bank has agreed to
refrain from exercising any rights under the loan agreement for defaults
existing at the time of default until the earliest of August 31, 2001, the
closing of a recapitalization or sale of the Company which in each case results
in the full repayment of the bank loan (a "Transaction") or a default under the
forbearance agreement or default under the loan agreement other than an existing
default. Among other things, under the forbearance agreement, the Company must
provide the bank draft documentation for a Transaction by August 15, 2001 and
definitive documentation for a Transaction by August 31, 2001. The Company has
received a written proposal from a new lender to refinance the credit facility
with a two-year revolving line of credit for up to $13.5 million. The line of
credit would be secured by the assets of the Company with availability tied to
eligible accounts receivable and inventory. Closing of the line of credit is
subject to satisfy to completion of due diligence and other conditions. No
assurance can be given that the Company will obtain this or any other facility
to refinance its existing bank credit facility. The failure to comply with the
forbearance agreement could result in the bank exercising some or all of its
remedies under the loan agreement, including foreclosing on the assets of the
Company.
Liquidity Requirements
Since the fourth quarter of fiscal 2000 and the Company has experienced a
lack of liquidity. Under the forbearance agreement with its commercial bank, it
cannot increase its borrowings from the bank and must refinance the credit
facility. Assuming the Company can refinance the credit facility, reduce its
inventory levels, maintain current sales levels and generally implement the
other parts of its turnaround strategy, the Company believes it will have
adequate liquidity for the next twelve months. However, because of the
uncertainties in being able to successfully implementing the turnaround
strategy, the Company may also attempt to secure debt or equity financing in
addition to refinancing its bank credit facility. Such financing could involve
the sale of control of the Company.
Need to Generate Increased Revenues
The Company's conversion in October 1999 from selling to independent
optical retailers in the United States through a direct national sales force
instead of distributors was not successful. The Company believed that it
20
21
needed to expand its direct sales force to approximately 130 sales
representatives by the end of fiscal 2000 to generate unit sales commensurate
with unit sales through its distributor network. The Company was unable to
attract that number of qualified sales representatives, and the domestic direct
sales force did not exceed 88 during the year. That number had decreased to 55
at February 28, 2001 due to attrition and terminations by the Company. While the
Company's turnaround strategy provides for significant reductions in costs and
expenses, the Company must also generate sufficient sales to become profitable.
Substantial Dependence upon Laura Ashley and Eddie Bauer Licenses
Net sales of Laura Ashley Eyewear and Eddie Bauer Eyewear accounted for 75%
and 60% of the Company's net sales in fiscal 1999 and fiscal 2000, respectively.
While the Company intends to continue reducing its dependence on the Laura
Ashley Eyewear and Eddie Bauer Eyewear lines through the development and
promotion of Nicole Miller Eyewear, Dakota Smith Eyewear and bebe eyes, as well
as its own house brands, the Company expects the Laura Ashley and Eddie Bauer
Eyewear lines to continue to be the Company's leading sources of revenue for the
near future. The Company markets Laura Ashley Eyewear through an exclusive
license which terminates in 2001, but may be renewed by the Company at least
through January 2006 so long as the Company is not in breach of the license
agreement and meets certain minimum net sales requirements. The Company markets
Eddie Bauer Eyewear through an exclusive license which terminates in December
2002, but may be renewed by the Company at least through 2008 so long as the
Company is not in material default and meets certain minimum net sales and
royalty requirements. Each of Laura Ashley and Eddie Bauer may terminate its
respective license before its term expires under certain circumstances,
including a material default by the Company or certain defined changes in
control of the Company.
Approval Requirements of Brand-Name Licensors
The Company's business is predominantly based on its brand-name licensing
relationships. Each of the Company's licenses requires mutual agreement of the
parties for significant matters. Each of these licensors has final approval over
all eyeglass frames and other products bearing the licensor's proprietary marks,
and the frames must meet the licensor's general design specifications and
quality standards. Consequently, each licensor may, in the exercise of its
approval rights, delay the distribution of eyeglass frames beating its
proprietary marks. The Company expects that each future license it obtains will
contain similar approval provisions. Accordingly, there can be no assurance that
the Company will be able to continue to maintain good relationships with each
licensor, or that the Company will not be subject to delays resulting from
disagreements with, or an inability to obtain approvals from, its licensors.
These delays could materially and adversely affect the Company's business,
operating results and financial condition.
Limitations on Ability to Distribute other Brand-Name Eyeglass Frames
Each of the Company's licenses limits the Company's right to market and
sell products with competing brand names. The Laura Ashley license prohibits the
Company from selling any range of designer eyewear that is similar to Laura
Ashley Eyewear in price and any of style, market position and market segment.
The Eddie Bauer license and the bebe license prohibit the Company from entering
into license agreements with companies which Eddie Bauer and bebe, respectively,
believe are its direct competitors. The Hart Schaffner & Marx license prohibits
the Company from marketing and selling another men's brand of eyeglass frames
under a well-known fashion name with a wholesale price in excess of $40. The
Company expects that each future license it obtains will contain some
limitations on competition within market segments. The Company's growth,
therefore, will be limited to capitalizing on its existing licenses in the
prescription eyeglass market, introducing eyeglass frames in other segments of
the prescription eyeglass market, and manufacturing and distributing products
other than prescription eyeglass frames such as sunglasses. In addition, there
can be no assurance that disagreements will not arise between the Company and
its licensors regarding whether certain brand-name lines would be prohibited by
their respective license agreements. Disagreements with licensors could
adversely affect sales of the Company's existing eyeglass frames or prevent the
Company from introducing new eyewear products in market segments the Company
believes are not being served by its existing products.
21
22
Dependence Upon Contract Manufacturers; Foreign Trade Regulation
The Company's frames are manufactured to its specifications by a number of
contract manufacturers located outside the United States, principally in Hong
Kong/China, Japan and Italy. The manufacture of high quality metal frames is a
labor-intensive process which can require over 200 production steps (including a
large number of quality-control procedures) and from 90 to 180 days of
production time. These long lead times increase the risk of overstocking, if the
Company overestimates the demand for a new style, or understocking, which can
result in lost sales if the Company underestimates demand for a new style. While
a number of contract manufacturers exist throughout the world, there can be no
assurance that an interruption in the manufacture of the Company's eyeglass
frames will not occur. An interruption occurring at one manufacturing site that
requires the Company to change to a different manufacturer could cause
significant delays in the distribution of the styles affected. This could cause
the Company to miss delivery schedules for these styles, which could materially
and adversely affect the Company's business, operating results and financial
condition.
In addition, the purchase of goods manufactured in foreign countries is
subject to a number of risks, including foreign exchange rate fluctuations,
economic disruptions, transportation delays and interruptions, increases in
tariffs and duties, changes in import and export controls and other changes in
governmental policies. For frames purchased other than from Hong Kong/China
manufacturers, the Company pays for its frames in the currency of the country in
which the manufacturer is located and thus the costs (in United States dollars)
of the frames vary based upon currency fluctuations. Increases and decreases in
costs (in United States dollars) resulting from currency fluctuations generally
do not affect the price at which the Company sells its frames, and thus currency
fluctuations can impact the Company's gross margin and results of operations. In
fiscal 2000, Signature used manufacturers principally in Hong Kong/China, Japan
and Italy.
International Sales
International sales accounted for approximately 8.4%, 8.7% and 12.8% of the
Company's net sales in fiscal 1998, fiscal 1999 and fiscal 2000, respectively.
These sales were primarily in England, Canada Australia, New Zealand, Holland
and Belgium. The Company's international business is subject to numerous risks,
including the need to comply with export and import laws, changes in export or
import controls, tariffs and other regulatory requirements, the imposition of
governmental controls, political and economic instability, trade restrictions,
the greater difficulty of administering business overseas and general economic
conditions. Although the Company's international sales are principally in United
States dollars, sales to international customers may also be affected by changes
in demand resulting from fluctuations in interest and currency exchange rates.
There can be no assurance that these factors will not have a material adverse
effect on the Company's business, operating results and financial condition.
Product Returns
The Company has a product return policy which it believes is standard in
the optical industry. Under that policy, the Company generally accepts returns
of non-discontinued product for credit, upon presentment and without charge. The
Company's product returns for fiscal 1998, fiscal 1999, and fiscal 2000 amounted
to 13.8%, 19.2 % and 22.4 % of gross sales (sales before returns), excluding
distributor returns of $4.4 million in fiscal 1999 in connection with the
Company's decision to terminate its relationship with domestic distributors,
respectively. The Company anticipates that it will likely experience returns at
a rate significantly exceeding its historical levels, due to the Company's
decision to sell directly to United States independent optical retailers, rather
than through distributors. The Company maintains reserves for product returns
which it considers adequate; however, an increase in returns that significantly
exceeds the amount of those reserves could have a material adverse impact on the
Company's business, operating results and financial condition.
Availability of Vision Correction Alternatives
The Company's future success could depend to a significant extent on the
availability and acceptance by the market of vision correction alternatives to
prescription eyeglasses, such as contact lenses and refractive (optical)
surgery, including a procedure named LASIK. While the Company does not believe
that contact lenses, refractive surgery or other vision correction alternatives
materially and adversely impact its business at present, there can be
22
23
no assurance that technological advances in, or reductions in the cost of,
vision correction alternatives will not occur in the future, resulting in their
more widespread use. Increased use of vision correction alternatives could
result in decreased use of the Company's eyewear products, which would have a
material adverse impact on the Company's business, operating results and
financial condition.
Acceptance of Eyeglass Frames; Unpredictability of Discretionary Consumer
Spending
The Company's success will depend to a significant extent on the market's
acceptance of the Company's brand-name eyeglass frames. If the Company is unable
to develop new, commercially successful styles to replace revenues from older
styles in the later stages of their life cycles, the Company's business,
operating results and financial condition could be materially and adversely
affected. The Company's future growth will depend in part upon the effectiveness
of the Company's marketing and sales efforts as well as the availability and
acceptance of other competing eyeglass frames released into the market place at
or near the same time, the availability of vision correction alternatives,
general economic conditions and other tangible and intangible factors, all of
which can change and cannot be predicted. The Company's success also will depend
to a significant extent upon a number of factors relating to discretionary
consumer spending, including the trend in managed health care to allocate fewer
dollars to the purchase of eyeglass frames, and general economic conditions
affecting disposable consumer income, such as employment business conditions,
interest rates and taxation. Any significant adverse change in general economic
conditions or uncertainties regarding future economic prospects that adversely
affect discretionary consumer spending generally, and purchasers of prescription
eyeglass frames specifically, could have a material adverse effect on the
Company's business, operating results and financial condition.
Competition
The markets for prescription eyewear are intensely competitive. There are
thousands of styles, including hundreds with brand names. At retail, the
Company's eyewear styles compete with styles that do and do not have brand
names, styles in the same price range, and styles with similar design concepts.
To obtain board space at an optical retailer, the Company competes against many
companies, both foreign and domestic, including Luxottica Group S.p.A.
(operating in the United States through a number of its subsidiaries), Safilo
Group S.p.A. (operating in the United States through a number of its
subsidiaries) and Marchon Eyewear, Inc., as well as Signature's former
distributors. Signature's largest competitors have significantly greater
financial, technical, sales, manufacturing and other resources than the Company.
They also employ direct sales forces that are significantly larger than the
Company's, and are thus able to realize a higher gross profit margin. At the
major retail chains, the Company competes not only against other eyewear
suppliers, but also against the chains themselves, which license some of their
own brand names for design, manufacture and sale in theft own stores. Luxottica,
one of the largest eyewear companies in the world, is vertically integrated in
that it manufactures frames, distributes them through direct sales forces in the
United States and throughout the world, and owns LensCrafters, one of the
largest United States retail optical chains.
The Company competes in its target markets through the quality of the brand
names it licenses, its marketing, merchandising and sales promotion programs,
the popularity of its frame designs, the reputation of its styles for quality,
and its pricing policies. There can be no assurance that the Company will be
able to compete successfully against current or future competitors or that
competitive pressures faced by the Company will not materially and adversely
affect its business, operating results and financial condition.
Dependence on Key Personnel
The Company's success has and will continue to depend to a significant
extent upon its executive officers, including Bernard Weiss (Chief Executive
Officer), Michael Prince (Chief Financial Officer), Robert Fried (Senior Vice
President of Marketing) and Robert Zeichick (Vice President of Advertising and
Sales Promotion). The loss of the services of one or more of these key employees
could have a material adverse effect on the Company. These officers may
terminate their employment at any time. The Company maintains and is the sole
beneficiary of "key person" life insurance on Messrs. Weiss, Prince, Fried and
Zeichick in the amount of $750,000 each. There can be no assurance that the
proceeds of these policies will be sufficient to offset the loss to the Company
due to the death of that executive officer. In addition, the Company's future
success will depend in large part upon its ability to attract, retain and
motivate personnel with a variety of creative, technical and managerial skills.
There can be no
23
24
assurance that the Company will be able to retain and motivate its personnel or
attract additional qualified members to its management staff. The inability to
attract and retain the necessary managerial personnel could have a material
adverse effect on the Company's business, operating results and financial
condition.
Control by Directors and Executive Officers
The directors and executive officers of the Company own approximately 56.8%
of the Company's outstanding shares. As a result, the directors and executive
officers control the Company and its operations, including the approval of
significant corporate transactions and the election of at least a majority of
the Company's Board of Directors and thus the policies of the Company. The
voting power of the directors and executive officers could also serve to
discourage potential acquirors from seeking to acquire control of the Company
through the purchase of the Common Stock, which might depress the price of the
Common Stock.
Quarterly and Seasonal Fluctuations
The Company's results of operations have fluctuated from quarter to quarter
and the Company expects these fluctuations to continue in the future.
Historically, the Company's net sales in the quarter ending January 31 (its
first quarter) have been lower than net sales in other fiscal quarters. The
Company attributes lower net sales in the first fiscal quarter in part to low
consumer demand for prescription eyeglasses during the holiday season and
year-end inventory adjustments by distributors and independent optical
retailers. A factor which may significantly influence results of operations in a
particular quarter is the introduction of a brand-name collection, which results
in disproportionate levels of selling expenses due to additional advertising,
promotions, catalogs and in-store displays, introduction of a new brand may also
generate a temporary increase in sales due to initial stocking by retailers.
Other factors which can influence the Company's results of operations include
customer demand, the mix of distribution channels through which the eyeglass
frames are sold, the mix of eyeglass frames sold, product returns, delays in
shipment and general economic conditions.
No Dividends Anticipated
The Company does not currently intend to declare or pay any cash dividends
and intends to retain earnings, if any, for the future operation and expansion
of the Company's business.
Possible Anti-Takeover Effects
The Company's Board of Directors has the authority to issue up to 5,000,000
shares of Preferred Stock and to determine the price, rights, preferences,
privileges and restrictions, including voting rights, of those shares without
any further vote or action by the shareholders. The Preferred Stock could be
issued with voting, liquidation, dividend and other rights superior to those of
the Common Stock. The Company has no present intention to issue any shares of
Preferred Stock. However, the rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire a majority of the outstanding voting
stock of the Company, which may depress the market value of the Common Stock. In
addition, each of the Laura Ashley, Hart Schaffner & Marx, Eddie Bauer and bebe
licenses allows the licensor to terminate its license upon certain events which
under the license are deemed to result in a change in control of the Company.
The licensors' rights to terminate their licenses upon a change in control of
the Company could have the effect of discouraging a third party from acquiring
or attempting to acquire a controlling portion of the outstanding voting stock
of the Company and could thereby depress the market value of the Common Stock.
ITEM 7A--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks, which include foreign exchange
rates and changes in U.S. interest rates. The Company does not engage in
financial transactions for trading or speculative purposes.
24
25
Foreign Currency Risks. During fiscal 2000, at any month-end a maximum of
$3.4 million and a minimum of $1.8 million of the Company's accounts payable
were payable in foreign currency. These foreign currencies included Japanese
Yen, Italian Lire and French Francs. Any significant change in foreign currency
exchange rates could therefore materially affect the Company's business,
operating results and financial condition. To monitor risks associated with
currency fluctuations, the Company on a weekly basis assesses the volatility of
certain foreign currencies and reviews the amounts and expected payment dates of
its purchase orders and accounts payable in those currencies. Based on those
factors, the Company may from time to time mitigate some portion of that risk by
purchasing forward commitments to deliver foreign currency to the Company. The
Company held forward commitments for foreign currencies in the amount of
$491,000 at October 31, 2000.
International sales accounted for approximately 12.8% of the Company's net
sales in fiscal 2000. Although the Company's international sales are principally
in United States dollars, sales to international customers may also be affected
by changes in demand resulting from fluctuations in interest and currency
exchange rates. There can be no assurance that these factors will not have a
material adverse effect on the Company's business, operating results and
financial condition. For frames purchased other than from Hong Kong/China
manufacturers, the Company pays for its frames in the currency of the country in
which the manufacturer is located and thus the costs (in United States dollars)
of the frames vary based upon currency fluctuations. Increases and decreases in
costs (In United States dollars) resulting from currency fluctuations generally
do not affect the price at which the Company sells its frames, and thus currency
fluctuation can impact the Company's gross margin.
Interest Rate Risk. The Company's bank credit facility includes an accounts
receivable and inventory revolving credit line and a term loan which are secured
by substantially all of the assets of the Company. Under the credit line, the
Company may obtain advances up to an amount equal to 60% of eligible accounts
receivable and 35% of eligible inventories, up to a maximum of $5,000,000, which
advances bear interest at the bank's prime rate or 2.5% in excess of the London
Interbank Offered Rate ("LIBOR"), at the Company's option. The term loan was in
the amount of $3,500,000, is payable in monthly installments of $73,000 plus
interest at the rate of 8.52% per annum. At October 31, 2000, $8.5 million was
due to the bank under the Credit Agreement. Any interest which may in the future
become payable on the Company's bank line of credit will be based on variable
interest rates and will therefore be affected by changes in market interest
rates.
In addition, the Company has fixed income investments consisting of cash
equivalents, which are also affected by changes in market interest rates. The
Company does not use derivative financial instruments in its investment
portfolio. The Company places its cash equivalents with high-quality financial
institutions, limits the amount of credit exposure to any one institution and
has established investment guidelines relative to diversification and maturities
designed to maintain safety and liquidity.
25
26
ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2000 AND 1999
================================================================================
Page
----
INDEPENDENT AUDITORS' REPORT F-1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Changes in Stockholders' Equity F-4
Consolidated Statements of Cash Flows F-5-F-6
Notes to the Consolidated Financial Statements F-7-F-22
27
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Signature Eyewear, Inc.
We have audited the accompanying consolidated balance sheets of Signature
Eyewear, Inc. and Subsidiary as of October 31, 2000 and 1999 and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the three years in the period ended October 31, 2000. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Signature Eyewear,
Inc. and Subsidiary as of October 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
October 31, 2000, in conformity with generally accepted accounting principles.
/s/ Altschuler, Melvoin and Glasser LLP
Los Angeles, California
January 29, 2001 (except for Notes 5
and 6, which are as of May 1, 2001)
F-1
28
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 2000 AND 1999
=================================================================================================================
2000 1999
------------- --------------
ASSETS
Current assets
Cash and cash equivalents $ 1,860,451 $ 463,023
Accounts receivable, trade (net of allowance for
doubtful accounts of $314,839 in 2000 and $198,363 in 1999) 8,744,254 6,550,057
Inventories 18,742,177 16,636,474
Income taxes refundable 1,262,154 999,820
Deferred tax asset 392,000
Promotion products and material 2,082,234 1,298,092
Prepaid expenses and other current assets 314,301 1,134,823
------------ ------------
33,005,571 27,474,289
------------ ------------
Property and equipment (net of accumulated depreciation and
amortization) 2,077,230 1,711,203
------------ ------------
Other assets
Goodwill and other intangibles (net of accumulated
amortization of $797,317 in 2000 and $201,478 in 1999) 5,499,351 6,035,190
Deferred tax asset 36,000
Deposits and other assets 852,456 217,402
------------ ------------
6,351,807 6,288,592
------------ ------------
$ 41,434,608 $ 35,474,084
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable, trade $ 14,751,544 $ 6,285,490
Notes payable 5,000,000 1,750,000
Current portion of long-term debt 4,603,203 873,505
Accrued distributor credits 789,062 1,727,970
Accrued expenses and other current liabilities 3,042,872 1,696,701
------------ ------------
28,186,681 12,333,666
------------ ------------
Long-term debt 4,806,455 5,137,193
------------ ------------
Commitments and contingencies (Note 8)
Stockholders' equity
Preferred stock - -
Common stock (5,056,889 and 5,082,389 shares issued and
outstanding at October 31, 2000 and 1999) 9,188 9,214
Paid-in capital 14,363,990 14,441,996
Retained earnings (accumulated deficit) (5,931,706) 3,552,015
------------ ------------
8,441,472 18,003,225
------------ ------------
$ 41,434,608 $ 35,474,084
============ ============
================================================================================
See accompanying notes. F-2
29
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED OCTOBER 31, 2000, 1999 AND 1998
=================================================================================================================
2000 1999 1998
------------ ------------ ------------
Net sales $ 51,932,066 $ 44,055,973 $ 40,891,882
Cost of sales 21,424,878 18,739,846 17,644,416
------------ ------------ ------------
GROSS PROFIT 30,507,188 25,316,127 23,247,466
------------ ------------ ------------
Operating expenses
Selling 21,648,965 13,808,621 12,007,302
General and administrative 18,105,413 11,018,342 7,034,516
Restructuring cost 2,634,500
------------ ------------ ------------
39,754,378 27,461,463 19,041,818
------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS (9,247,190) (2,145,336) 4,205,648
------------ ------------ ------------
Other
Interest expense (1,131,445) (183,037) (8,226)
Sundry income 122,917 235,724 411,250
------------ ------------ ------------
(1,008,528) 52,687 403,024
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (10,255,718) (2,092,649) 4,608,672
Provision (benefit) for income taxes (771,997) (783,254) 1,859,067
------------ ------------ ------------
NET INCOME (LOSS) $ (9,483,721) $ (1,309,395) $ 2,749,605
============ ============ ============
EARNINGS (LOSS) PER SHARE, BASIC AND DILUTED
Earnings (loss) per common share $ (1.87) $ (0.26) $ 0.52
============ ============ ============
Weighted average number of common shares
outstanding 5,058,915 5,095,259 5,254,156
============ ============ ============
================================================================================
See accompanying notes. F-3
30
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED OCTOBER 31, 2000, 1999 AND 1998
====================================================================================================================
Common Stock
-----------------------------
Number
of Shares Stated Paid-in Retained
Issued Value Capital Earnings Total
------------ ------------ ------------ ------------ ------------
Balance, November 1, 1997 5,268,027 $ 9,400 $ 15,190,389 $ 2,111,805 $ 17,311,594
Net income 2,749,605 2,749,605
Repurchases of common stock (148,690) (149) (646,105) (646,254)
------------ ------------ ------------ ------------ ------------
Balance, October 31, 1998 5,119,337 9,251 14,544,284 4,861,410 19,414,945
Net loss (1,309,395) (1,309,395)
Issuance of common stock 50,000 50 251,966 252,016
Repurchases of common stock (86,948) (87) (354,254) (354,341)
------------ ------------ ------------ ------------ ------------
Balance, October 31, 1999 5,082,389 9,214 14,441,996 3,552,015 18,003,225
Net loss (9,483,721) (9,483,721)
Repurchases of common stock (25,500) (26) (78,006) (78,032)
------------ ------------ ------------ ------------ ------------
BALANCE, OCTOBER 31, 2000 5,056,889 $ 9,188 $ 14,363,990 $ (5,931,706) $ 8,441,472
============ ============ ============ ============ ============
================================================================================
See accompanying notes. F-4
31
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 2000, 1999 AND 1998
=================================================================================================================
2000 1999 1998
-------------- ------------- ------------
OPERATING ACTIVITIES
Net income (loss) $ (9,483,721) $ (1,309,395) $ 2,749,605
Adjustments to reconcile net income (loss) to
net cash used in operating activities
Depreciation and amortization 1,282,236 880,992 557,668
Provision for bad debts 264,835 41,614 11,152
Provision for inventory reserve 437,636 73,368
Loss on disposition of equipment 2,284
Deferred income tax (benefit) expense 428,000 (53,000) (157,000)
Changes in assets--(increase) decrease
Accounts receivable, trade (2,459,032) 37,494 (1,852,356)
Inventories (2,543,339) (3,639,044) (4,480,976)
Income taxes refundable (262,334) (813,339) (186,481)
Prepaid expenses and other assets 179,042 (719,922) (796,714)
Deposits and other assets (117,899)
Changes in liabilities--increase (decrease)
Accounts payable, trade 8,466,054 976,023 2,091,103
Income taxes payable (346,000)
Accrued distributor credits (938,908) 1,727,970
Accrued expenses and other liabilities 1,346,171 (290,725) 130,571
------------ ------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (3,398,975) (3,087,964) (2,279,428)
------------ ------------ ------------
INVESTING ACTIVITIES
Purchases of property and equipment (784,225) (623,781) (951,086)
Acquisition of businesses, net of cash acquired (1,282,538)
Proceeds from sale of equipment 12,974 27,090
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (771,251) (1,879,229) (951,086)
------------ ------------ ------------
FINANCING ACTIVITIES
Borrowings on notes payable, bank 11,570,833 1,500,000
Repayments on notes payable, bank (4,820,833)
Borrowings on long-term debt 500,000
Principal payments on long-term debt (1,020,352) (472,098)
Principal payments on capitalized lease
obligations (83,962)
Repurchases of common stock (78,032) (354,341) (646,254)
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES 5,567,654 1,173,561 (646,254)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 1,397,428 (3,793,632) (3,876,768)
Cash and cash equivalents
Beginning of year 463,023 4,256,655 8,133,423
------------ ------------ ------------
END OF YEAR $ 1,860,451 $ 463,023 $ 4,256,655
============ ============ ============
================================================================================
See accompanying notes. F-5
32
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
YEARS ENDED OCTOBER 31, 2000, 1999 AND 1998
======================================================================================================================
2000 1999 1998
----------- ------------ -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for
Interest $ 1,042,586 $ 158,312 $ 8,227
Income taxes 201,350 83,084 2,555,677
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Purchase of equipment financed by capital lease
obligations 229,958 146,974
Covenant-not-to-compete and related obligation 60,000
Deferred consulting fees and related obligation 713,316
Acquisitions
Fair value of assets acquired 3,092,000
Liabilities assumed (5,178,000)
Liabilities incurred (1,868,500)
Stock issued (252,000)
================================================================================
See accompanying notes. F-6
33
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 1 NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES
Signature Eyewear, Inc. and Subsidiary (the "Company") designs, markets and
distributes eyeglass frames throughout the United States and internationally.
Primary operations are conducted from leased premises in Inglewood, California,
with a warehouse and sales office in Belgium.
The Company's fiscal 2000 and 1999 operations have produced losses and negative
cash flow from operations. At October 31, 2000, the Company has negative
retained earnings and is in violation of certain loan covenants. However,
management believes that since the Company has cash, positive working capital
and stockholders' equity and anticipates a profitable fiscal 2001, it will be
able to meet its obligations as they become due in the ordinary course of
business.
During fiscal 2001, management plans to return to profitability and positive
operating cash flow by (i) increasing profit margins by increasing selling
prices and lowering product purchase costs, (ii) reducing expenses by decreasing
staff, restructuring commissions and cutting certain selling and overhead costs,
(iii) reducing the number of brand name lines, (iv) negotiating discounts and
payment plans with vendors, (v) reducing inventory levels, and (vi) aggressively
collecting its accounts receivable. Additionally, the Company has retained an
investment banker to identify a new lender with an increased line of credit
facility.
A summary of significant accounting policies is as follows:
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include
the accounts of Signature Eyewear, Inc. and its wholly-owned subsidiary,
Signature Eyewear Canada Corporation. All significant intercompany accounts
and transactions have been eliminated in consolidation.
USE OF ESTIMATES--In preparing financial statements in conformity with
generally accepted accounting principles, management makes estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements, as well as the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from
those estimates.
INVENTORIES--Inventories (consisting of finished goods) are valued at the
lower of cost or market. Cost is computed using weighted average cost,
which approximates actual cost on a first-in, first-out basis.
REVENUE RECOGNITION--Revenue is recognized when merchandise is shipped. An
allowance for estimated product returns is established based upon actual
returns subsequent to year-end and estimated future returns.
ADVERTISING COSTS--The Company expenses all advertising costs as they are
incurred. Advertising expense for the years ended October 31, 2000, 1999
and 1998 amounted to $2,611,209, $867,865 and $782,354, respectively.
DEPRECIATION AND AMORTIZATION--Depreciation and amortization of property
and equipment are computed using the straight-line method over the useful
economic life of the assets. Depreciation and amortization of property and
equipment for tax reporting purposes are computed using various statutory
methods as provided in the Internal Revenue Code.
GOODWILL AND OTHER INTANGIBLE ASSETS--Goodwill represents the excess of
purchase price over the fair value of net assets acquired (see Note 2)
which is amortized on the straight-line basis over 20 years. Other
intangible assets include covenants-not-to-compete and various trademarks
which are being amortized on a straight-line basis over periods ranging
from 2 to 20 years.
================================================================================
F-7
34
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 1 NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES, Continued
INCOME TAXES--The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes", which requires deferred tax liabilities and assets to be
recognized for the expected future tax consequences of events that have
been included in the financial statements or tax returns. Deferred tax
liabilities and assets are provided for temporary differences between
financial statement and tax bases of certain liabilities and assets. SFAS
No. 109 also requires the Company to recognize income tax benefits for loss
carryovers which have not previously been recorded. The tax benefits
recognized must be reduced by a valuation allowance in certain
circumstances. The benefit of the Company's operating loss carryforwards
has been reduced 100% by a valuation allowance at October 31, 2000.
CONCENTRATION OF RISK--Financial instruments that potentially subject the
Company to significant concentrations of credit risk consist principally of
cash investments. The Company maintains its temporary cash investments with
a high credit quality financial institution. At times, such investments are
in excess of the FDIC insurance limit.
CASH EQUIVALENTS--The Company considers all highly liquid debt instruments
with an original maturity of three months or less to be cash equivalents.
FINANCIAL INSTRUMENTS--The Company's financial instruments, when valued
using market interest rates, would not be materially different from the
amounts presented in the financial statements.
IMPAIRMENT OF ASSETS--The Company recognizes impairment losses when
expected future cash flows are less than the assets' carrying value.
Accordingly, when indicators of impairment are present, the Company
evaluates the carrying value of property and equipment and intangibles in
relation to the operating performance and future undiscounted cash flows of
the underlying business. The Company adjusts the net book value of the
underlying assets if the sum of expected future cash flows is less than
book value.
FOREIGN CURRENCY TRANSLATION--Substantially all of the Company's
international operations use their local currency as their functional
currency. Assets and liabilities are, therefore, translated at exchange
rates in effect at the balance sheet date and income and expense accounts
at average exchange rates during the year. There have been no significant
resulting translation adjustments. Such adjustments would be recorded
directly to a separate component of stockholders' equity.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES--Statement of
Financial Accounting Standards ("SFAS") No. 137, "Accounting for Derivative
Instruments and Hedging Activities", has deferred the effective date of
SFAS No. 133 to all fiscal quarters of all fiscal years beginning after
June 15, 2000. This statement requires that certain derivative instruments
be recognized in balance sheets at fair value and that changes in fair
value be recognized in operations. Additional guidance is also provided to
determine when hedge accounting treatment is appropriate whereby hedging
gains and losses are offset by losses and gains related directly to the
hedged item. The Company believes that it is already in substantial
compliance with the accounting requirements as set forth in this new
pronouncement and therefore believes that adoption will not have a
significant impact on financial condition or operating results.
RECLASSIFICATIONS--Certain reclassifications have been made to
previously-reported financial statements to conform to this year's
presentation and have no effect on previously reported net loss or income.
================================================================================
F-8
35
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 2 BUSINESS ACQUISITIONS
In June 1999, the Company acquired substantially all of the assets (the "Asset
Acquisition") of California Design Studio, Inc. ("CDS"), including its Dakota
Smith proprietary name, and an exclusive license for Nicole Miller Eyewear.
Total consideration was approximately $7,394,000, consisting of a cash payment
of $800,000, payment in full of the $600,000 existing CDS bank loan, the
issuance of an unsecured promissory note in the principal amount of $1,250,000
and the assumption of approximately $4,744,000 of the liabilities of CDS.
Additionally, the Company recorded $351,000 of acquisition-related expenses.
The Asset Acquisition of CDS has been accounted for using the purchase method of
accounting. The purchase price has been allocated based upon the following
approximate fair values on the date of the acquisition:
Current assets $ 2,205,000
Property and equipment 170,000
Goodwill 5,105,000
Other intangibles 148,000
Other noncurrent assets 117,000
-----------
Purchase price $ 7,745,000
===========
The $5,105,000 excess of the purchase price over the fair value of the net
assets acquired has been recorded as goodwill. In connection with the Asset
Acquisition, the Company entered into a covenant- not-to-compete agreement as
well as a consulting agreement with the sole shareholder of CDS. The
consideration for the covenant-not-to-compete was $600,000.
The following table reflects unaudited pro forma combined results of operations
of the Company and CDS on the basis that the acquisition had taken place at the
beginning of the fiscal year for each of the periods presented:
1999 1998
------------ ------------
Net sales $ 48,515,725 $ 51,268,985
Net income (loss) (2,147,922) 2,298,975
Earnings (loss) per share (0.42) 0.44
Effective August 1999, the Company acquired 100% of the capital stock (the
"Stock Acquisition") of Great Western Optical ("GWO"), a privately-held
corporation. GWO's principal business was the distribution of the Company's
products. The purchase price for the Stock Acquisition was approximately
$519,500, consisting of the issuance of 50,000 shares of the Company's common
stock and 50,000 of stock warrants, valued at $252,000, a note payable for
$250,000 and acquisition-related expenses of $17,500.
================================================================================
F-9
36
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 2 BUSINESS ACQUISITIONS, CONTINUED
The Stock Acquisition of GWO has been accounted for using the purchase method of
accounting. The purchase price has been allocated based upon the following
approximate fair values on the date of the acquisition:
Current assets $ 565,000
Property and equipment 4,500
Goodwill 384,000
Liabilities (434,000)
---------
Purchase price $ 519,500
=========
The $384,000 excess of the purchase price over the fair value of the net assets
acquired has been recorded as goodwill. In connection with the Stock
Acquisition, the Company entered into a covenant- not-to-compete agreement as
well as a consulting agreement with the sole shareholder of the seller
corporation.
The Stock Acquisition provides for a purchase price adjustment if the per share
market value of the 50,000 shares of common stock issued at the initial Stock
Acquisition date is below $7 on July 31, 2001.
In order to reduce overhead, during fiscal 2000, GWO's corporate structure was
liquidated with all assets and liabilities and operations absorbed into
Signature Eyewear, Inc.
NOTE 3 RESTRUCTURING COSTS
Before October 1, 1999, the Company distributed its eyeglass frames to
independent optical retailers in the United States (other than California and
Arizona) through distributors. Sales through United States distributors
accounted for approximately 51% and 47% of the Company's total net sales for the
years ended October 31, 1999 and 1998. Effective October 1, 1999, the Company
changed its sales strategy by replacing its domestic network of distributors
with its own direct national sales force. Consequently, the Company experienced
an abnormally high rate of returns attributable to terminated distributors. The
$2,634,500 cost associated with these merchandise returns is reflected as a 1999
restructuring expense. As of October 31, 2000, a number of distributors have
sued the Company for the unpaid balances resulting from merchandise returns.
However, management believes that all liabilities associated with the returns
are adequately accrued.
================================================================================
F-10
37
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 4 PROPERTY AND EQUIPMENT
Property and equipment (stated at cost) as of October 31, 2000 and 1999
consisted of the following:
Periods of
Depreciation
or Amortization 2000 1999
--------------- ---------- ----------
Office furniture and fixtures 7 years $ 904,465 $ 955,908
Computer equipment 3 years 1,266,877 1,246,737
Software 3 years 825,191 597,975
Vehicles 7 years 37,637
Leasehold improvements Term of lease 1,185,190 749,019
Machinery and equipment held under
capitalized leases 3 to 5 years 376,932 146,974
Machinery and equipment 5 years 134,163 147,503
---------- ----------
4,692,818 3,881,753
Less accumulated depreciation and
amortization (including amortization
on capitalized leases of $62,295 in
2000 and $7,349 in 1999) 2,615,588 2,170,550
---------- ----------
Net book value $2,077,230 $1,711,203
========== ==========
Provision for depreciation and amortization charged to operations for the years
ended October 31, 2000, 1999 and 1998 amounted to $635,210, $682,131 and
$557,668, respectively (including capitalized lease amortization of $54,946,
$7,349 and $10,050, respectively).
================================================================================
F-11
38
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 5 NOTES PAYABLE
Notes payable at October 31, 2000 and 1999 consisted of the following:
2000 1999
--------- -------------
Accounts Receivable and Loan Agreement payable to a commercial
bank ("Bank") in the amount of $5,000,000 (secured by
substantially all the assets of the Company; maximum amount of
loan limited to 60% of eligible accounts receivable [as
defined] plus 35% of eligible inventory [as defined] to a
maximum of $4,500,000, less $600,000; interest at the London
Interbank Offered Rate ["LIBOR"] plus 2.5% or the Bank's prime
rate [at the Company's option {revised to 5% above the
previously prevailing rates, effective November 20, 2000}];
weighted average interest rate of 9.5%; due September 30, 2000,
extended to June 30, 2001 pursuant to a Forbearance Agreement) $5,000,000 $ --
Revolving Credit Agreement payable to a commercial bank ("Bank") in the
amount of $5,000,000 (secured by substantially all the Company's assets;
interest at the London Interbank Offered Rate ["LIBOR"] plus 2.5% or the
Bank's prime rate [at the Company's option]; weighted average interest
rate of 8.25%; expired March 31, 2000) 1,500,000
Note payable (unsecured; interest at 6% per annum; due and paid
January 10, 2000 [see Note 2]) 250,000
---------- ----------------
$5,000,000 $ 1,750,000
========== ================
The Forbearance Agreement, dated May 1, 2001, includes various covenants which
provisions include that (i) the Company will exert its best efforts to close a
Transaction (defined as the recapitalization of the business and/or the sale of
the stock and/or substantially all of the business assets) as promptly as
possible, and shall have entered into definitive documentation on or before June
30, 2001, and (ii) the outstanding amount of the obligations shall not exceed
$8,354,166 (including the term note payable [see Note 6]) and shall be reduced
by $100,000 each month beginning in April 2001 (in addition to the ongoing term
note monthly principal payment of $72,917). At May 1, 2001, the Company was in
compliance with all the covenants of the Forbearance Agreement.
================================================================================
F-12
39
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 6 LONG-TERM DEBT
Long-term debt at October 31, 2000 and 1999 consisted of the following:
2000 1999
----------- -----------
Term note payable, Bank, in the amount of $3,500,000 (secured by
substantially all the assets of the Company; payable in monthly
installments of $72,917 plus interest at 8.52% per annum
[revised to 13.52% per annum effective November 20, 2000]; due
September 30, 2000, extended to June 30, 2001 pursuant to a
Forbearance Agreement [see Note 5]) $3,500,000 $ --
Term note payable, Bank (secured by substantially all the assets of the
Company; payable in monthly installments of $12,242 plus interest at 8.52%
per annum until December 31, 2001; LIBOR plus
2.5% thereafter; restructured in December 1999) 500,000
Note payable, CDS (unsecured; payable in monthly installments of
$17,042, including interest at 7% per annum; matures on
January 23, 2004) 1,086,978 1,210,655
Obligation to vendor (unsecured; $4,195,847 original principal
less $639,043 unamortized discount; payable in monthly
installments of $50,000, including interest imputed at 7.37%
per annum; matures on July 23, 2002) 3,326,660 3,556,804
Note payable, lessor (unsecured; payable in monthly installments
of $4,134, including interest at 10% per annum; matures on
May 1, 2005) 181,814 211,608
Obligation assumed in conjunction with acquisition of CDS--see
Note 2 (payable in quarterly installments of $75,000 commencing
September 30, 2000; matures on June 30, 2001) 225,000 300,000
Obligation in conjunction with acquisition of GWO--see Note 2
(payable in monthly installments of $5,000 commencing on June
30, 2000; matures on February 28, 2001) 45,000
Obligation to consultant (unsecured; $999,167 principal less
$285,850 unamortized discount; payable in monthly installments of $7,500
to December 2000, $5,000 in January and February 2001, $7,500 in March
2001 and $10,000 thereafter, including
interest imputed at 8.75%; matures on September 15, 2008) 666,580
Liability for machinery and equipment under various capitalized
lease agreements (interest rates ranging from 8.12% to 11.14% per annum;
maturing at various dates through August 2004;
secured by certain machinery and equipment) 377,626 231,631
---------- ----------
9,409,658 6,010,698
Less current portion 4,603,203 873,505
---------- ----------
$4,806,455 $5,137,193
========== ==========
================================================================================
F-13
40
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 6 LONG-TERM DEBT, CONTINUED
Future minimum payments as of October 31, 2000, under the aforementioned
long-term debt, are as follows:
Capitalized
Lease
October 31, Obligations Agreements Total
- ---------------------- ------------ ----------- -------------
2001 $ 4,838,032 $ 160,210 $ 4,998,242
2002 3,294,412 138,692 3,433,104
2003 312,653 113,536 426,189
2004 824,041 26,938 850,979
2005 148,000 148,000
Thereafter 350,000 350,000
------------ ----------- -------------
9,767,138 439,376 10,206,514
Less imputed interest thereon 735,105 61,751 796,856
------------ ----------- -------------
$ 9,032,033 $ 377,625 $ 9,409,658
============ =========== =============
NOTE 7 INCOME TAXES
Income tax expense (benefit) consisted of the following:
2000 1999 1998
----------- ----------- ----------
Current
Federal $(1,266,914) $(730,254) $1,653,000
State 800 800 363,000
Deferred 494,117 (53,800) (157,000)
----------- --------- ----------
$ (771,997) $(783,254) $1,859,000
=========== ========= ==========
================================================================================
F-14
41
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 7 INCOME TAXES, CONTINUED
At October 31, 2000 and 1999, the Company's net deferred tax asset and liability
consisted of the following:
2000 1999
------------ -----------
Current--deferred tax assets
Allowance for doubtful accounts $ 135,000 $ 90,000
Capitalization of inventory costs 504,000 279,000
Inventory reserve 219,000 33,000
Deferred compensation 227,000
Sales returns reserve 125,000
Other (85,000) (10,000)
----------- -----------
1,125,000 392,000
Valuation allowance (1,125,000)
----------- -----------
$ -- $ 392,000
=========== ===========
Long-term--deferred tax assets
Depreciation on property and equipment $ 513,000 $ 32,000
Federal net operating loss carryforward 1,423,000
State net operating loss carryforward 321,000
Other (135,000) 4,000
----------- -----------
2,122,000 36,000
Valuation allowance (2,122,000)
----------- -----------
$ -- $ 36,000
=========== ===========
The Company has net operating loss carryforwards of approximately $4,000,000
available through October 2020.
A reconciliation of the provision for income taxes and the amount computed by
applying the federal statutory rate to loss before benefit for income taxes is
as follows:
2000 1999
----------- -----------
Computed income tax benefit at federal statutory rate $(3,486,944) $ (711,500)
Increase (reduction) resulting from
State income taxes 800 (32,000)
Permanent items 119,700
Change in federal valuation allowance 2,528,000
Other, net 66,447 (39,754)
----------- -----------
$ (771,997) $ (783,254)
=========== ===========
================================================================================
F-15
42
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 8 COMMITMENTS AND CONTINGENCIES
OPERATING LEASES--The Company maintains its principal offices and warehouse
in leased facilities in Inglewood, California, under an operating lease
which expires on May 31, 2005. The lease agreement provides for minimum
monthly rental payments ranging from $57,083 to $78,583. The Company is
also responsible for the payment of (i) common area operating expenses (as
defined), (ii) utilities, and (iii) insurance. The security deposit on the
lease includes a $70,000 irrevocable standby letter of credit in favor of
the lessor. The lease agreement provides for an option to extend the term
of the lease for five additional years.
The Company has various operating leases for hardware, software and
technical support services in connection with implementation of a computer
system. The lease agreements provide for minimum monthly payments of
$96,871. Upon expiration, the lease agreements provide for an option to
extend the term of the lease for 12 months or more at a fair market rental
value as mutually agreed to by the lessor and the Company.
Future minimum lease payments relating to the above operating leases at
October 31, 2000 are as follows:
October 31, Amount
------------------ -------------
2001 $ 1,844,440
2002 1,995,763
2003 1,110,926
2004 942,993
2005 550,079
--------------
$ 6,444,201
==============
Total facilities-related rent expense for the years ended October 31, 2000,
1999 and 1998 amounted to $677,636, $420,471 and $327,269, respectively.
Lease expense with respect to the computer system amounted to $1,409,337
and $512,252 for the years ended October 31, 2000 and 1999, respectively.
LICENSE AGREEMENTS--The Company has a license agreement with Laura Ashley
Manufacturing, B.V. and Laura Ashley Limited, which grants the Company
certain rights to use "Laura Ashley" trademarks in connection with the
distribution, marketing and sale of Laura Ashley eyewear products. The
license automatically renews annually, so long as the Company is not in
breach of the license and generates the required amount of minimum net
sales.
The Company has a license agreement with Hart Schaffner & Marx, which
grants the Company certain rights to use "Hart Schaffner & Marx" trademarks
in connection with the distribution, marketing and sale of Hart Schaffner &
Marx eyewear products. The license period extends through December 31,
2002, and may be renewed for three-year terms in perpetuity provided that
specified minimum sales are achieved and the Company is not in default
under the license agreement.
The Company has a license agreement with Eddie Bauer, Inc., which grants
the Company certain rights to use "Eddie Bauer" trademarks in connection
with the distribution, marketing and sale of Eddie Bauer eyewear products
and the Eddie Bauer Performance Sunwear using patented technology lenses
provided by Oakley, Inc. The license period extends through December 31,
2002 and can be renewed for two consecutive three-year terms (as defined),
provided that specified minimum sales are achieved and the Company is not
in material default under the license agreement.
================================================================================
F-16
43
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 8 COMMITMENTS AND CONTINGENCIES, CONTINUED
The Company has an agreement with Oakley, Inc., pursuant to which Oakley
will supply the Company its patented optical lenses for use in Eddie Bauer
Performance Sunwear. The agreement extends through December 31, 2002, with
an automatic two-year renewal term (as defined), provided that specified
minimum sales are achieved and the Company is not in default under the
agreement.
The Company had a license agreement with Coach, a division of Sara Lee
Corporation, which grants the Company certain rights to use "Coach" and
related trademarks in connection with the distribution, marketing and sale
of Coach eyewear products. The license period was to extend through April
30, 2010. In addition to a royalty based on net sales in fiscal 2000, the
Company issued to Coach, upon the introduction of Coach Eyewear, three-year
warrants to purchase 50,000 shares of common stock of the Company at an
exercise price of $6.50 per share and five-year warrants to purchase an
additional 50,000 shares of common stock of the Company at an exercise
price of $9.50 per share. On December 19, 2000, Coach terminated the
license agreement due to alleged breaches of the agreement by the Company.
In connection with the Asset Acquisition of CDS (see Note 2), the Company
acquired CDS's license with Kobra International, which grants the Company
rights to use the "Nicole Miller" trademark in connection with the
distribution, marketing and sale of eyewear products. The license period
extends until March 31, 2003, provided that specified minimum sales are
achieved and the Company is not in material default under the agreement.
The Company has a license agreement with bebe stores, inc., which grants
the Company certain rights to use the "bebe" trademark in connection with
the distribution, marketing and sale of bebe eyewear products. The license
period extends through March 31, 2003, and can be renewed for two
three-year terms (as defined) thereafter, provided that specified minimum
sales are achieved and the Company is not in material default under the
license agreement.
Total minimum royalties under all of the Company's license agreements
(excluding the terminated Coach license agreement) are as follows:
October 31, Amount
------------------ -------------
2001 $ 2,793,103
2002 3,246,171
2003 2,705,431
2004 2,520,664
2005 1,233,646
Thereafter 248,874
-------------
$ 12,747,889
=============
Total royalty expense charged to operations for the years ended October 31,
2000, 1999 and 1998 amounted to $3,114,807, $2,413,285 and $2,460,329,
respectively.
The Company is also subject to certain claims that arise in the ordinary
course of business. In the opinion of management, no pending or threatened
claims, actions or proceedings against the Company are expected to have a
material adverse effect on the Company's financial statements.
================================================================================
F-17
44
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 9 STOCK WARRANTS AND OPTIONS
The Company sold to Fechtor, Detwiler & Co., Inc. and Van Kasper Company, the
managing underwriters of the 1997 offering, warrants to purchase 180,000 shares
of common stock for $12.00 per share. The warrants expire on September 16, 2002.
In connection with the acquisition of Great Western Optical, the Company issued
warrants to purchase 50,000 shares of common stock for $7.50 per share. The
warrants expire on September 10, 2004.
During fiscal 2000, the Company issued warrants to Coach, a licensor, to
purchase 50,000 shares of the Company's common stock at an exercise price of
$6.50 and 50,000 shares at an exercise price of $9.50.
The following is a summary of warrants outstanding:
2000 1999 1998
---------------------------- ---------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------- -------------- ------------- -------------- ------------ --------------
Outstanding, beginning
of year 230,000 $11.02 180,000 $12.00 180,000 $12.00
Issued 100,000 $8.00 50,000 $7.50
------------ ------------- ------------
Outstanding, end of year 330,000 $10.11 230,000 $11.02 180,000 $12.00
============ ============= ============
No warrants were exercised during the year ended October 31, 2000.
The Company adopted a Stock Plan (the "Plan") whereby a maximum of 800,000
shares of common stock may be issued from time to time to directors, officers,
employees and consultants pursuant to awards such as stock options and
restricted stock sales. The Plan terminates in 2007. No compensation expense was
required to be recorded over the respective service periods required of the
optionees for existing options, because the exercise price was not less than the
fair market value of the common stock on the grant dates. The following is a
summary of stock option activity under the Plan:
2000 1999 1998
---------------------------- ---------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------- -------------- ------------- -------------- ------------ ------------
Outstanding, beginning of year 635,500 $7.92 477,000 $10.00 454,250 $10.00
Granted 1,300 $4.00 225,700 $4.00 43,500 $10.00
Canceled (107,400) $7.46 (67,200) $9.49 (20,750) $10.00
------------ ------------- ------------
Outstanding, end of year 529,400 $8.01 635,500 $7.92 477,000 $10.00
============ ============ ============
The following is a summary of options outstanding under the Plan at October 31,
2000:
Weighted Number of Remaining Number of Weighted
Average Options Contractual Exercisable Average
Exercise Price Outstanding Life Options Exercise Price
------------------ ----------------- ----------------- ----------------- ------------------
$8.01 529,400 7 524,300 $7.99
================================================================================
F-18
45
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 9 STOCK WARRANTS AND OPTIONS, CONTINUED
The Company has adopted only the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" and continues to account for stock
options in accordance with Accounting Principles Board Opinion No. 25.
The weighted-average grant date fair value of options granted was $2.02 during
1999. Fair value of options was calculated by using the Black-Scholes options
pricing model using the following assumptions for 1999 and 1998 activity:
1999 1998
----------- ---------
Expected life 6 years 6 years
Risk-free interest rate 5.825% 5.00%
Expected volatility 46.570% 82.15%
Dividend yield 0.000% 0.000%
Had the Company adopted SFAS 123, pro forma results for fiscal 2000 would not
vary significantly from those reported.
On a pro forma basis, the effect of stock-based compensation had the Company
adopted SFAS 123 for fiscal 1999 and 1998 is as follows:
1999 1998
------------ ---------
Net income (loss)
As reported $ (1,309,395) $2,749,605
Pro forma (1,933,721) 2,242,005
Basic and diluted earnings (loss) per share
As reported (0.26) 0.52
Pro forma (0.38) 0.43
================================================================================
F-19
46
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 10 EARNINGS PER SHARE
The Company has adopted SFAS No. 128 which establishes standards for computing
and presenting earnings per share by replacing the presentation of primary
earnings per share with a presentation of basic earnings per share. It also
requires the dual presentation of basic and diluted earnings per share on the
face of the statements of operations. Earnings (loss) per share ("EPS") is
calculated as follows:
Year Ended October 31, 2000
-------------------------------------------------
Net Loss Shares Per-Share
(Numerator) (Denominator) Amount
------------- ------------ -----------
Basic and diluted
Loss to common stockholders $ (9,483,721) 5,058,915 $(1.87)
Year Ended October 31, 1999
--------------------------------------------------
Net Loss Shares Per-Share
(Numerator) (Denominator) Amount
------------- ------------ -----------
Basic and diluted
Loss to common stockholders $ (1,309,395) 5,095,259 $(0.26)
Year Ended October 31, 1998
---------------------------------------------------
Net Loss Shares Per-Share
(Numerator) (Denominator) Amount
------------- ------------ -----------
Basic and diluted
Income to common stockholders $ 2,749,605 5,254,156 $ 0.52
For the years ended October 31, 2000, 1999 and 1998, there were no differences
between basic and diluted EPS. Warrants and options to purchase 330,000, 230,000
and 180,000 shares and 529,400, 635,500 and 477,000 shares, respectively, of
common stock were outstanding during the years. They were not included in the
computation of diluted EPS because the warrants' and options' exercise prices
were greater than the average market price of the common stock during the years
ended October 31, 2000, 1999 and 1998.
NOTE 11 STOCKHOLDERS' EQUITY
The Company's Articles of Incorporation authorized 30,000,000 shares of common
stock, par value $.001 per share, and 5,000,000 shares of preferred stock, par
value $.001 per share. In June 1997, a 3.175 to 1 stock split of the Company's
common stock was effected. All shares and per-share amounts included in the
accompanying financial statements and footnotes have been restated to reflect
the stock split.
The Board of Directors has the authority to issue the authorized and unissued
preferred stock in one or more series with such designations, rights and
preferences as may be determined from time to time by the Board of Directors,
without stockholder approval. No shares of the preferred stock were issued as of
October 31, 2000.
In September 1998, the Board of Directors authorized the repurchase of up to
$1,000,000 of the Company's common stock in the open market. During the years
ended October 31, 2000 and 1999, the Company had repurchased 25,500 and 86,948
shares of the Company's stock at an average price of $3.06 and $4.08 per share
for an aggregate amount of $78,032 and $354,341, respectively.
================================================================================
F-20
47
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 12 EMPLOYEE BENEFIT PLAN
The Company has a 401(k) profit sharing plan covering substantially all
employees. Eligible employees may elect to contribute up to 15% of their annual
compensation, as defined, and may elect to separately contribute up to 100% of
their annual bonus (if any) to the plan. The Company may also elect to make
discretionary contributions. For the years ended October 31, 2000 and 1999, the
Company made matching contributions to the plan in the amount of $282,589 and
$261,686, respectively.
NOTE 13 ECONOMIC DEPENDENCY
The Company made sales to one customer representing approximately 12% of net
sales during the year ended October 31, 2000.
================================================================================
F-21
48
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 14 QUARTERLY INFORMATION (UNAUDITED)
First Quarter Second Quarter Third Quarter Fourth Quarter
----------------------- -------------------------- -------------------------- ---------------------------
2000 1999 2000 1999 2000 1999 2000 1999
----------- ---------- ------------ ----------- ------------ ----------- ------------ ------------
Net sales $12,003,409 $8,856,901 $ 12,389,749 $12,177,743 $ 17,441,961 $12,961,638 $ 10,096,947 $ 10,059,691
Gross profit 7,195,961 4,639,954 7,331,313 6,877,799 10,366,029 7,174,951 5,613,885 6,623,423
Net income (loss) (252,258) 38,859 (2,468,978) 746,341 (1,017,567) 576,182 (5,744,918) (2,670,777)
Earnings (loss)
per share, basic
and diluted (0.05) 0.01 (0.49) 0.15 (0.20) 0.11 (1.13) (0.52)
================================================================================
F-22
49
50
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
AND CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2001
51
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
TABLE OF CONTENTS
JANUARY 31, 2001
- --------------------------------------------------------------------------------
Page
----
INDEPENDENT ACCOUNTANTS' REVIEW REPORT F-23
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets F-24
Consolidated Statements of Operations F-25
Consolidated Statements of Cash Flows F-26 - F-27
Notes to the Consolidated Financial Statements F-28
52
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Board of Directors and Stockholders
Signature Eyewear, Inc.
We have reviewed the accompanying consolidated balance sheet of Signature
Eyewear, Inc. and Subsidiary as of January 31, 2001 and the related consolidated
statements of operations and cash flows for the three-month period ended January
31, 2001. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the consolidated financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of the Company as of October 31, 2000,
and the related consolidated statements of operations, shareholders' equity and
cash flows for the year then ended (not presented herein), and in our report
dated January 29, 2001, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying consolidated balance sheet as of October 31, 2000 is fairly
stated, in all material respects, in relation to the consolidated balance sheet
from which it has been derived.
The consolidated statements of operations and cash flows for the three-month
period ended January 31, 2000 were not audited or reviewed by us and,
accordingly, we do not express an opinion or any other form of assurance on
them.
/s/ Altschuler, Melvoin and Glasser LLP
Los Angeles, California
May 1, 2001
F-23
53
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 2001 AND OCTOBER 31, 2000
- --------------------------------------------------------------------------------
January 31, October 31,
2001 2000
------------ ------------
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 679,804 $ 1,860,451
Accounts receivable, trade (net) 9,215,650 8,744,254
Inventories 16,390,769 18,742,177
Income taxes refundable 1,262,154 1,262,154
Promotion products and material 1,857,120 2,082,234
Prepaid expenses and other current assets 277,434 314,301
------------ ------------
29,682,931 33,005,571
------------ ------------
Property and equipment (net of accumulated
depreciation and amortization) 1,932,792 2,077,230
------------ ------------
Other assets
Goodwill and other intangibles, net 5,355,565 5,499,351
Deposits and other assets 335,798 852,456
------------ ------------
5,691,363 6,351,807
------------ ------------
$ 37,307,086 $ 41,434,608
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable, trade $ 12,740,658 $ 14,751,544
Notes payable 4,469,752 5,000,000
Current portion of long-term debt 4,508,640 4,603,203
Accrued credits 703,325 789,062
Accrued expenses and other current liabilities 2,362,743 3,042,872
------------ ------------
24,785,118 28,186,681
------------ ------------
Long-term debt 3,976,673 4,806,455
------------ ------------
Commitments and contingencies
Stockholders' equity
Preferred stock -- --
Common stock (authorized 30,000,000 shares, $.001 par
value, 5,056,889 shares issued and outstanding at
January 31, 2001 and October 31, 2000) 9,188 9,188
Paid-in capital 14,363,990 14,363,990
Retained earnings (accumulated deficit) (5,827,883) (5,931,706)
------------ ------------
8,545,295 8,441,472
------------ ------------
$ 37,307,086 $ 41,434,608
============ ============
- --------------------------------------------------------------------------------
See accompanying notes. F-24
54
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED JANUARY 31, 2001 AND 2000
- --------------------------------------------------------------------------------
2001 2000
------------ ------------
Net sales $ 10,889,044 $ 12,003,409
Cost of sales 3,760,963 4,807,448
------------ ------------
GROSS PROFIT 7,128,081 7,195,961
------------ ------------
Operating expenses
Selling 3,290,642 3,587,438
General and administrative 3,080,519 3,511,306
Depreciation and amortization 300,512 333,214
------------ ------------
6,671,673 7,431,958
------------ ------------
INCOME (LOSS) FROM OPERATIONS 456,408 (235,997)
------------ ------------
Other income (expense)
Interest, net (373,833) (195,498)
Sundry 21,978 11,066
------------ ------------
(351,855) (184,432)
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 104,553 (420,429)
Provision (benefit) for income taxes 730 (168,171)
------------ ------------
NET INCOME (LOSS) $ 103,823 $ (252,258)
============ ============
Earnings (loss) per share, basic and diluted
Earnings (loss) per common share $ 0.02 $ (0.05)
============ ============
Weighted average number of common
shares outstanding 5,056,889 5,064,927
============ ============
- --------------------------------------------------------------------------------
See accompanying notes. F-25
55
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED JANUARY 31, 2001 AND 2000
- --------------------------------------------------------------------------------
2001 2000
----------- -----------
OPERATING ACTIVITIES
Net income (loss) $ 103,823 $ (252,258)
Adjustments to reconcile net income (loss) to net cash
used in operating activities
Depreciation and amortization 300,512 333,214
Provision for bad debts 13,149 90,504
Changes in assets--(increase) decrease
Accounts receivable, trade (net) (484,545) (2,347,076)
Inventories 2,351,588 (46,524)
Income taxes refundable (368,171)
Prepaid expenses and other assets 135,005 221,743
Deposits and other assets 17,590
Changes in liabilities--increase (decrease)
Accounts payable, trade (2,010,886) (1,412,329)
Income taxes payable (1,055,667)
Accrued distributor credits (85,737)
Accrued expenses and other liabilities (728,785) (962,183)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (388,286) (5,798,747)
----------- -----------
INVESTING ACTIVITIES
Purchases of property and equipment (12,467) (41,655)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (12,467) (41,655)
----------- -----------
FINANCING ACTIVITIES
Borrowings on notes payable, bank 2,850,000
Repayments on notes payable, bank (530,248)
Borrowings on long-term debt 3,500,000
Principal payments on long-term debt (223,200) (655,921)
Principal payments on capitalized lease obligations (26,446)
Repurchase of common stock (78,032)
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (779,894) 5,616,047
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,180,647) (224,355)
Cash and cash equivalents
Beginning of period 1,860,451 463,023
----------- -----------
END OF PERIOD $ 679,804 $ 238,668
=========== ===========
- --------------------------------------------------------------------------------
F-26
56
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED), Continued
THREE MONTHS ENDED JANUARY 31, 2001 AND 2000
- --------------------------------------------------------------------------------
2001 2000
----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for
Interest $ 386,819 $ 1,042,586
=========== ===========
Income taxes $ 730 $ 201,350
=========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Consulting obligation $ $ 773,316
=========== ===========
- --------------------------------------------------------------------------------
F-27
57
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 1 UNAUDITED INTERIM FINANCIAL STATEMENTS
The consolidated financial statements should be read in conjunction with the
financial statements in this Annual Report on Form 10-K. Significant accounting
policies disclosed therein have not changed. Certain reclassifications of prior
period amounts have been made to conform to the current presentation.
The interim financial information in this report has not been audited. In the
opinion of management, all adjustments necessary for a fair presentation of the
consolidated financial position and the consolidated results of operations for
the interim periods have been made. All adjustments made were of a normal,
recurring nature. Results of operations reported for interim periods are not
necessarily indicative of results for the entire year.
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and reported amounts of revenue
and expenses during the reporting period. Actual results could differ from those
estimates.
NOTE 2 BASIS OF PRESENTATION
A summary of significant accounting policies is as follows:
INCOME TAXES--The Company's effective income tax rate varies from the federal
statutory tax rate for the three months ended January 31, 2001 due to the
utilization of Net Operating Loss carryforwards and for the three months
ended January 31, 2000 principally due to state income taxes.
EARNINGS PER SHARE--Financial Accounting Standards No. 128 establishes
standards for computing and presenting earnings per share. It also requires
the dual presentation of basic and diluted earnings per share on the face of
the income statement. Earnings per share is calculated as follows:
Three Months Ended January 31, 2001
---------------------------------------------
Net Income Shares Per-Share
(Numerator) Denominator Amount
----------- ----------- -----------
Basic and diluted EPS income available to
common stockholders $ 103,823 5,056,889 $ 0.02
=========== =========== ===========
Three Months Ended January 31, 2000
---------------------------------------------
Net Loss Shares Per-Share
(Numerator) Denominator Amount
----------- ----------- -----------
Basic and diluted EPS loss available to
common stockholders $ (252,258) 5,064,927 $ (0.05)
=========== =========== ===========
Warrants and options issued by the Company are only included in the computation
of weighted average number of shares, where their inclusion is not
anti-dilutive. For the three months ended January 31, 2001 the common stock
equivalents are not included because the warrants' and options' exercise prices
were greater than the average market price of the common stock. For the three
months ended January 31, 2000 the common stock equivalents are not included
because the Company reported a net loss and their inclusion would be
anti-dilutive.
- --------------------------------------------------------------------------------
F-28
58
ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10--DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the
directors and executive officers of the Company as of May 31, 2001:
YEAR FIRST
ELECTED OR
APPOINTED
NAME: AGE DIRECTOR PRINCIPAL OCCUPATION
----- --- -------- --------------------
NOMINEES:
Bernard Weiss 62 1983 Mr. Weiss has served as Chief Executive Officer of the Company
since 1983. Mr. Weiss served as Chairman of the Board from
1983 to 1988 and since June 2000, and served as Co-Chairman
from 1989 to June 2000. Mr. Weiss started in the optical
industry in 1975 as Vice President of Sales and Marketing for
Optique du Monde. From 1977 until he founded the Company in
1983, Mr. Weiss worked in a variety of executive positions at
companies in the optical industry.
Michael Prince 51 1994 Mr. Prince joined the Company in 1993 and has served as the
Chief Financial Officer and as a Director of the Company since
March 1994. For more than 14 years before joining the
Company, Mr. Prince's primary occupation was as a principal
with Prince & Co., a business consulting firm that he owned.
Joel Johnson 46 1998 Mr. Johnson is owner and President of Orchard Partners, Inc.,
a professional firm providing advisory services in corporate
finance which he formed in February 1998. For eight years
before forming Orchard Partners, Mr. Johnson served in the
investment banking department of Fechtor, Detwiler & Co.,
Inc. He received an MBA in Finance from the University of
Colorado in 1980 and an AB from Harvard College in 1976.
OTHER EXECUTIVE
OFFICERS:
Robert Fried 56 Mr. Fried has served as the Company's chief marketing
executive since joining the Company in 1990. In 1995, he was
appointed the Company's Senior Vice President of Marketing.
Before joining the Company in 1990, Mr. Fried served in
various executive marketing positions at Motorola, Quasar
Electronics, Rockwell International, Starcraft Leisure
Products, Marantz Stereo Company, Nautilus Fitness, Inc. and
Hansen Foods.
Robert Zeichick 50 Mr. Zeichick has served as the Company's chief advertising and
promotion executive since joining the Company in November
1990. In 1995, he was appointed the Company's Vice President
of Advertising and Sales Promotion. From 1988 until joining
the Company in 1990, Mr. Zeichick served as Vice President of
Advertising and Sales Promotion at Nautilus Fitness, Inc. and
Hansen Foods. Mr. Zeichick worked as an independent
advertising consultant from 1984 until 1988 and worked on such
brand names as Applause, Walt Disney Home Video and Marantz.
26
59
ITEM 11--EXECUTIVE COMPENSATION
The following table sets forth, as to the Chief Executive Officer and
as to each of the other persons serving as executive officers as of October 31,
2000 whose compensation exceeded $100,000 during the last fiscal year (the
"Named Executive Officers"), information concerning all compensation paid for
services to the Company in all capacities during the last three fiscal years.
SUMMARY COMPENSATION TABLE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM
COMPENSATION
-----------------
FISCAL YEAR NUMBER OF
ENDED SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION (1) OCTOBER 31, ANNUAL COMPENSATION UNDERLYING OPTIONS COMPENSATION
- ----------------------------------------------------------------------------------------------------------------------------
SALARY BONUS
- ----------------------------------------------------------------------------------------------------------------------------
Bernard Weiss 2000 $ 230,000 -- -- $ --
Chief Executive Officer 1999 190,000 -- --
1998 190,000 -- --
- ----------------------------------------------------------------------------------------------------------------------------
Michael Prince 2000 $215,000 -- -- $ --
Chief Financial Officer 1999 175,000 25,000 9,000
1998 175,000 25,000 --
- ----------------------------------------------------------------------------------------------------------------------------
Robert Fried 2000 $215,000 -- -- $ --
Senior Vice President, 1999 175,000 $25,000 9,000
Marketing 1998 175,000 25,000 --
- ----------------------------------------------------------------------------------------------------------------------------
Robert Zeichick 2000 $215,000 -- -- $ --
Vice President, Advertising 1999 160,000 $25,000 9,000
and Sales Promotion 1998 160,952 25,000 --
- ----------------------------------------------------------------------------------------------------------------------------
OPTION GRANTS IN LAST FISCAL YEAR
There were no option grants to Named Executive Officers in fiscal 2000.
STOCK OPTIONS HELD AT FISCAL YEAR END
The following table sets forth, for each of the Named Executive Officers,
certain information regarding the number of shares of Common Stock underlying
stock options held at October 31, 2000 and the value of options held at fiscal
year end based upon the last reported sales price of the Common Stock on the
Nasdaq Stock Market on October 31, 2000 ($.59 per share). No Named Executive
Officer exercise any stock options during fiscal 2000.
AGGREGATED FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXECUTED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
OCTOBER 31, 2000 AT OCTOBER 31, 2000
- ---- ---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
Bernard Weiss 12,000 8,000 $ 0 $ 0
Michael Prince 30,000 14,000 0 0
27
60
Robert Fried 30,000 14,000 0 0
Robert Zeichick 30,000 14,000 0 0
EMPLOYMENT CONTRACTS
Bernard Weiss, Michael Prince, Robert Fried and Robert Zeichick have each
entered into an employment agreement with the Company that took effect on
September 16, 1997. The present salaries of these executive officers are
(subject to increases from time to time approved by the Board of Directors or
Compensation Committee): Mr. Weiss--$230,000; Mr. Prince--$215,000; Mr.
Fried--$215,000; and Mr. Zeichick-$215,000.
Upon termination of employment by the Company without cause or by an
executive officer upon an adverse event, the executive officer will continue to
receive salary and benefits for one year following termination. The employment
agreements define an "adverse event" to include the occurrence of any of the
following, without the prior written consent of the executive officer: (i) the
executive's demotion as evidenced by the loss of the executive officer's title,
(ii) a significant diminution of the executive's on-going duties and
responsibilities, (iii) the relocation of the Company's principal executive
offices outside the Los Angeles Metropolitan area, or (iv) the Company requiring
the executive to relocate to an office outside the Los Angeles Metropolitan area
for a period exceeding three months in any calendar year.
STOCK PLAN
The Company adopted the Signature Eyewear, Inc. 1997 Stock Plan (the "Stock
Plan ") in 1997. The purpose of the Stock Plan is to attract, retain and
motivate certain key employees of the Company and its subsidiaries by giving
them incentives which are linked directly to increases in the value of the
Company's Common Stock. Each executive officer, other employee, non-employee
director or consultant of the Company or any of its subsidiaries is eligible to
be considered for the grant of awards under the Stock Plan. A maximum of 800,000
shares of Common Stock may be issued pursuant to awards granted under the Stock
Plan, subject to certain adjustments to prevent dilution. No person may receive
awards representing more than 25% of the number of shares of Common Stock
covered by the Stock Plan (200,000 shares). Any shares of Common Stock subject
to an award which for any reason expires or terminates unexercised are again
available for issuance under the Stock Plan. The Stock Plan terminates in 2007.
The Stock Plan authorizes its administrator to enter into any type of
arrangement with an eligible participant that, by its terms, involves or might
involve the issuance of (i) shares of Common Stock, (ii) an option, warrant,
convertible security, stock appreciation right or similar right with an exercise
or conversion privilege at a price related to the Common Stock, or (iii) any
other security or benefit with a value derived from the value of the Common
Stock. Any stock option granted pursuant to the Stock Plan may be an incentive
stock option within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended, or a nonqualified stock option.
In November 1999, the Board of Directors established a Compensation
Committee and delegated to the Compensation Committee the authority to
administer the Stock Plan. Before November 1999, the Board of Directors
administered the Stock Plan. Subject to the provisions of the Stock Plan, the
Compensation Committee will have full and final authority to select the
participants to whom awards will be granted thereunder, to grant the awards and
to determine the terms and conditions of the awards and the number of shares to
be issued pursuant to awards.
DEFERRED COMPENSATION PLAN
Effective as of January 1, 2000, the Company adopted the Signature Eyewear,
Inc. Key Employee Deferred Compensation Plan (the "Deferred Compensation Plan"),
a non-qualified deferred compensation plan. The Deferred Compensation Plan is
intended to permit the Company's key employees and directors to defer
compensation in excess of the limits permitted under the Company's tax-qualified
401(k) plan and to defer taxation on the earnings attributable to compensation
deferred under the Deferred Compensation Plan. Participation is limited to a
select group of management and highly compensated employees specifically
approved by the Compensation Committee. Members of the Board of Directors are
also eligible to participate. Participation is voluntary and eligible
participants may elect to defer up to 90% of salary, commissions, overrides or
director fees and up to 100% of
28
61
bonuses. The Company credits a matching allocation in the amount of 50% of a
participant's deferrals of up to 6% of total compensation. For non-sales
employees, the Company match vests at a rate of 20% per year and is fully vested
after five years of service. The annual Company match for sales employees will
vest at a rate of 20% per year over the five years after the year such match is
credited on behalf of the participant. The Deferred Compensation Plan provides
accelerated vesting in the event of a participant's death prior to termination
of employment, in the event the participant is subject to an involuntary
termination within 12 months after a change in control of the Company and a
partial acceleration if the Deferred Compensation Plan is terminated. The
Deferred Compensation Plan was terminated effective October 31, 2000.
COMPENSATION OF DIRECTORS
Each director who is not an officer of or otherwise employed by the Company
receives an annual retainer of $8,000. During fiscal 2000, each director who was
not an officer of the Company was awarded non-statutory stock options to
purchase up to 4,000 shares of the Company's Common Stock under the 1997 Stock
Plan.
ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of March 31, 2001 certain information
relating to the ownership of the Common Stock by (i) each person known by the
Company to be the beneficial owner of more than 5% of the outstanding shares of
the Company's Common Stock, (ii) each of the Company's directors, (iii) each of
the Named Executive Officers, and (iv) all of the Company's executive officers
and directors as a group. Except as may be indicated in the footnotes to the
table and subject to applicable community property laws, each such person has
the sole voting and investment power with respect to the shares owned. The
address of each person listed is in care of the Company, 498 North Oak Street,
Inglewood, California 90302.
NUMBER OF SHARES OF
COMMON STOCK
NAME AND ADDRESS BENEFICIALLY OWNED (1) PERCENT (1)
---------------- ---------------------- -----------
The Weiss Family Trust(2) 2,090,972 41.1%
Bernard Weiss(2)(3) 2,110,972 41.4
Julie Heldman(2)(3) 2,090,972 41.1
Robert Fried(4) 222,599 4.3
Robert Zeichick(4) 223,689 4.4
Michael Prince(4) 143,941 2.8
Joel Johnson(5) 12,420 *
Directors and executive officers
as a group (5 persons)(6) 2,713,621 51.7%
- -----------
* Less than one percent.
(1) Under Rule 13d-3, certain shares may be deemed to be beneficially owned by
more than one person (if, for example, persons share the power to vote or
the power to dispose of the shares). In addition, shares are deemed to be
beneficially owned by a person if the person has the right to acquire the
shares (for example, upon exercise of an option) within 60 days of the date
as of which the information is provided. In computing the percentage
ownership of any person, the amount of shares outstanding is deemed to
include the amount of shares beneficially owned by such person (and only
such person) by reason of these acquisition rights. As a result, the
percentage of outstanding shares of any person as shown in this table does
not necessarily reflect the person's actual ownership or voting power with
respect to the number of shares of Common Stock actually outstanding at
March 1, 2001.
(2) Bernard Weiss and Julie Heldman are married. Mr. Weiss and Ms. Heldman are
co-trustees of The Weiss Family Trust, and have voting and investment power
for shares held by The Weiss Family Trust.
(3) Includes 20,000 shares of Common Stock reserved for issuance upon exercise
of stock options which currently are exercisable.
(4) Includes 44,000 shares of Common Stock reserved for issuance upon exercise
of stock options which currently are exercisable.
29
62
(5) Includes 10,500 shares of Common Stock reserved for issuance upon exercise
of warrants which currently are exercisable.
(6) Includes 162,500 shares of Common Stock reserved for issuance upon exercise
of stock options and warrants which currently are exercisable.
ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Inapplicable.
30
63
PART IV
ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents Filed As Part of Report:
1. Financial Statements:
Independent Auditor's Report;
Consolidated Balance Sheets at October 31, 1999 and 2000;
Consolidated Statements of Operations for the years ended October 31,
1998, 1999 and 2000;
Consolidated Statements of Changes in Stockholders' Equity for the
years ended October 31, 1998, 1999 and 2000; and
Consolidated Statements of Cash Flows for the years ended October 31,
1998, 1999 and 2009.
Independent Auditor's Report
Consolidated Balance Sheets at January 31, 2001 (unaudited)
Consolidated Statements of Operations for the three months ended
January 31, 2000 and 2001 (unaudited)
Consolidated Statements of Cash Flows for the three months ended
January 31, 2000 and 2001 (unaudited)
Notes to Consolidated Financial Statements (unaudited)
2. Financial Statement Schedules:
Schedule II--Valuation and Qualifying Accounts
3. Exhibits:
See attached Exhibit List.
(b) Reports on Form 8-K:
None
31
64
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SIGNATURE EYEWEAR, INC.
By: /s/ MICHAEL PRINCE
------------------------------
Michael Prince
Chief Financial Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ BERNARD WEISS Chairman of the Board and Chief June 13, 2001
- ------------------------------------ Executive Officer
Bernard Weiss
/s/ MICHAEL PRINCE
- ------------------------------------ Chief Financial Officer and June 13, 2001
Michael Prince Director (Principal Financial and
Accounting Officer)
/s/ JOEL JOHNSON
- ------------------------------------ Director June 13, 2001
Joel Johnson
32
65
EXHIBIT INDEX
Exhibit
Number Exhibit Description
------ -------------------
3.1 Restated Articles of Incorporation of Registrant. Incorporated by
reference to Exhibit 3.1 to Registrant's Form S-1 (SEC Registration
No. 333-30017), filed with the Commission on June 25, 1997, as
amended.
3.2 Amended and Restated Bylaws of Registrant. Incorporated by reference
to Exhibit 3.2 to Registrant's Form S-1 (SEC Registration No.
333-30017), filed with the Commission on June 25, 1997, as amended.
4.1 Specimen Stock Certificate of Common Stock of Registrant.
Incorporated by reference to Exhibit 4.1 to Registrant's Form S-1
(SEC Registration No. 333-30017), filed with the Commission on June
25, 1997, as amended.
10.1 Registrant's 1997 Stock Plan. Incorporated by reference to Exhibit
10.1 to Registrant's Form S-1 (SEC Registration No. 333-30017),
filed with the Commission on June 25, 1997, as amended.
10.2 Form of Registrant's Stock Option Agreement (Non-Statutory Stock
Option). Incorporated by reference to Exhibit 10.2 to Registrant's
Form S-1 (SEC Registration No. 333-30017), filed with the Commission
on June 25, 1997, as amended.
10.3 Form of Indemnification Agreement for Directors and Officers.
Incorporated by reference to Exhibit 10.3 to Registrant's Form S-1
(SEC Registration No. 333-30017), filed with the Commission on June
25, 1997, as amended.
10.4 Tax Indemnification Agreement among Registrant and the Existing
Shareholders. Incorporated by reference to Exhibit 10.4 to
Registrant's Form S-1 (SEC Registration No. 333-30017), filed with
the Commission on June 25, 1997, as amended.
10.5 License Agreement, dated May 28, 1991, between Laura Ashley
Manufacturing B.V. and Registrant, as amended August 2, 1993, May
31, 1994, January 30, 1995, August 21, 1995 and October 4, 2000.
[Portions of this Exhibit have been deleted and filed separately
with the Securities and Exchange Commission pursuant to a request
for an order granting of Confidential Treatment.]
10.6 Lease Agreement, dated March 23, 1995, between the Registrant and
Roxbury Property Management, and Guaranty of Lease, dated March 23,
1995, between Julie Heldman and Bernard Weiss and Roxbury Property
Management; First Amendment to Lease, dated May 5, 1998, between
Roxbury Property Management and the Registrant; and Second Amendment
to Lease, dated June 3, 1998, between Roxbury Property Management
and the Registrant. Incorporated by reference to Exhibit 10.6 to
Registrant's Form S-1 (SEC Registration No. 333-30017) and Exhibit
10.17 to Registrant's Annual Report on Form 10-K for the year ended
October 31, 1999. Third Amendment to Lease, dated March 2000,
between Roxbury Property Management and Registrant.
10.7 Accounts Receivable and Inventory Loan Agreement dated June 26, 2000
between Registrant and City National Bank; Forbearance Agreement
dated December 18, 2000; Amendment to Forbearance Agreement dated
February 28, 2001; Second Amendment to Forbearance Agreement
dated May 1, 2001; and Third Amendment to Forbearance Agreement
dated June 8, 2001.
10.8 Employment Agreement between the Registrant and Bernard Weiss.
Incorporated by reference to Exhibit 10.8 to Registrant's Form S-1
(SEC Registration No. 333-30017), filed with the Commission on June
25, 1997, as amended.
10.9 Employment Agreement between the Registrant and Michael Prince.
Incorporated by reference to Exhibit 10.10 to Registrant's Form S-1
(SEC Registration No. 333-30017), filed with the Commission on June
25, 1997, as amended.
10.10 Employment Agreement between the Registrant and Robert Fried.
Incorporated by reference to Exhibit 10.11 of Registrant's Form S-1
(SEC Registration No. 333-30017), filed with the Commission on June
25, 1997, as amended.
10.11 Employment Agreement between the Registrant and Robert Zeichick.
Incorporated by reference to Exhibit 10.12 of Registrant's Form S-1
(SEC Registration No. 333-30017), filed with the Commission on June
25, 1997, as amended.
10.12 License Agreement, dated June 24, 1997, between Eddie Bauer, Inc.
and the Registrant and First Addendum to License Agreement Dated
June 24, 1997, dated as of March 26, 1999, between the Registrant
and Eddie Bauer, Inc. Incorporated by reference to Exhibit 10.15 to
Registrant's Form S-1 (SEC Registration No. 333-30017 and
33
66
Exhibit 10.2 to Registrant's Quarterly Report of Form 10-Q for the
quarter ended April 30, 1999. [Portions of this Exhibit have been
deleted and filed separately with the Securities and Exchange
Commission pursuant to a grant of Confidential Treatment.]
10.13 Form of Representatives' Warrant. Incorporated by reference to
Exhibit 1.2 to Registrant's Form S-1 (SEC Registration No.
333-30017), filed with the Commission on June 25, 1997, as amended.
23.1 Consent of Altschuler, Melvoin and Glasser LLP.
99.1 Schedule II--Valuation and Qualifying Accounts.
34