================================================================================
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, 2001
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
INGLEWOOD, CALIFORNIA 90302
------------------------------------------------------------
(Address of Principal Executive Offices, including ZIP Code)
(310) 330-2700
--------------------------------------------------
Registrant's Telephone Number, Including Area Code
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS 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 [X]
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. [X]
On September 30, 2002, the Registrant had 5,583,989 outstanding shares of
Common Stock, $.001 par value. The aggregate market value of the 3,032,868
shares of Common Stock held by non-affiliates of the Registrant as of September
30, 2002 was $788,546.
================================================================================
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. ("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 and the Signature line. 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 75%, 60% and
61% of the Company's net sales in fiscal 1999, fiscal 2000 and fiscal 2001,
respectively.
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.
BUSINESS STRATEGY
The Company suffered material operating losses in its last three fiscal
years, causing a significant deterioration in its financial condition. At
October 31, 2001, the Company's stockholders' deficit was $4,946,000. The
Company has been in default under its bank credit facility since the fourth
quarter of fiscal 2000 and since December 2000 has operated under a forbearance
agreement from the bank which has been extended a number of times and currently
expires on November 8, 2002. The Company also has a forbearance agreement from a
frame vendor for an obligation in the amount of approximately $5.9 million which
will remain in effect for so long as the bank forbearance agreement is in
effect.
The Company's ability to continue operations without filing for a
reorganization under the Bankruptcy Code will depend in significant part upon
the bank extending the forbearance agreement and the Company obtaining
additional capital and refinancing its bank credit facility. If the bank does
not extend the forbearance agreement and demands full payment of the credit
facility, the Company would most likely file for protection under the Bankruptcy
Code.
The Company has been attempting to refinance its bank credit facility for
two years, and management believes it is unlikely to be able to refinance the
facility without a capital infusion. Additional capital could be obtained
directly through the sale of debt or equity securities or indirectly through a
merger with or sale to another entity. In all likelihood, any recapitalization
would involve a change of control of the Company. A change in control of the
Company could result in a default under certain of its eyewear licenses unless
the Company obtains the prior approval of the licensor under such licenses. See
"Business--Products."
2
The Company's ability to recapitalize will depend in part on an investor's
or acquiror's determination that the Company can return to operating
profitability. While the Company has significantly reduced its general,
administrative and other expenses during the past two years, its revenues have
continued to be adversely affected by the downturn in the optical frame
industry, the effects of the September 11, 2001 tragedy, the reluctance of
retailers to purchase large inventories of the Company's products due to
concerns about the Company's viability and the discontinuation of certain
product lines.
In April 2002, the Company signed a letter of intent with a private
investor which contemplated a sale to the investor of capital stock for $400,000
concurrent with a refinancing of the bank credit facility with a new lender
arranged by the investor. The letter of intent contained a covenant of the
Company not to seek other investors or acquirors. While the letter of intent and
related covenants have expired, the investor continues discussions with the
Company and its creditors concerning a recapitalization of the Company. In
addition, the Company is in discussions with other potential
investors/acquirors, and is actively seeking other investors/acquirors. However,
as of October 31, 2002, the Company had no letter of intent for any financing or
acquisition.
INDUSTRY OVERVIEW(1)
THE OPTICAL MARKET. After several years of steady, albeit slowing growth in
the 1990s, optical retail sales in the United States experienced a substantial
slowdown in 2001. Retail sales of all eyewear products--including contact
lenses, sunglasses, clip-ons, lenses, lens treatments, and prescription
frames--totaled $15.8 billion in 2001, a decrease of 4% from $16.5 billion in
2000. It was the first time since 1998 that sales were below $16 billion.
Correspondingly, the frame segment of the optical market was $5.2 billion,
down nearly 5% from $5.48 billion in 2000. This drop in sales was in spite of a
steady rise in retail frame prices over the past five years: in 2001, the
average retail price for frames and lenses/lens treatments across all retail
channels in the U.S. was approximately $175, as compared to $153 in 1997.
However, the frame category's slowing sales were accompanied by a shrinking
share of the market, dropping slightly to 32.6% in 2001 from a 33.3% share in
2000.
Sales in the remaining three product categories were down as well in 2001:
lenses/lens treatments ($8.1 billion, -2.7%); contact lenses ($1.9 billion,
- -6%); non-prescription sunwear and clip-ons ($620 million, -8%). Many industry
observers attribute the relatively smaller drop in sales of lenses/lens
treatments to consumers choosing to put off frame purchases in an uncertain
economy, and instead having new lenses fitted into existing frames. In fact, in
2001 the percentage of optical customers fitting new lenses into older frames
climbed 7% over 2000.
Despite slowing growth, the number of potential eyewear customers remains
large. With a U.S. population of 278 million in 2001, approximately 169 million
people require some type of vision correction. Out of the 169 million people
requiring vision correction, 86.3 million people purchased eyewear in 2001--or
about 31% of the population.
Typically, men and women over the age of 45 need corrective eyewear due to
presbyopia, a condition that makes it difficult to focus on nearby objects such
as small newspaper print. As more of the U.S. population exceeds age 45, the
Company believes more people will have vision impairment, and sales of
corrective eyewear should increase. The table below demonstrates how the number
of people 45 years and older will increase substantially.
- -------------------
(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 2002 U.S. Optical Industry Handbook published by Jobson Publishing
Corporation in March 2002.
3
CURRENT AGE BREAKDOWN OF U.S. POPULATION
AND PROJECTED GROWTH 2001-2005, 2005-2010
PROJECTED GROWTH PROJECTED GROWTH
AGE 2001 POPULATION 2001-2005 2005-2010
- -------------- --------------- ---------------- ----------------
0-14 59,000 -3.0% 3.0%
15-24 39,000 5.1% 4.9%
25-44 81,000 -2.5% -2.5%
45-64 63,000 9.5% 14.5%
65 and up 35,000 2.9% 11.1%
--------------- ---------------- ----------------
Total 278,000 3.2% 3.8%
=============== ================ ================
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.
COMPETITIVE 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 2001 ($1.9 billion), their sales as a percentage of
total retail sales decreased from 13.5% in 1995 to 12.3% in 2001. 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 over 1.5 million procedures performed in the U.S. in 2000.
Revenues from the procedure reached $2.4 billion in 2001, up from $700 million
in 1997. Nonetheless, the Company believes that these techniques will not have a
material adverse affect on sales of prescription eyewear in the near future.
Many who have the procedure require follow up procedures and experience an
increased sensitivity to light. The Company believes that a number of people who
have had successful eye surgery may still need 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 two main types of optical retailers:
independents (with one or two stores) and chains. Chains include national
optical retailers such as LensCrafters, Cole Vision Corp. and its subsidiary
Pearle Vision, and EyeCare Centers of America. A third category includes optical
departments within major mass merchandisers, including Wal-Mart and Costco. In
2001, independent optical retailers had a 57% market share, national optical
chain retailers had a 34% market share, and mass merchandisers had a 6% market
share. The remaining 3% market share went to managed care organizations such as
Kaiser Permanente.
BRAND DEVELOPMENT
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, 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.
4
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, teenager), 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 modern 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.
QUALITY CONTROL. The Company uses manufacturers it believes are 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
5
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.
PRODUCTS
The Company's principal products during fiscal 2001 were eyeglass frames
sold under the brand names Laura Ashley Eyewear, Eddie Bauer Eyewear, Hart
Schaffner & Marx Eyewear, Nicole Miller Eyewear, bebe eyes, 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
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
Laura Ashley
Prescription.................. Women 1992 $125 - $180
Sunwear....................... Women 1993 $ 90 - $100
Petites....................... Girls/Women 1993 $ 80- $125
Nicole Miller (2)................ Women
Prescription.................. 1993 $90-$138
Sunwear....................... 1993 $75-$95
HOUSE BRANDS
- ------------
Camelot(3)....................... Men/Women 1986 $70-$130
Unisex 1987 $70-$130
Boys/Girls 1987 $60-$90
Dakota Smith (2)
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
6
(1) Retail prices are established by retailers, not the Company.
(2) Obtained by the Company in June 1999 in connection with its acquisition
of California Design Studio, Inc.
(3) The Company sold its rights in this line in connection with the sale of
its USA Optical division in March 2002.
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 $14.0 million in
fiscal 2001, 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 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 the royalty payment for the prior two
contract years exceeds the minimum royalty for those years. Laura Ashley may
terminate the license before its term expires under certain circumstances,
including a material breach of the license agreement by the Company, if
management or control of the Company passes from Bernard L. Weiss and Julie
Heldman to other parties whom Laura Ashley may reasonably regard as unsuitable,
or if minimum sales requirements are not met in any two years.
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
a 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.
7
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 2005 but the Company may renew it for one two-year term,
provided the Company 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 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. The license period
extends through December 31, 2002, and may be 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 L.
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. The Company will
discontinue sales of bebe sunwear by the end of 2002.
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
8
before its stated term expires under certain circumstances, including if the
Company materially breaches the license agreement, if the Company is insolvent,
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. Because the Company has a
stockholders' deficit, it may be deemed to be insolvent, which would permit bebe
to terminate 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. The Company has sold the Camelot collection primarily through USA
Optical, a division of Signature. The Company sold its rights in the Camelot
line in connection with its sale of USA Optical in March 2002.
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; 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,
----------------------------------------------
1999 2000 2001
------------ -------------- ------------
(IN THOUSANDS)
Domestic distributors .... $ 12,281 $ 916 $ 1,640
Optical retail chains .... 15,709 17,041 12,346
Telemarketing(1) ......... 4,863 5,098 3,230
International ............ 3,822 6,634 5,029
Direct sales(2) .......... 7,381 22,243 21,147
------------ ------------ ------------
$ 44,056 $ 51,932 $ 43,392
============ ============ ============
(1) In fiscal 1999, included net sales by Optical Surplus, a division which
sold brand name close-outs. Optical Surplus was discontinued in fiscal
2000; therefore net sales of Company close-outs in fiscal 2000 and 2001
are included by distribution channel.
(2) The Company began selling directly to independent optical retailers
nationally in October 1999.
9
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 65 at October
31, 2001.
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. Net sales to Eyecare
Centers of America in fiscal 2001 amounted to 12% of the Company's total net
sales.
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 October 31, 2001, the Company had approximately 25
international distributors and 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. The Company had three distributors in the United States at October 31,
2001.
TELEMARKETING. The Company's USA Optical division sold frames through a
form of telemarketing to optical retailers, focusing on establishing long-term,
ongoing relationships. The Company sold this division in March 2002.
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 2001, 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.
10
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 resources than the Company.
They also employ direct sales forces that have existed far 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, 2001, the Company had 199 full-time employees, including 71
in sales and marketing, 33 in customer service and support, 40 in warehouse
operations and shipping and 55 in general administration and finance. None of
the Company's employees is 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 May 2005, and the
Company has an option to renew the lease for an additional five years.
As of November 1, 2001, the Company subleased approximately 26,000 square
feet of this space to an unaffiliated party through November 2003 with a renewal
option through May 2005.
The Company's international division also leases approximately 2,500 square
feet of warehouse and office space in Liege, Belgium, which supports the
Company's sales in Europe.
See Note 9 of Notes to Consolidated Financial Statements.
ITEM 3--LEGAL PROCEEDINGS
In March 2002, the Company settled the lawsuit filed by Coach, Inc in
February 2001 in which Coach sought damages of approximately $900,000 primarily
for advertising costs Coach alleged were owed by the Company (the non-payment of
which was the basis of Coach's termination of the eyewear license). In the
settlement, Coach released the Company from all actions and debts for a payment
of $250,000.
As of September 30, 2002, the Company was not involved in any material
legal proceedings.
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
None.
11
PART II
ITEM 5--MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK
The following table sets forth, for the periods indicated, high and low
reported sales prices for the Common Stock on the Nasdaq SmallCap Market through
March 15, 2001 and on the OTC Bulletin Board thereafter.
HIGH LOW
----------- -----------
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
FISCAL YEAR ENDED OCTOBER 31, 2001
First Quarter ......................... $ 0.97 $ 0.38
Second Quarter ........................ $ 0.75 $ 0.06
Third Quarter.......................... $ 0.80 $ 0.19
Fourth Quarter ........................ $ 0.65 $ 0.10
On September 30, 2002, the last sales price of the Common Stock as reported
in the OTC Bulletin Board was $0.26 per share. As of September 30, 2002, there
were 33 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 is unable to pay any dividends
as a result of its default under its bank credit facility and negative retained
earnings. The Company paid no dividends in fiscal 2001.
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,
-----------------------------------------------------------------------
1997 1998 1999 2000 2001
------------- ------------- ----------- ------------- -------------
STATEMENT OF OPERATIONS DATA:
Net sales ............................. $ 33,176 $ 40,892 $ 44,056 $ 51,932 $ 43,392
Gross profit .......................... 19,333 23,247 25,316 30,507 21,920
Total operating expenses .............. 15,323 19,041 27,461 39,709 33,942
Income (Loss) from operations ......... 4,010 4,206 (2,145) (9,202) (12,022)
Net income (loss) ..................... 3,585 2,750 (1,309) (9,439) (13,387)
Net income (loss) per share ........... 0.52 (0.26) (1.87) (2.65)
Pro forma net income (1) .............. 2,340
Pro forma net income per share ........ 0.61(1)
Weighted average common shares
outstanding ......................... 3,829,822 5,254,156 5,095,259 5,058,915 5,056,589
12
1997 1998 1999 2000 2001
------------- ------------- ----------- ------------- -------------
BALANCE SHEET DATA:
Current assets ........................ $ 19,964 $ 23,548 $ 27,474 $ 33,006 $ 17,185
Total assets .......................... 21,175 25,151 35,474 41,435 18,906
Current liabilities ................... 3,860 5,498 12,334 28,142 22,390
Long term debt and capitalized lease
obligations............................ 3 238 5,137 4,806 1,461
Total liabilities ..................... 3,863 5,736 17,471 32,948 23,851
Stockholders' equity (deficit) ........ 17,312 19,415 18,003 8,487 (4,945)
(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.
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 and Signature.
The Company's best-selling product lines are Laura Ashley Eyewear and Eddie
Bauer Eyewear. Net sales of Laura Ashley Eyewear and Eddie Bauer Eyewear
together accounted for 75%, 60% and 61% of the Company's net sales in fiscal
1999, fiscal 2000 and fiscal 2001, respectively.
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 consisted 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 frames
under the Nicole Miller brand name, proprietary brand names Dakota Smith, Koko
and Nukes, inventory, machinery, furniture, equipment and accounts receivable.
The acquisition was accounted for as a purchase. In fiscal 2002, the Company and
the holder of the $1.25 million note agreed to modify the note to reduce the
monthly payment to $8,500 for 18 months commencing April 2002 and to extend the
maturity date to 2007.
13
Following many years of profitability, the Company incurred operating
losses in each of the last three fiscal years. The principal reason for these
losses was the change 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'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 advertising, promotion and point-of-purchase displays, which were
particularly high for Coach Eyewear.
In addition, in fiscal 2001, the Company's revenues were adversely affected
by a general downturn in the optical frame business, the aftermath of the
September 11th World Trade Center tragedy, the reluctance of retailers to
purchase large inventories of the Company's products due to concerns about the
Company's viability and the discontinuation of certain product lines. The
aftermath of the September 11 tragedy included reduced sales orders resulting in
inventory build-up, slowed collection of accounts receivable, higher return
rates due to the uncertain future retail environment. The Company believes that
it lost approximately 10 days of shipments in September 2001 due to
interruptions in outgoing and incoming shipments and overall an estimated $4
million in gross sales in fiscal 2001 due to the September 11th tragedy. Lastly,
the Company expended $0.8 million in connection with an advertising campaign for
Eddie Bauer Eyewear in August and September 2001, which did not result in the
intended increase in sales of Eddie Bauer Eyewear as a result of the September
11, 2001 tragedy.
The net loss of $13.9 million in the fourth quarter of fiscal 2001 was also
the result of the write-down of $4.9 million of goodwill and inventory
write-downs of $2.9 million in the aftermath of the September 11, 2001 tragedy
due to reduced sales and inventory build-up at retailers, which accelerated the
rate of obsolescence of the Company's inventory and reduced the prices which the
Company could obtain in close-out sales.
The Company made the conversion in distribution strategy 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 but did result in increased inventory returns from
distributors, from $2.8 million in fiscal 1998 to $6.8 million in fiscal 1999.
The Company had targeted to have a direct sales force numbering approximately
130 by the end of fiscal 2000. However, the direct sales force has never
exceeded 88 and was 65 at October 31, 2001.
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.
The Company has been in default under its bank credit facility since the
fourth quarter of fiscal 2000 and since December 2000 has operated under a
forbearance agreement from the bank which has been extended a number of times
and currently expires on November 8, 2002. The Company also has a forbearance
agreement from a frame vendor for an obligation in the amount of approximately
$5.9 million which will remain in effect for so long as the bank forbearance
agreement is in effect.
In fiscal 2001 the Company implemented a turnaround strategy which
encompassed the following activities:
ATTEMPT TO REFINANCE CREDIT FACILITY. The Company has been attempting to
refinance its existing credit facility since the first quarter of fiscal 2000.
Its efforts in this regard have been hampered by continuing operating losses and
declining financial condition.
NEGOTIATE DISCOUNTS AND PAYMENT PLANS WITH VENDORS. In fiscal 2001, the
Company negotiated approximately $850,000 of discounts of accounts payable and
other obligations and entered into extended payment programs with more than 40
vendors.
INCREASE GROSS PROFIT. To increase its gross profit, in fiscal 2001 the
Company increased prices of most of its frames and used lower cost manufacturers
in situations where the Company believed such manufacturers could meet the
Company's quality requirements.
14
REDUCE INVENTORY AND INCREASE INVENTORY TURNOVER RATES. Part of the
Company's 2001 strategy was to maintain a reduced inventory to improve its cash
position and improve inventory turnover by better matching frame purchases with
customer orders. Inventory has been reduced from $18.7 million at October 31,
2000 to $10.3 million at October 31, 2001 as a result of this strategy and $1.9
million of additional reserves for obsolescent inventory. The Company also
lowered its on-hand number of days of selected frames, cases and
point-of-purchase materials. The reduction in inventory adversely affected the
Company's gross profit margin due to the increase in the reserve for
obsolescence and from close-out sales.
STAFF REDUCTIONS. The Company has decreased the number of full-time
employees from a high of 288 in fiscal 2000 to 199 at October 31, 2001,
resulting in a substantial reduction of the average monthly payroll. In
addition, the Company has reduced its use of temporary employees, resulting in a
savings of approximately $1.0 million in fiscal 2001 from fiscal 2000.
IMPROVE PERFORMANCE OF DIRECT SALES FORCE. The Company attempted 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 in fiscal 2001.
REDUCE SELLING EXPENSES. In fiscal 2001 the Company reduced its selling
expenses by reducing trade and consumer advertising programs, promotional
expenses and trade show participation.
REDUCE OVERHEAD EXPENSES. The Company reduced its overhead by subleasing
excess space and eliminating sales support offices.
IMPROVE ACCOUNTS RECEIVABLE COLLECTIONS. The Company shortened 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. The Company had fewer brand name lines
in 2001 due to the discontinuation of the Coach Eyewear line in December 2000.
Notwithstanding the implementation of the turnaround strategy, the Company
suffered a material net loss in fiscal 2001. The Company's ability to continue
operations without filing for a reorganization under the Bankruptcy Code will
depend in significant part upon the bank extending the forbearance agreement and
the Company obtaining additional capital and refinancing its bank credit
facility. If the bank does not extend the forbearance agreement and demands full
payment of the credit facility, the Company would most likely file for
protection under the Bankruptcy Code.
The Company has been attempting to refinance its bank credit facility for
almost two years, and management believes it is unlikely to be able to refinance
the facility without a capital infusion. Additional capital could be obtained
directly through the sale of debt or equity securities or indirectly through a
merger with or sale to another entity. In all likelihood, any recapitalization
would involve a change of control of the Company. A change in control of the
Company could result in a default under certain of its eyewear licenses unless
the Company obtains the prior approval of the licensor under such licenses. See
"Business--Products."
The Company's ability to recapitalize will depend in part on an investor's
or acquiror's determination that the Company can return to operating
profitability. While the Company has significantly reduced its general,
administrative and other expenses during the past two years, its revenues have
continued to be adversely affected by the downturn in the optical frame
industry, the effects of the September 11, 2001 World Trade Center tragedy, the
reluctance of retailers to purchase large inventories of the Company's products
due to concerns about the Company's viability and the discontinuation of certain
product lines.
15
In April 2002, the Company signed a letter of intent with a private
investor which contemplated a sale to the investor of capital stock for $400,000
concurrent with a refinancing of the bank credit facility with a new lender
arranged by the investor. The letter of intent contained a covenant of the
Company not to seek other investors or acquirors. While the letter of intent and
related covenants have expired, the investor continues discussions with the
Company and its creditors concerning a recapitalization of the Company. In
addition, the Company is in discussions with other potential
investors/acquirors, and is actively seeking other investors/acquirors. However,
as of October 31, 2002, the Company had no letter of intent for any financing or
acquisition.
The Company's license for bebe eyes provides that bebe may terminate the
license if the Company is insolvent. Because the Company has a stockholders'
deficit, it may be deemed to be insolvent, which would permit bebe to terminate
the license.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our financial statements requires us to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities. We
base our estimates on historical experience and on various other assumptions
that we believe to be reasonable under the circumstances, and which form the
basis for making judgments about the carrying values of assets and liabilities.
Actual results may differ from these estimates under different assumptions or
conditions.
We consider the following accounting policies to be both those most
important to the portrayal of our financial condition and those that require the
most subjective judgment:
o revenue recognition;
o inventory valuation; and
o impairment of assets.
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.
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. The Company
periodically evaluates its inventory to identify obsolete, slow-moving, damaged
or unusual materials and merchandise which may be included in inventory at
prices in excess of market or net realizable value, and establishes reserves
where management deems appropriate. The Company considers a number of factors in
determining the net realizable or market value of its inventory, including
prices received by the Company historically in connection with close-out sales
of inventory. However, changing economic and market conditions generally,
changes and developments in the optical frame industry in particular, and other
events (such as the September 11, 2001 tragedy) can result in rapid and material
changes in the market or net realizable value of the Company's inventory,
rendering historic price comparisons less meaningful.
ASSET IMPAIRMENT. 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.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated selected
statements of operations data shown as a percentage of net sales.
16
YEAR ENDED OCTOBER 31,
------------------------------
1999 2000 2001
-------- -------- --------
Net sales.............................. 100.0% 100.0% 100.0%
Cost of sales ......................... 42.5 41.3 49.5
-------- -------- --------
Gross profit........................... 57.5 58.7 50.5
-------- -------- --------
Operating expenses:
Selling............................ 31.3 41.7 33.1
General and administrative ........ 25.0 34.9 33.9
Restructuring cost ................ 6.0 -- --
Asset impairment charges -- -- 11.3
-------- -------- --------
Total operating expenses ....... 62.3 76.6 78.2
-------- -------- --------
Income (Loss) from operations ......... (4.8) (17.9) (27.7)
-------- -------- --------
Other income (expense), net ........... 0.1 (1.9) (3.1)
-------- -------- --------
Income (Loss) before income taxes ..... (4.7) (19.8) (30.8)
Provision (Benefit) for income taxes .. (1.8) (1.5) 0.1
-------- -------- --------
Net income (loss)...................... 6.5% (21.3)% (30.7)%
======== ======== ========
COMPARISON OF FISCAL YEARS 1999, 2000 AND 2001
NET SALES. Net sales were $43.4 million in fiscal 2001 compared to $51.9
million in fiscal 2000 and $44.1 million in fiscal 1999. The following table
shows certain information regarding net sales for the periods indicated:
YEAR END OCTOBER 31
----------------------------------------
1999 2000 2001
--------- -------------- ---------
(IN THOUSANDS)
Laura Ashley Eyewear ......... $19,013 $16,079 $13,968
Eddie Bauer Eyewear .......... 14,100 15,136 11,889
Nicole Miller Eyewear 907 4,447 5,273
Other ........................ 10,036 16,270 12,262
--------- --------- ---------
$44,056 $51,932 $43,392
========= ========= =========
Net sales in fiscal 2000 were 18% greater than net sales in 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.
Net sales in fiscal 2001 were 16.4% less than net sales in fiscal 2000 due
primarily to the general decline in the optical frame industry, the effects of
the September 11, 2001 World Trade Center tragedy (as discussed above) and the
reluctance of retailers to purchase large inventories of the Company's products
due to concerns about the Company's viability and the termination of certain
product lines.
GROSS PROFIT AND GROSS MARGIN. Gross profit was $25.3 million in fiscal
1999, $30.5 million in fiscal 2000 and $21.9 million in fiscal 2001. The
increase in gross profit in fiscal 2000 reflected increased net sales, while the
decrease in fiscal 2001 was due to lower net sales and increased inventory
write-downs.
The gross margin was 57.5% in fiscal 1999, 58.7% in fiscal 2000 and 50.5%
in fiscal 2001. The increase in gross margin in fiscal 2000 was due to an
increase in direct sales as a percentage of total net sales. The decrease in
17
fiscal 2001 was due to inventory write downs, which are included in cost of
goods sold, and the sale of close-out frames, which are sold at substantially
lower margins than other frames.
SELLING EXPENSES. Selling expenses were $13.8 million in fiscal 1999, $21.6
million in fiscal 2000 and $14.3 million in fiscal 2001. The 57% 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. The 33.7%
decrease in fiscal 2001 was due primarily to decreases of $2.9 million in
salaries for sales personnel due to a reduction in staffing, $2.3 million of
advertising expenses and $1.4 million in convention expenses.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $11.0 million in fiscal 1999, $18.1 million in fiscal 2000 and $14.7
million in fiscal 2001. 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 amortization expense resulting primarily from the CDS
Acquisition, which amortized a full year in fiscal 2000 as opposed to four
months in fiscal 1999. The 19.9% decrease in fiscal 2001 was due principally to
decreases of: (a) $3.1 million in compensation expense and related employee
benefits due to a reduction in full-time employees; and (b) $1.0 million in
temporary help. During fiscal 2001, legal and accounting expenses increased $0.7
million and collection and bad debt expenses increased $0.4 million.
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.
ASSET IMPAIRMENT CHARGES. In fiscal 2001, the Company wrote down $4.9
million of goodwill upon determining that the that there was no remaining value
of the goodwill relating to the CDS Acquisition and the acquisition of a
distributor.
OTHER INCOME (EXPENSE), NET. Other income, net of $53,000 in fiscal 1999
reflected principally 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 $1.0 million consisted primarily of $1.1 million
of interest expense as the Company increased its bank borrowings to fund
operations. Other expense, net in fiscal 2001 was $1.3 million due primarily to
interest on bank debt.
PROVISION (BENEFIT) FOR INCOME TAXES. The Company had income tax benefits
of $0.8 million in each of fiscal 1999 and fiscal 2000 and paid income taxes of
$27,000 in fiscal 2001. As of October 31, 2001 the Company had a federal net
operating loss carryforward of approximately $16 million through 2021.
NET INCOME (LOSS). The Company had net losses of $1.3 million, $9.4 million
and $13.4 million in fiscal 1999, 2000 and 2001, respectively.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company's accounts receivable (net of allowance for doubtful accounts)
decreased from $8.7 million at October 31, 2000 to $5.1 million at October 31,
2001 due to the Company's plan to shorten the time period for collecting
accounts receivable by tightening its credit policy, reducing credit terms to
retailers, reducing the number of retailer programs with extended credit terms
and the reduction in net sales (and primarily the lower net sales at the end of
fiscal 2001 following the September 11th World Trade Center tragedy).
The Company's inventories (net of obsolescence reserve) decreased from
$18.7 million at October 31, 2000 to $10.3 million at October 31, 2001 as part
of the Company's turnaround strategy to reduce inventory and improve inventory
turnover by better matching frame purchases with customer orders and an increase
of $1.9 million in the reserve for obsolescent inventory.
18
The Company's goodwill and other intangibles decreased from $5.5 million at
October 31, 2000 to $0.1 million at October 31, 2001 primarily from the write
down of the remaining goodwill relating to the CDS Acquisition and the
acquisition of a distributor.
The Company has a credit facility with a commercial bank consisting of 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 30% of eligible inventories, up to a maximum of
$4,500,000, 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 and is payable in monthly
installments of $72,917 plus interest at the rate of 8.52% per annum (revised to
13.5% per annum effective November 20, 2000). The credit facility matured on
September 30, 2000. Since that date, the Company has paid interest at the
default rate of 5% per annum in excess of the original rate.
The Company has defaulted under its bank credit facility for various events
of default including non-payment at maturity as well as other non-compliance
with various covenants and conditions. The Company entered into a forbearance
agreement with its bank in December 2000, which has been extended many times.
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 November 8, 2002 (the "Termination Date"), 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 October 1, 2002 and
definitive documentation for a Transaction by October 21, 2002. In connection
with the forbearance agreement and its extensions, the bank has also required
continuing principal paydowns of the facility. As a result, the outstanding
balance under the credit facility was $6.0 million at October 31, 2001. The
failure to comply with the forbearance agreement could result in the bank
exercising some or all of its remedies under the loan agreement at law,
including foreclosing on the assets of the Company. The Company is attempting to
refinance the credit facility. The Company has no current proposals to refinance
the credit facility.
Long-term debt at October 31, 2001 included principally a $1.0 million note
payable to California Design Studio, Inc. in connection with the CDS Acquisition
and an obligation to a frame vendor of California Design Studio, Inc. (present
value of $3.2 million) assumed in connection with the CDS Acquisition. The
Company defaulted in its obligation to the frame vendor, and subsequently
entered into a standstill agreement pursuant to which the frame vendor has
agreed to forbear from legal action relating to the breach for so long as the
forbearance agreement with the Company's commercial bank is in effect. See Note
7 of Notes to Consolidated Financial Statements.
Of the Company's accounts payable at October 31, 2000 and October 31, 2001,
$3.2 million and $1.8 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 no forward commitments for
foreign currencies at October 31, 2001. See Note 1 of Notes to Consolidated
Financial Statements.
The Company's bad debt write-offs were zero, $148,000 and $175,000 in
fiscal years 1999, 2000 and 2001, respectively. In addition, as a result of the
declining economy, the Company increased its allowance for doubtful accounts
from $315,000 at October 31, 2000 to $575,000 at October 31, 2001. 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.
Since the fourth quarter of fiscal 2000, the Company has experienced a lack
of liquidity. Under its forbearance agreement, it cannot increase its borrowings
from its commercial bank, must refinance the credit facility and has had to pay
down the facility. If the bank does not extend the forbearance agreement, which
currently expires November 8, 2002, the Company will not have sufficient
liquidity to continue operations unless it obtains alternative financing. If the
bank does extend the forbearance agreement, the Company believes it will have
sufficient liquidity to continue for some time assuming no further material
reductions in sales and continued collections of accounts receivable.
19
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, in the fourth quarter of fiscal 2000 as
a result of the launch of a number of products in the second and third quarters
of fiscal 2000 and increased selling efforts during those periods, and in the
fourth quarter of fiscal 2001 as a result of the September 11th World Trade
Center tragedy. 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, 2001. 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.
1999 2000 2001
--------------------------------------------------------------------------------------------------------
JAN. APR. JULY OCT. JAN. APR. JULY OCT. JAN. APR. JULY OCT.
31. 30 31 31 31. 30 31 31 31. 30 31 31
--------------------------------------------------------------------------------------------------------
Net sales.............. $9,036 $12,426 $13,228 $9,374 $12,003 $12,390 $17,442 $10,097 $10,889 $11,470 $11,822 $9,211
Cost of sales.......... 4,216 5,300 5,787 3,444 4,807 5,058 7,076 4,281 3,761 4,428 4,657 8,626
Gross profit........... 4,820 7,126 7,441 5,930 7,196 7,332 10,366 5,818 7,128 7,042 7,165 585
Operating expenses:
Selling.............. 2,885 3,646 3,461 3,895 3,587 6,066 6,858 5,171 3,291 3,343 2,664 5,045
General and
administrative.... 1,915 2,292 3,020 3,722 3,845 4,708 5,014 4,554 3,381 3,146 4,013 4,166
Restructuring cost... -- -- -- 2,654 -- -- -- -- -- -- -- --
Asset impairment..... -- -- -- -- -- -- -- -- -- -- -- 4,892
Total operating
expenses............. 4,800 5,938 6,481 10,251 7,432 10,774 11,872 9,725 6,672 6,488 6,677 14,105
Income (loss) from
operations........... 20 1,188 960 (4,321) (236) (3,442) (1,506) (3,907) 456 554 488 (13,520)
Other expense, net..... 42 31 18 (31) (184) (265) (320) (136) (352) (325) (329) (332)
Income (loss) before
pro forma provision
for income taxes..... 62 1,219 978 (4,352) (420) (3,707) (1,826) (4,043) 104 229 159 (13,852)
INFLATION
The Company does not believe its business and operations have been
materially affected by inflation.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued SFAS Nos. 141 and 142 "Business Combinations"
and "Goodwill and Other Intangible Assets". SFAS No. 141 replaces APB Opinion
No. 16 and eliminates pooling-of-interest accounting prospectively. It also
provides guidance on purchase accounting related to the recognition of
intangible assets and accounting for negative goodwill. SFAS No. 142 changes the
accounting for goodwill from an amortization method to an impairment-only
approach. Under SFAS No. 142, goodwill will be tested annually, or when events
or circumstances
20
occur indicating that goodwill might be impaired. SFAS No. 141 and SFAS No. 142
are effective for all business combinations initiated after June 30, 2001.
Upon adoption of SFAS No. 142, amortization of goodwill recorded for
business combinations consummated prior to July 1, 2001 will cease, and
intangible assets acquired prior to July 1, 2001 that do not meet the criteria
for recognition under SFAS No. 141 will be reclassified to goodwill. Companies
are required to adopt SFAS No. 142 for fiscal years beginning after December 15,
2001. The Company will adopt SFAS No. 142 on November 1, 2002. In connection
with the adoption of SFAS No. 142, the Company will be required to perform a
transitional goodwill impairment assessment. The Company has not yet determined
the impact these standards will have on its results of operations and financial
position.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Obligations
Associated with the Retirement of Long-Lived Assets". SFAS No. 143 establishes
accounting standards for the recognition and measurement of an asset retirement
obligation and its associated asset cost. It also provides accounting guidance
for legal obligations associated with the retirement of tangible long-lived
assets. SFAS No. 143 is effective in fiscal years beginning after June 15, 2002,
with early adoption permitted. The Company has not determined the effect of
adopting SFAS No. 143 on its consolidated results of operations or financial
position, as it plans to adopt SFAS No. 143 effective November 1, 2002.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 establishes a single
accounting model for the impairment or disposal of long-lived assets, including
discontinued operations. SFAS No. 144 superseded SFAS No. 121, "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
and APB Opinion 30, "Reporting the Results of Operations - Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions." The provisions of SFAS No. 144
are effective for fiscal years beginning after December 15, 2001, with early
adoption permitted, and in general are to be applied prospectively. The Company
has not yet determined the impact this standard will have on its consolidated
results of operations and financial position, as it plans to adopt SFAS No 144
effective November 1, 2002.
In April 2002, the FASB approved SFAS No. 145, rescission of FASB
Statements Nos. 4, 44 and 64, amendment of SFAS No. 13 and technical
corrections. SFAS No. 145 rescinds previous accounting guidance, which required
all gains and losses from extinguishment of debt be classified as an
extraordinary item. Under FAS No. 145, classification of debt extinguishment
depends on the facts and circumstances of the transaction. SFAS No. 145 is
effective for fiscal years beginning after May 15, 2002.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 requires recognition
of costs associated with exit or disposal activities when they are incurred
rather than at the date of a commitment to an exit or disposal plan. Examples of
costs covered by the standard include lease termination costs and certain
employee severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity. SFAS No. 146 is to
be applied prospectively to exit or disposal activities initiated after December
31, 2002.
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.
NET LOSSES, STOCKHOLDERS' DEFICIT AND NEED TO REFINANCE BANK CREDIT
FACILITY AND OBTAIN ADDITIONAL CAPITAL
The Company suffered material operating losses in its last three fiscal
years, causing a significant deterioration in its financial condition. At
October 31, 2001, the Company's stockholders' deficit was $4,946,000. The
Company has been in default under its bank credit facility since the fourth
quarter of fiscal 2000 and since December 2000 has operated under a forbearance
agreement from the bank which has been extended a number of times and currently
expires on November 8, 2002.
21
The Company's ability to continue operations without filing for a
reorganization under the Bankruptcy Code will depend in significant part upon
the bank extending the forbearance agreement and the Company obtaining
additional capital and refinancing its bank credit facility. If the bank does
not extend the forbearance agreement or otherwise properly demand full payment
of the credit facility, the Company would most likely file for protection under
the Bankruptcy Code at that time.
The Company has been attempting to refinance its bank credit facility for
two years, and management believes it is unlikely that the Company will be able
to refinance the facility without a capital infusion. Additional capital could
be obtained directly through the sale of debt or equity securities or indirectly
through a merger with or sale to another entity. In all likelihood, any
recapitalization would involve a change of control of the Company. A change in
control of the Company could result in a default under certain of its eyewear
licenses unless the Company obtains the prior approval of the licensor under
such licenses. See "Business--Products."
The Company's ability to recapitalize will depend in part on an investor's
or acquiror's determination that the Company can return to operating
profitability. While the Company has significantly reduced its general,
administrative and other expenses during the past two years, its revenues have
continued to be adversely affected by the downturn in the optical frame
industry, the effects of the September 11, 2001 tragedy, the reluctance of
retailers to purchase large inventories of the Company's products due to
concerns about the Company's viability and the termination of certain product
lines.
LIQUIDITY REQUIREMENTS
Since the fourth quarter of fiscal 2000, 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 and has had to
pay down the facility. If the bank does not extend the forbearance agreement,
which currently expires November 8, 2002, the Company will not have sufficient
liquidity to continue operations unless it obtains alternative financing. If the
bank does extend the forbearance agreement, the Company believes it will have
sufficient liquidity to continue for some time assuming no further material
reductions in sales, and continued collections of accounts receivable.
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 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 65 at October 31, 2001
due to attrition and terminations by the Company. Because of the significant
cost-cutting measures already undertaken by the Company, it believes that
generating additional revenues will be more critical to returning to
profitability than further cost-cutting. The Company's ability to increase
revenues will be hindered by its lack of working capital and by the downturn in
the optical frame industry. In addition, the Company's license for bebe eyes
provides that bebe may terminate the license if the Company is insolvent.
Because the Company has a stockholders' deficit, it may be deemed to be
insolvent, which would permit bebe to terminate the license.
SUBSTANTIAL DEPENDENCE UPON LAURA ASHLEY AND EDDIE BAUER LICENSES
Net sales of Laura Ashley Eyewear and Eddie Bauer Eyewear accounted for 60%
and 61% of the Company's net sales in fiscal 2000 and fiscal 2001, 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, bebe eyes and its
Signature line, 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 Laura Ashley license is automatically renewed annually so long as
the Company is not in breach of the license agreement and the royalty payment
for the prior two contract years exceeds the minimum royalty for those years.
The Company markets Eddie Bauer Eyewear through an exclusive license which
terminates in December 2005, but may be renewed by the Company at least through
2007 so long as the Company is not in material default and meets certain minimum
net sales
22
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.
DEPENDENCE UPON SALES TO OPTICAL RETAIL CHAINS
Net sales to major optical retail chains, including Eyecare Centers of
America, Cole Vision Corp. and its subsidiary, LensCrafters, and U.S. Vision,
amounted to 33% and 29% of net sales in fiscal years 2000 and 2001,
respectively. Net sales to Eyecare Centers of America in fiscal 2001 amounted to
12% of the Company's net sales for such fiscal year. The loss of one or more
retail chains as a customer would have a material adverse affect on the
Company's business.
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 bearing 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 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.
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 2001, Signature used manufacturers principally in Hong Kong/China, Japan
and Italy.
23
INTERNATIONAL SALES
International sales accounted for approximately 8.7%,12.8% and 11.3% of the
Company's net sales in fiscal 1999, fiscal 2000 and fiscal 2001, 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 1999, fiscal 2000 and fiscal 2001 amounted
to 19%, 22% and 23% 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 product returns may increase as a result of the
downturn in the optical frame industry and general economic conditions. The
Company maintains reserves for product returns; however, an increase in returns
that significantly exceeds the amount of those reserves would 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 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 marketplace 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.
24
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 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, 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.
CONTROL BY DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company own beneficially
approximately 47.0% 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. In addition, the Company is unable to pay any
dividends for so long as it is in default under its bank credit facility. In
addition, in light of the Company's current financial condition, it is not
authorized to pay dividends under the California General Corporation Law.
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
25
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
unless the change of control is approved by the licensor. 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.
FOREIGN CURRENCY RISKS. During fiscal 2001, 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
and euros. 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 no
forward commitments for foreign currencies at October 31, 2001.
International sales accounted for approximately 11.3% of the Company's net
sales in fiscal 2001. 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
fluctuations 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, as of
October 31, 2001, the Company could obtain advances up to an amount equal to 60%
of eligible accounts receivable and 30% of eligible inventories, up to a maximum
of $4,500,000, 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 and is payable in monthly
installments of $72,917 plus interest at the rate of 8.52% per annum. Since that
date, the Company has paid interest at the default rate of 5% per annum in
excess of the original rate. At October 31, 2001, $6.0 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.
26
ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT................................................ 27
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets................................................. 28
Consolidated Statements of Operations....................................... 29
Consolidated Statements of Changes in Stockholders' Equity (Deficit)........ 30
Consolidated Statements of Cash Flows....................................... 31
Notes to the Consolidated Financial Statements.............................. 33
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, 2001 and 2000 and the related
consolidated statements of operations, changes in stockholders' equity (deficit)
and cash flows for each of the three years in the period ended October 31, 2001.
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 auditing standards generally accepted
in the United States. 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, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
October 31, 2001, in conformity with accounting principles generally accepted in
the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As described in Note 1, the Company's
deteriorating financial results and liquidity have caused it to be in default of
the covenants of its loan agreement. These events and circumstances raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
accompanying financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of these uncertainties.
Los Angeles, California
Altschuler, Melvoin and Glasser LLP
April 5, 2002 (except Notes 6 and 7,
which are as of July 8, 2002 and Note 9,
which is as of July 30, 2002).
27
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 2001 AND 2000
2001 2000
------------ ------------
ASSETS
Current assets
Cash and cash equivalents $ 1,443,496 $ 1,860,451
Accounts receivable, trade (net of allowance
for doubtful accounts of $574,096 in 2001
and $314,839 in 2000) 5,129,460 8,744,254
Inventories (net of reserve for obsolescence
of $2,450,000 in 2001 and $511,004 in 2000) 10,328,364 18,742,177
Income taxes refundable 110,000 1,262,154
Promotion products and material 164,548 2,082,234
Prepaid expenses and other current assets 8,952 314,301
------------ ------------
17,184,820 33,005,571
------------ ------------
Property and equipment (net of accumulated
depreciation and amortization) 1,456,083 2,077,230
------------ ------------
Other assets
Goodwill and other intangibles (net of
accumulated amortization of $16,882 in 2001
and $797,317 in 2000) 130,897 5,499,351
Deposits and other assets 133,772 852,456
------------ ------------
264,669 6,351,807
------------ ------------
$ 18,905,572 $ 41,434,608
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable, trade $ 10,143,540 $ 14,751,544
Notes payable 3,228,358 5,000,000
Current portion of long-term debt 6,265,773 4,603,203
Accrued credits 114,580 789,062
Accrued expenses and other current liabilities 2,637,701 3,042,872
------------ ------------
22,389,952 28,186,681
------------ ------------
Long-term debt 1,461,456 4,806,455
Commitments and contingencies (Note 9)
Stockholders' equity (deficit)
Preferred stock (5,000,000 shares authorized;
no shares issued at October 31, 2001 and 2000) -- --
Common stock (5,056,889 shares issued and
outstanding at October 31, 2001 and 2000) 9,188 9,188
Paid-in capital 14,363,990 14,363,990
Accumulated deficit (19,319,014) (5,931,706)
------------ ------------
(4,945,836) 8,441,472
------------ ------------
$ 18,905,572 $ 41,434,608
============ ============
28
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED OCTOBER 31, 2001, 2000 AND 1999
2001 2000 1999
------------ ------------ ------------
Net sales $ 43,392,022 $ 51,932,066 $ 44,055,973
------------ ------------ ------------
Cost of sales 18,499,151 20,987,242 18,666,478
Inventory write-down 2,973,202 437,636 73,368
------------ ------------ ------------
21,472,353 21,424,878 18,739,846
------------ ------------ ------------
GROSS PROFIT 21,919,669 30,507,188 25,316,127
------------ ------------ ------------
Operating expenses
Selling 14,344,093 21,648,965 13,808,621
General and administrative 14,706,389 18,105,413 11,018,342
Restructuring cost 2,634,500
Asset impairment charges 4,891,459
------------ ------------ ------------
33,941,941 39,754,378 27,461,463
------------ ------------ ------------
LOSS FROM OPERATIONS (12,022,272) (9,247,190) (2,145,336)
------------ ------------ ------------
Other
Interest expense (1,302,673) (1,131,445) (183,037)
Sundry income (expense) (35,461) 122,917 235,724
------------ ------------ ------------
(1,338,134) (1,008,528) 52,687
------------ ------------ ------------
LOSS BEFORE INCOME TAXES (13,360,406) (10,255,718) (2,092,649)
Provision (benefit) for income taxes 26,902 (771,997) (783,254)
------------ ------------ ------------
NET LOSS $(13,387,308) $ (9,483,721) $ (1,309,395)
============ ============ ============
LOSS PER SHARE, BASIC AND DILUTED
Loss per common share $ (2.65) $ (1.87) $ (0.26)
============ ============ ============
Weighted average number of common
shares outstanding 5,056,889 5,058,915 5,095,259
============ ============ ============
29
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED OCTOBER 31, 2001, 2000 AND 1999
Common Stock
------------------------------ Retained
Number Earnings
of Shares Stated Paid-in (Accumulated
Issued Value Capital Deficit) Total
------------ ------------ ------------ ------------ ------------
Balance, November 1, 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
Repurchase 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
Net loss (13,387,308) (13,387,308)
------------ ------------ ------------ ------------ ------------
BALANCE, OCTOBER 31, 2001 5,056,889 $ 9,188 $ 14,363,990 $(19,319,014) $ (4,945,836)
============ ============ ============ ============ ============
30
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 2001, 2000 AND 1999
2001 2000 1999
------------ ------------ ------------
OPERATING ACTIVITIES
Net loss $(13,387,308) $ (9,483,721) $ (1,309,395)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities
Depreciation and amortization 1,068,117 1,282,236 880,992
Provision for bad debts 434,090 264,835 41,614
Provision for inventory write-down 2,973,202 437,636 73,368
Loss on disposition of equipment 61,922 2,284
Asset impairment charges 4,891,459
Deferred income tax (benefit) expense 428,000 (53,000)
Other (13,940)
Changes in assets--(increase) decrease
Accounts receivable, trade 3,180,704 (2,459,032) 37,494
Inventories 5,440,611 (2,543,339) (3,639,044)
Income taxes refundable 1,152,154 (262,334) (813,339)
Prepaid expenses and other current assets 2,096,060 179,042 (719,922)
Deposits and other assets 219,616 (117,899)
Changes in liabilities-increase (decrease)
Accounts payable, trade (4,608,004) 8,466,054 976,023
Accrued credits (674,482) (938,908) 1,727,970
Accrued expenses and other liabilities (231,972) 1,346,171 (290,725)
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 2,602,229 (3,398,975) (3,087,964)
------------ ------------ ------------
INVESTING ACTIVITIES
Purchases of property and equipment (73,081) (784,225) (623,781)
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 (73,081) (771,251) (1,879,229)
------------ ------------ ------------
FINANCING ACTIVITIES
Borrowings on notes payable, bank 11,570,833 1,500,000
Repayments on notes payable, bank (1,771,642) (4,820,833)
Borrowings on long-term debt 500,000
Principal payments on long-term debt (1,047,863) (1,020,352) (472,098)
Principal payments on capitalized lease obligations (126,598) (83,962)
Repurchases of common stock (78,032) (354,341)
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (2,946,103) 5,567,654 1,173,561
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (416,955) 1,397,428 (3,793,632)
Cash and cash equivalents
Beginning of year 1,860,451 463,023 4,256,655
------------ ------------ ------------
END OF YEAR $ 1,443,496 $ 1,860,451 $ 463,023
============ ============ ============
31
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
YEARS ENDED OCTOBER 31, 2001, 2000 AND 1999
2001 2000 1999
------------ ------------ ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for
Interest $ 1,139,766 $ 1,042,586 $ 158,312
Income taxes 56,160 201,350 83,084
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Exchange of note payable for future consulting obligation 154,876
Derecognition of consulting agreement 666,580
Lease payments deferred in exchange for future lump sum payment 221,855
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 (1,886,500)
Stock issued (252,000)
32
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
NOTES TO THE 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 accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company suffered material
operating losses in its last three fiscal years, causing a significant
deterioration in its financial condition. At October 31, 2001, the Company's
stockholders' deficit was $4,946,000. The Company has been in default under its
bank credit facility since the fourth quarter of fiscal 2000 and since December
2000 has operated under a forbearance agreement from the bank which has been
extended a number of times and currently expires on November 8, 2002. The
Company also has a forbearance agreement from a frame vendor for an obligation
in the amount of approximately $5.9 million which will remain in effect for so
long as the bank forbearance agreement is in effect.
The Company's ability to continue operations without filing for a reorganization
under the Bankruptcy Code will depend in significant part upon the bank
extending the forbearance agreement and the Company obtaining additional capital
and refinancing its bank credit facility. If the bank does not extend the
forbearance agreement and demands full payment of the credit facility, the
Company would most likely file for protection under the Bankruptcy Code.
The Company has been attempting to refinance its bank credit facility for two
years, and management believes it is unlikely to be able to refinance the
facility without a capital infusion. Additional capital could be obtained
directly through the sale of debt or equity securities or indirectly through a
merger with or sale to another entity. In all likelihood, any recapitalization
would involve a change of control of the Company. A change in control of the
Company could result in a default under certain of its eyewear licenses unless
the Company obtains the prior approval of the licensor under such licenses.
The Company's ability to recapitalize will depend in part on an investor's or
acquiror's determination that the Company can return to operating profitability.
While the Company has significantly reduced its general, administrative and
other expenses during the past two years, its revenues have continued to be
adversely affected by the downturn in the optical frame industry, the effects of
the September 11, 2001 tragedy, the reluctance of retailers to purchase large
inventories of the Company's products due to concerns about the Company's
viability and the discontinuation of certain product lines.
In April 2002, the Company signed a letter of intent with a private investor
which contemplated a sale to the investor of capital stock for $400,000
concurrent with a refinancing of the bank credit facility with a new lender
arranged by the investor. The letter of intent contained a covenant of the
Company not to seek other investors or acquirors. While the letter of intent and
related covenants have expired, the investor continues discussions with the
Company and its creditors concerning a recapitalization of the Company. In
addition, the Company is in discussions with other potential
investors/acquirors, and is actively seeking other investors/acquirors. However,
as of October 31, 2002, the Company had no letter of intent for any financing or
acquisition.
The accompanying financial statements do not include any adjustments relating to
the possible future effects on the recoverability and classification of assets
or the amounts and classification of liabilities that might be necessary should
the Company be unable to continue as a going concern.
33
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 U.S.
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, 2001, 2000
and 1999 amounted to $886,890, $2,611,209 and $867,865, 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. The Company periodically evaluates the recoverability
of its intangible assets for possible impairment
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, 2001 and
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--Due to the deteriorating financial condition of the
Company, management has been unable to refinance its debt. Accordingly,
management is unable to estimate the fair value of its financial
instruments.
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
34
underlying assets if the sum of expected future cash flows is less than
book value. During 2001, the Company determined estimated cash flows would
not exceed the carrying value of the Company's intangible assets.
Accordingly, an impairment write-down was recorded in the accompanying
financial statements (see Note 3).
FOREIGN CURRENCY TRANSLATION--Substantially all of the Company's
international operations used the U.S. dollar as their functional currency
for the year ended October 31, 2001. Monetary assets and liabilities are
re-measured at exchange rates in effect at the balance sheet date, while
other assets and equities are re-measured at historical rates. Income and
expense accounts are re-measured at historical rates. There have been no
significant re-measurement adjustments.
The Company's international operations used their local currency as their
functional currency for the years ended October 31, 2000 and 1999. Assets,
liabilities, income and expense accounts were, therefore, translated at
exchange rates in effect at the balance sheet date and equities translated
at historical rates. There were no significant translation adjustments.
Such adjustments would have been recorded directly to a separate component
of stockholders' equity.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES--In June 1998
and June 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities," and SFAS No. 138,
"Accounting for Certain Derivative Instruments and Hedging Activities" (an
amendment of SFAS No. 133), respectively. These standards establish
accounting and reporting standards requiring that every derivative
instrument be recorded on the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 and SFAS No. 138 also require that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. The adoption of those
standards on November 1, 2000 did not have an effect on the consolidated
financial statements.
NEW ACCOUNTING PRONOUNCEMENTS--In July 2001, the FASB issued SFAS Nos. 141
and 142 "Business Combinations" and "Goodwill and Other Intangible Assets".
SFAS No. 141 replaces APB Opinion No. 16 and eliminates pooling-of-interest
accounting prospectively. It also provides guidance on purchase accounting
related to the recognition of intangible assets and accounting for negative
goodwill. SFAS No. 142 changes the accounting for goodwill from an
amortization method to an impairment-only approach. Under SFAS No. 142,
goodwill will be tested annually, or when events or circumstances occur
indicating that goodwill might be impaired. SFAS No. 141 and SFAS No. 142
are effective for all business combinations initiated after June 30, 2001.
Upon adoption of SFAS No. 142, amortization of goodwill recorded for
business combinations consummated prior to July 1, 2001 will cease, and
intangible assets acquired prior to July 1, 2001 that do not meet the
criteria for recognition under SFAS No. 141 will be reclassified to
goodwill. Companies are required to adopt SFAS No. 142 for fiscal years
beginning after December 15, 2001. The Company will adopt SFAS No. 142 on
November 1, 2002. In connection with the adoption of SFAS No. 142, the
Company will be required to perform a transitional goodwill impairment
assessment. The Company has not yet determined the impact these standards
will have on its results of operations and financial position.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Obligations
Associated with the Retirement of Long-Lived Assets". SFAS No. 143
establishes accounting standards for the recognition and measurement of an
asset retirement obligation and its associated asset cost. It also provides
accounting guidance for legal obligations associated with the retirement of
tangible long-lived assets. SFAS No. 143 is effective in fiscal years
beginning after June 15, 2002, with early adoption permitted. The Company
has not determined the effect of adopting SFAS No. 143 on its consolidated
results of operations or financial position, as it plans to adopt SFAS No.
143 effective November 1, 2002.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 establishes a
single accounting model for the impairment or disposal of long-lived
assets, including discontinued operations. SFAS No. 144 superseded SFAS No.
121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," and APB Opinion 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." The provisions of SFAS No. 144 are effective for fiscal
35
years beginning after December 15, 2001, with early adoption permitted, and
in general are to be applied prospectively. The Company has not yet
determined the impact this standard will have on its consolidated results
of operations and financial position, as it plans to adopt SFAS No 144
effective November 1, 2002.
In April 2002, the FASB approved SFAS No. 145, rescission of FASB
Statements Nos. 4, 44 and 64, amendment of SFAS No. 13 and technical
corrections. SFAS No. 145 rescinds previous accounting guidance, which
required all gains and losses from extinguishment of debt be classified as
an extraordinary item. Under FAS No. 145, classification of debt
extinguishment depends on the facts and circumstances of the transaction.
SFAS No. 145 is effective for fiscal years beginning after May 15, 2002.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 requires
recognition of costs associated with exit or disposal activities when they
are incurred rather than at the date of a commitment to an exit or disposal
plan. Examples of costs covered by the standard include lease termination
costs and certain employee severance costs that are associated with a
restructuring, discontinued operation, plant closing, or other exit or
disposal activity. SFAS No. 146 is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002.
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.
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 was accounted for using the purchase method of
accounting. The purchase price was 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 was 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 the period presented:
1999
------------
Net sales $ 48,515,725
Net loss (2,147,922)
Loss per share (0.42)
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
36
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.
The Stock Acquisition of GWO was 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 was 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 provided 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 was below $7 on July 31, 2001. On July 31, 2001, the Company's
common stock was trading at $.45 per share. In lieu of the purchase price
adjustment, the Company entered into an agreement to issue additional shares
(see Note 12).
In order to reduce overhead, during fiscal 2000, GWO's corporate structure was
liquidated with all assets and liabilities and operations absorbed into the
Company.
NOTE 3 ASSET IMPAIRMENT CHARGES
During 2001, the Company conducted a review of certain brands and distribution
channels within its business. The review triggered an impairment review of
goodwill related to the prior acquisitions of CDS and GWO to determine the fair
value of those assets. The Company determined that there was no remaining value
of the goodwill relating to the CDS and GWO acquisitions. Accordingly, the
Company recorded a noncash impairment charge writing down goodwill by
approximately $4,891,000.
NOTE 4 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% of the Company's total net sales for the year
ended October 31, 1999. 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.
NOTE 5 PROPERTY AND EQUIPMENT
Property and equipment (stated at cost) as of October 31, 2001 and 2000
consisted of the following:
37
Periods of
Depreciation
or Amortization 2001 2000
--------------- ------------ ------------
Office furniture and fixtures 7 years $ 902,453 $ 904,465
Computer equipment 3 years 1,212,065 1,266,877
Software 3 years 821,288 825,191
Leasehold improvements Term of lease 1,185,190 1,185,190
Machinery and equipment held
under capitalized leases 3 to 5 years 376,932 376,932
Machinery and equipment 5 years 134,163 134,163
------------ ------------
4,632,091 4,692,818
Less accumulated depreciation
and amortization (including
amortization on capitalized
leases of $168,342 in 2001
and $62,295 in 2000) 3,176,008 2,615,588
------------ ------------
Net book value $ 1,456,083 $ 2,077,230
============ ============
Provision for depreciation and amortization charged to operations for the years
ended October 31, 2001, 2000 and 1999 amounted to $632,306, $635,210 and
$682,131, respectively (including capitalized lease amortization of $106,047,
$54,946 and $7,349, respectively).
NOTE 6 NOTE PAYABLE, BANK
Note payable to bank at October 31, 2001 and 2000 consisted of the following:
2001 2000
---------- ----------
Accounts Receivable and Inventory 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] at October 31, 2001 and 2000 plus
30% and 35% of eligible inventory [as
defined] at October 31, 2001 and 2000,
respectively, to a maximum of $4,500,000;
interest at the London Interbank Offered Rate
["LIBOR"] plus 2.5% or the Bank's prime rate
[5.5% at October 31, 2001] [at the Company's
option {revised to 5% above the previously
prevailing rates for the portion of the loan
representing advances on accounts receivable,
effective November 20, 2000}]; weighted
average interest rates of 10.96% and 9.50% at
October 31, 2001 and 2000, respectively, no
outstanding balance as of October 31, 1999;
due September 30, 2000, extended to November
8, 2002 pursuant to the Eleventh Amendment to
the Forbearance Agreement) $3,228,358 $5,000,000
========== ==========
The Eleventh Amendment to the Forbearance Agreement, dated July 8, 2002,
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), or License Sale as promptly as possible, but in no event later
than November 8, 2002 (due date), with circulation of draft documentation by
October 1, 2002 and entered into definitive documentation on or before October
21, 2002 and, (ii) the outstanding amount of the obligations shall not exceed
$5,100,000 (including the term note payable [see Note 7]) and shall be reduced
by (i) $100,000 on July 15, 2002; (ii) $150,000 on August 15, 2002; (iii)
$225,000 on September 15, 2002; and (iv) $125,000 on October 15, 2002 (in
addition to the ongoing term note monthly principal payment of $72,917). At July
8, 2002, the Company was in compliance with all the covenants of the Forbearance
Agreement.
NOTE 7 LONG-TERM DEBT
Long-term debt at October 31, 2001 and 2000 consisted of the following:
38
2001 2000
---------- ----------
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 June 30, 2000, extended to
November 8, 2002 pursuant to a
Forbearance Agreement [see Note 6]) $2,770,857 $3,500,000
Note payable, CDS (unsecured; payable in
monthly installments of $17,042 (reduced
to $8,500 through October 23, 2003),
including interest at 7% per annum;
matures on May 23, 2007) 972,422 1,086,978
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;
matured on July 23, 2002; extended to
November 8, 2002 pursuant to a
forbearance agreement) 3,207,291 3,326,660
Note payable, lessor (unsecured; payable in
monthly installments of $4,134,
including interest at 10% per annum;
matures on May 1, 2005) 148,901 181,814
Obligation assumed in conjunction with
acquisition of CDS--see Note 2 (payable
in quarterly installments of $75,000
commencing September 30, 2000; matured
on June 30, 2001) 225,000
Obligation assumed in conjunction with
acquisition of CDS and extension of
consulting agreement (payable in monthly
installments of $15,000 commencing July
1, 2002; including interest imputed at
10% per annum; matures on July 1, 2003) 154,876
Lump sum liability for machinery and
equipment associated with various
operating lease agreements (payable in
full in August 2004; secured by certain
machinery and equipment) 221,855
Obligation in conjunction with acquisition of
GWO--see Note 2 (payable in monthly
installments of $5,000 commencing on
June 30, 2000; matured 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 through September 2008,
including interest imputed at 8.75%) 666,580
Liability for machinery and equipment under
various capitalized lease agreements
(interest rates ranging from 8.19% to
15.07% per annum in 2001 and 8.12% to
11.14% per annum in 2000; maturing at
various dates through August 2004;
secured by certain machinery and equipment) 251,027 377,626
-------------------------
7,727,229 9,409,658
Less current portion 6,265,773 4,603,203
-------------------------
$1,461,456 $4,806,455
=========================
39
Future minimum payments as of October 31, 2001, under the aforementioned
long-term debt, are as follows:
Capitalized
Lease
Obligations Agreements Total
---------- ---------- ----------
2002 $6,497,227 $ 138,692 $6,635,919
2003 221,219 113,536 334,755
2004 412,927 26,939 439,866
2005 185,305 -- 185,305
2006 168,675 -- 168,675
Thereafter 419,529 -- 419,529
---------- ---------- ----------
7,904,882 279,167 8,184,049
Less imputed interest thereon 428,680 28,140 456,820
---------- ---------- ----------
$7,476,202 $ 251,027 $7,727,229
========== ========== ==========
NOTE 8 INCOME TAXES
Income tax expense (benefit) for the years ended October 31, 2001, 2000 and 1999
consisted of the following:
2001 2000 1999
---------- ---------- ----------
Current
Federal $ (110,000) $(1,200,797) $ (731,054)
State 136,902 800 800
Deferred 428,000 (53,000)
---------- ---------- ----------
$ 26,902 $ (771,997) $ (783,254)
========== ========== ==========
At October 31, 2001 and 2000, the Company's net deferred tax asset and liability
consisted of the following:
2001 2000
------------ ------------
Current--deferred tax assets
Allowance for doubtful accounts $ 230,000 $ 135,000
Capitalization of inventory costs 203,000 504,000
Inventory reserve 980,000 219,000
Deferred compensation 227,000
Sales returns reserve 123,000 125,000
Other 131,000 (85,000)
------------ ------------
1,667,000 1,125,000
Valuation allowance (1,667,000) (1,125,000)
------------ ------------
$ -- $ --
============ ============
Long-term--deferred tax assets
Depreciation on property and equipment
and amortization of intangibles $ 431,000 $ 513,000
Federal net operating loss carryforward 3,817,000 1,423,000
State net operating loss carryforward 412,000 321,000
Asset impairment charges 1,957,000
Other (135,000)
------------ ------------
6,617,000 2,122,000
Valuation allowance (6,617,000) (2,122,000)
------------ ------------
$ -- $ --
============ ============
The Company has net operating loss carryforwards of approximately $16,000,000
available through October 2021.
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:
40
2001 2000
------------ ------------
Computed income tax benefit at federal
statutory rate $ (4,542,538) $ (3,486,944)
Increase (reduction) resulting from
State income taxes (529,072) 800
Permanent items 40,664 119,700
Change in valuation allowance 5,037,000 2,528,000
Other, net 20,848 66,447
------------ ------------
$ 26,902 $ (771,997)
============ ============
NOTE 9 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 $76,083 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 lease agreement provides for an option to extend the
term of the lease for five additional years.
Effective November 1, 2001, the Company subleased a portion of its warehouse to
an unrelated third party. Under the terms of the agreement, the Company will
receive approximately $196,000 in annual rent for the years ending October 31,
2002 and 2003. The annual rent to be received has been reflected as a reduction
in future minimum lease payments.
The Company has various operating leases for hardware, software and technical
support services in connection with implementation of a computer system. The
original lease agreements were restructured to extend the terms of the leases,
incorporating an additional covenant and providing for minimum monthly payments
ranging from $15,324 to $82,908. The additional covenant requires the Company to
not engage in any merger restructuring or sale of substantially all of the
assets of its business without the prior written consent of the lessor and its
lender. 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, 2001, net of the sublease, are as follows:
2002 $ 1,545,517
2003 1,573,017
2004 1,690,397
2005 741,874
-------------
$ 5,550,805
=============
Total facilities-related rent expense for the years ended October 31, 2001, 2000
and 1999 amounted to $708,226, $677,636 and $420,471, respectively. Lease
expense with respect to the computer system amounted to $1,221,861, $1,409,337
and $512,252 for the years ended October 31, 2001, 2000 and 1999, respectively.
The Company entered into a consulting agreement on June 2, 2000 for the
consultant to provide advice and assistance to senior management of the Company.
Pursuant to the second amendment dated May 31, 2001, the unsecured consulting
obligation is payable in monthly installments of $5,000 through February 2002,
$6,000 from March 2002 to February 2003, $7,500 from March 2003 to February
2004, $12,500 from March 2004 to February 2005, and $20,000 thereafter through
April 2007, or until the balance is fully paid.
41
Total minimum payments under the Company's consulting obligation are as follows:
2002 $ 68,000
2003 84,000
2004 130,000
2005 210,000
2006 240,000
Thereafter 108,000
-------------
$ 840,000
=============
Total fees paid for the consulting obligation for the years ended October 31,
2001 and 2000 amounted to $63,000 and $83,000, 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. The license
agreement, amended on July 30, 2002, extends through December 31, 2005 and can
be renewed for a two-year term (as defined), provided that specified minimum
sales are achieved and the Company is not in material default under the license
agreement.
The Company had a license agreement with Coach, a division of Sara Lee
Corporation, which granted 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 and filed an action seeking recovery for unpaid
royalties and advertising costs pursuant to the License Agreement. On March 7,
2002, the Company entered into a Settlement Agreement with Coach in which Coach
agreed to release the Company from all actions and debts for $250,000 payable
over the 90-day period following the date of the settlement agreement.
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. The Company's
license for bebe eyes provides that bebe may terminate the license if the
Company is insolvent. Because the Company has a stockholders' deficit, it may be
deemed to be insolvent, which would permit bebe to terminate the license.
42
Total minimum royalties under all of the Company's license agreements (excluding
the terminated Coach license agreement) are as follows:
2002 $ 2,183,671
2003 1,424,181
2004 1,051,914
2005 983,646
2006 995,496
Thereafter 248,874
-------------
$ 6,887,782
=============
Total royalty expense charged to operations for the years ended October 31,
2001, 2000 and 1999 amounted to $2,286,267, $3,114,807 and $2,413,285,
respectively.
MINIMUM ADVERTISING--In addition to the above minimum royalties, the Company is
required under certain license agreements to advertise and market license
trademark brands as specified in the respective agreements. The Company was in
compliance with these minimum advertising and related expense requirements for
the year ended October 31, 2001.
PURCHASE AGREEMENT--In conjunction with the Asset Acquisition outlined in Note
2, the Company entered into a purchase agreement with a frame vendor in which
the Company agreed to purchase the following amounts of eyeglass frames during
the periods indicated: (i) $2.4 million from the closing of the acquisition
through July 31, 2000; (ii) $3.0 million during the year ending July 31, 2001;
and (iii) $3.0 million during the year ending July 31, 2002.
OTHER--The Company is 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.
NOTE 10 STOCK WARRANTS AND OPTIONS
The Company sold to Fechtor, Detwiler & Co., Inc. and Van Kasper Company, the
managing underwriters of the initial public offering in 1997, 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 GWO, 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 warrants canceled
January 18, 2001, 30 days after the termination of the Coach license.
The following is a summary of warrants outstanding:
2001 2000 1999
-------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- ------- --------- ------- --------- -------
Outstanding, beginning
of year 330,000 $ 10.11 230,000 $ 11.02 180,000 $ 12.00
Issued 100,000 $ 8.00 50,000 $ 7.50
Canceled (100,000) $ 8.00 -- --
--------- --------- ---------
Outstanding, end of year 230,000 $ 11.02 330,000 $ 10.11 230,000 $ 11.02
========= ========= =========
No warrants were exercised during the year ended October 31, 2001.
43
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:
2001 2000 1999
-------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- ------- --------- ------- --------- -------
Outstanding, beginning
of year 529,400 $ 8.01 635,500 $ 7.92 477,000 $ 10.00
Granted 1,300 $ 4.00 225,700 $ 4.00
Canceled (71,900) $ 7.63 (107,400) $ 7.46 (67,200) $ 9.49
--------- --------- ---------
Outstanding, end of year 457,500 $ 8.07 529,400 $ 8.01 635,500 $ 7.92
========= ========= =========
The following is a summary of options outstanding under the Plan at October 31,
2001:
Weighted Number of Remaining Number of Weighted
Average Options Contractual Exercisable Average
Exercise Price Outstanding Life Options Exercise Price
-------------- ----------- ----------- ----------- --------------
$8.07 457,500 6 453,600 $8.05
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 activity:
Expected life 6 years
Risk-free interest rate 5.825%
Expected volatility 46.570%
Dividend yield 0.000%
Had the Company adopted SFAS No. 123, pro forma results for fiscal 2001 and 2000
would not vary significantly from those reported.
On a pro forma basis, the effect of stock-based compensation had the Company
adopted SFAS No. 123 for fiscal 1999 is as follows:
Net loss
As reported $(1,309,395)
Pro forma (1,933,721)
Basic and diluted loss per share
As reported (0.26)
Pro forma (0.38)
NOTE 11 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
44
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:
For the Year Ended,
------------------------------------------
2001 2000 1999
------------ ------------ ------------
Numerator
Net loss $(13,387,308) $ (9,483,721) $ (3,738,803)
============ ============ ============
Denominator
Weighted average shares 5,056,889 5,058,915 5,095,259
============ ============ ============
Basic and diluted loss per share $ (2.65) $ (1.87) $ (0.26)
============ ============ ============
For the years ended October 31, 2001, 2000 and 1999, there were no differences
between basic and diluted EPS. Warrants and options to purchase 330,000, 330,000
and 230,000 shares and 457,500, 529,400 and 635,500 shares, respectively, of
common stock were outstanding during the years. All options and warrants are
omitted from the computation of diluted earnings per share when net losses are
reported because options and warrants are anti-dilutive. For the years ended
October 31, 2001, 2000 and 1999, basic and diluted loss per share are identical
because of the losses incurred during those years.
NOTE 12 STOCKHOLDERS' EQUITY
The Company's Articles of Incorporation authorize 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. 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.
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 year
ended October 31, 2000, the Company repurchased 25,500 shares of the Company's
stock at an average price of $3.06 per share for an aggregate amount of $78,032.
The Company did not repurchase any shares of the Company's stock during the year
ended October 31, 2001.
On December 20, 2001, the Company entered into a Stock Issuance and Release
Agreement (the "Agreement") whereby the Company issued 500,000 shares of its
common stock and paid $3,000 to Springer Capital Corporation in satisfaction of
the purchase price adjustment relating to the GWO acquisition (see Note 2). The
fair value of the settlement amount, $68,000, has been accrued as a liability at
October 31, 2001.
NOTE 13 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, 2001, 2000 and
1999, the Company made matching contributions to the plan in the amounts of
$157,996, $282,589 and $261,686, respectively.
NOTE 14 ECONOMIC DEPENDENCY
The Company made sales to one customer representing approximately 12% of net
sales during the years ended October 31, 2001 and 2000. No other customer
accounted for more than 10% of net sales during the year ended October 31, 1999.
The Company's net sales of Laura Ashley Eyewear and Eddie Bauer Eyewear together
accounted for 61%, 60% and 75% of net sales for the years ended October 31,
2001, 2000 and 1999, respectively
45
NOTE 15 SUBSEQUENT EVENTS
On March 28, 2002, the Company entered into an Asset Purchase Agreement (the
"Agreement") to sell the USA Optical product line (Division). Under the terms of
the Agreement, the buyer purchased (i) all of the eyewear frame inventory under
the brand name of Camelot or sold as part of the USA Optical line, (ii) all
names, copyrights, logos, trademarks, computer software and other intellectual
property rights related to the trademarks or trade names Camelot or USA Optical,
and (iii) all marketing materials, customer lists, sales and vendor records to
the trademarks or trade names of Camelot or USA Optical.
The price for the USA Optical product line was $570,000 including the assumption
of certain obligations and liabilities related to the USA Optical line
outstanding purchase orders. In addition, the Company agreed to supply the buyer
with inventory for the existing models of eyeglass frames sold by the Company at
a discount of 10% off the prices set forth by the buyer until the aggregate
savings with respect to such purchases equals the total amount of Earned and
Pending Premium Obligations (as defined).
In connection with the sale of the USA Optical product line, the Company's chief
executive officer ("CEO") entered into a three-year consulting agreement with
the buyer for a monthly consulting fee of $4,667. The CEO has agreed to a
monthly reduction in his salary from the Company equal to the monthly consulting
fee.
NOTE 16 QUARTERLY INFORMATION (UNAUDITED)
First Quarter Second Quarter Third Quarter Fourth Quarter
------------------------ ------------------------ ------------------------ ------------------------
2001 2000 2001 2000 2001 2000 2001 2000
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net sales 10,889,044 12,003,409 11,470,364 12,389,749 11,821,152 17,441,961 9,211,462 10,096,947
Gross profit 7,128,081 7,195,961 7,042,041 7,331,313 7,164,518 10,366,029 585,029 5,613,885
Net income (loss) 103,823 (252,258) 229,031 (2,468,978) 153,799 (1,017,567) (13,873,961) (5,744,918)
Earnings (loss)
per share, basic
and diluted 0.02 (0.05) 0.05 (0.49) 0.03 (0.20) (2.75) (1.13)
Signature's turnaround strategy for fiscal 2001 was in the final implementation
stages and the Company was profitable through August 2001. The tragic events of
September 2001 caused the Company to lose ten days of sales due to the
suspension of all outgoing and incoming shipments. That loss in sales resulted
in the Company losing over $4 million in gross sales while creating a higher
return rate due to the uncertain future retail environment. The speed in which
the decline in sales occurred did not permit the Company any time to respond.
The high level of retailer returns coupled with the seasonally slow winter
months and the lack of ability to sell down slow moving frames during this
period caused the Company to experience an unexpected shock loss.
In addition, noncash transactions to write down inventory and increase the
reserve for obsolescence for $3,277,000, write down point of purchase inventory
for $661,000 and asset impairment charges of $4,891,000 were also significant
factors for the 4th quarter loss.
ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
46
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 September 30, 2002:
YEAR FIRST
ELECTED OR
APPOINTED
NAME: AGE DIRECTOR PRINCIPAL OCCUPATION
================================================================================
Bernard L. Weiss (1) 64 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 53 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 48 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.
Robert Fried 57 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 51 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.
Seth Weiss (1) 38 Mr. Weiss has been an Executive Vice President
of the Company since November 2000. He has
worked for the Company for more than the past
five years.
- -----------------
(1) Bernard L. Weiss is the father of Seth Weiss.
47
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,
2001 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
------------
NUMBER OF
FISCAL YEAR SECURITIES
ENDED UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION (1) OCTOBER 31, ANNUAL COMPENSATION OPTIONS COMPENSATION (1)
- -------------------------------------------------------------------------------------------------------------
SALARY BONUS
- -------------------------------------------------------------------------------------------------------------
Bernard L. Weiss 2001 $230,000 -- -- $29,445
Chief Executive Officer 2000 230,000 -- -- 4,932
1999 190,000 -- -- 5,627
- -------------------------------------------------------------------------------------------------------------
Michael Prince 2001 $215,000 -- -- $25,987
Chief Financial Officer 2000 215,000 -- -- 4,939
1999 175,000 $25,000 $9,000 5,896
- -------------------------------------------------------------------------------------------------------------
Robert Fried 2001 $215,000 -- -- $25,825
Senior Vice President, 2000 215,000 -- -- 5,100
Marketing 1999 175,000 $25,000 $9,000 6,221
- -------------------------------------------------------------------------------------------------------------
Robert Zeichick 2001 $215,000 -- -- $26,180
Vice President, Advertising 2000 215,000 -- -- 4,745
and Sales Promotion 1999 160,000 $25,000 $9,000 5,770
- -------------------------------------------------------------------------------------------------------------
Seth Weiss
Executive Vice President 2001 $130,000 -- -- $ 4,089
- -------------------------------------------------------------------------------------------------------------
(1) Includes: (i) Company contribution to 401(k) Plan; and (ii) cash-out of a
portion of unused vacation at approximately 60% of accrued amount due to
Company's request to limit vacation during the period.
OPTION GRANTS IN LAST FISCAL YEAR
There were no option grants to Named Executive Officers in fiscal 2001.
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, 2001 and the value of options held
at fiscal year end based upon the last reported sales price of the Common Stock
on the OTC Bulletin Board on October 31, 2001 ($0.12 per share). No Named
Executive Officer exercised any stock options during fiscal 2001.
48
AGGREGATED FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXECUTED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
OCTOBER 31, 2001 AT OCTOBER 31, 2001
----------- ------------- ----------- -------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
Bernard L. Weiss 12,000 8,000 $ 0 $ 0
Michael Prince 30,000 14,000 0 0
Robert Fried 30,000 14,000 0 0
Robert Zeichick 30,000 14,000 0 0
Seth Weiss 31,700 -- 0 0
EMPLOYMENT CONTRACTS
Bernard L. 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. Mr. Weiss's salary has been reduced
by $4,667 per month for so long as he receives consulting fees in like amount
under the three-year consulting agreement which he entered into in connection
with the sale of the USA Optical product line in March 2002.
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.
The Board of Directors administers the Stock Plan. Subject to the
provisions of the Stock Plan, the administrator has 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.
49
COMPENSATION OF DIRECTORS
Each director who is not an officer of or otherwise employed by the
Company receives an annual retainer of $8,000.
ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of September 30, 2002 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).............. 2,075,337 37.2%
Bernard L. Weiss(2)(3)................. 2,095,337 37.4
Julie Heldman(2)(3).................... 2,075,337 37.2
Robert Fried(4)........................ 222,599 4.0
Robert Zeichick(4)..................... 223,689 4.0
Michael Prince(4)...................... 143,941 2.6
Seth Weiss(5).......................... 52,700 1.0
Joel Johnson(6)........................ 5,920 *
Springer Capital Corporation(7)........ 600,000 10.6
Directors and executive officers
as a group (6 persons)(8) ........... 2,750,686 47.6%
- -----------
* Less than 1%.
(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
September 30, 2002.
(2) Bernard L. 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 issuable upon exercise of stock options.
(4) Includes 44,000 shares issuable upon exercise of stock options.
(5) Includes 31,700 shares issuable upon exercise of stock options.
(6) Includes 4,000 shares issuable upon exercise of stock options.
(7) Includes 50,000 shares issuable upon exercise of warrants.
(8) Includes 162,500 shares issuable upon exercise of stock options.
ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Inapplicable.
50
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, 2000 and 2001
Consolidated Statements of Operations for the years ended
October 31, 1999, 2000 and 2001
Consolidated Statements of Changes in Stockholders' Equity for
the years ended October 31, 1999, 2000 and 2001
Consolidated Statements of Cash Flows for the years ended
October 31, 1999, 2000 and 2001
2. Financial Statement Schedules:
Schedule II--Valuation and Qualifying Accounts
3. Exhibits:
See attached Exhibit List
(b) Reports on Form 8-K:
None
51
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 L. Weiss Chairman of the Board and November 6, 2002
- -------------------------- Chief Executive Officer
Bernard L. Weiss
/s/ Michael Prince Chief Financial Officer and November 6, 2002
- -------------------------- Director (Principal Financial
Michael Prince and Accounting Officer)
/s/ Joel Johnson Director November 6, 2002
- --------------------------
Joel Johnson
52
CERTIFICATIONS FOR FORM 10-K
----------------------------
I, Bernard L. Weiss, certify that:
1. I have reviewed this annual report on Form 10-K of Signature Eyewear,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
Date: November 6, 2002 /s/ Bernard L. Weiss
---------------- -------------------------------
Name: Bernard L. Weiss
Title: Chief Executive Officer
53
CERTIFICATIONS FOR FORM 10-K
----------------------------
I, Michael Prince, certify that:
1. I have reviewed this annual report on Form 10-K of Signature Eyewear,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
Date: November 6, 2002 /s/ Michael Prince
---------------- -------------------------------
Name: Michael Prince
Title: Chief Financial Officer
54
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
3.1 Restated Articles of Incorporation of Signature Eyewear, Inc.
("Signature"). Incorporated by reference to Exhibit 3.1 to Signature'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 Signature. Incorporated by reference to
Exhibit 3.2 to Signature'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 Signature. Incorporated
by reference to Exhibit 4.1 to Signature's Form S-1 (SEC Registration
No. 333-30017), filed with the Commission on June 25, 1997, as amended.
10.1 Signature's 1997 Stock Plan. Incorporated by reference to Exhibit 10.1
to Signature's Form S-1 (SEC Registration No. 333-30017), filed with
the Commission on June 25, 1997, as amended.
10.2 Form of Signature's Stock Option Agreement (Non-Statutory Stock
Option). Incorporated by reference to Exhibit 10.2 to Signature'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 Signature'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 Signature and the Existing
Shareholders. Incorporated by reference to Exhibit 10.4 to Signature'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 Signature, as amended August 2, 1993, May 31,
1994, January 30, 1995, August 21, 1995 and October 4, 2000.
Incorporated by reference to Exhibit 10.5 of Signature's Annual Report
on Form 10-K for the year ended October 31, 2000. Further amending
Agreement dated November 5, 2001. [Portions of this Exhibit have been
deleted and filed separately with the Securities and Exchange
Commission pursuant to a grant of Confidential Treatment.]
10.6 Lease Agreement, dated March 23, 1995, between the Signature and
Roxbury Property Management, and Guaranty of Lease, dated March 23,
1995, between Julie Heldman and Bernard L. Weiss and Roxbury Property
Management and First Amendment to Lease, dated May 5, 1998, between
Roxbury Property Management and the Signature, and Second Amendment to
Lease, dated June 3, 1998, between Roxbury Property Management and the
Signature. Incorporated by reference to Exhibit 10.6 to Signature's
Form S-1 (SEC Registration No. 333-30017) and Exhibit 10.17 to
Signature'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 Signature. Incorporated by reference to Exhibit
10.6 of Signature's Annual Report on Form 10-K for the year ended
October 31, 2000.
10.7 Accounts Receivable and Inventory Loan Agreement dated June 26, 2000
between Signature and City National Bank; Forbearance Agreement dated
December 18, 2000; Amendment to Forbearance Agreement dated February
28, 2001; and Second Amendment to Forbearance Agreement dated May 1,
2001. Incorporated by reference to Exhibit 10.7 of Signature's Annual
Report on Form 10-K for the year ended October 31, 2000. Third
Amendment to Forbearance Agreement dated June 8, 2001; Fourth Amendment
to Forbearance Agreement dated August 22, 2001; Fifth Amendment to
Forbearance Agreement dated October 22, 2001; Sixth Amendment to
Forbearance Agreement dated December 14, 2001; Superseding Sixth
Amendment to Forbearance Agreement dated January 28, 2002; Seventh
Amendment to Forbearance Agreement dated March 15, 2002; Eighth
Amendment to Forbearance Agreement dated March 26, 2002; Ninth
Amendment to Forbearance Agreement dated April 12, 2002; Tenth
Amendment to Forbearance Agreement dated May 31, 2002; and Eleventh
Amendment to Forbearance Agreement dated July 8, 2002.
55
10.8 Employment Agreement between the Signature and Bernard L. Weiss.
Incorporated by reference to Exhibit 10.8 to Signature'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 Signature and Michael Prince.
Incorporated by reference to Exhibit 10.10 to Signature'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 Signature and Robert Fried.
Incorporated by reference to Exhibit 10.11 of Signature'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 Signature and Robert Zeichick.
Incorporated by reference to Exhibit 10.12 of Signature'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 Signature and First Addendum to License Agreement Dated June 24,
1997, dated as of March 26, 1999, between the Signature and Eddie
Bauer, Inc. Incorporated by reference to Exhibit 10.15 to Signature's
Form S-1 (SEC Registration No. 333-30017 and Exhibit 10.2 to
Signature's Quarterly Report on 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 Signature's Form S-1 (SEC Registration No. 333-30017), filed
with the Commission on June 25, 1997, as amended.
10.14 Master Lease dated as of March 1, 1999 between Oliver-Allen Corporation
and Signature; 9/6/01 Restructure Agreement dated September 6, 2001 by
and among Oliver-Allen Corporation, Wells Fargo Equipment Finance
Company Inc. and Signature; and First Amended and Restated Lease
Payment Restructure Agreement dated as of September 17, 2002 by and
among Wells Fargo Equipment Finance Company, Oliver-Allen Corporation
and Signature.
10.15 Third Amended Revised and Restated Secured Promissory Note dated as of
June 23, 1999 issued by Signature in favor of California Design Studio,
Inc. in the original principal amount of $1,250,000.
23.1 Consent of Altschuler, Melvoin and Glasser LLP
99.1 Schedule II--Valuation and Qualifying Accounts.
56