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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
[_] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 2002
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.
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(Exact name of Registrant as Specified in its Charter)
CALIFORNIA 95-3876317
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
498 NORTH OAK STREET
INGLEWOOD, CALIFORNIA 90302
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(Address of Principal Executive Offices, including ZIP Code)
(310) 330-2700
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Registrant's Telephone Number, Including Area Code
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [_] No [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. [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [_] No [X]
On June 30, 2003, the Registrant had 5,976,889 outstanding shares of Common
Stock, $.001 par value. The aggregate market value of the 2,983,732 shares of
Common Stock held by non-affiliates of the Registrant as of June 30, 2003 was
$895,120.
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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") designs,
markets and distributes prescription eyeglass frames and sunglasses, primarily
under exclusive licenses for Laura Ashley Eyewear, Eddie Bauer Eyewear, Hart
Schaffner & Marx Eyewear, Nicole Miller Eyewear, bebe eyes and Dakota Smith, as
well as its proprietary Signature line. 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 60% and 62% of the Company's net sales in fiscal
2001 and fiscal 2002, 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, U.S. Vision and Dollond & Atchitson; and
(4) through selected distributors in the United States.
RECENT RECAPITALIZATION
The Company suffered material operating losses in its last four
fiscal years, causing a significant deterioration in its financial condition. At
October 31, 2002, the Company's stockholders' deficit was $9.0 million. The
Company was in default under its bank credit facility since the fourth quarter
of fiscal 2000 and since December 2000 had operated under a forbearance
agreement from the bank. The Company also has a forbearance agreement from a
frame vendor for an obligation in the amount of approximately $5.9 million. In
April 2003 the Company completed a recapitalization involving a refinancing of
its credit facility, an equity capital infusion and a change of management and a
reconstitution of the Board of Directors. The key elements of the
recapitalization included the following:
Credit Facility with Home Loan and Investment Company. The Company
obtained a $3.5 million credit facility from Home Loan and Investment Company
("HLIC"). The credit facility includes a $3,000,000 term loan and a $500,000
revolving line of credit and is secured by all of the assets of the Company. The
term loan bears interest at a rate of 10% per annum, is payable interest only
for the first year with payments of principal and interest on a 10-year
amortization schedule commencing the second year, and is due and payable in
April 2008. The revolving credit facility bears interest at a rate of 1% per
month, payable monthly, with all advances subject to approval of HLIC, and is
due and payable in April 2008.
Issuance of Preferred Stock. The Company created a new series of
preferred stock, designated "Series A 2% Convertible Preferred Stock" (the
"Series A Preferred"), and issued 1,200,000 shares to Bluebird Finance Limited,
a British Virgin Islands corporation ("Bluebird"), for $800,000, or $0.67 per
share.
Bluebird Credit Facility. The Company obtained from Bluebird a
credit facility of up to $4,150,000 secured by the assets of the Company. The
credit facility includes a revolving credit line in the amount of $2,900,000 and
support for the $1,250,000 letter of credit securing the HLIC credit facility.
The loan bears interest at the rate of 5% per annum, payable annually for the
first two years, with payments of principal and interest on a 10-year
amortization schedule
2
commencing in the third year, and is due and payable in April 2013. Bluebird's
loan commitment will be reduced by $72,000 in July 2005 and by the same amount
every three months thereafter. This loan is subordinate to the HLIC credit
facility.
Retirement of Bank Credit Facility. The Company retired its bank
credit facility with City National Bank which had been in default since
September 30, 2000.
Retirement of Obligations to Frame Vendor. The Company retired its
obligations to a frame vendor in the aggregate amount of approximately $5.8
million (some of which were assumed in connection with the Company's acquisition
of California Design Studio, Inc. in 1999) for a payment of $2,475,000 to
Dartmouth Commerce of Manhattan, Inc. ("Dartmouth"). Dartmouth had purchased
this obligation from the frame vendor for $2,350,000. The Company recognized a
net gain of approximately $3.3 million in connection with this transaction.
Reduction in Trade Payables and Restructuring of Equipment Lease.
The Company retired $775,000 of trade payables for approximately $372,000,
resulting in a gain of approximately $400,000. In addition, the Company
purchased certain leased property and equipment, including its computer system,
for $750,000, thereby terminating the lease with aggregate future obligations of
approximately $1.7 million. To fund this payment, the Company obtained a
$750,000 loan from a commercial bank secured by the purchased assets and bearing
interest at 4% per annum payable in monthly installments of approximately
$14,000 with the balance due in February 2008.
Sale of Stock by Weiss Family Trust. The Weiss Family Trust, the
principal shareholder of the Company, sold all of the shares of the Common Stock
of the Company which it held (2,075,337 shares, representing approximately 37%
of the outstanding Common Stock of the Company) for $0.012 per share. Dartmouth
purchased 1,600,000 shares and Michael Prince purchased 475,337 shares.
Dartmouth, which is wholly owned by Richard M. Torre, is now the largest
shareholder of the Company holding approximately 28.7% of the outstanding Common
Stock of the Company. Dartmouth has agreed with Bluebird that until April 2008
it will not sell or transfer any of these shares without the prior consent of
Bluebird.
Management and Board Changes. Bernard L. Weiss resigned as Chairman
of the Board, Director and Chief Executive Officer, positions he held since
founding the Company in 1983. Richard M. Torre was appointed as Director and
Chairman of the Board and Ted Pasternack, Edward Meltzer and Drew Miller were
appointed as Directors. In addition, Michael Prince was named Chief Executive
Officer and President. The Company has also entered into a three-year consulting
agreement with Dartmouth for compensation of $55,000 per year.
The recapitalization significantly improved the Company's financial
condition and liquidity through decreasing the shareholders deficit by
approximately $5.7 million, increasing capital, reducing liabilities and
replacing current obligations with long-term obligations. Although following the
recapitalization the Company continues to have a stockholders' deficit, the
Company believes that for at least the following 12 months, assuming there are
no unanticipated material adverse developments, no material decrease in revenues
and continued compliance with its credit facilities, it will be able pay its
debts and obligations as they mature. However, the Company's long-term viability
will depend on its ability to return to profitability on a consistent basis,
which will depend in part on its ability to increase revenues.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for more information regarding the recapitalization.
BUSINESS STRATEGY
Following the recapitalization, the Company changed its business
strategy to focus its efforts primarily on increasing revenues. As part of its
turnaround strategy during the prior two years, the Company had significantly
reduced its general, administrative and other expenses to the extent that it
does not believe further material reductions are possible. Accordingly, the
ability of the Company to return to profitability will depend most importantly
on its ability to increase revenues.
3
The Company's efforts to increase revenues will focus principally
upon increasing sales to retail optical chains. Sales to existing retail optical
chain customers, most of which are based in the United States, could be
increased through the chains purchasing additional eyewear lines and/or
purchasing the Company's products for sales through additional market channels,
such as stores outside the United States or different retail outlets. In
addition, the Company will market to retail optical chains based outside of the
United States.
The Company will also attempt to increase revenues through expanding
international sales, principally through engaging additional international
distributors, and domestic sales through increasing its direct sales force for
sales to independent optical retailers within the United States.
To attract new customers and expand sales to existing customers, the
Company intends to focus even greater efforts on frame design, quality control
and quality assurance. The Company believes that the prescription eyewear frame
market is a "product-driven" business, where the quality and styling, in
addition to brand name recognition, are the principal factors in generating
sales.
INDUSTRY OVERVIEW(1)
THE OPTICAL MARKET. After several years of steady, albeit slowing
growth in the late 1990's, optical retail sales in the United States experienced
a substantial slowdown in 2001 that has only recently begun to signs of
subsiding. 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 retail sales of eyewear products was less than $16
billion. For 2002, preliminary numbers indicate a slight (2%) increase, with
retail sales inching up to $16.2 billion. But while industry observers are
hopeful for a sales rebound in 2003, trends set into motion in 2001 continue to
make the optical industry - particularly the frame portion of the market - a
challenging business.
Perhaps the biggest single factor on the optical industry and the
frame category is the move to value, led by the mass merchandiser category.
Among the four channels of eyewear sales, the mass merchandiser/warehouse clubs
are only growing segment, with a 13% increase in retail sales in 2001 to nearly
$1 billion in sales ($976 million in sales, 6% share of market). Other channels
has sales declines. The independent optical retailers (optometrists, opticians
and ophthalmologists with one or two stores) had $9 billion in sales, or 57% of
the market. Optical chains (including Pearle and LensCrafters), had $5.4 billion
and a 34% share, with HMO/hospitals $413 million and a 3% share. Characterized
by lower-priced product, the mass merchandiser/warehouse club category continues
to grow: preliminary estimates show an increased share of market in 2002, with
Wal-Mart and Costco optical solidly positioned among the top six optical
retailers in the U.S.
THE FRAME PORTION OF THE MARKET: A symptom of this value trend is a
decrease in retail frame price points. The retail price for a pair of frames
across all types of optical retailers has dropped each quarter since December
2001 from a high of $124.59 to $120.25 in September 2002. It was projected to be
$120 by the end of 2002. Other industry numbers correspond with this trend:
While unit sales of frames inched up 5% to 64.8 million in 2002, the 2002 retail
sales figure for frames was down 1% to $5.17 billion. Retail dollars in the
other industry categories (lenses, plano sunglasses, contact lenses) remained
virtually flat in 2002, with only lens treatments experiencing a slight (4%)
increase. These numbers and reports from the field indicate that while consumers
continue to purchase prescription eyewear, they are clearly seeking value in
their frame purchase.
Despite the drop in retail prices and the increased demand for
value, the Company's product remains competitively priced in what is the heart
of the business. In the U.S. market, 40% of all frame units sold and 40.4% of
frame retail dollars through March 2003 were in the $100-$149 retail price
range. The value portion of the frame market, priced under $100, had a 35% share
of units and a 22% share of retail dollars. The overwhelming majority of the
Company's frames retail in the $100-$149.
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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.
4
THE OPTICAL CUSTOMER: Even in a sluggish optical market, 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 US 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.
CURRENT AGE BREAKDOWN OF U.S. POPULATION
AND PROJECTED GROWTH 2001-2005, 2005-2010
PROJECTED GROWTH
AGE 2001 POPULATION 2001-2005 PROJECTED GROWTH 2005-2010
- --------- --------------- ----------- ---------------------------
0-14 59,000 -3% 3%
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%
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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.
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.
5
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.
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
6
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.
PRODUCTS
The Company's principal products during fiscal 2002 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, Signature and Camelot.
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
- ---------------
Laura Ashley
Prescription............... Women 1992 $125 - $180
Sunwear.................... Women 1993 $90 - $100
bebe eyes...................... Women May 2000
Prescription............... $100-$150
Eddie Bauer.................... Men/Women 1998
Prescription............... $95- $170
Hart Schaffner & Marx.......... Men 1996
Prescription............... 1993 $95-$180
Nicole Miller ................. Women
Prescription............... 1993 $125-$156
Sunwear.................... 1993 $75-$95
House Brands
- ------------
Dakota Smith (2)
Prescription............... Unisex 1992 $90-$150
Sunwear.................... Unisex 1992 $75-$125
Signature Collection
Intuition.................. Women 1999 $80-$90
Lifescape.................. Women 1999 $60-$70
- -------------------
(1) Retail prices are established by retailers, not the Company.
(2) The Company sold and licensed back the rights to this trademark in February
2003.
LAURA ASHLEY EYEWEAR
The Company's first major eyewear line is Laura Ashley Eyewear,
which was introduced in 1992. With net sales of $11.9 million in fiscal 2002,
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
7
will be to extend its product selection to reach a broader audience within the
feminine eyewear niche. This is accomplished by drawing inspiration from two
primary living environments consistent with the Laura Ashley lifestyle, city and
country. The city-inspired collection expands the eyewear designs to a more
sophisticated customer with an urban style and sensibility, while remaining true
to the Laura Ashley brand. And the country-inspired collection will be
identified with the more traditional and longtime Laura Ashley customer who
appreciates the floral detail and ornamentation on each frame.
Signature's in-house merchandising team has conceptualized and
designed brand new Laura Ashley point of purchase display items for 2003 and
2004. The new displays feature an integrated presentation of painted wood,
fabric accents and lifestyle graphics. Consistent with the broader focus of the
brand, the display items will draw inspiration from city and country
environments, with each reflected in specific colors, fabrics, and molding
treatments. These unique displays allow the optical retailer to create 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. Laura Ashley Eyewear
environments are covered with colorful Laura Ashley textured floral-print fabric
with paint selected from Laura Ashley's paint palette, 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, the United
Kingdom and certain other countries. The Laura Ashley license is automatically
renewed annually through January 2008 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 the present managers, shareholders or
controllers to other parties whom Laura Ashley may reasonably regard as
unsuitable, or if minimum sales requirements are not met in any two years. The
Company did not meet the minimum sales requirement for the license year ended
January 2003, but Laura Ashley waived noncompliance.
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 and the brand's
longtime outdoor heritage. It is the intent to design a product for every Eddie
Bauer customer. In keeping with Eddie Bauer's commitment to value, the
collection consists of medium priced frames.
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 outdoor casual lifestyle. The new displays for
2003-2004 to bring the Eddie Bauer image into retail optical stores through
beautiful outdoor imagery and on-model photography. These displays are designed
to match the look and feel of displays found in Eddie Bauer retail stores,
further strengthening brand recognition at the optical point of sale.
The Company has the exclusive worldwide right to market and sell
Eddie Bauer Eyewear through a license agreement with Eddie Bauer Diversified
Sales LLC 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 contains minimum annual net sales and minimum
annual royalty requirements. The license 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, or (2)
the Company commits a material breach of the license agreement.
Eddie Bauer Diversified Sales LLC, and its parent Speigel, Inc and
other affiliates, have filed voluntary petitions for reorganization under
Chapter 11 of the U.S. Bankruptcy Code. As a result, the licensor has the rights
of a debtor under the Bankruptcy Code with respect to executory contracts such
as the Eddie Bauer Eyewear license,
8
including the right to assume or reject the license. The rejection of the
license would have a material adverse affect on the Company. The Company has
received no indication or notice from the licensor regarding the licensor's
intentions with respect to the license agreement.
HART SCHAFFNER MARX EYEWEAR
The Hart Schaffner Marx Eyewear is the distinctively masculine
collection targeted at men who seek quality, comfort and fit. 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. Select styles feature titanium, a
material reknown for its strength and lightweight qualities. 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 license agreement contains minimum annual net sales
and minimum annual royalty requirements. The license expires December 31, 2005,
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 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
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, in June 1999. Nicole Miller Eyewear is targeted at the
sophisticated, style-conscious modern woman who creates her own fashion trends
in a fun, whimsical way. Created in New York City by the designer of the same
name, Nicole Miller clothing feature colorful designs with interesting shapes,
without being pretentious or extreme. The Nicole Miller Eyewear collection
captures the spirit of this exciting brand, with colorful designs and
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 agreement for Nicole Miller Eyewear expires in March
2006. The license agreement contains minimum annual net sales and minimum annual
royalty requirements. The licensor may terminate the license agreement before
its stated term expires upon a material breach by the Company.
BEBE EYES
bebe clothing is famous for its provocative clothing for women that
turns heads. The bebe eyes eyewear collection captures the spirit of the bebe
brand through sexy, provocative eyewear and sunwear styles with
attention-getting colors and design accents. Eye-catching point of purchase
displays feature distinctive on-model imagery and frame displays. The collection
appeals to fashion-conscious women of all ages.
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 June 2006. The license agreement contains minimum annual net
sales requirements and minimum quarterly and annual royalty requirements. bebe
may terminate the license before its stated expiration 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. If the Company is deemed "insolvent" within the meaning of the
license agreement as a result of its stockholders' deficit, and bebe stores has
not waived its right to terminate, then bebe stores, inc. would have the right
9
to terminate the agreement. bebe stores, inc. raised no objection to the renewal
of the license in June 2003 based on the Company's financial condition.
DAKOTA SMITH EYEWEAR
Dakota Smith Eyewear targets men and women with eclectic designs
that capture the American spirit. The Dakota Smith brand is a compelling blend
of Santa Fe spirit, Western swagger and Route 66 style. The collection will be
re-launched in late 2003, with a fall release featuring high quality titanium at
an affordable price matched by few collections in the industry. Dakota Smith
sunwear will be released in late fall, featuring superior lenses and exciting
shapes and designs at an affordable price. The collection will be highlighted at
the point of sale with unique displays created from elements and artistic styles
from the American southwest. Complementing the eyewear and sunwear collections
will be an ambitious marketing and merchandising program featuring Dakota Smith
apparel - including jackets, shirts, skirts, and headwear - as well as an
exciting on-line store to expand the reach of the brand beyond eyewear.
The Company has the exclusive right to market and sell Dakota Smith
Eyewear in the United States, Canada and a number of other countries pursuant to
a license agreement entered into in February 2003 with Axwood Investments
Limited, which had concurrently purchased the Dakota Smith eyewear trademark
from the Company. The license expires in February 2006, but is automatically
renewed for an additional two-year term unless the Company notifies the licensor
in advance that it will not renew the term. The license agreement contains
minimum annual royalty payments based on net sales. The licensor may terminate
the license for any material breach of either the license or the supply
agreement.
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.
The Company established the 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 through its own account managers; and (4) through selected
distributors in the United States.
The following table sets forth the Company's net sales by
distribution channel for the periods indicated:
YEAR ENDED OCTOBER 31,
------------------------------------
2000 2001 2002
---------- ---------- ----------
(IN THOUSANDS)
Direct sales ................ $ 22,243 $ 21,147 $ 15,349
Optical retail chains ....... 17,041 12,346 11,560
International ............... 6,634 5,029 3,468
Telemarketing(1)............. 5,098 3,230 1,532
Domestic distributors........ 916 1,640 1,212
---------- ---------- ----------
$ 51,932 $ 43,392 $ 33,121
========== ========== ==========
------------
(1) In March 2002 the Company sold its USA Optical division which had sold
frames through a form of telemarketing to optical retailers, focusing
on establishing long-term, ongoing relationships. The Company no
longer sells frames in this manner.
10
DIRECT SALES. The Company distributes its products to independent
optical retailers in the United States primarily through a national direct sales
force, including company and independent sales representatives. The direct sales
force, including independent sales representatives, numbered 46 at October 31,
2002.
OPTICAL RETAIL CHAINS. Signature sells directly to optical retail
chains, including EyeCare Centers of America, Cole Vision Corp. and its
subsidiary Pearle Vision, LensCrafters, U.S. Vision and Dollond & Atchitson. Net
sales to Eyecare Centers of America amounted to 12% and 13% of the Company's net
sales for fiscal years 2001 and 2002, respectively.
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, 2002, the Company had
approximately 20 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. The Company distributes 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, 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 2002,
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/China 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.
11
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., Marchon Eyewear, Inc., Marcolin S.p.A. and De Rigo
S.p.A. 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. De
Rigo S.p.A. is also vertically integrated, in that it manufactures frames,
distributes them throughout the world, and owns Dollond and Atchitson, one of
the largest retail optical chains in the world.
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, 2002, the Company had 152 full-time employees,
including 52 in sales and marketing, 24 in customer service and support, 31 in
warehouse operations and shipping and 45 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--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 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 7 of Notes to Consolidated Financial Statements.
ITEM 3--LEGAL PROCEEDINGS
As of June 30, 2003, the Company was not involved in any material
legal proceedings.
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
None.
12
PART II
ITEM 5--MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK
Since March 15, 2001, the Company's Common Stock has been traded in
the over-the-counter market. During fiscal 2001 prior to March 15, the Common
Stock was traded on the Nasdaq SmallCap Market. The following table sets forth,
for the periods indicated, high and low last reported sales prices for the
Common Stock on the Nasdaq SmallCap Market through March 15, 2001 and in the
over-the-counter market, in each case as reported by Nasdaq.
HIGH LOW
---------- ---------
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
FISCAL YEAR ENDED OCTOBER 31, 2002
First Quarter ....................... $ 0.30 $ 0.07
Second Quarter ...................... $ 0.20 $ 0.07
Third Quarter........................ $ 0.25 $ 0.11
Fourth Quarter ...................... $ 0.45 $ 0.20
On June 30, 2003, the last reported sales price of the Common Stock
as reported by Nasdaq, was $0.30 per share. At June 30, 2003, there were 33
holders of record of the Common Stock.
DIVIDENDS
As a California corporation, under the California General
Corporation Law, generally the Company may not pay dividends in cash or property
except (i) out of positive retained earnings or (ii) if, after giving effect to
the distribution, the Company's assets would be at least 1.25 times its
liabilities and its current assets would exceed its current liabilities
(determined on a consolidated basis under generally accepted accounting
principles). At October 31, 2002, the Company had an accumulated deficit of
$23.4 million. As a result, the Company will not be able to pay dividends for
the foreseeable future. In addition, the payment of dividends is prohibited
under its credit facilities.
EQUITY COMPENSATION PLANS
The following table sets forth certain information regarding the
Company's equity compensation plans as of October 31, 2002.
13
- --------------------------------- ------------------------------- --------------------- -------------------------
(a) (b) (c)
- --------------------------------- ------------------------------- --------------------- -------------------------
Plan category Number of securities to be Weighted-average Number of securities
issued upon exercise of exercise price of remaining available for
outstanding options, warrants outstanding options, future issuance under
and rights. warrants and rights. equity compensation
plans (excluding
securities reflected in
column (a))
- --------------------------------- ------------------------------- --------------------- -------------------------
Equity compensation plans 367,300 $8.10 432,700
approved by security holders
- --------------------------------- ------------------------------- --------------------- -------------------------
Equity compensation plans not -- -- --
approved by security holders
- --------------------------------- ------------------------------- --------------------- -------------------------
Total 367,300 $8.10 432,700
- --------------------------------- ------------------------------- --------------------- -------------------------
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,
--------------------------------------------------------------------
1998 1999 2000 2001 2002
------------ ------------ ------------ ------------ ------------
(dollars in thousands, except per-share data)
STATEMENT OF OPERATIONS DATA:
Net sales ...................................... $ 40,892 $ 44,056 $ 51,932 $ 43,392 $ 33,121
Gross profit ................................... 23,247 25,316 30,507 21,920 17,653
Total operating expenses ....................... 19,041 27,461 39,754 33,942 21,092
Income (Loss) from operations .................. 4,206 (2,145) (9,247) (12,022) (3,439)
Net income (loss) .............................. 2,750 (1,309) (9,484) (13,387) (4,116)
Net income (loss) per share .................... 0.52 (0.26) (1.87) (2.65) (0.75)
Weighted average common shares outstanding ..... 5,254,156 5,095,259 5,058,915 5,056,889 5,488,396
1998 1999 2000 2001 2002
------------ ------------ ------------ ------------ ------------
BALANCE SHEET DATA:
Current assets ................................. $ 23,548 $ 27,474 $ 33,006 $ 17,184 $ 9,876
Total assets ................................... 25,151 35,474 41,435 18,906 11,944
Current liabilities ............................ 5,498 12,334 28,142 22,390 19,226
Long-term debt and capitalized lease
obligations, net of current portion........... 238 5,137 4,806 1,461 1,715
Total liabilities .............................. 5,736 17,471 32,948 23,851 20,941
Stockholders' equity (deficit) ................. 19,415 18,003 8,487 (4,945) (8,996)
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.
14
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, Nicole Miller Eyewear, Dakota
Smith Eyewear and under its proprietary Signature brand.
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 60% and 62% of the Company's net sales in fiscal
2001 and fiscal 2002, 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.
Following many years of profitability, the Company incurred
operating losses in each of its last four 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. In addition, in fiscal 2001 and the
first quarter of fiscal 2002, 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 and higher return rates due
to the uncertain future retail environment.
SUBSEQUENT EVENTS
This Form 10-K has been filed after a recapitalization completed by
the Company in April 2003 which materially impacted its financial condition. The
key elements of the recapitalization and certain other material transactions
subsequent to the period covered by this Form 10-K were as follows.
Credit Facility with Home Loan and Investment Company. As part of
the recapitalization in April 2003, the Company obtained a $3.5 million credit
facility from Home Loan and Investment Company ("HLIC"). The credit facility
includes a $3,000,000 term loan and a $500,000 revolving line of credit and is
secured by all of the assets of the Company. The term loan bears interest at a
rate of 10% per annum, is payable interest only for the first year with payments
of principal and interest on a 10-year amortization schedule commencing the
second year, and is due and payable in April 2008. The revolving credit facility
bears interest at a rate of 1% per month, payable monthly, with all advances
subject to approval of HLIC, and is due and payable in April 2008. The Company
must maintain inventory, accounts receivable and cash of not less than
$7,000,000. In addition, the Company must comply with certain other covenants,
including that it may not, without the consent of HLIC, incur any additional
debt, engage in any merger or acquisition, or pay any dividends or make any
distributions to shareholders other than stock dividends. The Company may prepay
the credit facility without premium or penalty. The Company also purchased a
$250,000 debenture issued by HLIC which is additional collateral for the credit
facility. The debenture bears interest at 3% per annum, adjusted annually to the
one-year debenture rate offered by HLIC. Additional credit enhancement for the
credit facility is a $1,250,000 letter of credit issued in favor of HLIC by a
commercial bank. As further consideration for the credit facility, the Company
issued to HLIC five-year warrants to purchase 100,000 shares of Common Stock for
$0.67 per share.
Issuance of Preferred Stock. As part of the recapitalization in
April 2003, the Company created a new series of preferred stock, designated
"Series A 2% Convertible Preferred Stock" (the "Series A Preferred"), and issued
1,200,000
15
shares to Bluebird Finance Limited, a British Virgin Islands corporation
("Bluebird"), for $800,000, or $0.67 per share. The Series A Preferred provides
for cumulative dividends at the rate of 2% per annum payable in cash or
additional shares of Series A Preferred and has a liquidation preference equal
to its original purchase price plus accrued and unpaid dividends. The Company
has the right to redeem the Series A Preferred commencing April 2005 at the
liquidation preference plus accrued and unpaid dividends plus a premium of
$450,000. The Company must redeem the Series A Preferred upon certain changes of
control to the extent the Company has the funds legally available therefor, at
the same redemption price, unless the change of control occurs before April
2005, in which event the premium is 10% of either the consideration received by
the Company's shareholders or the market price, as applicable. The Series A
Preferred is convertible into Common Stock on a share-for-share basis (subject
to adjustment for stock splits, stock dividends and similar events) at any time
commencing May 2005. The holders of the Series A Preferred have no voting rights
except as required by law, provided, however, that at any time two dividend
payments are not paid in full, the Board of Directors will be increased by two
and the holders of the Series A Preferred, voting as a single class, will be
entitled to elect the additional directors. Bluebird received demand and
piggyback registration rights for the shares of Common Stock into which Series A
Preferred may be converted.
Bluebird Credit Facility. As part of the recapitalization in April
2003, the Company obtained from Bluebird a credit facility of up to $4,150,000
secured by the assets of the Company. The credit facility includes a revolving
credit line in the amount of $2,900,000 and support for the $1,250,000 letter of
credit securing the HLIC credit facility. The loan bears interest at the rate of
5% per annum, payable annually for the first two years, with payments of
principal and interest on a 10-year amortization schedule commencing in the
third year, and is due and payable in April 2013. Bluebird's loan commitment
will be reduced by $72,000 in July 2005 and by the same amount every three
months thereafter. This loan is subordinate to the HLIC credit facility. The
Company must comply with certain covenants including among others that without
the consent of Bluebird it may not make any acquisition or investment in excess
of an aggregate of $150,000 each fiscal year outside the ordinary course of
business, or enter into any merger or similar reorganization.
Retirement of Bank Credit Facility. As part of the recapitalization
in April 2003, the Company retired its bank credit facility with City National
Bank which had been in default since September 30, 2000.
Retirement of Obligations to Frame Vendor. As part of the
recapitalization in April 2003, the Company retired its obligations to a frame
vendor in the aggregate amount of approximately $5.8 million (some of which were
assumed in connection with the Company's acquisition of California Design
Studio, Inc. ("CDS") in 1999) for a payment of $2,475,000 to Dartmouth Commerce
of Manhattan, Inc. ("Dartmouth"). Dartmouth had purchased this obligation from
the frame vendor for $2,350,000. The Company recognized a net gain of
approximately $3.3 million in connection with this transaction.
Reduction in Trade Payables and Restructuring of Equipment Lease. As
part of the recapitalization in April 2003, the Company retired $775,000 of
trade payables for approximately $372,000, resulting in a gain of approximately
$400,000. In addition, the Company purchased certain leased property and
equipment, including its computer system, for $750,000, thereby terminating the
lease with aggregate future obligations of approximately $1.7 million. To fund
this payment, the Company obtained a $750,000 loan from a commercial bank
secured by the purchased assets and bearing interest at 4% per annum payable in
monthly installments of approximately $14,000 with the balance due in February
2008.
Sale of Stock by Weiss Family Trust. As part of the recapitalization
in April 2003, the Weiss Family Trust, the principal shareholder of the Company,
sold all of the shares of the Common Stock of the Company which it held
(2,075,337 shares, representing approximately 37% of the outstanding Common
Stock of the Company) for $0.012 per share. Dartmouth purchased 1,600,000 shares
and Michael Prince purchased 475,337 shares. Dartmouth, which is wholly owned by
Richard M. Torre, is now the largest shareholder of the Company holding
approximately 28.7% of the outstanding Common Stock of the Company. Dartmouth
has agreed with Bluebird that until April 2008 it will not sell or transfer any
of these shares without the prior consent of Bluebird.
Management and Board Changes. As part of the recapitalization in
April 2003, Bernard L. Weiss resigned as Chairman of the Board, Director and
Chief Executive Officer, positions he held since founding the Company in 1983.
Richard M. Torre was appointed as Director and Chairman of the Board and Ted
Pasternack, Edward Meltzer and Drew
16
Miller were appointed as Directors. In addition, Michael Prince was named Chief
Executive Officer and President. The Company has also entered into a three-year
consulting agreement with Dartmouth for compensation of $55,000 per year.
Sale/License Back of Dakota Smith Trademark. In February 2003, the
Company completed a "sale/license back" of its "Dakota Smith" trademark. In the
transaction, the Company sold to an unaffiliated entity all of its rights to the
"Dakota Smith" trademark and its Dakota Smith Eyewear inventory for $1,000,000.
Concurrently, the Company entered into a three-year exclusive license agreement,
with a two-year renewal option, to use the trademark for eyeglass frames sold
and distributed in the United States and certain other countries. Signature also
repurchased the Dakota Smith inventory for a non-interest bearing promissory
note in the amount of $400,000 payable in monthly installments though March 2004
and secured by the Company's Dakota Smith inventory.
Settlement with CDS. In February 2003, the Company entered into a
settlement agreement with CDS and CDS's sole shareholder of all remaining
obligations between the parties emanating from the Company's purchase in 1999 of
all the assets of CDS. The remaining obligations included obligations under a
consulting agreement with the CDS shareholder and the promissory note given as
part of the purchase price. The Company's net book value for these obligations
was approximately $1.1 million as of the closing. In the settlement, the Company
paid $500,000 to CDS and the CDS shareholder and the parties executed a mutual
general release. The Company recognized a gain of approximately $600,000 in
connection with this settlement.
The recapitalization significantly improved the Company's financial
condition and liquidity through decreasing the shareholders deficit by
approximately $5.7 million, increasing capital, reducing liabilities and
replacing current obligations with long-term obligations. Although following the
recapitalization the Company continues to have a stockholders' deficit, the
Company believes that for at least the following 12 months, assuming there are
no unanticipated material adverse developments, no material decrease in revenues
and continued compliance with its credit facilities, it will be able pay its
debts and obligations as they mature. However, the Company's long-term viability
will depend on its ability to return to profitability on a consistent basis,
which will depend in part on its ability to increase revenues.
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; and
o inventory valuation.
REVENUE RECOGNITION. The Company's policy is to recognize revenue
from sales to customers when the rights and risks of ownership have passed to
the customer, when persuasive evidence of an arrangement exists, the price is
fixed and determinable and collection of the resulting receivable is reasonably
assured. In general, revenue is recognized when merchandise is shipped.
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 establishes an allowance for estimated product
returns based upon actual returns subsequent to year-end and estimated future
returns. The Company applies the historical ratio of sales returns to sales to
estimate future returns in addition to known information about actual returns in
the period subsequent to the balance sheet date.
17
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
writes down its inventory for estimated obsolescence or unmarketable inventory
equal to the difference between the cost of inventory and the estimated market
value based upon assumptions about future demand, selling prices and market
conditions. Its inventories include designer prescription eye glass frames and
sunglasses, which are sold in a highly competitive industry. If actual product
demand or selling prices are less favorable than the Company estimates it may be
required to take additional inventory write-downs in the future. Similarly, if
the Company's inventory is determined to be undervalued due to write-downs below
market value, it would be required to recognize such additional operating income
at the time of sale. Significant unanticipated changes in demand could have a
material and significant impact on the future value of our inventory and
reported operating results.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated selected
statements of operations data shown as a percentage of net sales.
YEAR ENDED OCTOBER 31,
--------------------------------------------------------------------------
2000 2001 2002
------------------- ------------------- -------------------
Net sales.............................. 100.0% 100.0% 100.0%
Cost of sales ......................... 41.3 49.5 46.7
------------------- ------------------- -------------------
Gross profit........................... 58.7 50.5 53.3
------------------- ------------------- -------------------
Operating expenses:
Selling........................... 41.7 33.1 28.5
General and administrative ....... 34.9 33.9 35.2
Asset impairment charges ......... -- 11.3 --
------------------- ------------------- -------------------
Total operating expenses ..... 76.6 78.2 63.7
------------------- ------------------- -------------------
Income (Loss) from operations ......... (17.9) (27.7) (10.4)
------------------- ------------------- -------------------
Other income (expense), net ........... (1.9) (3.1) (2.0)
------------------- ------------------- -------------------
Income (Loss) before income taxes ..... (19.8) (30.8) (12.4)
Benefit (Provision) for income taxes .. 1.5 (0.1) 0.0
------------------- ------------------- -------------------
Net income (loss)...................... (18.3)% (30.9)% (12.4)%
=================== =================== ===================
COMPARISON OF FISCAL YEARS 2000, 2001 AND 2002
NET SALES. Net sales were $33.1 million in fiscal 2002 compared to
$43.4 million in fiscal 2001 and $51.9 million in fiscal 2000. The following
table shows certain information regarding net sales for the periods indicated:
YEAR ENDED OCTOBER 31,
------------------------------------------------------
2000 2001 2002
---------------- ---------------- ----------------
(in thousands)
Laura Ashley Eyewear .... $16,079 31.0% $13,968 32.2% $11,430 34.5%
Eddie Bauer Eyewear ..... 15,136 29.1 11,889 27.4 9,147 27.6
Nicole Miller Eyewear ... 4,447 8.6 5,273 12.2 4,950 14.9
Other ................... 16,270 31.3 12,262 28.2 7,594 22.9
---------------- ---------------- ----------------
$51,932 100.0% $43,392 100.0% $33,121 100.0%
================ ================ ================
Net sales declined 23.7% in fiscal 2002 and 16.4% in fiscal 2001 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. In addition, net sales were
adversely affected by the termination of the Coach Eyewear line in fiscal 2001
and the sale of the USA Optical product line in fiscal 2002.
18
Net sales reflect gross sales less a reserve for product returns
established by the Company. The Company's product returns for fiscal years 2000,
2001 and 2002 amounted to 22%, 23% and 22% of gross sales, respectively.
Historically, returns have been higher from independent optical retailers in the
United States and lower from optical retail chains and international customers.
GROSS PROFIT AND GROSS MARGIN. Gross profit was $17.7 million in
fiscal 2002 compared to $21.9 million in fiscal 2001 and $30.5 million in fiscal
2000. These decreases were due to lower net sales and increased inventory
write-downs.
The gross margin was 53.3% in fiscal 2002 compared to 50.5% in
fiscal 2001 and 58.7% in fiscal 2000. The decrease in 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. The increase in fiscal 2002 reflects fewer close-out sales.
SELLING EXPENSES. Selling expenses were $9.4 million in fiscal 2002
compared to $14.3 million in fiscal 2001 and $21.6 million in fiscal 2000. The
34.2% decrease in fiscal 2002 was due primarily to lower net sales and decreases
of $2.1 million in salaries due to fewer personnel, $1.9 million in point of
purchase display expenses and $0.7 million in shipping costs. 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 of compensation expenses.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses were $11.2 million in fiscal 2002 compared to $14.7 million in fiscal
2001 and $16.8 million in fiscal 2000. The 17.8% decrease in fiscal 2002 was due
principally to decreases of $0.8 million in consulting, legal and accounting
fees, $0.7 million in employee benefit and related expenses, and $0.4 million in
operating lease expenses. The 18.8% decrease in fiscal 2001 was due principally
to decreases of $3.1 million in compensation expense and related employee
benefits due to a reduction in full-time employees and $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.
ASSET IMPAIRMENT CHARGES. In fiscal 2001, the Company wrote down
$4.9 million of goodwill upon determining 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 expense, net consists principally
of interest expense on bank debt. The decrease in fiscal 2002 was due to lower
interest rates as market rates declined and to reductions in the current debt.
The increase in fiscal 2001 was due to increased bank debt and a higher interest
rate, as the Company paid interest at default interest rates commencing October
2001.
PROVISION (BENEFIT) FOR INCOME TAXES. The Company had income tax
benefits of $0.8 million in fiscal 2000, paid income taxes of $27,000 in fiscal
2001 and had a small tax benefit in fiscal 2002. As of October 31, 2002 the
Company had net operating loss carryforwards for federal and state income tax
purposes of approximately $14.7 million and $8.5 million, respectively, which
expire through 2022. The Company believes that the recapitalization in April
2003 may have resulted in "ownership change" under the Internal Revenue Code, in
which event the Company's utilization of the net operating loss carryforwards
would be significantly limited.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company's accounts receivable (net of allowance for doubtful
accounts) decreased from $5.1 million at October 31, 2001 to $3.1 million at
October 31, 2002 due to lower net sales.
The Company's inventories (net of obsolescence reserve) decreased
from $10.3 million at October 31, 2001 to $5.5 million at October 31, 2002 as a
part of the Company's turnaround strategy to reduce inventory and improve
inventory turnover by better matching frame purchases with customer orders, an
increase of $0.7 million in the reserve for obsolescent inventory, and the sale
of the USA Optical product line.
The Company had a credit facility with a commercial bank consisting
of an accounts receivable and inventory revolving credit line and a term loan
which were secured by substantially all of the assets of the Company. The credit
19
facility matured on September 30, 2000, and the Company 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. This
credit facility was repaid in April 2003.
In addition to the term loan included as part of its bank credit
facility, long-term debt (including the current portion) at October 31, 2002
included principally a $1.0 million note payable to CDS in connection with the
CDS acquisition and an obligation to a frame vendor (present value of $3.2
million at October 31, 2002) assumed in connection with the CDS acquisition. As
discussed above, the Company settled its obligation to CDS in February 2003 and
with the frame vendor in April 2003. See Notes 6 and 14 of Notes to Consolidated
Financial Statements.
Of the Company's accounts payable at October 31, 2001 and October
31, 2002, $1.8 million and $1.2 million, respectively, were payable in foreign
currency. To monitor risks associated with currency fluctuations, the Company on
a weekly basis assesses the volatility of certain foreign currencies and reviews
the amounts and expected payment dates of its purchase orders and accounts
payable in those currencies. Based on those factors, the Company may from time
to time mitigate some portion of that risk by purchasing forward commitments to
deliver foreign currency to the Company. The Company held no forward commitments
for foreign currencies at October 31, 2002. See Note 3 of Notes to Consolidated
Financial Statements.
The Company's bad debt write-offs, net of recoveries, were $148,000,
$175,000 and $403,000 in fiscal years 2000, 2001 and 2002, respectively. 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.
As part of the Company's recapitalization in April 2003, the Company
obtained two long-term credit facilities. See "Subsequent Events."
Historically, the Company has generated cash primarily through
product sales in the ordinary course of business, its bank credit facility and
sales of equity securities. Following the default on its bank credit facility in
September 2000, and as a condition to numerous forbearances extended by its
bank, the Company had to regularly reduce its aggregate borrowings under its
bank credit facility, from $ 6.0 million at October 31, 2001 to $3.1 million
when the facility was repaid in April 2003. This, coupled with declining sales
and corresponding inability to raise equity capital, materially adversely
affected the Company's liquidity and working capital. To address this problem,
the Company reduced operating expenses through reduction in personnel and
subletting office space, negotiated vendor discounts and deferred payments of
trade payables, sold obsolete inventory at a deep discount, sold its USA Optical
product line and completed a sale/license back of its Dakota Smith trademark and
inventory.
The recapitalization materially improved the Company's liquidity by
replacing current obligations to its bank and a frame vendor with long-term
indebtedness and through discounted payoffs of trade payables. The Company
believes that for at least the next twelve months, assuming there are no
unanticipated material adverse developments, no material decrease in revenues
and continued compliance with its credit facilities, it will be able pay its
debts and obligations as they mature. However, the Company's current sources of
funds are not sufficient to provide the working capital for material growth, and
it would be required to obtain additional debt or equity financing to support
such growth.
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.
Sales were lower in the fourth quarter of fiscal 2001 and subsequent periods 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.
20
The following table sets forth certain unaudited results of
operations for the twelve fiscal quarters ended October 31, 2002. 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.
2000 2001 2002
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........... $12,003 $12,390 $17,442 $10,097 $10,889 $11,470 $11,822 $9,211 $8,522 $8,806 $8,188 $7,605
Cost of sales....... 4,807 5,058 7,076 4,281 3,761 4,428 4,657 8,626 3,334 3,937 3,666 4,531
Gross profit........ 7,196 7,332 10,366 5,818 7,128 7,042 7,165 585 5,187 4,869 4,522 3,074
Operating expenses:
Selling............ 3,587 6,066 6,858 5,171 3,291 3,343 2,664 5,045 2,391 2,450 2,084 2,460
General and
administrative.... 3,845 4,708 5,014 4,554 3,381 3,146 4,013 4,166 3,000 2,892 3,031 2,623
Asset impairment... -- -- -- -- -- -- -- 4,892 -- -- -- --
Total operating
expenses........... 7,432 10,774 11,872 9.725 6,672 6,488 6,677 14,105 5,392 5,502 5,115 5,083
Income (loss) from
operations........ (236) (3,442) (1,506) (3,907) 456 554 488 (13,520) (205) (632) (592) (2,009)
Other expense, net.. (184) (265) (320) (136) (352) (325) (329) (332) (186) (148) (184) (160)
Income (loss) before
pro forma provision
for income taxes... (420) (3,707) (1,826) (4,043) 104 229 159 (13,852) (390) (780) (776) (2,169)
INFLATION
The Company does not believe its business and operations have been
materially affected by inflation.
NEW ACCOUNTING PRONOUNCEMENTS
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. Management
does not expect adoption of SFAS No. 144 to have a material impact on the
Company's statements of earnings, financial position or cash flows
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. Management believes
that the Company is in compliance with the provisions of SFAS 145.
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. Management does not expect adoption of SFAS No. 144 to have a material
impact on the Company's statements of earnings, financial position or cash
flows.
21
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," an amendment of SFAS No.
123. SFAS No. 148 provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require more prominent and more frequent disclosures in
financial statements about the effects of stock-based compensation. This
statement is effective for financial statements for fiscal years ending after
December 15, 2002. SFAS No. 148 will not have any impact on the Company's
financial statements as management does not have any intention to change to the
fair value method.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting and reporting for derivative instruments and hedging
activities under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 149 is effective for derivative instruments and
hedging activities entered into or modified after June 30, 2003, except for
certain forward purchase and sale securities. For these forward purchase and
sale securities, SFAS No. 149 is effective for both new and existing securities
after June 30, 2003. Management does not expect adoption of SFAS No. 149 to have
a material impact on the Company's statements of earnings, financial position or
cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for how an issuer classifies and measures in its
statement of financial position certain financial instruments with
characteristics of both liabilities and equity. In accordance with the standard,
financial instruments that embody obligations for the issuer are required to be
classified as liabilities. SFAS No. 150 will be effective for financial
instruments entered into or modified after May 31, 2003 and otherwise will be
effective at the beginning of the first interim period beginning after June 15,
2003.
FACTORS THAT MAY AFFECT FUTURE RESULTS
NEED TO INCREASE REVENUES AND TO RETURN TO PROFITABILITY; GOING
CONCERN QUALIFICATION
The Company suffered material operating losses in its last four
fiscal years, causing a significant deterioration in its financial condition. At
October 31, 2002, the Company's stockholders' deficit was $9.0 million. The
report of the independent auditors of the Company's financial statements for
fiscal year 2001 contained an explanatory paragraph describing the uncertainty
of the Company's ability to continue as a going concern as of October 31, 2001.
The Company's recapitalization in April 2003 significantly improved the
Company's financial condition and liquidity through increasing capital, reducing
liabilities and replacing current obligations and debts with long-term
obligations. However, following the recapitalization the Company continues to
have a stockholders' deficit, and the Company's long-term viability will depend
on its ability to return to profitability on a consistent basis.
During the past several years, the Company has significantly reduced
its general, administrative and other expenses to the extent that it does not
believe further material reductions are possible. Accordingly, the ability of
the Company to return to profitability will depend most significantly on its
ability to increase its revenues. The Company's revenues during the past several
years have been adversely affected by the significant downturn in the optical
frame industry and its inability to hire a direct sales force sufficient to
replace its distributor network following its conversion to direct sales in
2000. This problem has been exacerbated by the Company's impaired financial
condition. In addition, since the fourth quarter of fiscal 2001, the Company's
revenues were adversely impacted by the September 11, 2001 tragedy and the
reluctance of retailers to purchase large inventories of the Company's products
due to concerns about the Company's viability. While the Company is hopeful that
the recapitalization will generate greater customer confidence and increase its
ability to hire qualified sales personnel, no assurance can be given that this
will occur or that the Company will be able to generate materially greater
revenues or to return to consistent profitability.
SUBSTANTIAL DEPENDENCE UPON LAURA ASHLEY AND EDDIE BAUER LICENSES
Net sales of Laura Ashley Eyewear and Eddie Bauer Eyewear accounted
for 60% and 62% of the Company's net sales in fiscal years 2001 and 2002,
respectively. While the Company intends to continue reducing its dependence on
22
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 through January 2008
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 also terminate the license agreement if minimum sales
requirements are not met in any two years. The Company did not meet the minimum
sales requirement for the license year ended January 2003, but Laura Ashley
waived noncompliance. 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 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.
BANKRUPTCY OF EDDIE BAUER
Eddie Bauer Diversified Sales LLC, the licensor on the Eddie Bauer
Eyewear license, and its parent Speigel, Inc and other affiliates, have filed
voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy
Code. As a result, the licensor has the rights of a debtor under the Bankruptcy
Code with respect to executory contracts such as the Eddie Bauer Eyewear
license, including the right to assume or reject the license. The rejection of
the license would have a material adverse affect on the Company. The Company has
received no indication or notice from the licensor regarding the licensor's
intentions with respect to the license agreement.
DEPENDENCE UPON SALES TO RETAIL OPTICAL CHAINS
Net sales to major optical retail chains amounted to 29% and 35% of
net sales in fiscal years 2001 and 2002, respectively. Net sales to Eyecare
Centers of America in fiscal 2002 amounted to 12% and 13% of the Company's net
sales for such fiscal years. The loss of one or more major optical 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
23
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 2002, Signature used manufacturers principally in Hong Kong/China, Japan
and Italy.
INTERNATIONAL SALES
International sales accounted for approximately 11.3% and 10.5% of
the Company's net sales in fiscal years 2001 and 2002, 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 years 2001 and 2002
amounted to 23% and 22% of gross sales (sales before returns), 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 which it considers adequate;
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. 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
24
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.
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., Marchon Eyewear, Inc., Marcolin S.p.A. and De Rigo
S.p.A. 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. De
Rigo S.p.A. is also vertically integrated, in that it manufactures frames,
distributes them throughout the world, and owns Dollond & Atchitson, one of the
largest retail optical chains in the world.
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
As of June 30, 2003, the directors and executive officers of the
Company owned beneficially approximately 52% of the Company's outstanding shares
of Common Stock. 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.
NO DIVIDENDS ALLOWED
As a California corporation, under the California General
Corporation Law, generally the Company may not pay dividends in cash or property
except (i) out of positive retained earnings or (ii) if, after giving effect to
the
25
distribution, the Company's assets would be at least 1.25 times its liabilities
and its current assets would exceed its current liabilities (determined on a
consolidated basis under generally accepted accounting principles). At October
31, 2002, the Company had an accumulated deficit of $23.4 million. As a result,
the Company will not be able to pay dividends for the foreseeable future. In
addition, the payment of dividends is prohibited under its credit facilities.
POSSIBLE ANTI-TAKEOVER EFFECTS
The Company's Board of Directors has the authority to issue up to
5,000,000 shares of Preferred Stock and to determine the price, rights,
preferences, privileges and restrictions, including voting rights, of those
shares without any further vote or action by the shareholders. The Preferred
Stock could be issued with voting, liquidation, dividend and other rights
superior to those of the Common Stock. The Company issued 1,200,000 shares of
Series A Preferred in the recapitalization, and has no present intention to
issue any other 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 2002, at any month-end a
maximum of $1.8 million and a minimum of $1.0 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, 2002.
International sales accounted for approximately 11% of the Company's
net sales in fiscal 2002. 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 credit facilities existing at June
30, 2003 had fixed interest rates. See "Subsequent Events." Accordingly, the
Company does not believe it is subject to material interest rate risk.
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
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
OCTOBER 31, 2002, 2001, AND 2000
27
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
CONTENTS
OCTOBER 31, 2002
================================================================================
Page
----
INDEPENDENT AUDITOR'S REPORTS ........................................ 29-30
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets ....................................... 31-32
Consolidated Statements of Operations ............................. 33
Consolidated Statements of Shareholders' Equity (Deficit) ......... 34
Consolidated Statements of Cash Flows ............................. 35-36
Notes to Consolidated Financial Statements ........................ 37-67
SUPPLEMENTAL INFORMATION
Independent Auditor's Report on Financial Statement Schedule
Valuation and Qualifying Accounts - Schedule II
28
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
Signature Eyewear, Inc. and subsidiary
We have audited the accompanying consolidated balance sheet of Signature
Eyewear, Inc. and subsidiary as of October 31, 2002, and the related
consolidated statements of operations, shareholders' equity (deficit), and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides 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, 2002, and the consolidated results of
their operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
/s/ Singer Lewak Greenbaum & Goldstein LLP
- -----------------------------------------------
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
April 15, 2003, except for
Notes 2, 5, 6, and 14,
as to which the date is
April 21, 2003
29
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 the related consolidated
statements of operations, changes in stockholders' equity (deficit) and cash
flows for each of the two 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 the results of their operations
and their cash flows for each of the two 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.
/s/ Altschuler, Melvoin and Glasser LLP
- -----------------------------------------------
ALTSCHULER, MELVOIN AND GLASSER LLP
Los Angeles, California
April 5, 2002 (except for
Note 7, which is as of July 30, 2002)
30
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
OCTOBER 31,
================================================================================
ASSETS
2002 2001
------------ ------------
CURRENT ASSETS
Cash and cash equivalents, including restricted cash
of $127,946 and $202,824 $ 1,077,388 $ 1,443,496
Accounts receivable - trade, net of allowance for
doubtful accounts of $543,884 and $574,096 3,142,949 5,129,460
Inventories, net of reserves for obsolete inventories
of $2,799,940 and $2,450,000 5,514,702 10,328,364
Income taxes refundable 2,704 110,000
Promotional products and materials 87,912 164,548
Prepaid expenses and other current assets 49,862 8,952
------------ ------------
Total current assets 9,875,517 17,184,820
PROPERTY AND EQUIPMENT, net 1,825,085 1,456,083
TRADEMARK, net of accumulated amortization of $16,882
and $16,882 130,897 130,897
DEPOSITS AND OTHER ASSETS 112,706 133,772
------------ ------------
TOTAL ASSETS $ 11,944,205 $ 18,905,572
============ ============
The accompanying notes are an integral part of these financial statements.
31
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
OCTOBER 31,
================================================================================
LIABILITIES AND SHAREHOLDERS' DEFICIT
2002 2001
------------ ------------
CURRENT LIABILITIES
Accounts payable - trade $ 7,108,449 $ 10,143,540
Accrued expenses and other current liabilities 1,980,003 2,637,701
Reserve for customer returns 2,286,934 114,580
Line of credit 2,317,134 3,228,358
Current portion of long-term debt 5,533,149 6,265,773
------------ ------------
Total current liabilities 19,225,669 22,389,952
LONG-TERM DEBT, net of current portion 1,714,981 1,461,456
------------ ------------
Total liabilities 20,940,650 23,851,408
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIT
Preferred stock, $0.001 par value
5,000,000 shares authorized
0 and 0 shares issued and outstanding -- --
Common stock, $0.001 par value
30,000,000 shares authorized
5,556,889 and 5,056,889 shares issued
and outstanding 5,557 5,057
Additional paid-in capital 14,432,621 14,368,121
Accumulated deficit (23,434,623) (19,319,014)
------------ ------------
Total shareholders' deficit (8,996,445) (4,945,836)
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 11,944,205 $ 18,905,572
============ ============
The accompanying notes are an integral part of these financial statements.
32
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED OCTOBER 31,
================================================================================
2002 2001 2000
------------ ------------ ------------
NET SALES $ 33,121,431 $ 43,392,022 $ 51,932,066
COST OF SALES 15,468,265 21,472,353 21,424,878
------------ ------------ ------------
GROSS PROFIT 17,653,166 21,919,669 30,507,188
------------ ------------ ------------
OPERATING EXPENSES
Selling 9,435,084 14,344,093 21,648,965
General and administrative 11,220,753 13,651,522 16,823,177
Depreciation and amortization 435,984 1,054,867 1,282,236
Impairment of assets -- 4,891,459 --
------------ ------------ ------------
Total operating expenses 21,091,821 33,941,941 39,754,378
------------ ------------ ------------
LOSS FROM OPERATIONS (3,438,655) (12,022,272) (9,247,190)
------------ ------------ ------------
OTHER INCOME (EXPENSE)
Sundry income (expense) 18,514 (53,932) 81,906
Interest expense, net (696,455) (1,284,202) (1,090,434)
------------ ------------ ------------
Total other income (expense) (677,941) (1,338,134) (1,008,528)
------------ ------------ ------------
LOSS BEFORE PROVISION FOR (BENEFIT FROM)
INCOME TAXES (4,116,596) (13,360,406) (10,255,718)
PROVISION FOR (BENEFIT FROM) INCOME TAXES (987) 26,902 (771,997)
------------ ------------ ------------
NET LOSS $ (4,115,609) $(13,387,308) $ (9,483,721)
============ ============ ============
BASIC AND DILUTED LOSS PER SHARE $ (0.75) $ (2.65) $ (1.87)
============ ============ ============
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING 5,488,396 5,056,889 5,058,915
============ ============ ============
The accompanying notes are an integral part of these financial statements.
33
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED OCTOBER 31,
================================================================================
COMMON STOCK ADDITIONAL
------------------------------ PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------------ ------------ ------------ ------------ ------------
BALANCE,
OCTOBER 31, 1999 5,082,389 $ 5,082 $ 14,446,128 $ 3,552,015 $ 18,003,225
REPURCHASE OF
COMMON STOCK (25,500) (25) (78,007) (78,032)
NET LOSS (9,483,721) (9,483,721)
------------ ------------ ------------ ------------ ------------
BALANCE,
OCTOBER 31, 2000 5,056,889 5,057 14,368,121 (5,931,706) 8,441,472
NET LOSS (13,387,308) (13,387,308)
------------ ------------ ------------ ------------ ------------
BALANCE,
OCTOBER 31, 2001 5,056,889 5,057 14,368,121 (19,319,014) (4,945,836)
ISSUANCE OF COMMON
STOCK IN
SATISFACTION OF
THE PURCHASE
PRICE ADJUSTMENT
RELATED TO THE
GWO ACQUISITION 500,000 500 64,500 65,000
NET LOSS (4,115,609) (4,115,609)
------------ ------------ ------------ ------------ ------------
BALANCE,
OCTOBER 31, 2002 5,556,889 $ 5,557 $ 14,432,621 $(23,434,623) $ (8,996,445)
============ ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
34
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31,
================================================================================
2002 2001 2000
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (4,115,609) $(13,387,308) $ (9,483,721)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities
Depreciation and amortization 435,986 1,068,117 1,282,236
Provision for bad debts 432,224 434,090 264,835
Provision for inventory write down 2,066,213 2,973,202 437,636
Loss on disposal of property and equipment -- 61,922 2,284
Impairment of assets -- 4,891,459 --
Deferred income tax expense -- -- 428,000
(Increase) decrease in Accounts receivable - trade 1,554,287 3,180,704 (2,459,032)
Inventories, net of effect of sale of USA Optical 2,247,449 5,440,611 (2,543,339)
Income taxes refundable 107,296 1,152,154 (262,334)
Promotional products and materials 76,636 1,917,686 (784,142)
Prepaid expenses and other current assets (40,910) 178,374 963,184
Deposits and other assets 21,066 219,616 (117,899)
Increase (decrease) in Accounts payable - trade (3,256,946) (4,608,004) 8,466,054
Accrued expenses and other current liabilities (592,698) (709,974) 407,263
Reserve for customer returns 2,172,354 (210,420) --
------------ ------------ ------------
Net cash provided by (used in) operating activities 1,107,348 2,602,229 (3,398,975)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (54,988) (73,081) (784,225)
Proceeds from sale of property and equipment -- -- 12,974
Cash received from sale of USA Optical 500,000 -- --
------------ ------------ ------------
Net cash provided by (used in) investing activities 445,012 (73,081) (771,251)
------------ ------------ ------------
The accompanying notes are an integral part of these financial statements.
35
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31,
================================================================================
2002 2001 2000
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (payments) on line of credit $ (911,224) $ (1,771,642) $ 3,250,000
Payments on long-term debt (1,093,480) (1,174,461) (1,104,314)
Borrowings on long-term debt 86,236 -- 3,500,000
Repurchases of common stock -- -- (78,032)
------------ ------------ ------------
Net cash provided by (used in) financing activities (1,918,468) (2,946,103) 5,567,654
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (366,108) (416,955) 1,397,428
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,443,496 1,860,451 463,023
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,077,388 $ 1,443,496 $ 1,860,451
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
INTEREST PAID $ 541,173 $ 1,139,766 $ 1,042,586
============ ============ ============
INCOME TAXES PAID (REFUNDED) $ (108,283) $ 56,160 $ 201,350
============ ============ ============
The accompanying notes are an integral part of these financial statements.
36
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31,
================================================================================
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES
During the year ended October 31, 2002, the Company:
o entered into a Stock Issuance and Release Agreement on December 20, 2001,
whereby the Company issued 500,000 shares of common stock and paid $3,000
to Springer Capital Corporation in satisfaction of the purchase price
adjustment relating to the Great Western Optical acquisition. The fair
value of the settlement amount of $68,000 was included in accrued expenses
and other current liabilities at October 31, 2001.
o entered into an operating lease payoff with the lessor of the warehouse
upgrades and computer system for $750,000. This amount was financed by a
promissory note (see Notes 6 and 7).
During the year ended October 31, 2001, the Company:
o entered into an agreement to modify an operating lease, which reduced
long-term debt by $674,699 by applying prepaid expenses of $126,975 and
deposits and other assets of $499,068 related to the note holder and by
increasing accrued expenses and other current liabilities by $48,656.
o agreed to convert $207,915 of consulting payments, which were included in
accrued expenses and other current liabilities at October 31, 2001, into a
$166,731 note payable. The discount of $41,184 was offset against a $60,000
covenant not to complete.
During the year ended October 31, 2000, the Company:
o purchased $229,958 of property and equipment via a capital lease
obligation.
o entered into a covenant not to compete for $60,000 in connection with the
acquisition of Great Western Optical. This transaction was funded by a note
payable.
o entered into an agreement with a consultant, whereby the Company recorded
$142,662 of prepaid expenses, $53,499 of property and equipment, and
$517,155 of deposits and other assets in exchange for a note payable of
$713,316.
The accompanying notes are an integral part of these financial statements.
37
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2002
================================================================================
NOTE 1 - ORGANIZATION AND LINE OF BUSINESS
General
-------
Signature Eyewear, Inc. and subsidiary (collectively, the "Company")
design, market, and distribute 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.
During the year ended October 31, 2000, the subsidiary was dissolved.
Business Acquisition
--------------------
Effective August 1999, the Company acquired 100% of the capital stock of
Great Western Optical ("GWO"), a privately-held corporation engaged
primarily in the distribution of the Company's products (the "GWO
Acquisition"). The purchase price for the GWO Acquisition was approximately
$519,500, consisting of the issuance of 50,000 shares of the Company's
common stock and warrants to purchase 50,000 shares of the Company's common
stock valued at $252,000, a note payable for $250,000, and
acquisition-related expenses of $17,500.
The GWO Acquisition 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)
-----------
TOTAL 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, which was impaired as of October
31, 2001 and written off. In connection with the GWO 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
during the year ended October 31, 2000.
The GWO 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 GWO Acquisition date was below $7 on July 31, 2001. On July 31,
2001, the Company's common stock was trading at $0.45 per share. In lieu of
the purchase price adjustment, in December 2001, the Company issued 500,000
shares of common stock and paid $3,000 to Springer Capital Corporation, the
seller, in satisfaction of the purchase price adjustment (see Note 8).
38
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2002
================================================================================
NOTE 1 - ORGANIZATION AND LINE OF BUSINESS (CONTINUED)
Business Acquisition (Continued)
--------------------
In order to increase efficiencies and create economies of scale, during the
year ended October 31, 2000, GWO was dissolved and liquidated with all
assets, liabilities, and operations absorbed into the Company.
Sale of USA Optical
-------------------
In March 2002, the Company sold its USA Optical product line, including (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, and sales and vendor records to
the trademarks or trade names of Camelot or USA Optical. Management
believes the effect of the sale on its future operations will not be
significant.
The sales price for the USA Optical product line was $500,000, plus the
assumption of certain obligations and liabilities related to the USA
Optical line's outstanding purchase orders amounting to $70,000. The effect
of the sale on the Company's operations for the year ended October 31, 2002
is not significant. As such a gain or loss has not been recorded on the
accompanying consolidated statement of operations. 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
former Chairman of the Board/Chief Executive Officer entered into a
three-year consulting agreement with the buyer for a monthly consulting fee
of $4,667. The monthly consulting fee was offset against the former
officer's salary until his resignation in April 2003 (see Note 14).
NOTE 2 - RESTRUCTURING OF DEBT
In April 2003, the Company entered into various agreements with certain of
its creditors and commercial banks, which resulted in the restructuring of
its current capital structure (see Notes 5, 6, and 14).
39
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2002
================================================================================
NOTE 2 - RESTRUCTURING OF DEBT (CONTINUED)
The unaudited, pro forma effects of this restructuring as if it had
occurred as of October 31, 2002 on the Company's consolidated balance sheet
would have been as follows:
AS REPORTED ADJUSTMENTS PRO FORMA
------------ ------------ ------------
(unaudited) (unaudited) (unaudited)
Cash and cash equivalents $ 1,077,388 $ 1,373,000 $ 2,450,388
Accounts receivable - trade 856,015 -- 856,015
Inventories 5,114,702 -- 5,114,702
Other assets 2,209,166 -- 2,209,166
------------ ------------ ------------
TOTAL ASSETS $ 9,257,271 $ 1,373,000 $ 10,630,271
============ ============ ============
Liabilities
Accounts payable - trade $ 7,108,449 $ (3,099,090) $ 4,009,359
Accrued expenses and other
current liabilities 1,980,003 (9,699) 1,970,304
Line of credit 2,317,134 (2,317,134) --
Long-term debt 7,248,130 253,719 7,501,849
------------ ------------ ------------
Total liabilities 18,653,716 (5,172,204) 13,481,512
------------ ------------ ------------
Shareholders' deficit
Preferred stock -- 800,000 800,000
Common stock 5,557 -- 5,557
Additional paid-in capital 14,432,621 -- 14,432,621
Accumulated deficit (23,834,623) 5,745,204 (18,089,419)
------------ ------------ ------------
Total shareholders' deficit (9,396,445) 6,545,204 (2,851,241)
------------ ------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' DEFICIT $ 9,257,271 $ 1,373,000 $ 10,630,271
============ ============ ============
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of Signature
Eyewear, Inc. and its wholly owned subsidiary, Signature Eyewear Canada
Corporation, which was dissolved during the year ended October 31, 2000.
All significant inter-company accounts and transactions are eliminated in
consolidation.
40
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2002
================================================================================
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition
-------------------
For transactions satisfying the conditions for revenue recognition under
Statement of Financial Accounting Standards ("SFAS") No. 48, "Revenue
Recognition when Right of Return Exists," and Securities and Exchange
Commission, Staff Accounting Bulletin ("SAB") No. 101, "Revenue
Recognition," product revenue is recorded at the time of shipment, net of
estimated allowances and returns. For transactions not satisfying the
conditions for revenue recognition under SFAS No. 48 and SAB No. 101,
product revenue is deferred until the conditions are met, net of an
estimate for cost of sales. For the years ended October 31, 2002, 2001, and
2000, the Company had sales returns totaling $9,326,467, $12,277,661, and
$15,312,636, respectively.
The Company performs periodic credit evaluations of its customers and
maintains allowances for potential credit losses based on management's
evaluation of historical experience and current industry trends. Although
the Company expects to collect amounts due, actual collections may differ.
Comprehensive Income
--------------------
The Company utilizes SFAS No. 130, "Reporting Comprehensive Income." This
statement establishes standards for reporting comprehensive income and its
components in a financial statement. Comprehensive income as defined
includes all changes in equity (net assets) during a period from non-owner
sources. Examples of items to be included in comprehensive income, which
are excluded from net income, include foreign currency translation
adjustments and unrealized gains and losses on available-for-sale
securities. For the years ended October 31, 2002, 2001, and 2000,
comprehensive income is not presented in the Company's financial statements
since the Company did not have any material translation adjustments or any
of the other items of comprehensive income in any period presented.
Cash and Cash Equivalents
-------------------------
For the purpose of the statements of cash flows, the Company considers all
highly liquid investments purchased with original maturities of three
months or less to be cash equivalents.
Accounts Receivable
-------------------
Customer credit balances, which result due to customer returns, are
reclassified as a liability on the balance sheet as a reserve for customer
returns.
Inventories
-----------
Inventories at October 31, 2002 and 2001 consisted solely of finished goods
and are valued at the lower of cost or market. Cost is computed using the
weighted-average cost, which approximates actual cost on a first-in,
first-out basis.
41
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2002
================================================================================
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Inventories (Continued)
-----------
The Company regularly and periodically evaluates its inventories for
obsolescence based on current market trends, product history, and turnover.
As of October 31, 2002 and 2001, the Company has recorded a reserve for
obsolete inventory of $2,799,940 and $2,450,000, respectively. Writedown
of inventories for the years ended October 31, 2002, 2001 and 2000 was
$349,940, $2,973,202 and $437,636, respectively.
Property and Equipment
----------------------
Property and equipment are recorded at cost. Depreciation and amortization
are provided using the straight-line method over the estimated useful lives
of the assets as follows:
Office furniture and equipment 7 years
Computer equipment 3 years
Software 3 years
Machinery and equipment 5 years
Machinery and equipment held under
capital lease agreements 3-5 years
Leasehold improvements term of the lease
Expenditures for major renewals and betterments that extend the useful
lives of property and equipment are capitalized. Expenditures for
maintenance and repairs are charged to expense as incurred. Depreciation
expense on assets acquired under capital leases is included with
depreciation expense on owned assets.
Trademark
---------
The Dakota Smith trademark is recorded at cost, less accumulated
amortization. Amortization is provided using the straight-line method over
the estimated useful life of the trademark of 20 years. The Company
continually evaluates whether events or circumstances have occurred that
indicate the remaining estimated value of the trademark may not be
recoverable. When factors indicate that the value of the trademark may be
impaired, the Company estimates the remaining value and reduces the
trademark to that amount. Amortization of goodwill was $0, $435,811, and
$595,839 for the years ended October 31, 2002, 2001, and 2000,
respectively. Amortization expense in each of the next five years is
estimated to be $7,389 per year.
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 the trademark 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 the book value.
42
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2002
================================================================================
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Impairment of Assets (Continued)
--------------------
During the year ended October 31, 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 certain acquisitions
to determine the fair value of those assets. Management determined those
acquisitions did not have any remaining value of goodwill. Accordingly, the
Company recorded a write down of goodwill of $4,891,459.
Fair Value of Financial Instruments
-----------------------------------
For certain of the Company's financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable - trade, and line of
credit, the carrying amounts approximate fair value due to their short
maturities. The amounts shown for long-term debt also approximate fair
value because current interest rates offered to the Company for debt of
similar maturities are substantially the same.
Certain of the Company's liabilities were settled subsequent to October 31,
2002 for less than their carrying value at that date (see Note 14).
Stock-Based Compensation
------------------------
SFAS No. 123, "Accounting for Stock-Based Compensation," establishes and
encourages the use of the fair value based method of accounting for
stock-based compensation arrangements under which compensation cost is
determined using the fair value of stock-based compensation determined as
of the date of grant and is recognized over the periods in which the
related services are rendered. The statement also permits companies to
elect to continue using the current implicit value accounting method
specified in Accounting Principles Bulletin ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," to account for stock-based
compensation issued to employees. The Company has elected to use the
implicit value based method and has disclosed the pro forma effect of using
the fair value based method to account for its stock-based compensation.
For stock-based compensation issued to non-employees, the Company uses the
fair value method of accounting under the provisions of SFAS No. 123.
Loss per Share
--------------
The Company calculates loss per share in accordance with SFAS No. 128,
"Earnings Per Share." Basic loss per share is computed by dividing the net
loss by the weighted-average number of common shares outstanding. Diluted
loss per share is computed similar to basic loss per share, except that the
denominator is increased to include the number of additional common shares
that would have been outstanding if the potential common shares had been
issued and if the additional common shares were dilutive. Because the
Company had net losses for the years ended October 31, 2002, 2001, and
2000, basic and diluted loss per share are the same.
43
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2002
================================================================================
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Loss per Share (Continued)
--------------
The following potential common shares have been excluded from the
computations of diluted loss per share for the years ended October 31,
2002, 2001, and 2000 because the effect would have been anti-dilutive:
2002 2001 2000
-------- -------- --------
Stock options 367,300 457,500 529,400
Warrants 50,000 230,000 330,000
-------- -------- --------
TOTAL 417,300 687,500 859,400
======== ======== ========
Advertising Expense
-------------------
The Company expenses all advertising costs as they are incurred.
Advertising expense for the years ended October 31, 2002, 2001, and 2000
amounted to $1,072,213, $886,890, and $2,611,209, respectively.
Income Taxes
------------
The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which
requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred income
taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established,
when necessary, to reduce deferred tax assets to the amount expected to be
realized. The provision for (benefit from) income taxes represents the tax
payable (refundable) for the period and the change during the period in
deferred tax assets and liabilities.
Foreign Currency Translation
----------------------------
Substantially all of the Company's international operations used the United
States dollar as their functional currency for the years ended October 31,
2002 and 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. The Company did not have any significant
re-measurement adjustments.
The Company's international operations used their local currency as their
functional currency for the year ended October 31, 2000. Assets,
liabilities, income, and expense accounts were translated at exchange rates
in effect at the balance sheet date and equities translated at historical
rates. The Company did not have any significant translation adjustments.
The effect of such adjustments was immaterial.
44
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2002
================================================================================
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Estimates
---------
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from
those estimates.
Concentrations of Credit Risk
-----------------------------
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash
equivalents and accounts receivable. The Company maintains its cash and
cash equivalents with high credit, quality financial institutions. At
times, such cash and cash equivalents deposited at a particular institution
exceed the Federal Deposit Insurance Corporation's $100,000 insurance
limit. With respect to accounts receivable, the Company routinely assesses
the financial strength of its customers and, as a consequence, believes
that the receivable credit risk exposure is limited.
Major Customers
---------------
The Company had sales to one customer which represented 12%, 12%, and 12%
of net sales during the years ended October 31, 2002, 2001, and 2000,
respectively.
Reclassifications
-----------------
Certain amounts included in the prior years' financial statements have been
reclassified to conform with the current year presentation. Such
reclassifications did not have any effect on reported net loss and are
immaterial to the financial statements as a whole.
Recently Issued Accounting Pronouncements
-----------------------------------------
In October 2002, the Financial Accounting Standards Board issued SFAS No.
147, "Acquisitions of Certain Financial Institutions." SFAS No. 147 removes
the requirement in SFAS No. 72 and Interpretation 9 thereto, to recognize
and amortize any excess of the fair value of liabilities assumed over the
fair value of tangible and identifiable intangible assets acquired as an
unidentifiable intangible asset. This statement requires that those
transactions be accounted for in accordance with SFAS No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." In
addition, this statement amends SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," to include certain financial
institution-related intangible assets. This statement is not applicable to
the Company.
45
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2002
================================================================================
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recently Issued Accounting Pronouncements (Continued)
-----------------------------------------
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," an amendment of SFAS No. 123.
SFAS No. 148 provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require more prominent and more frequent
disclosures in financial statements about the effects of stock-based
compensation. This statement is effective for financial statements for
fiscal years ending after December 15, 2002. SFAS No. 148 will not have any
impact on the Company's financial statements as management does not have
any intention to change to the fair value method.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting and reporting for derivative instruments and hedging
activities under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 149 is effective for derivative instruments
and hedging activities entered into or modified after June 30, 2003, except
for certain forward purchase and sale securities. For these forward
purchase and sale securities, SFAS No. 149 is effective for both new and
existing securities after June 30, 2003. Management does not expect
adoption of SFAS No. 149 to have a material impact on the Company's
statements of earnings, financial position, or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
SFAS No. 150 establishes standards for how an issuer classifies and
measures in its statement of financial position certain financial
instruments with characteristics of both liabilities and equity. In
accordance with the standard, financial instruments that embody obligations
for the issuer are required to be classified as liabilities. SFAS No. 150
will be effective for financial instruments entered into or modified after
May 31, 2003 and otherwise will be effective at the beginning of the first
interim period beginning after June 15, 2003.
46
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2002
================================================================================
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment at October 31, 2002 and 2001 consisted of the
following:
2002 2001
---------- ----------
Office furniture and equipment $ 912,756 $ 877,799
Computer equipment 1,472,556 1,212,065
Software 1,121,288 821,288
Machinery and equipment 440,680 158,817
Machinery and equipment held under
capital lease agreements 294,609 376,932
Leasehold improvements 1,195,190 1,185,190
---------- ----------
5,437,079 4,632,091
Less accumulated depreciation and
amortization (including accumulated
depreciation and amortization of
$231,022 in 2002 and $131,172 in
2001 for equipment under capital
lease agreement) 3,611,994 3,176,008
---------- ----------
TOTAL $1,825,085 $1,456,083
========== ==========
Depreciation and amortization expense was $435,986, $632,306, and $682,131
for the years ended October 31, 2002, 2001, and 2000, respectively,
(including depreciation and amortization expense of $98,850, $106,047, and
$54,946, respectively, on machinery and equipment held under capital
leases).
NOTE 5 - LINE OF CREDIT
The Company had a credit facility with a commercial bank (the "Bank"),
consisting of an accounts receivable and inventory revolving credit line
and a term note payable (see Note 6), which were secured by substantially
all of the assets of the Company. Under the credit line, 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.
The advances on the line of credit bore interest at the Company's option at
either the Bank's prime rate or 2.5% in excess of the London Inter-Bank
Offering Rate ("LIBOR"). The credit facility matured on September 30, 2000.
47
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2002
================================================================================
NOTE 5 - LINE OF CREDIT (CONTINUED)
The Company defaulted on the credit facility for various reasons, including
the nonpayment of the line of credit at maturity as well as noncompliance
with various covenants and conditions. Since September 30, 2000, the
interest rate on the credit line has been 5% per annum in excess of the
original rate. The Company entered into a forbearance agreement with the
Bank in December 2000, which was extended many times. Amounts outstanding
on the line of credit at October 31, 2002 and 2001 were $2,317,134 and
$3,228,358, respectively.
In April 2003, the credit facility was repaid from the proceeds of the Home
Loan Investment Company ("HLIC") credit facility (see Note 14).
NOTE 6 - LONG-TERM DEBT
Long-term debt at October 31, 2002 and 2001 consisted of the following:
2002 2001
--------------- ---------------
Term note payable to the Bank in the original amount of
$3,500,000, secured by substantially all of the assets of
the Company, payable in monthly installments of $72,917,
plus interest at LIBOR, plus 7.5% per annum, which
includes the 5% default penalty since September 2000. In
April 2003, the term note payable was repaid
(see Notes 5 and 14). $ 1,895,856 $ 2,770,857
Obligation to a frame vendor in the original amount of
$4,195,847, less an unamortized discount of $639,043,
unsecured, payable in monthly installments of $50,000,
including interest imputed at 7.37% per annum. This
obligation was in default at October 31, 2002. In April
2003, the Company paid $2,350,000 to settle this and other
obligations to the frame vendor (see Note 14). 3,207,291 3,207,291
Note payable to lessor of the Company's principal offices and
warehouse in the original amount of $240,000, unsecured,
payable in monthly installments of $4,134, including
interest at 10% per annum, maturing on May 1, 2005. 112,541 148,901
48
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2002
================================================================================
NOTE 6 - LONG-TERM DEBT (CONTINUED)
2002 2001
--------------- ---------------
Note payable to lessor of the Company's principal offices and
warehouse, unsecured, payable in monthly installments of
$3,757, including interest at 8% per annum, maturing on
May 1, 2005 (see Note 14). $ 89,405 $ --
Note payable to California Design Studio, Inc. ("CDS"),
unsecured, payable in monthly installments of between
$8,333 and $17,042, with a final payment of any principal
plus interest remaining in May 2007, including interest at
7% per annum, maturing on May 23, 2007. In February 2003,
the Company paid $500,000 to settle all liabilities with
CDS, including this note and the obligation assumed in
conjunction with the acquisition of CDS and extension of
the consulting agreement (see Note 14). 938,258 972,422
Obligation assumed in conjunction with acquisition of CDS and
extension of consulting agreement, payable in monthly
installments of $15,000, including interest imputed at 10%
per annum, maturing on July 1, 2003. This obligation was
settled in January 2003 (see Note 14). 104,876 154,876
Lump sum liability for property and equipment associated with
various operating lease agreements with Oliver Allen,
secured by such property and equipment, payable in full in
August 2004. The Company adjusted the liability in October
2002 in anticipation of the lease payoff and general
release in February 2003 (see Note 7). -- 221,855
Note payable to commercial bank, secured by certain property
and equipment (see Note 7), bearing interest at 4% per
annum, payable in 39 monthly installments of $13,812,
commencing March 31, 2003, with the remaining principal
and accrued interest due and payable in full on February
28, 2008. 750,000 --
49
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2002
================================================================================
NOTE 6 - LONG-TERM DEBT (CONTINUED)
2002 2001
--------------- ---------------
Liability for machinery and equipment under various capital
lease agreements, secured by certain machinery and
equipment, bearing interest ranging from 8.19% to 11.4%
per annum, maturing through August 2004. In March and
April 2003, the Company paid $58,162 in full settlement
of $89,550 of this liability (see Note 14). $ 149,903 $ 251,027
--------------- ---------------
7,248,130 7,727,229
Less current portion 5,533,149 6,265,773
--------------- ---------------
LONG-TERM PORTION $ 1,714,981 $ 1,461,456
=============== ===============
Future maturities of long-term debt at October 31, 2002 were as follows:
YEAR ENDING
OCTOBER 31,
-----------
2003 $ 5,533,149
2004 390,851
2005 353,633
2006 318,712
2007 577,186
Thereafter 74,599
---------------
TOTAL $ 7,248,130
===============
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Leases
------
The Company maintains its principal offices and warehouse in leased
facilities in Inglewood, California under an operating lease that
expires in May 2005. The lease provides for minimum monthly rental
payments of $76,614. The Company is also responsible for the payment of
50.76% of the common area operating expenses, as defined, utilities,
and insurance. The Company has the option to extend the term of the
lease for five additional years.
50
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2002
================================================================================
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Leases (Continued)
------
Effective November 1, 2001, the Company subleased a portion of its
warehouse to an unrelated third party. The Company received $196,560 in
rental income during the year ended October 31, 2002 and is scheduled to
receive rental income of $212,160 during the year ended October 31, 2003.
The rent scheduled to be received has been reflected as a reduction in
future minimum lease payments. The sublessee is responsible for 29.8% of
the common area operating expenses. The sublessee has the option to extend
the term of the sublease from November 1, 2003 through May 31, 2005 at a
base rent of $18,200 per month, provided the sublessee delivers to the
Company written notice of its exercise of the option to extend no later
than July 31, 2003.
Future minimum lease payments under this non-cancelable operating lease
obligation at October 31, 2002 were as follows:
YEAR ENDING
OCTOBER 31,
-----------
2003 $ 727,028
2004 941,688
2005 549,318
------------
TOTAL $ 2,218,034
============
The Company had various operating leases for warehouse upgrades and
computer system with Oliver Allen, which required minimum monthly rental
payments of $82,908 through January 2004. In August 2002, the Company
defaulted on the lease payments and commenced negotiations for a lease
payoff. In February 2003, the Company purchased the warehouse upgrades and
computer system for $750,000, which was financed by a new bank loan (see
Note 6). This transaction has been recorded by the Company as of October
31, 2002, and accordingly, an operating lease commitment did not exist with
Oliver Allen at that date.
Total facilities-related rent expense was $741,488, $708,226, and $677,636
for the years ended October 31, 2002, 2001, and 2000, respectively. Lease
expense with respect to the warehouse upgrades and computer system was
$829,084, $1,221,861, and $1,409,337 for the years ended October 31, 2002,
2001, and 2000, respectively.
51
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2002
================================================================================
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Frame Purchase Agreement
------------------------
In conjunction with the asset acquisition of CDS, the Company entered into
a purchase agreement with one of CDS' frame vendors, whereby the Company
agreed to purchase the following amounts of eyeglass frames during the
periods indicated: (i) $2,400,000 from the closing of the acquisition
through July 31, 2000; (ii) $3,000,000 during the 12 months ending July 31,
2001; and (iii) $3,000,000 during the 12 months ending July 31, 2002. The
Company did not meet the minimum purchase requirement for the year ended
July 31, 2002. In April 2003, the Company paid $2,350,000 to retire all
obligations with this frame vendor and terminate this frame purchase
agreement (see Note 14).
Consulting Agreement
--------------------
The Company entered into a consulting agreement on June 2, 2000 with a
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, $20,000
from March 2005 through March 2007, and the remaining balance of $8,000 in
April 2007.
Total minimum payments under this consulting obligation at October 31, 2002
were as follows:
YEAR ENDING
OCTOBER 31,
-----------
2003 $ 84,000
2004 130,000
2005 210,000
2006 240,000
2007 108,000
------------
TOTAL $ 772,000
============
Total fees paid for this consulting obligation for the years ended October
31, 2002, 2001, and 2000 amounted to $66,000, $63,000, and $83,000,
respectively.
License Agreements
------------------
The Company has a license agreement with Laura Ashley Limited, which grants
the Company certain rights to use the "Laura Ashley" trademarks in
connection with the distribution, marketing, and sale of Laura Ashley
eyewear products. The license, as amended, automatically renews annually
through 2008, so long as the Company is not in breach of the license and
generates the required amount of minimum net sales.
52
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2002
================================================================================
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
License Agreements (Continued)
------------------
The Company has a license agreement with Hart Schaffner & Marx, which
grants the Company certain rights to use the "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. In December 2002, the Company
extended its license agreement until December 31, 2005 (see Note 14).
In July 2002, the Company extended its license agreement with Eddie Bauer,
Inc. through December 31, 2005. The license can be renewed for a two-year
term provided that specified minimum sales are achieved and the Company is
not in material default under the license agreement.
The Company has a license agreement 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. In December 2002, the Company extended its license agreement
until March 31, 2006 (see Note 14).
The Company had a license agreement with Coach, a division of Sara Lee
Corporation, which granted the Company certain rights to use the "Coach"
and related trademarks in connection with the distribution, marketing, and
sale of Coach eyewear products. In December 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. The
Company has paid this settlement in full.
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 prescription eyewear
products. The license period extends through June 30, 2003, and can be
renewed for a three-year term, as defined, provided that specified minimum
sales are achieved and the Company is not in material default under the
license agreement.
53
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2002
================================================================================
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
License Agreements (Continued)
------------------
The Company's license for bebe eyes provides that bebe may terminate the
license if the Company is insolvent. Because the Company has a
shareholders' deficit, it may be deemed to be insolvent, which would permit
bebe to terminate the license. As of April 2003, bebe has not determined
the Company to be insolvent.
Total minimum royalties payable under all of the Company's license
agreements at October 31, 2002 were follows:
YEAR ENDING
OCTOBER 31,
-----------
2003 $ 2,132,267
2004 2,138,121
2005 2,356,667
2006 1,143,750
2007 837,500
Thereafter 212,500
------------
TOTAL $ 8,820,805
============
Total royalty expense charged to operations for the years ended October 31,
2002, 2001, and 2000 amounted to $2,160,725, $2,286,267, and $3,114,807,
respectively.
In addition to the above minimum royalties payable, 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 years ended October 31, 2002, 2001, and 2000.
Litigation
----------
In December 2000, Coach terminated the eyewear license agreement with the
Company 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. In March 2002, the Company entered into
a settlement agreement with Coach, whereby 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. The Company has paid
this settlement in full.
54
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2002
================================================================================
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Litigation (Continued)
----------------------
In addition, the Company is involved in certain legal proceedings and
claims which arise in the normal course of business. Management does not
believe that the outcome of these matters will have a material effect on
the Company's financial position or results of operations.
NOTE 8 - SHAREHOLDERS' DEFICIT
Preferred and Common Stock
--------------------------
The Company's Articles of Incorporation authorize 5,000,000 shares of
preferred stock, par value $0.001 per share, and 30,000,000 shares of
common stock, par value $0.001 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 shareholder
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 common 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 years ended October 31, 2002 and 2001.
In December 2001, 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. The fair value of the
settlement amount, $68,000, had been accrued as a liability at October 31,
2001.
Stock Options
-------------
The Company maintains a stock option 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.
Compensation expense has not been 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. Through October 31, 2002, the Company has issued only stock
options under the stock option plan.
55
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2002
================================================================================
NOTE 8 - SHAREHOLDERS' DEFICIT (CONTINUED)
Stock Options (Continued)
-------------
The following is a summary of stock option activity under the plan:
WEIGHTED-
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
--------- --------
Outstanding, October 31, 1999 635,500 $ 7.92
Granted 1,300 $ 4.00
Canceled (107,400) $ 7.46
---------
Outstanding, October 31, 2000 529,400 $ 8.01
Canceled (71,900) $ 7.63
---------
Outstanding, October 31, 2001 457,500 $ 8.07
Canceled (90,200) $ 7.92
---------
OUTSTANDING, OCTOBER 31, 2002 367,300 $ 8.10
=========
EXERCISABLE, OCTOBER 31, 2002 367,300 $ 8.10
=========
The options have a remaining contractual life of five years at October
31, 2002.
The Company has adopted only the disclosure provisions of SFAS No. 123. It
applies APB Opinion No. 25 and related interpretations in accounting for
its plans and does not recognize compensation expense for its stock-based
compensation plans other than for restricted stock and options issued to
outside third parties. If the Company had elected to recognize compensation
expense based upon the fair value at the grant date for awards under this
plan consistent with the methodology prescribed by SFAS No. 123, the
Company's net loss and loss per share would be unchanged for the years
ended October 31, 2002, 2001, and 2000 as the pro forma amounts would be
immaterial.
Warrants
--------
The Company issued to its managing underwriters of its initial public
offering in 1997 warrants to purchase 180,000 shares of common stock for
$12 per share. The warrants expired on September 16, 2002.
In connection with the GWO Acquisition, the Company issued warrants to
purchase 50,000 shares of common stock for $7.50 per share. The warrants
expire on September 10, 2004.
56
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2002
================================================================================
NOTE 8 - SHAREHOLDERS' DEFICIT (CONTINUED)
Warrants (Continued)
--------
In January 2002, warrants to purchase 100,000 shares of the Company's
common stock held by Coach, a division of Sara Lee Corporation, were
canceled 30 days following the termination of the Company's eyewear license
with Coach.
The following is a summary of warrants outstanding:
WEIGHTED-
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
--------- --------
Outstanding, October 31, 1999 230,000 $ 11.02
Granted 100,000 $ 8.00
---------
Outstanding, October 31, 2000 330,000 $ 10.11
Canceled (100,000) $ 8.00
---------
Outstanding, October 31, 2001 230,000 $ 11.02
Canceled (180,000) $ 12.00
---------
OUTSTANDING, OCTOBER 31, 2002 50,000 $ 7.50
=========
EXERCISABLE, OCTOBER 31, 2002 50,000 $ 7.50
=========
57
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2002
================================================================================
NOTE 9 - INCOME TAXES
Significant components of the Company's deferred tax assets and liabilities
for federal and state income taxes as of October 31, 2002 and 2001
consisted of the following:
2002 2001
------------ ------------
Deferred tax assets
Allowance for doubtful accounts $ 229,000 $ 230,000
Capitalization of inventory costs 125,000 203,000
Inventory reserve 1,199,000 980,000
Sales returns reserve 479,000 123,000
Excess of tax basis of property
and equipment over book basis 2,408,000 2,388,000
Net operating loss carryforward 5,842,000 4,229,000
Other 107,000 131,000
Valuation allowance (9,802,000) (7,294,000)
------------ ------------
Total deferred tax assets 587,000 990,000
Deferred tax liability
State taxes (587,000) (990,000)
------------ ------------
NET DEFERRED TAXES $ -- $ --
============ ============
The following table presents the current and deferred income tax provision
for (benefit from) federal and state income taxes for the years ended
October 31, 2002, 2001, and 2000:
2002 2001 2000
------------ ------------ ------------
Current
Federal $ (4,256) $ (110,000) $ (1,200,797)
State 3,269 136,902 800
------------ ------------ ------------
(987) 26,902 (1,199,997)
------------ ------------ ------------
Deferred
Federal -- -- 428,000
State -- -- --
------------ ------------ ------------
-- -- 428,000
------------ ------------ ------------
TOTAL $ (987) $ 26,902 $ (771,997)
============ ============ ============
58
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2002
================================================================================
NOTE 9 - INCOME TAXES (CONTINUED)
A reconciliation of the provision for (benefit from) income taxes and the
amount computed by applying the federal statutory rate to loss before
benefit for income taxes is as follows:
2002 2001 2000
------------ ------------ ------------
Computed income tax benefit
at federal statutory rate $ (1,399,643) $ (4,542,538) $ (3,486,944)
Increase (decrease) resulting
from State income taxes (149,282) (529,072) 800
Permanent items 3,877 40,664 119,700
Change in valuation allowance 1,516,000 5,037,000 2,528,000
Other, net 28,061 20,848 66,447
------------ ------------ ------------
TOTAL $ (987) $ 26,902 $ (771,997)
============ ============ ============
As of October 31, 2002, the Company had net operating loss carryforwards
for federal and state income tax purposes of approximately $14,500,000 and
$8,500,000, respectively. The net operating loss carryforwards expire
through 2022. The utilization of net operating loss carryforwards may be
limited due to the ownership change, which occurred in April 2003, under
the provisions of Internal Revenue Code Section 382 and similar state
provisions.
NOTE 10 - 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,
2002, 2001, and 2000, the Company made matching contributions to the plan
in the amounts of $9,799, $157,996, and $282,589, respectively.
59
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2002
================================================================================
NOTE 11 - FOREIGN OPERATIONS
The Company operates a branch in Belgium. The following is a summary of the
Company's foreign operations:
2002 2001
------------ ------------
Balance Sheet
Identifiable assets $ 1,376,455 $ 2,034,302
2002 2001 2000
------------ ------------ ------------
Statement of operations
Net sales $ 2,046,195 $ 2,441,946 $ 1,675,531
Net income (loss) $ (506,083) $ 53,559 $ (62,850)
In addition, the Company's United States' operations conducted business
with foreign countries. During the years ended October 31, 2002, 2001, and
2000, such net sales amounted to $1,291,565, $2,168,744, and $3,499,680,
respectively.
NOTE 12 - QUARTERLY INFORMATION (UNAUDITED)
The following tables represent the Company's quarterly data for the years
ended October 31, 2002, 2001, and 2000:
2002
------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------------ ------------ ------------ ------------ ------------
Net sales $ 8,521,661 $ 8,806,211 $ 8,188,296 $ 7,605,263 $ 33,121,431
Gross profit $ 5,187,248 $ 4,869,441 $ 4,522,362 $ 3,074,115 $ 17,653,166
Net loss $ (390,643) $ (780,291) $ (777,077) $ (2,167,598) $ (4,115,609)
Loss per share $ (0.07) $ (0.14) $ (0.14) $ (0.40) $ (0.75)
2001
------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------------ ------------ ------------ ------------ ------------
Net sales $ 10,889,044 $ 11,470,364 $ 11,821,152 $ 9,211,462 $ 43,392,022
Gross profit $ 7,128,081 $ 7,042,041 $ 7,164,518 $ 585,029 $ 21,919,669
Net income (loss) $ 103,823 $ 229,031 $ 153,800 $(13,873,962) $(13,387,308)
Earnings (loss)
per share $ 0.02 $ 0.04 $ 0.03 $ (2.74) $ (2.65)
60
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2002
================================================================================
NOTE 12 - QUARTERLY INFORMATION (UNAUDITED) (CONTINUED)
2000
------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------------ ------------ ------------ ------------ ------------
Net sales $ 12,003,409 $ 12,389,749 $ 17,441,961 $ 10,096,947 $ 51,932,066
Gross profit $ 7,195,961 $ 7,331,313 $ 10,366,029 $ 5,613,885 $ 30,507,188
Net loss $ (252,258) $ (2,468,978) $ (1,017,567) $ (5,744,918) $ (9,483,721)
Loss per
share $ (0.05) $ (0.49) $ (0.20) $ (1.13) $ (1.87)
NOTE 13 - FOURTH QUARTER ADJUSTMENTS
2002
----
During the fourth quarter of the fiscal year ended October 31, 2002, the
Company:
o increased its allowance for doubtful accounts by $285,018 after
re-evaluating the recoverability of accounts receivable from its
international and 365-day credit period customers
o increased its reserve for obsolete inventory by $659,161 after
re-evaluating the net realizable value of slow moving inventory held
at the Company's main warehouse and in Belgium
o wrote down inventory held at October 31, 2002 that had been returned
by customers by $840,965 to $754,569
o entered into the lease payoff with Oliver Allen (see Note 7)
The effects of the adjustments were significant factors for the fourth
quarter loss.
2001
----
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 10 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 fourth quarter loss.
61
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2002
================================================================================
NOTE 14 - SUBSEQUENT EVENTS
Note Payable to Lessor of the Company's Principal Offices and Warehouse
-----------------------------------------------------------------------
In November 2002, the Company executed an unsecured promissory note for
$89,405 with the lessor of the Company's principal offices and warehouse.
This amount consisted of amounts related to the base rent and common area
operating expenses payable per the operating lease due October 1, 2002 and
the October payment of principal and interest with respect to the $240,000
unsecured promissory note dated June 23, 1998. Late charges and other
penalties totaling $12,761 owed by the Company with respect to the October
rent were forgiven. The promissory note bears interest at 8% per annum and
is repayable in 26 equal monthly installments of $3,757 each beginning
April 1, 2003 and ending May 1, 2005. This promissory note was recorded as
of October 31, 2002 in long-term debt (see Note 6).
Settlement Agreement and General Release with CDS
-------------------------------------------------
In January 2003, the Company entered into a settlement agreement with CDS
and the sole shareholder of CDS, settling all remaining obligations between
the parties emanating from the Company's purchase of all of the assets of
CDS in 1999. The remaining obligations included those under a consulting
agreement with the sole shareholder of CDS for $104,876 at October 31, 2002
(see Note 6) and the promissory note given as part of the purchase price
for $938,258 at October 31, 2002 (see Note 6). In the settlement, the
Company paid $500,000 to CDS and the sole shareholder of CDS, and the
parties executed a mutual general release. This transaction will result in
the Company recording a gain of $543,134 in the statement of operations for
the year ended October 31, 2003.
Sale and License Back of Dakota Smith Trademark and Inventory
-------------------------------------------------------------
In February 2003, the Company sold all of its rights to its Dakota Smith
eyewear trademark for $600,000 and the related inventory for $400,000.
Concurrently, the Company entered into a three-year exclusive license
agreement, with a two-year renewal option, with the purchaser to use the
trademark for eyeglass frames sold and distributed in the United States and
certain other countries. The license agreement specifies certain guaranteed
minimum royalties per annum. The Company also repurchased the Dakota Smith
inventory for a non-interest-bearing note in the amount of $400,000. The
note is secured by the inventory and payable in monthly installments
through March 2004.
Credit Facilities
-----------------
HLIC CREDIT FACILITY
In April 2003, the Company obtained a $3,500,000 credit facility from HLIC.
The credit facility is secured by all of the assets of the Company and
includes a $3,000,000 term loan and a $500,000 revolving line of credit.
62
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2002
================================================================================
NOTE 14 - SUBSEQUENT EVENTS (CONTINUED)
Credit Facilities (Continued)
-----------------
HLIC CREDIT FACILITY (Continued)
The term loan bears interest at 10% per annum, is payable interest only for
the first year of payments, with payments of principal and interest on a
10-year amortization commencing in the second year, and is due and payable
in April 2008. The revolving credit facility bears interest at a rate of 1%
per month, payable monthly, with all advances subject to approval of HLIC,
and is due and payable in April 2008. The Company may prepay the credit
facility without premium or penalty at any time.
As additional security for the credit facility, an irrevocable letter of
credit must be issued in favor of HLIC by a commercial bank in the amount
of $1,250,000, subject to reduction if the credit facility is less than
$1,250,000. The letter of credit delivered to obtain the credit facility
was secured by a related party. Furthermore, the Company purchased a
$250,000 debenture from HLIC as additional security. This debenture will
earn interest at 3% per annum, adjusted annually to the one-year debenture
rate offered by HLIC, and will remain as collateral until the credit
facility is paid in full.
The terms of the agreement include certain financial and non-financial
covenants, which include that the Company must maintain inventories,
accounts receivable, and cash of not less than $7,000,000; and that the
Company cannot incur any additional debt, engage in any merger or
acquisition, or pay any dividends or make any distributions to shareholders
other than stock dividends without the consent of HLIC.
As further consideration for the credit facility, the Company also granted
HLIC warrants to purchase 100,000 shares of common stock. The warrants vest
immediately, expire on April 30, 2008, and have an exercise price of $0.67
per share.
BLUEBIRD CREDIT FACILITY
In April 2003, the Company obtained from Bluebird Finance Limited
("Bluebird") a credit facility of up to $4,150,000 secured by the assets of
the Company. The credit facility includes a revolving credit line in the
amount of $2,900,000 and support for the $1,250,000 letter of credit
securing the HLIC credit facility. The loan bears interest at 5% per annum,
payable annually for the first two years, with payments of principal and
interest on a 10-year amortization schedule commencing in the third year,
and is due and payable in April 2013.
Bluebird's loan commitment will be reduced by $72,000 in July 2005 and by
the same amount every three months thereafter. This loan is subordinate to
the HLIC credit facility. The Company must comply with certain financial
and non-financial covenants, which include that without the consent of
Bluebird it may not make any acquisition or investment in excess of an
aggregate of $150,000 each fiscal year outside the ordinary course of
business or enter into any merger or similar reorganization.
63
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2002
================================================================================
NOTE 14 - SUBSEQUENT EVENTS (CONTINUED)
Designation and Issuance of Series A 2% Convertible Preferred Stock
-------------------------------------------------------------------
In April 2003, the Company designated a new series of preferred stock,
designated "Series A 2% Convertible Preferred Stock" (the "Series A
Preferred"), authorizing 1,360,000 shares. In addition, in April 2003, the
Company issued 1,200,000 shares to Bluebird for $800,000, or $0.6667 per
share. The Series A Preferred provides for cumulative dividends at the rate
of 2% per annum payable in cash or additional shares of Series A Preferred
and has a liquidation preference equal to its original purchase price plus
accrued and unpaid dividends. The Company has the right to redeem the
Series A Preferred, commencing April 2005 at the liquidation preference,
plus accrued and unpaid dividends, plus a premium of $450,000.
The Company must redeem the Series A Preferred upon certain changes of
control, as defined in the agreement, to the extent the Company has the
funds legally available at the same redemption price, unless the change of
control occurs before April 2005, in which event the premium is 10% of
either the consideration received by the Company's shareholders or the
market price, as applicable. The Series A Preferred is convertible into
common stock on a share-for-share basis, subject to adjustments for stock
splits, stock dividends, and similar events, at any time commencing May
2005.
The holders of the Series A Preferred do not have voting rights, except as
required by law, provided, however, that at any time two dividend payments
are not paid in full, the Board of Directors will be increased by two and
the holders of the Series A Preferred, voting as a single class, will be
entitled to elect the additional directors. Bluebird received demand and
piggyback registration rights for the shares of common stock into which
Series A Preferred may be converted.
Retirement of Bank Credit Facility
----------------------------------
In April 2003, the Company utilized the proceeds from the Home Loan
Investment Company ("HLIC") credit facility to retire its bank credit
facility, which consisted of a line of credit and term note payable that
had been in default, for a payment of $3,125,000. This transaction will
result in the Company recording a gain of approximately $700,000 in the
statement of operations for the year ended October 31, 2003.
Retirement of Obligations to Frame Vendor
-----------------------------------------
In April 2003, the Company used a portion of the proceeds from the Bluebird
credit facility to retire its obligations to a frame vendor in the
aggregate amount of approximately $5,800,000 for a payment of $2,475,000 to
Dartmouth Commerce of Manhattan, Inc. ("Dartmouth Commerce"), a related
party. Dartmouth Commerce had purchased this obligation from the frame
vendor for $2,350,000. The payment also terminated the purchase agreement
(see Note 7).
64
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2002
================================================================================
NOTE 14 - SUBSEQUENT EVENTS (CONTINUED)
Retirement of Obligations to Frame Vendor (Continued)
-----------------------------------------
The amounts retired, which at October 31, 2002 amounted to $2,324,090,
$3,207,291, and $409,699 and were included in accounts payable - trade,
long-term debt, and accrued interest, which is included in accrued expenses
and other current liabilities, respectively, were partly assumed in
connection with the Company's acquisition of CDS in 1999. This transaction
will result in the Company recording a gain of approximately $3,500,000 in
the statement of operations for the year ended October 31, 2003.
Reduction in Trade Payables
---------------------------
In April 2003, the Company used a portion of the proceeds from the Bluebird
credit facility to retire approximately $775,000 of trade payables for an
aggregate payment of approximately $327,000. At October 31, 2002, the
amount included in accounts payable - trade for these trade payables was
approximately $840,000.
Reduction in Capital Lease Obligations
--------------------------------------
In April 2003, the Company used a portion of the proceeds from the Bluebird
credit facility to settle $89,550 of a liability for machinery and
equipment under various capital leases for a payment of $58,162.
Sale of Stock by Principal Shareholder
--------------------------------------
In April 2003, the Weiss Family Trust, the principal shareholder of the
Company, sold its entire shareholding in the Company of 2,075,337 shares of
common stock, representing approximately 37% of the outstanding common
stock of the Company, for $0.012 per share. Dartmouth Commerce purchased
1,600,000 shares, and Michael Prince, the Company's Chief Executive
Officer/Chief Financial Officer, purchased 475,337 shares. Dartmouth
Commerce, which is wholly owned by the Company's new Chairman of the Board,
is now the largest shareholder of the Company, holding approximately 28.7%
of the outstanding common stock of the Company as of April 2003. Dartmouth
Commerce has agreed with Bluebird that until April 2008, it will not sell
or transfer any of these shares without Bluebird's prior consent.
Consulting Agreements
---------------------
In April 2003, the Company entered into a three-year consulting agreement
with Dartmouth Commerce, a related party wholly owned by the Company's new
Chairman of the Board, Richard M. Torre, for compensation of $55,000 per
year.
In April 2003, the Company entered into an 18-month consulting agreement
with the former Chairman of the Board/Chief Executive Officer for total
compensation of $20,000.
65
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2002
================================================================================
NOTE 14 - SUBSEQUENT EVENTS (CONTINUED)
Changes in Management
---------------------
In April 2003, Bernard L. Weiss resigned as Chairman of the Board, Chief
Executive Officer, and Director, positions he held since founding the
Company in 1983, and Seth Weiss resigned as an Executive Vice President.
Richard M. Torre was appointed as Chairman of the Board and Director, and
Ted Pasternack, Edward Meltzer, and Drew Miller were appointed as
Directors. In addition, Michael Prince was named Chief Executive Officer
and President. Michael Prince will continue to occupy the position of Chief
Financial Officer until a replacement is hired.
Employment Agreement
--------------------
In April 2003, the Company entered into a new five-year employment
agreement with Michael Prince, the Company's President/Chief Executive
Officer/Chief Financial Officer, which superseded his existing employment
agreement. Under the new employment agreement, he receives a salary of
$240,000 per year, subject to annual review for increase. He also received
420,000 shares of common stock, which he must forfeit if certain conditions
are not met as follows:
(i) 210,000 shares must be forfeited if the Company has not achieved
positive net income from ordinary operations in at least one fiscal
year in the period 2003 to 2006 and
(ii) 210,000 shares must be forfeited if the Company does not have net
income from ordinary operations of at least $250,000 in at least one
of the three fiscal years following the fiscal year it achieves
positive net income.
If prior to March 31, 2008, Mr. Prince's employment is terminated without
cause or he terminates his employment for "good reason":
(i) he will be entitled to a lump sum payment of all salary to which he
would have been entitled under the employment agreement from the date
of termination through March 31, 2008 and
(ii) any of the 420,000 shares which have not vested will vest and be free
of the risk of forfeiture.
License Agreements
------------------
In December 2002, the Company extended its license agreement with Hart
Schaffner & Marx for a period of three years until December 31, 2005. The
license agreement requires specified minimum net sales and royalties per
annum.
66
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2002
================================================================================
NOTE 14 - SUBSEQUENT EVENTS (CONTINUED)
License Agreements (Continued)
------------------
In December 2002, the Company extended its license agreement with Nicole
Miller until March 31, 2006. Under the terms of the extension agreement,
the Company will have the option to renew the license agreement for an
additional term of three years, if and only if (i) the Company is in
compliance with the terms and conditions of the license agreement at the
time of this extension and on March 31, 2006 and (ii) the Company pays the
guaranteed minimum royalty for each of the three years ended March 31,
2006.
67
INDEPENDENT AUDITOR'S REPORT
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders
Signature Eyewear, Inc. and subsidiary
Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The consolidated
supplemental schedule II is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not a part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in our audit of the basic consolidated financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic consolidated financial statements taken as a whole.
/s/ Singer Lewak Greenbaum & Goldstein LLP
- -----------------------------------------------
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
April 15, 2003
68
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
Board of Directors
Signature Eyewear, Inc. and Subsidiary
In connection with our audit of the consolidated financial statements of
Signature Eyewear, Inc. and Subsidiary referred to in our report dated April 5,
2002 (except for Note 7, which is as of July 30, 2002), which is included in
this Form 10-K, we have also audited Schedule II as of and for the years ended
October 31, 2001 and 2000. In our opinion, this schedule presents fairly, in all
material respects, the information required to be set forth therein.
/s/ Altschuler, Melvoin and Glasser LLP
- -----------------------------------------------
ALTSCHULER, MELVOIN AND GLASSER LLP
Los Angeles, California
April 5, 2002
69
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS - SCHEDULE II
FOR THE YEARS ENDED OCTOBER 31,
================================================================================
ADDITIONS ADDITIONS
BALANCE, (DEDUCTIONS) (DEDUCTIONS) BALANCE,
BEGINNING CHARGE TO FROM END
OF YEAR OPERATIONS RESERVE OF YEAR
------------ ------------ ------------ ------------
ALLOWANCE FOR DOUBTFUL ACCOUNTS
October 31, 2002 $ 574,096 $ 432,224 $ (462,436) $ 543,884
=========== =========== =========== ===========
October 31, 2001 $ 314,839 $ 434,090 $ (174,833) $ 574,096
=========== =========== =========== ===========
October 31, 2000 $ 198,363 $ 264,835 $ (148,359) $ 314,839
=========== =========== =========== ===========
RESERVES FOR OBSOLETE INVENTORIES
October 31, 2002 $ 2,450,000 $ 2,066,213 $(1,716,273) $ 2,799,940
=========== =========== =========== ===========
October 31, 2001 $ 511,004 $ 2,973,202 $(1,034,206) $ 2,450,000
=========== =========== =========== ===========
October 31, 2000 $ 73,368 $ 437,636 $ -- $ 511,004
=========== =========== =========== ===========
VALUATION ALLOWANCE FOR DEFERRED TAX ASSETS
October 31, 2002 $ 8,284,000 $ 1,516,000 $ -- $ 9,800,000
=========== =========== =========== ===========
October 31, 2001 $ 3,247,000 $ 5,037,000 $ -- $ 8,284,000
=========== =========== =========== ===========
October 31, 2000 $ -- $ 3,247,000 $ -- $ 3,247,000
=========== =========== =========== ===========
RESERVES FOR CUSTOMER RETURNS
October 31, 2002 $ 307,500 $ 1,978,500 $ -- $ 2,286,000
=========== =========== =========== ===========
October 31, 2001 $ 285,000 $ 22,500 $ -- $ 307,500
=========== =========== =========== ===========
October 31, 2000 $ -- $ 285,000 $ -- $ 285,000
=========== =========== =========== ===========
70
ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Altschuler, Melvoin and Glasser LLP of California ("AM&G of
California") resigned as the Company's independent auditors as of October 18,
2002 (the date the audit for fiscal 2001 was completed), due to the fact that it
has determined that it would no longer audit public companies through its Los
Angeles office because of the departure of the firm's partner in charge of
audits of companies required to file periodic reports with the Securities and
Exchange Commission. As a result of that partner's departure, AM&G of California
will no longer be acting as independent auditors for reporting companies.
During the Company's fiscal years ended October 31, 2000 and 2001,
and the period commencing November 1, 2001 through October 18, 2002: (i) the
Company had no disagreements with AM&G of California, whether or not resolved,
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which, if not resolved to the
satisfaction of AM&G of California, would have caused it to make reference to
the subject matter of the disagreement in connection with its report; and (ii)
AM&G of California did not advise the Company of any of the events requiring
reporting under Item 304(a)(iv)(B) of Regulation S-K.
AM&G of California's report on the financial statements of the
Company for the year ended October 31, 2000 did not contain an adverse opinion
or disclaimer of opinion and was not modified as to audit scope or accounting
principles. AM&G of California's report on the financial statements of the
Company for the fiscal year ended October 31, 2001 contained a going concern
modification.
On October 16, 2002, the Company engaged Singer, Lewak, Greenbaum &
Goldstein, LLP ("SLGG") to audit its financial statements for the year ended
October 31, 2002. This decision was approved by the Company's Board of
Directors. Prior to such engagement, the Company did not consult with SLGG
regarding the application of accounting principles to a specific, completed or
contemplated transaction, or the type of audit opinion that might be rendered on
its financial statements.
71
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 June 30, 2003:
NAME AGE POSITION PRINCIPAL OCCUPATION
- ------------------------------------------------------------------------------------------------------------------------
Richard M. Torre 57 Chairman of the Board Mr. Torre has served as Chairman of the Board since April
2003. For more than the past 19 years he has owned and
operated Dartmouth Associates, a merchant and investment
bank. From January 2001 through June 2002, he was Chairman
of Global Vantage Securities, Inc., a broker-dealer, and for
the two years prior to that he was Chairman of its affiliate
investment bank Global Vantage Ltd. From 1995 through 1998
he was Chairman of Global Capital Markets, Inc., an
investment banking firm. Mr. Torre currently is also
Chairman of Exceed Capital Holdings Ltd.
Edward Meltzer 68 Director Mr. Meltzer joined the Board in April 2003. He has been the
President of Elanday Equities, Inc., an exporter of various
products, since 1987.
Drew Miller 44 Director Mr. Miller joined the Board in May 2003. He has been the
President of Heartland Consulting Group since 1994, and has
been the President of Global Vantage Securities and its
successor H. Roark Securities Corporation since 2001.
Ted Pasternack 61 Director Mr. Pasternack joined the Board in April 2002. He is a
certified public accountant who for more than the past five
years has been a financial consultant through Betafam, Inc.,
a corporation wholly owned by him, for the legal profession.
Michael Prince 54 Director Mr. Prince joined the Company in 1993 and has served as the
Chief Executive Officer Chief Financial Officer and as a Director of the Company
Chief Financial Officer since March 1994, and as Chief Executive Officer since April
2003. 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.
Robert M. Fried 58 Senior Vice President- Mr. Fried has served as the Company's chief marketing
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.
72
NAME AGE POSITION PRINCIPAL OCCUPATION
- ------------------------------------------------------------------------------------------------------------------------
Robert A. Zeichick 52 Senior Vice Mr. Zeichick has served as the Company's chief advertising
President-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, and in 2003
was promoted to Senior Vice President--Advertising. 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.
Kevin D. Seifert 40 Vice President-Operations Mr. Seifert joined the Company in 1998 and has served as
Vice President of Operations since 1999. He was appointed to
the Management Executive Committee of the Company in April
2003.
Marie Welsch 44 Vice President-Corporate Ms. Welsch joined the Company in 1998 and has served as Vice
Accounts President of Corporate Accounts since 2000. She was
appointed to the Management Executive Committee of the
Company in April 2003.
Sheptanya Page 39 Director of Human Ms. Page joined the Company as Manager of Human Resources in
Resources 1999 and was promoted to Director of Human Resources in
2000. She was appointed to the Management Executive
Committee of the Company in April 2003. From 1992 to 1999
she was Corporate Human Resources Manager for Authentic
Fitness Corporation.
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, 2002 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.
73
SUMMARY COMPENSATION TABLE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM
COMPENSATION
- ------------------------------------------------------------------------------------------------------------------------------------
FISCAL YEAR
ENDED ANNUAL COMPENSATION NUMBER OF SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION OCTOBER 31, SALARY BONUS UNDERLYING OPTIONS COMPENSATION(1)
- ------------------------------------------------------------------------------------------------------------------------------------
Bernard L. Weiss (2) 2002 $ 48,000 -- -- $23,273
Chief Executive Officer 2001 230,000 -- -- 29,445
2000 230,000 -- -- 4,932
- ------------------------------------------------------------------------------------------------------------------------------------
Michael Prince 2002 $215,500 -- -- $25,825
Chief Financial Officer 2001 215,000 -- -- 25,987
2000 215,000 $25,000 $9,000 4,939
- ------------------------------------------------------------------------------------------------------------------------------------
Robert M. Fried 2002 $215,000 -- -- $27,486
Senior Vice President-Marketing 2001 215,000 -- -- 25,825
2000 215,000 $25,000 $9,000 5,100
- ------------------------------------------------------------------------------------------------------------------------------------
Robert A. Zeichick 2002 $215,000 -- -- $27,478
Vice President-Advertising and Sales 2001 215,000 -- -- 26,180
Promotion 2000 215,000 $25,000 $9,000 4,745
- ------------------------------------------------------------------------------------------------------------------------------------
Seth Weiss(2) 2002 $150,000 -- -- $4,350
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.
(2) Resigned in April 2003.
OPTION GRANTS IN LAST FISCAL YEAR
There were no option grants to Named Executive Officers in fiscal
2002.
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, 2002 and the value of options held
at fiscal year end based upon the last reported sales price of the Common Stock
as reported by Nasdaq on October 31, 2002 ($0.35 per share). No Named Executive
Officer exercised any stock options during fiscal 2002.
74
AGGREGATED FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXECUTED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
OCTOBER 31, 2002 AT OCTOBER 31, 2002
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----
Bernard L. Weiss 12,000 0 $ 0 $ 0
Michael Prince 44,000 0 0 0
Robert M. Fried 44,000 0 0 0
Robert A. Zeichick 44,000 0 0 0
Seth Weiss 31,700 0 0 0
EMPLOYMENT AGREEMENTS
Michael Prince, Robert Fried and Robert Zeichick have each entered
into an employment agreement with Signature. Mr. Prince's employment agreement
was revised and restated when he was appointed Chief Executive Officer in April
2003. Under the revised employment agreement, he receives salary of $240,000 per
year, subject to annual review for increase. He also received 420,000 shares of
Common Stock, of which he must forfeit 210,00 shares if Signature has not
achieved positive net income from ordinary operations in at least one fiscal
year in the period 2003 to 2006, and must forfeit an additional 210,000 shares
if Signature does not have net income from ordinary operations of at least
$250,000 in at least one of the three fiscal years following the fiscal year it
achieves positive net income. If prior to March 31, 2008 Mr. Prince's employment
is terminated without cause or he terminates his employment for "good reason":
(i) he will be entitled to a lump sum payment of all salary to which he would
have been entitled under the employment agreement from the date of termination
through March 31, 2008; and (ii) any of the 420,000 shares which have not vested
will vest and be free of the risk of forfeiture.
Under their employment agreements, Messrs. Fried and Zeichick
presently have salaries of $215,000. If Mr. Fried's or Mr. Zeichick's employment
is terminated without cause or he terminates his employment following an adverse
event, he 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
75
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.
COMPENSATION OF DIRECTORS
In fiscal 2002, the Company compensated paid its sole outside
director a retainer of $8,000.
ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table provides information as of the record date
regarding the Common Stock and Series A Convertible 2% Preferred Stock ("Series
A Preferred") owned by: (i) each person the Company knows to beneficially own
more than 5% of the outstanding Common Stock or Series A Preferred; (ii) each of
the Company's directors; (iii) each of the Company's executive officers named in
the Summary Compensation Table included in this Proxy Statement; and (iv) all of
our 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, to
our knowledge each person identified in the table has sole voting and investment
power with respect to the shares shown as beneficially owned.
NUMBER OF SHARES OF
NAME AND ADDRESS OF COMMON STOCK NUMBER OF SHARES OF PERCENT OF
BENEFICIAL OWNER(1) BENEFICIALLY OWNED PERCENT OF CLASS SERIES A PREFERRED CLASS
- --------------------------------- ------------------- ---------------- ------------------- ----------
Edward Meltzer -- -- -- --
Drew Miller -- -- -- --
Ted Pasternack 7,400 0.1 -- --
Michael Prince 1,039,878(2) 17.3 -- --
Richard M. Torre 1,600,000 26.6 -- --
Robert M. Fried 222,599(3) 3.7 -- --
Robert A. Zeichick 223,689(4) 3.7 -- --
Kevin D. Seifert 37,844(5) 0.6 -- --
Marie Welsch 34,200(6) 0.6 -- --
Sheptanya Page 2,000(7) -- -- --
Craig Springer 700,000(8) 11.4 -- --
Bluebird Finance Limited -- -- 1,200,000 100%
Box 957, Road Town, Tortola
British Virgin Islands
All directors and executive 3,145,997(9) 51.7 -- --
officers as a group (10 persons)
- -----------------------
(1) The business address of each director and executive officer (each person
identified in the table other than Bluebird Finance Limited) is c/o
Signature Eyewear, Inc., 498 North Oak Street, Inglewood, CA 90302.
(2) Includes 44,000 shares which may be acquired upon exercise of options.
(3) Includes 44,000 shares which may be acquired upon exercise of options.
76
(4) Includes 44,000 shares which may be acquired upon exercise of options.
(5) Includes 9,500 shares which may be acquired upon exercise of options.
(6) Includes 9,300 shares which may be acquired upon exercise of options.
(7) Includes 2,000 shares which may be acquired upon exercise of options.
(8) Includes (i) 550,000 shares owned by Springer Capital Corporation, a
corporation owned by Mr. Springer; (ii) 50,000 shares issuable upon
exercise of warrants owned by Springer Capital Corporation; and (iii)
100,000 shares issuable upon exercise of warrants owned by Home Loan and
Investment Company; Mr. Springer may be deemed to share voting and
investment power with respect to these shares by virtue of being a
director, officer and shareholder of that corporation.
(9) Includes 152,800 shares which may be acquired upon exercise of options
and warrants as described in footnotes (2) through (7).
COMPLIANCE WITH SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires our directors, executive officers and 10% shareholders to file reports
with the Securities and Exchange Commission on changes in their beneficial
ownership of Common Stock and to provide us with copies of the reports. The
Company believes that all of these persons filed all required reports on a
timely basis in 2002.
ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In April 2003, as part of its recapitalization, the Company paid
$2,475,000 to Dartmouth Commerce of Manhattan, Inc. ("Dartmouth") to retire its
obligations to a frame vendor in the aggregate amount of approximately $5.8
million (some of which obligations were assumed in connection with the Company's
acquisition of California Design Studio, Inc. in 1999). Dartmouth had purchased
this obligation from the frame vendor for $2,350,000. Dartmouth is owned by
Richard M. Torre, who became the Chairman of the Board and largest shareholder
of the Company in the recapitalization.
In April 2003, as part of its recapitalization, the Company obtained
a credit facility from Home Loan and Investment Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Subsequent Events." Craig Springer, a director, officer and shareholder of Home
Loan and Investment Company, owns, through his wholly owned corporation,
Springer Capital Corporation, in excess of 5% of the Common Stock of the
Company.
ITEM 14--CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer
has conducted an evaluation of the effectiveness of the Company's disclosure
controls and procedures pursuant to Rule 13a-14 under the Securities Exchange
Act of 1934, as amended, within 90 days of the filing of this annual report.
Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer believes that the Company's disclosure controls and procedures were
effective in ensuring that information required to be disclosed by the Company
in this annual report has been made known to them in a timely manner.
During the year ended October 31, 2002, there were no significant
changes in the Company's internal controls or in other factors that could
significantly affect those controls.
77
PART IV
ITEM 15--EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of Report:
1. Financial Statements:
Independent Auditor's Reports
Consolidated Balance Sheets at October 31, 2001 and 2002
Consolidated Statements of Operations for the years ended October 31, 2000,
2001 and 2002
Consolidated Statements of Changes in Stockholders' Equity for the years
ended October 31, 2000, 2001 and 2002
Consolidated Statements of Cash Flows for the years ended October 31, 2000,
2001 and 2002
2. Financial Statement Schedules:
Schedule II--Valuation and Qualifying Accounts
3. Exhibits:
See attached Exhibit List
(b) Reports on Form 8-K:
8-K dated October 16, 2002 (Item 4)
78
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 Executive 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/ Michael Prince Chief Executive Officer, August 11, 2003
- ------------------------- Chief Financial Officer and
Michael Prince Director (Principal Financial
and Accounting Officer)
/s/ Edward Meltzer Director August 11, 2003
- -------------------------
Edward Meltzer
/s/ Drew Miller Director August 11, 2003
- -------------------------
Drew Miller
/s/ Ted Pasternack Director August 11, 2003
- -------------------------
Ted Pasternack
/s/ Richard M. Torre Chairman of the Board August 11, 2003
- -------------------------
Richard M. Torre
79
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. Certificate of Determination of Series A
2% Convertible Preferred Stock of Signature Eyewear, Inc., filed April
21, 2003 with the California Secretary of State.(1)
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 for Common Stock. 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.
4.2 Specimen Stock Certificate for Series A 2% Convertible Preferred
Stock. (1)
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, 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, 2001. Further Amending Agreement dated
December 18, 2002. Letter Amendment dated as of April 14, 2003.
(Portions of this Exhibit have been omitted and filed separately with
the Securities and Exchange Commission pursuant to a grant of
Confidential Treatment and an additional request for 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. 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. Incorporated by
reference to Exhibit 10.7 of Signature's Annual Report on Form 10-K
for the year ended October 31, 2001.
80
10.8 Employment Agreement dated April 23, 2003 between the Signature and
Michael Prince.
10.9 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.
10.10 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.
10.11 License Agreement, dated June 24, 1997, between Eddie Bauer, Inc. and
the Signature and First Addendum to License Agreement. 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. Second Addendum to License
Agreement dated July 30, 2002. Acknowledgement of Assignment dated as
of January 1, 2003. (Portions of this Exhibit have been omitted and
filed separately with the Securities and Exchange Commission pursuant
to a grant of Confidential Treatment and an additional request for
Confidential Treatment.)
10.12 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. Incorporated by reference to Exhibit 10.14
of Signature's Annual Report on Form 10-K for the year ended October
31, 2001.
10.13 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.
Incorporated by reference to Exhibit 10.15 of Signature's Annual
Report on Form 10-K for the year ended October 31, 2001.
10.14 Agreement dated April 21, 2003: US $4,150,000 Credit Facility for
Signature Eyewear, Inc. provided by Bluebird Finance Limited; Security
Agreement dated April 21, 2003 between Signature Eyewear, Inc. as
Debtor and Bluebird Finance Limited as Secured Party.(1)
10.15 Stock Purchase Agreement dated April 21, 2003 between Bluebird Finance
Limited and Signature Eyewear, Inc.(1)
10.16 Loan and Security Agreement, dated April 21, 2003, between Signature
Eyewear, Inc. and Home Loan and Investment Company; Revolving Credit
Promissory Note, dated April 21, 2003, in the principal amount of
$500,000; Promissory Note, dated April 21, 2003, in the principal
amount of $3,000,000.(1)
10.17 Subordination Agreement, dated April 21, 2003, among Bluebird Finance
Limited, Signature Eyewear, Inc. and Home Loan and Investment
Company. (1)
10.18 100,000 Warrants, dated April 21, 2003, issued to Home Loan and
Investment Company. (1)
10.19 Consulting Agreement dated as of April 1, 2003 between Signature
Eyewear, Inc. and Dartmouth Commerce of Manhattan, Inc.
23.1 Consent of Altschuler, Melvoin and Glasser LLP
23.2 Consent of Singer Lewak Greenbaum & Goldstein LLP
31.1 Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C.ss. 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
- ------------
(1) Incorporated by reference from Form 8-K dated April 28, 2003.
81