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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, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________.
COMMISSION FILE NUMBER: 0-23001
SIGNATURE EYEWEAR, INC.
(Exact name of Registrant as Specified in its Charter)
CALIFORNIA 95-3876317
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
498 NORTH OAK STREET
INGLEWOOD, CALIFORNIA 90302
(Address of Principal Executive Offices, including ZIP Code)
(310) 330-2700
Registrant's Telephone Number, Including Area Code
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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 |X| No
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulations S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Act). Yes ..... No |X|...
On January 31, 2004, the Registrant had 5,976,889 outstanding shares
of Common Stock, $.001 par value. The aggregate market value of the 3,320,367
shares of Common Stock held by non-affiliates of the Registrant as of January
31, 2004 was $531,259.
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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 63% and 57% of the Company's net sales in fiscal
2002 and fiscal 2003, 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.
2003 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 had been 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 had 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
3
commencing in the third year, and is due and payable in April 2013. Bluebird's
loan commitment will be reduced by $72,500 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 26.8% 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 the Company
continues to have a stockholders' deficit, the Company believes that for at
least fiscal 2004, 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 . The Company has
continued to reduce its operating expenses. However, the Company believes that
its ability to return to profitability will depend mostly on its ability to
increase revenues.
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
4
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 show 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
have 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.
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
- -----------------------
(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.
5
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
2001 POPULATION PROJECTED GROWTH PROJECTED GROWTH
AGE (IN THOUSANDS) 2001-2005 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%
--------------- ---------------- ----------------
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.
6
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
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
7
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, weekly audio presentations, sales contests and
other sales tools to facilitate professional presentations.
PRODUCTS
The Company's principal products during fiscal 2003 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
CUSTOMER INTRODUCTION RETAIL
BRAND NAME/SEGMENT GENDER/AGE DATE PRICES(1)
- --------------------------------
Licensed Brands
Laura Ashley
Prescription.............. Women 1992 $125-$180
Sunwear................... Women 1993 $90 -$100
bebe eyes..................... Women 2000
Prescription.............. $100-$200
Eddie Bauer................... Men/Women 1998
Prescription.............. $95-$170
Hart Schaffner & Marx......... Men 1996
Prescription.............. 1993 $95-$180
Nicole Miller ................ Women
Prescription.............. 1993 $125-$175
Sunwear................... 1993 $75-$125
Dakota Smith (2)
Prescription.............. Unisex 1992 $90-$150
Sunwear................... Unisex 1992 $75-$125
House Brands
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 $7.8 million in fiscal 2003, 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
8
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 years ended
January 2003 and 2004, 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 Spiegel, 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
9
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.
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
10
a result of its stockholders' deficit, and bebe stores, inc. has not waived its
right to terminate, then bebe stores, inc. would have the right 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:
11
YEAR ENDED OCTOBER 31,
---------------------------------------------
2001 2002 2003
---------- ---------- -----------
(IN THOUSANDS)
Direct sales ................ $ 21,147 $ 15,349 $ 12,893
Optical retail chains ....... 12,346 11,560 7,074
International ............... 5,029 3,468 3,601
Telemarketing(1)............. 3,230 1,532 --
Domestic distributors........ 1,640 1,212 852
---------- ----------- -----------
$ 43,392 $ 33,121 $ 24,420
========== =========== ===========
- ------------
(1) In March 2002 the Company sold its USA Optical division that
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.
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 47 at October 31,
2003.
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%, 13% and 11% of the
Company's net sales for fiscal years 2001, 2002 and 2003, respectively.
INTERNATIONAL. The Company sells certain of its products
internationally through exclusive distributors and 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, 2003, the Company had approximately 15
international distributors and 13 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 2
distributors in the United States at October 31, 2003.
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 2003,
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
12
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.
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. and Marcolin 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.
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, 2003, the Company had 123 full-time employees,
including 43 in sales and marketing, 23 in customer service and support, 23 in
warehouse operations and shipping and 34 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 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 March 15, 2004, the Company was not involved in any material
legal proceedings.
13
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
None.
14
PART II
ITEM 5 -- MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK
The Company's Common Stock trades in the over-the-counter market.
The following table sets forth, for the periods indicated, high and low last
reported sales prices for the Common Stock in the over-the-counter market as
reported by Nasdaq.
HIGH LOW
-------- --------
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
FISCAL YEAR ENDED OCTOBER 31, 2003
First Quarter ....................... $ 0.10 $ 0.03
Second Quarter ...................... $ 0.30 $ 0.03
Third Quarter........................ $ 0.35 $ 0.35
Fourth Quarter ...................... $ 0.30 $ 0.16
On January 31, 2004, the last reported sales price of the Common
Stock in the over-the counter market as reported by Nasdaq, was $0.11 per share.
At January 31, 2004, there were 37 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, 2003, the Company had an accumulated deficit of
$20.0 million. As a result, the Company will not be able to pay dividends (other
than stock 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, 2003.
15
- ------------------------------ --------------------------- ------------------------------ ------------------------
(a) (b) (c)
- ------------------------------ --------------------------- ------------------------------ ------------------------
Plan category Number of securities to Weighted-average exercise Number of securities
be issued upon exercise of price of outstanding options, remaining available for
outstanding options, warrants and rights future issuance under
warrants and rights equity compensation
plans (excluding
securities reflected
in column (a))
- ------------------------------ --------------------------- ------------------------------ ------------------------
Equity compensation plans 217,800 $7.99 582,200
approved by security holders
- ------------------------------ --------------------------- ------------------------------ ------------------------
Equity compensation plans not -- -- --
approved by security holders
- ------------------------------ --------------------------- ------------------------------ ------------------------
Total 217,800 $7.99 582,200
- ------------------------------ --------------------------- ------------------------------ ------------------------
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,
----------------------------------------------------------------------------
1999 2000 2001 2002 2003
-----------------------------------------------------------------------------
(dollars in thousands, except per-share data)
STATEMENT OF OPERATIONS DATA:
Net sales ..................................... $ 44,056 $ 51,932 $ 43,392 $ 33,121 24,420
Gross profit .................................. 25,316 30,507 21,920 17,653 15,921
Total operating expenses ...................... 27,461 39,754 33,942 21,092 16,783
(Loss) from operations ........................ (2,145) (9,247) (12,022) (3,439) (862)
Extraordinary item ............................ -- -- -- -- 4,099
Net income (loss) ............................. (1,309) (9,484) (13,387) (4,116) 3,463
Basic and diluted income (loss) per share ..... (0.26) (1.87) (2.65) (0.75) 0.60
Weighted average common shares outstanding .... 5,095,259 5,058,915 5,056,889 5,488,396 5,780,122
1999 2000 2001 2002 2003
------------ ------------ ------------ ------------ ------------
BALANCE SHEET DATA:
Current assets ................................ $ 27,474 $ 33,006 $ 17,184 $ 9,876 8,678
Total assets .................................. 35,474 41,435 18,906 11,944 10,398
Current liabilities ........................... 12,334 28,142 22,390 19,226 8,261
Long-term debt, net of current portion......... -- 4,806 1,461 1,715 6,874
Total liabilities ............................. 17,471 32,948 23,851 20,941 15,134
Stockholders' equity (deficit) ................ 18,003 8,487 (4,945) (8,996) (4,736)
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.
16
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 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 62% and 57% of the Company's net sales in fiscal
2002 and fiscal 2003, respectively.
The Company's cost of sales consists primarily of purchases from
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 five 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.
The Company significantly reduced its loss from operations in fiscal
2003 notwithstanding a significant decrease in net sales. This was due to
continued reductions in expenses and an increase in gross margin due primarily
to fewer close out sales and markdowns, a general firming of prices to
independent optical retailers and the lack of discontinuation of any product
lines in fiscal 2003.
2003 RECAPITALIZATION
The Company completed a recapitalization in April 2003 that
materially impacted its financial condition. The key elements of the
recapitalization and certain other material transactions in fiscal 2003 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.
17
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 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 $72,500 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.
18
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 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 the Company
continues to have a stockholders' deficit, the Company believes that for at
least through fiscal 2004, 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 that it believes is standard
in the optical industry and is followed by most of its competitors. Under that
policy, the Company generally accepts returns of non-discontinued product for
credit, upon presentment and without charge, and as a general policy the Company
does not make cash refunds. 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.
19
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 eyeglass 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,
------------------------------------------
2001 2002 2003
---------- ---------- ----------
Net sales....................................... 100.0% 100.0% 100.0%
Cost of sales................................... 49.5 46.7 35.0
---------- ---------- ----------
Gross profit.................................... 50.5 53.3 65.0
---------- ---------- ----------
Operating expenses:
Selling....................................... 33.1 28.5 32.0
General and administrative.................... 33.9 35.2 37.0
Asset impairment charges...................... 11.3 -- --
---------- ---------- ----------
Total operating expenses.................... 78.2 63.7 69.0
---------- ---------- ----------
Income (Loss) from operations................... (27.7) (10.4) (4.0)
Other income (expense), net..................... (3.1) (2.0) 1.0
---------- ---------- ----------
Loss before provision for (benefit from)
income taxes and gain on extraordinary items.. (30.8) (12.4) (3.0)
Provision for (benefit from) income taxes....... 0.1 0.0 0.0
---------- ---------- ----------
Loss before gain on extraordinary item.......... (30.7) (12.4) (3.0)
Extraordinary gain on extinguishment of debt.... 0.0 0.0 17.0
---------- ---------- ----------
Net income (loss)............................... (30.7)% (12.4)% 14.0%
========== ========== ==========
COMPARISON OF FISCAL YEARS 2001, 2002 AND 2003
NET SALES. Net sales were $24.4 million in fiscal 2003 compared to
$33.1 million in fiscal 2002 and $43.4 million in fiscal 2001. The following
table shows certain information regarding net sales for the periods indicated:
YEAR ENDED OCTOBER 31,
---------------------------------------------------------------
2001 2002 2003
------------------- ------------------- -------------------
(in thousands)
Laura Ashley Eyewear....... $13,968 32.2% $11,430 34.5% $7,811 32.0%
Eddie Bauer Eyewear........ 11,889 27.4 9,147 27.6 5,848 23.9
Nicole Miller Eyewear...... 5,273 12.2 4,950 14.9 3,901 15.6
Other...................... 12,262 28.2 7,594 22.9 6,980 28.5
------------------- ------------------- -------------------
$43,392 100.0% $33,121 100.0% $24,420 100.0%
=================== =================== ===================
20
Net sales declined 26.3% in fiscal 2003 and 23.7% in fiscal 2002 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 sale of the USA Optical product line in fiscal 2002.
Net sales reflect gross sales less a reserve for product returns
established by the Company. The Company's product returns for fiscal years 2001,
2002 and 2003 amounted to 23%, 22% 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 $15.9 million in
fiscal 2003 compared to $17.7 million in fiscal 2002 and $21.9 million in fiscal
2001. These decreases were due primarily to lower net sales.
The gross margin was 65.2% in fiscal 2003 compared to 53.3% in
fiscal 2002 and 50.5% in fiscal 2001. The increase in fiscal 2003 was due to
fewer close out sales and markdowns, a general firming of prices to independent
optical retailers and the lack of discontinuation of any product lines in fiscal
2003. The increase in fiscal 2002 was due to fewer close out sales and lower
inventory write-downs.
SELLING EXPENSES. Selling expenses were $7.9 million in fiscal 2003
compared to $9.4 million in fiscal 2003 and $14.3 million in fiscal 2001. The
16.7% decrease in fiscal 2003 was due to a decreases of $0.8 million in salaries
due to fewer sales personnel, $0.6 million in premium expense due to the sale of
USA Optical, and $0.5 million in advertising tied to lower net sales, offset by
increase of $0.3 million in promotions expense and $0.3 million in royalty
expense due to increases in minimum royalties. 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.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses were $8.4 million in fiscal 2003 compared to $11.2 million in fiscal
2002 and $14.7 million in fiscal 2001. The 24.8% decrease in fiscal 2003 was due
to decreases of $1.3 million in salaries, $0.8 million in operating lease
expenses, $0.4 million in bad debt expense and $0.3 million in bank charges. 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.
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 (LOSS), NET. In fiscal 2003, the Company recognized net
sundry income of $0.7 million in connection with the write-offs of Dakota Smith
trademark cost in connection with the sale/license back of the trademark in
February 2003. Interest expense decreased in fiscal 2003 and fiscal 2002 due to
reductions in debt.
EXTRAORDINARY GAIN. The Company recognized a gain of $4.1 million in
fiscal 2003 resulting from the extinguishment of debt in connection with the
recapitalization.
PROVISION (BENEFIT) FOR INCOME TAXES. The Company paid income taxes
of $27,000 in fiscal 2001, had a small tax benefit in fiscal 2002 and paid
$10,000 in income taxes in fiscal 2003. As of October 31, 2003 the Company had
net operating loss carryforwards for federal and state income tax purposes of
approximately $14.3 million and $6.3 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. During fiscal 2003, net operating losses were reduced by
the non-taxable gain on extinguishment of debt of $4.1 million.
21
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company's accounts receivable (net of allowance for doubtful
accounts) decreased from $3.1 million at October 31, 2002 to $2.3 million at
October 31, 2003 due to lower net sales.
The Company's inventories (net of obsolescence reserve) increased
from $5.5 million at October 31, 2002 to $6.0 million at October 31, 2003 due to
the $1.2 million reduction in the reserve for obsolete inventory offset in part
by a $0.6 million increase in gross inventory.
The Company's long-term debt at October 31, 2003 included
principally its credit facilities with HLIC and Bluebird and a commercial bank
loan the proceeds of which were used to purchase its computer system and related
equipment. See "2003 Recapitalization" and Notes 5 and 6 of Notes to
Consolidated Financial Statements.
In December 2003 the Company obtained an unsecured term loan in the
amount of $350,000 from an unaffiliated third party. The loan bears interest at
the rate of 3% per annum, is payable in monthly installments of $50,000
commencing April 2004 with the balance due and payable on October 29, 2004.
In January 2004 the Company obtained an additional secured loan from
HLIC in the amount of $153,000. This loan bears interest at a rate of 12% per
annum and is due and payable on May 31, 2004.
Of the Company's accounts payable at October 31, 2002 and October
31, 2003, $1.2 million and $1.1 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, 2003. See Note 3 of Notes to Consolidated
Financial Statements.
The Company's bad debt write-offs, net of recoveries, were $175,000,
$403,000 and $33,000 in fiscal years 2001, 2002 and 2003, 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.
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 in April 2003 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. At
October 31, 2003, the Company had working capital of $0.6 million as compared to
negative working capital of $9.4 million at October 31, 2002. Operating
activities used $1.3 million during fiscal 2003, while investing activities
provided $0.6 million, due to the $0.6 million gain on the sale of the Dakota
Smith trademark and inventory. An additional $0.3 million was provided by
financing activities.
The Company believes that at least through fiscal 2004, assuming
there are no unanticipated material adverse developments, no material decrease
in revenues and continued compliance with its credit facilities, its cash flows
from operations and through credit facilities will be sufficient to enable the
Company to pay its debts and obligations as they mature. The Company will
benefit in fiscal 2004 from expense reductions through reduced number of
employees and other expenses undertaken in fiscal 2003 and the first quarter of
fiscal 2004. 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.
22
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.
The following table sets forth certain unaudited results of
operations for the twelve fiscal quarters ended October 31, 2003. 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.
2001 2002 2003
in thousands 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........... $10,889 $11,470 $11,822 $9,211 $8,522 $8,806 $8,188 $7,605 $7,243 $5,776 $6,302 $5,099
Cost of sales....... 3,761 4,428 4,657 8,626 3,334 3,937 3,666 4,531 2,911 1,836 2,301 1,451
Gross profit ....... 7,128 7,042 7,165 585 5,187 4,869 4,522 3,074 4,332 3,940 4,001 3,648
Operating expenses:
Selling ........... 3,291 3,343 2,664 5,045 2,391 2,450 2,084 2,460 1,961 1,838 2,158 1,903
General and
administrative... 3,381 3,146 4,013 4,166 3,000 2,892 3,031 2,623 2,459 2,443 2,032 1,959
Asset impairment... -- -- -- 4,892 -- -- -- -- -- -- -- --
Total operating
expenses .......... 6,672 6,488 6,677 14,105 5,392 5,502 5,115 5,083 4,450 4,281 4,190 3,862
Income (loss) from
operations ........ 456 554 488 (13,520) (205) (632) (592) (2,009) (118) (341) (189) (214)
Other income
(expense), net .... (352) (325) (329) (332) (186) (148) (184) (160) (96) 617 (150) (134)
Income (loss) before
provision for
income taxes and
extraordinary
item.............. 104 229 159 (13,852) (390) (780) (776) (2,169) (214) 276 (339) (348)
Extraordinary gain -- -- -- -- -- -- -- -- -- 4,144 (45) --
INFLATION
The Company does not believe its business and operations have been
materially affected by inflation.
NEW ACCOUNTING PRONOUNCEMENTS
In November 2002, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." In the course of business, the Company has contractual guarantees in
the form of warranties. However, these warranties are limited and do not
represent significant commitments or contingent liabilities of the indebtedness
of others. This pronouncement is effective for financial statements issued after
December 15, 2002 and is not expected to have a material impact on the Company's
financial statements.
23
In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidated Financial Statements." This pronouncement requires the
consolidation of variable interest entities, as defined, and is effective
immediately for variable interest entities created after January 31, 2003, and
for variable interest entities in which an enterprise obtains an interest after
that date. The Company does not have any variable interest entities, and,
therefore, this interpretation is not expected to have a material impact on the
Company's financial statements.
FACTORS THAT MAY AFFECT FUTURE RESULTS
NEED TO INCREASE REVENUES AND TO RETURN TO PROFITABILITY;
SHAREHOLDERS' DEFICIT
The Company suffered material operating losses in its last four
fiscal years, causing a significant deterioration in its financial condition. At
October 31, 2003, the Company's stockholders' deficit was $4.7 million. 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 62% and 57% of the Company's net sales in fiscal years 2002 and 2003,
respectively. While the Company intends to continue reducing its dependence on
the Laura Ashley Eyewear and Eddie Bauer Eyewear lines through the development
and promotion of Nicole Miller Eyewear, Dakota Smith Eyewear, bebe eyes and its
Signature line, the Company expects the Laura Ashley and Eddie Bauer Eyewear
lines to continue to be the Company's leading sources of revenue for the near
future. The Laura Ashley license is automatically renewed 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 years ended January 2003 and 2004, 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 Spiegel, Inc and other affiliates, have filed
voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy
Code. As
24
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 35% and 30% of
net sales in fiscal years 2002 and 2003, respectively. Net sales to EyeCare
Centers of America in fiscal 2002 and fiscal 2003 amounted to 13% and 11% 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
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.
PRODUCT RETURNS
The Company has a product return policy that it believes is standard
in the optical industry and is followed by its competitors. Under that policy,
the Company generally accepts returns of non-discontinued product for credit,
upon presentment and without charge, and as a general policy the Company does
not make cash refunds. The Company's product returns for fiscal years 2002 and
2003 amounted to 22% 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 that 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.
25
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 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. and Marcolin 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.
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 January 31, 2004, the directors and executive officers of the
Company owned beneficially approximately 45% 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.
26
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 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, 2003, the Company had an accumulated deficit of
$20.0 million. As a result, the Company will not be able to pay cash 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 2003, at any month-end a
maximum of $1.2 million and a minimum of $0.6 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, 2003.
International sales accounted for approximately 15% of the Company's
net sales in fiscal 2003. 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
October 31, 2003 had fixed interest rates. See Management's Discussion and
Analysis of Financial Condition and Results of Operations." Accordingly, the
Company does not believe it is subject to material interest rate risk.
27
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.
28
ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
29
SIGNATURE EYEWEAR, INC.
CONTENTS
OCTOBER 31, 2003
- --------------------------------------------------------------------------------
Page
INDEPENDENT AUDITOR'S REPORTS 31
FINANCIAL STATEMENTS
Balance Sheets 33
Statements of Operations 35
Statements of Shareholders' Deficit 37
Statements of Cash Flows 39
Notes to Financial Statements 40
SUPPLEMENTAL INFORMATION
Independent Auditor's Reports on Financial Statement Schedule 65
Valuation and Qualifying Accounts - Schedule II 66
30
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Signature Eyewear, Inc.
We have audited the accompanying consolidated statements of operations, changes
in stockholders' deficit and cash flows for Signature Eyewear, Inc. and
Subsidiary for the year 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 audit.
We conducted our audit 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 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 results of operations and cash flows of
Signature Eyewear, Inc. for the year 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)
31
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
Signature Eyewear, Inc. and subsidiary
Inglewood, California
We have audited the accompanying consolidated balance sheets of Signature
Eyewear, Inc. and subsidiary as of October 31, 2003 and 2002, and the related
consolidated statements of operations, shareholders' deficit, and cash flows for
the years 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 audits.
We conducted our audits 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 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, 2003 and 2002, and the results of their
operations and their cash flows for the years 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
January 23, 2004
32
SIGNATURE EYEWEAR, INC.
BALANCE SHEETS
OCTOBER 31,
================================================================================
ASSETS
2003 2002
------------ ------------
CURRENT ASSETS
Cash and cash equivalents, including restricted cash of
$340,567 and $127,946 $ 663,251 $ 1,077,388
Accounts receivable - trade, net of allowance for
doubtful accounts of $503,490 and $543,884 2,281,255 3,142,949
Inventories, net of reserves for obsolete inventories
of $1,506,007 and $2,799,940 5,955,253 5,514,702
Income taxes refundable -- 2,704
Promotional products and materials 9,425 87,912
Prepaid expenses and other current assets 19,293 49,862
------------ ------------
Total current assets 8,928,477 9,875,517
PROPERTY AND EQUIPMENT, net 1,354,362 1,825,085
TRADEMARK, net of accumulated amortization of $0 and $16,882 -- 130,897
DEPOSITS AND OTHER ASSETS 115,055 112,706
------------ ------------
TOTAL ASSETS $ 10,397,894 $ 11,944,205
============ ============
The accompanying notes are an integral part of these financial statements.
33
SIGNATURE EYEWEAR, INC.
BALANCE SHEETS
OCTOBER 31,
================================================================================
LIABILITIES AND SHAREHOLDERS' DEFICIT
2003 2002
------------ ------------
CURRENT LIABILITIES
Accounts payable - trade $ 5,367,576 $ 7,108,449
Accrued expenses and other current liabilities 1,722,825 1,980,003
Reserve for customer returns 619,460 2,286,934
Lines of credit -- 2,317,134
Current portion of long-term debt 550,748 5,533,149
------------ ------------
Total current liabilities 8,260,609 19,225,669
LONG-TERM DEBT, net of current portion 6,873,535 1,714,981
------------ ------------
Total liabilities 15,134,144 20,940,650
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIT
Preferred stock, $0.001 par value
5,000,000 shares authorized
Series A 2% convertible preferred stock, $0.001
par value;
1,360,000 shares authorized
1,200,000 and 0 shares issued and outstanding 1,200 --
Common stock, $0.001 par value
30,000,000 shares authorized
5,976,889 and 5,556,889 shares issued and outstanding 5,977 5,557
Additional paid-in capital 15,236,041 14,432,621
Accumulated deficit (19,979,468) (23,434,623)
------------ ------------
Total shareholders' deficit (4,736,250) (8,996,445)
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 10,397,894 $ 11,944,205
============ ============
The accompanying notes are an integral part of these financial statements.
34
SIGNATURE EYEWEAR, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED OCTOBER 31,
================================================================================
2003 2002 2001
------------ ------------ ------------
NET SALES $ 24,420,014 $ 33,121,431 $ 43,392,022
COST OF SALES 8,498,768 15,468,265 21,472,353
------------ ------------ ------------
GROSS PROFIT 15,921,246 17,653,166 21,919,669
------------ ------------ ------------
OPERATING EXPENSES
Selling 7,860,058 9,435,084 14,344,093
General and administrative 8,437,158 11,220,753 13,651,522
Depreciation and amortization 486,031 435,984 1,054,867
Impairment of assets -- -- 4,891,459
------------ ------------ ------------
Total operating expenses 16,783,247 21,091,821 33,941,941
------------ ------------ ------------
LOSS FROM OPERATIONS (862,001) (3,438,655) (12,022,272)
------------ ------------ ------------
OTHER INCOME (EXPENSE)
Sundry income (expense) 209,330 18,514 (35,461)
Gain on sale of trademark 469,103 -- --
Interest expense, net (441,472) (696,455) (1,302,673)
------------ ------------ ------------
Total other income (expense) 236,961 (677,941) (1,338,134)
------------ ------------ ------------
LOSS BEFORE PROVISION FOR (BENEFIT FROM)
INCOME TAXES AND EXTRAORDINARY ITEM (625,040) (4,116,596) (13,360,406)
PROVISION FOR (BENEFIT FROM) INCOME TAXES 10,492 (987) 26,902
------------ ------------ ------------
LOSS BEFORE EXTRAORDINARY ITEM (635,532) (4,115,609) (13,387,308)
EXTRAORDINARY ITEM
Gain on extinguishment of debt, net 4,098,687 -- --
------------ ------------ ------------
NET INCOME (LOSS) 3,463,155 (4,115,609) (13,387,308)
PREFERRED STOCK DIVIDENDS (8,000) -- --
------------ ------------ ------------
NET INCOME (LOSS) AVAILABLE TO COMMON STOCK
SHAREHOLDERS $ 3,455,155 $ (4,115,609) $(13,387,308)
============ ============ ============
The accompanying notes are an integral part of these financial statements.
35
SIGNATURE EYEWEAR, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED OCTOBER 31,
================================================================================
2003 2002 2001
------------ ------------ ------------
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE
Before extraordinary item $ (0.11) $ (0.75) $ (2.65)
Extraordinary item 0.71 -- --
------------ ------------ ------------
TOTAL BASIC AND DILUTED EARNINGS
(LOSS) PER SHARE $ 0.60 $ (0.75) $ (2.65)
============ ============ ============
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING 5,780,122 5,488,396 5,056,889
============ ============ ============
The accompanying notes are an integral part of these financial statements.
36
SIGNATURE EYEWEAR, INC.
STATEMENTS OF SHAREHOLDERS' DEFICIT
FOR THE YEARS ENDED OCTOBER 31,
================================================================================
SERIES A 2% CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
--------------------------- --------------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
------------ ------------ ------------ ------------ ------------ ------------ ------------
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)
ISSUANCE OF COMMON STOCK
AS COMPENSATION 420,000 420 4,620 5,040
ISSUANCE OF PREFERRED
STOCK IN CONJUNCTION
WITH BLUEBIRD FINANCING 1,200,000 1,200 798,800 800,000
PREFERRED STOCK DIVIDENDS (8,000) (8,000)
NET LOSS 3,463,155 3,463,155
------------ ------------ ------------ ------------ ------------ ------------ ------------
BALANCE, OCTOBER 31, 2003 1,200,000 $ 1,200 5,976,889 $ 5,977 $ 15,236,041 $(19,979,468) $ (4,736,250)
============ ============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
37
SIGNATURE EYEWEAR, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31,
================================================================================
2003 2002 2001
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 3,455,155 $ (4,115,609) $(13,387,308)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities
Stock to be issued as compensation 5,040 -- --
Depreciation and amortization 486,029 435,986 1,068,117
Provision for bad debts 52,412 432,224 434,090
Provision for inventory write down 159,018 2,066,213 2,973,202
Loss on disposal of property and equipment -- -- 61,922
Impairment of assets -- -- 4,891,459
Gain on extinguishment of debt (4,098,687) -- --
Gain on sale of trademark (469,103) -- --
(Increase) decrease in Accounts receivable - trade 809,282 1,554,287 3,180,704
Inventories, net of effect of sale of Smith
Dakota and USA Optical (599,569) 2,247,449 5,440,611
Income taxes refundable 2,704 107,296 1,152,154
Promotional products and materials 78,487 76,636 1,917,686
Prepaid expenses and other current assets 30,569 (40,910) 178,374
Deposits and other assets (2,348) 21,066 219,616
Increase (decrease) in Accounts payable - trade 557,127 (3,256,946) (4,608,004)
Accrued expenses and other current liabilities (80,027) (592,698) (709,974)
Reserve for customer returns (1,667,474) 2,172,354 (210,420)
------------ ------------ ------------
Net cash provided by (used in) operating activities (1,281,385) 1,107,348 2,602,229
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (15,306) (54,988) (73,081)
Cash received from sale of trademark 600,000 -- --
Cash received from sale of USA Optical -- 500,000 --
------------ ------------ ------------
Net cash provided by (used in) investing activities 584,694 445,012 (73,081)
------------ ------------ ------------
The accompanying notes are an integral part of these financial statements.
38
SIGNATURE EYEWEAR, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31,
================================================================================
2003 2002 2001
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net payments on lines of credit $ (2,317,134) $ (911,224) $ (1,771,642)
Payments on long-term debt (5,000,312) (1,093,480) (1,174,461)
Borrowings on long-term debt 6,800,000 86,236 --
Proceeds from sale of preferred stock 800,000 -- --
------------ ------------ ------------
Net cash provided by (used in) financing activities 282,554 (1,918,468) (2,946,103)
------------ ------------ ------------
Net decrease in cash and cash equivalents (414,137) (366,108) (416,955)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,077,388 1,443,496 1,860,451
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 663,251 $ 1,077,388 $ 1,443,496
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
INTEREST PAID $ 365,939 $ 541,173 $ 1,139,766
============ ============ ============
INCOME TAXES PAID (REFUNDED) $ 77,721 $ (108,283) $ 56,160
============ ============ ============
The accompanying notes are an integral part of these financial statements.
39
SIGNATURE EYEWEAR, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31,
- --------------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES
During the year ended October 31, 2003, the Company
o recorded compensation expense related to the granting of 420,000 shares of
common stock to the Company's Chief Executive Officer as per his employment
agreement (see Note 7).
o cash flow from operations and financing activities exclude the effect of a
gain on extinguishment of debt, accounts payable - trade, and accrued
expenses and other current liabilities in the amount of $4,098,687.
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 ("GWO") 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.
The accompanying notes are an integral part of these financial statements.
40
SIGNATURE EYEWEAR, INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND LINE OF BUSINESS
General
- -------
Signature Eyewear, Inc. (the "Company") designs, markets, and distributes
eyeglass frames throughout the United States and internationally. Primary
operations are conducted from leased premises in Inglewood, California, with a
warehouse and sales office in Belgium.
Going Concern
- -------------
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplate continuation of the Company as a going concern. During the years
ended October 31, 2003, 2002 and 2001, the Company had recurring losses in the
amount of $635,532 (before gain on extraordinary item), $4,115,609, and
$13,387,308, respectively. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Liquidity
- ---------
At October 31, 2003, the Company had a net working capital of approximately
$417,000 as compared with a negative working capital of $9,350,000 at October
31, 2002, representing an increase of $9,767,000. This increase is due mostly to
the recapitalization the Company completed in April 2003 (see Note 2). Operating
activities used approximately $1,281,000 during 2003. Additionally, the
investing activities provided $334,000 mostly due to the gain on a sale of
trademark of $600,000 which was partially offset by investment in a $250,000
debenture required by a lender and purchase of property and equipment. In
addition, approximately $282,000 was provided by financing activities.
The Company has a $3,500,000 credit facility with a lender comprising of
$3,000,000 term note payable and $500,000 revolving line of credit, expiring in
April 2008. Such facility is collateralized by eligible accounts receivable and
inventories (see Note 5).
The Company also has a $4,150,000 credit facility with another lender. This
facility is collateralized by assets of the Company (see Note 5).
Subsequent to October 31, 2003, the Company obtained two additional loans in the
total amount of $503,000 (see Note 14).
During the year ended October 31, 2003, the Company reduced its headcount and
aggressively reduced general and administrative expenses. The Company
anticipates realizing the full impact of expense reductions in 2004.
Additionally, the Company improved its credit and collections function and
worked with its vendors to extend payment terms wherever possible. The Company's
business plan for 2004 provides for positive cash generation from operations.
The Company will continue to search for areas in which to further reduce
expenses and increase sales.
41
SIGNATURE EYEWEAR, INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND LINE OF BUSINESS (CONTINUED)
Liquidity (Continued)
- ---------------------
The Company cannot guarantee that the timing of further reductions in operating
expenses will be adequate to return to profitability for 2004 and beyond.
Management believes that these plans will provide adequate financial resources
to sustain the Company's operations and enable the Company to continue as a
going concern.
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, 2003 was not
significant. As such, a gain or loss has not been recorded on the accompanying
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 seller until the aggregate
savings with respect to such purchases equaled the total amount of Earned and
Pending Premium Obligations, as defined. As of October 31, 2002, this was
satisfied in full.
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.
Sale of Stock by Principal Shareholder
- --------------------------------------
In April 2003, the Weiss Family Trust, the then 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 of Manhattan ("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 October 31, 2003. Dartmouth
Commerce has agreed with Bluebird Finance Limited ("Bluebird") (see Note 5) that
until April 2008, it will not sell or transfer any of these shares without
Bluebird's prior consent.
42
SIGNATURE EYEWEAR, INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2003
- --------------------------------------------------------------------------------
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
capital structure. As a result, the Company recognized a gain on extinguishment
of debt of $4,098,687, net of related expense of $233,848. This gain has been
recorded as an extraordinary item in the financial statements. Income taxes are
not allocable to this gain as the Company has net operating losses to offset
this gain.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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. 104, "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. 104, product revenue is deferred until
the conditions are met, net of an estimate for cost of sales. For the years
ended October 31, 2003, 2002, and 2001, the Company had sales returns totaling
$6,683,346, $9,326,467, and $12,277,661, 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, 2003, 2002, and 2001, 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.
43
SIGNATURE EYEWEAR, INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accounts Receivable
- -------------------
Customer credit balances, which result due to customer returns, are reclassified
as a liability on the balance sheets and are described as a reserve for customer
returns.
Inventories
- -----------
Inventories at October 31, 2003 and 2002 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.
The Company regularly and periodically evaluates its inventories for
obsolescence based on current market trends, product history, and turnover. As
of October 31, 2003 and 2002, the Company has recorded a reserve for obsolete
inventory of $1,506,007 and $2,799,940, 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 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 was recorded at cost, less accumulated amortization.
Amortization was provided using the straight-line method over the estimated
useful life of the trademark of 20 years. As of November 1, 2002, the Company
adopted SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142
prohibits the amortization of goodwill and other intangible assets, but requires
that it be reviewed for impairment at least annually. During the year ended
October 31, 2003, the Company sold all of its rights to the trademark (see Note
7). Amortization expense was $0, $147,779, and $435,811 for the years ended
October 31, 2003, 2002, and 2001, respectively.
44
SIGNATURE EYEWEAR, INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
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 options and warrants are anti-dilutive,
basic and diluted loss per share are the same.
45
SIGNATURE EYEWEAR, INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2003
- --------------------------------------------------------------------------------
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, 2003, 2002, and 2001
because the effect would have been anti-dilutive:
2003 2002 2001
--------- --------- ---------
Stock options 217,800 367,300 457,500
Warrants 150,000 50,000 230,000
--------- --------- ---------
TOTAL 367,800 417,300 687,500
========= ========= =========
Advertising Expense
- -------------------
The Company expenses all advertising costs as they are incurred. Advertising
expense for the years ended October 31, 2003, 2002, and 2001 amounted to
$595,541, $1,072,213, and $886,890, 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
- ----------------------------
The Company's Belgium branch's functional currency is the Euro. Assets and
liabilities are translated at exchange rates in effect at the balance sheet
date. Income and expense accounts are translated at average rates. The Company
did not have any significant translation adjustments. In addition, some of the
Company's liabilities are denominated in foreign currencies. Such liabilities
are converted into U.S. Dollars at the exchange rate prevailing at the balance
sheet date. The resulting gains or losses are reflected in the income statement.
During the year such gains or losses were immaterial.
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.
46
SIGNATURE EYEWEAR, INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 11%, 12%, and 12% of net
sales during the years ended October 31, 2003, 2002, and 2001, respectively.
Reclassifications
- -----------------
Certain amounts included in the prior years' financial statements have been
reclassified to conform to the current year presentation. Such reclassifications
did not have any effect on reported net income (loss) and are immaterial to the
financial statements as a whole.
Recently Issued Accounting Pronouncements
- -----------------------------------------
In November 2002, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others." In the
course of business the Company has contractual guarantees in the form of
warranties. However, these warranties are limited and do not represent
significant commitments or contingent liabilities of the indebtedness of others.
This pronouncement is effective for financial statements issued after December
15, 2002 and is not expected to have a material impact on the Company's
financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities," an interpretation of Accounting Research Bulletin
No. 51, "Consolidated Financial Statements." This pronouncement requires the
consolidation of variable interest entities, as defined, and is effective
immediately for variable interest entities created after January 31, 2003, and
for variable interest entities in which an enterprise obtains an interest after
that date. The Company does not have any variable interest entities, and
therefore, this interpretation is not expected to have a material impact on the
Company's financial statements.
47
SIGNATURE EYEWEAR, INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment at October 31, 2003 and 2002 consisted of the following:
2003 2002
----------- -----------
Office furniture and equipment $ 912,756 $ 912,756
Computer equipment 1,497,096 1,472,556
Software 1,123,340 1,121,288
Machinery and equipment 429,394 440,680
Machinery and equipment held under capital
lease agreements 294,609 294,609
Leasehold improvements 1,195,190 1,195,190
----------- -----------
5,452,385 5,437,079
Less accumulated depreciation and amortization
(including accumulated depreciation and
amortization of $272,563 in 2003 and $231,022 in
2002 for equipment under capital
lease agreements) 4,098,023 3,611,994
----------- -----------
TOTAL $ 1,354,362 $ 1,825,085
=========== ===========
Depreciation and amortization expense was $486,029, $435,986, and $632,306 for
the years ended October 31, 2003, 2002, and 2001, respectively, (including
depreciation expense of $41,959, $98,850, and $106,047, respectively, on
machinery and equipment held under capital leases).
NOTE 5 - CREDIT FACILITIES
Line of Credit
- --------------
The Company had a credit facility with a commercial bank, consisting of an
accounts receivable and inventory revolving credit line and a term note payable,
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.
48
SIGNATURE EYEWEAR, INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 5 - CREDIT FACILITIES (CONTINUED)
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 was 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. The outstanding amount on the line of credit at October 31,
2002 was $2,317,134. The credit facility was repaid in April 2003.
Home Loan Investment Company ("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.
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
was 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 are vested,
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 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, and every three months
thereafter, and is due and payable in April 2013.
49
SIGNATURE EYEWEAR, INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 5 - CREDIT FACILITIES (CONTINUED)
Bluebird Credit Facility (Continued)
- ------------------------------------
Bluebird's loan commitment will be reduced by $72,500 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.
NOTE 6 - LONG-TERM DEBT
Long-term debt at October 31, 2003 and 2002 consisted of the following:
2003 2002
----------- -----------
Term note payable to HLIC in the original amount of
$3,000,000, secured by the assets of the Company,
a letter of credit in the amount of $1,250,000 and
a $250,000 debenture issued by HLIC; interest rate
at 10% per annum, requires interest payments only
for the first 12 months and monthly installments
of principal and interest based on a 10-year
amortization schedule and
it is due in April 2008. $ 3,000,000 $ --
Revolving line of credit from HLIC in the amount of
$500,000, secured by the collateral securing the
HLIC term note, bearing an interest of 1% per
month on the outstanding balance and it is
due in April 2008. 500,000 --
Term note payable to Bluebird in the original amount of
$2,900,000, secured by the assets of the Company
(subordinated to the HLIC credit facility),
bearing an interest at 5% per annum, and payable
in quarterly installments of $72,500,
commencing in July 2005. 2,900,000 --
Term note in the original amount of $400,000, secured
by certain inventory, payable without interest in
monthly installments
of $30,000 through March 2004. 190,000 --
50
SIGNATURE EYEWEAR, INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 6 - LONG-TERM DEBT (CONTINUED)
2003 2002
----------- -----------
Term note payable to commercial 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. $ -- $ ,895,856
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. -- 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. 72,374 112,541
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.
66,834 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 (see Note 7). -- 938,258
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. -- 104,876
51
SIGNATURE EYEWEAR, INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 6 - LONG-TERM DEBT (CONTINUED)
2003 2002
----------- -----------
Note payable to commercial bank in the original amount
of $750,000, secured by certain property and
equipment, 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 (see Note 7). $ 660,700 $ 750,000
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. 34,375 149,903
----------- -----------
7,424,283 7,248,130
Less current portion 550,748 5,533,149
----------- -----------
LONG-TERM PORTION $ 6,873,535 $ 1,714,981
=========== ===========
Future maturities of long-term debt at October 31, 2003 were as follows:
Year Ending
October 31,
-----------
2004 $ 550,748
2005 536,349
2006 655,477
2007 685,729
2008 3,110,980
Thereafter 1,885,000
-----------
TOTAL $ 7,424,283
===========
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 $79,499. 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.
52
SIGNATURE EYEWEAR, INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2003
- --------------------------------------------------------------------------------
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 $212,160 in rental income during
the year ended October 31, 2003 and is scheduled to receive rental income of
$218,400 during the year ending October 31, 2004. 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 extended the term of the sublease from November 1, 2003 through
May 31, 2005 at a base rent of $18,200 per month.
Future minimum lease payments under this non-cancelable operating lease
obligation at October 31, 2003 were as follows:
Year Ending
October 31,
-----------
2004 $ 953,982
2005 556,490
-----------
TOTAL $ 1,510,472
===========
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 $738,406, $741,488, and $708,226 for
the years ended October 31, 2003, 2002, and 2001, respectively. Lease expense
with respect to the warehouse upgrades and computer system was $41,454,
$829,084, and $1,221,861 for the years ended October 31, 2003, 2002, and 2001,
respectively.
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.
53
SIGNATURE EYEWEAR, INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Employment Agreement (Continued)
- --------------------------------
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.
Consulting Agreements
- ---------------------
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 varying monthly installments ranging from $5,000 to
$20,000 through March 2007, and $8,000 in April 2007. Total minimum payments
under this consulting obligation at October 31, 2003 were as follows:
Year Ending
October 31,
2004 $ 130,000
2005 210,000
2006 240,000
2007 108,000
-----------
TOTAL $ 688,000
===========
Total fees paid for this consulting obligation for the years ended October 31,
2003, 2002, and 2001 amounted to $54,000, $66,000, and $63,000, respectively.
54
SIGNATURE EYEWEAR, INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Consulting Agreements (Continued)
- ---------------------------------
In April 2003, the Company entered into a three-year consulting agreement with
Dartmouth Commerce in connection with the Company's recapitalization and the
appointment of Richard M. Torre as Chairman of the Board. Mr. Torre owns
Dartmouth Commerce. This agreement provides for an annual compensation in the
amount of $55,000 per year. Total consulting fees paid under this agreement
during the year ended October 31, 2003 were $27,500.
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. Total consulting fees paid under this agreement during the year
ended October 31, 2003 were $6,667.
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 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.
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 eyewear products. The
license period extends through December 31, 2005 and may be renewed for
three-year terms in perpetuity provided that specified minimum sales are
achieved and the Company is not in default under the license agreement.
The Company has a license agreement with Eddie Bauer Diversified Sales LLC,
which grants the Company certain rights to use the "Eddie Bauer" trademark in
connection with the distribution, marketing and sale of eyewear products. The
license period extends 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, 2006 and can be renewed for an additional three-year
term provided the Company is in compliance with the license agreements.
55
SIGNATURE EYEWEAR, INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
License Agreements (Continued)
- ------------------------------
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, 2006. The Company's license for bebe
eyes provides that bebe stores 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 October
2003, bebe had not notified the Company that it seeks to terminate the license.
Total minimum royalties payable under all of the Company's license agreements at
October 31, 2003 were follows:
Year Ending
October 31,
2004 $ 2,556,454
2005 2,845,000
2006 1,501,667
2007 837,500
2008 212,500
-----------
TOTAL $ 7,953,121
===========
Total royalty expense charged to operations for the years ended October 31,
2003, 2002, and 2001 amounted to $2,456,292, $2,160,725, $2,286,267,
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, 2003, 2002, and 2001.
56
SIGNATURE EYEWEAR, INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 and the promissory
note given as part of the purchase price for $938,258 at October 31, 2002. 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
resulted in the Company recording a gain of $526,487 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.
Lawsuits
- --------
The Company is a defendant in one lawsuit. While the outcome of this lawsuit is
unknown, management does not believe it would result in significant additional
liability to the Company. A reserve has not been booked at October 31, 2003.
NOTE 8 - SHAREHOLDERS' DEFICIT
General
- -------
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.
57
SIGNATURE EYEWEAR, INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 8 - SHAREHOLDERS' DEFICIT (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. At October 31, 2003, dividends in arrears were approximately
$8,000.
Common Stock
- ------------
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's 1997 Stock Plan provides for the issuance from time to time of up
to 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,
2003, the Company has issued only stock options under the plan.
58
SIGNATURE EYEWEAR, INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2003
- --------------------------------------------------------------------------------
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, 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
Canceled (149,500) $ 8.25
-----------
OUTSTANDING, OCTOBER 31, 2003 217,800 $ 7.99
===========
EXERCISABLE, OCTOBER 31, 2003 217,800 $ 7.99
===========
The options have a remaining contractual life of four years at October 31, 2003.
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, 2003,
2002, and 2001 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 without being exercised 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.
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.
In April 2003, warrants to purchase 100,000 shares of the Company's common stock
for $0.67 per share were issued to HLIC as a consideration for the credit
facility (see Note 5).
59
SIGNATURE EYEWEAR, INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 8 - SHAREHOLDERS' DEFICIT (CONTINUED)
Warrants (Continued)
The following is a summary of warrants outstanding:
Weighted-
Average
Number Exercise
of Shares Price
----------- -----------
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
Issued 100,000 $ 0.67
-----------
OUTSTANDING, OCTOBER 31, 2003 150,000 $ 4.30
===========
EXERCISABLE, OCTOBER 31, 2003 150,000 $ 4.30
===========
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, 2003 and 2002 consisted of the
following:
2003 2002
----------- -----------
Deferred tax assets
Allowance for doubtful accounts $ 216,000 $ 229,000
Capitalization of inventory costs 38,000 125,000
Inventory reserve 645,000 1,199,000
Sales returns reserve 92,000 479,000
Depreciation and amortization of property
and equipment 2,221,000 2,408,000
Net operating loss carry-forward 5,600,000 5,842,000
Other 72,000 107,000
Valuation allowance (8,399,000) (9,802,000)
----------- -----------
Total deferred tax assets 485,000 587,000
Deferred tax liability
State taxes (485,000) (587,000)
----------- -----------
NET DEFERRED TAXES $ -- $ --
=========== ===========
60
SIGNATURE EYEWEAR, INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 9 - INCOME TAXES (CONTINUED)
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,
2003, 2002, and 2001:
2003 2002 2001
--------- --------- ---------
Current
Federal $ -- $ (4,256) $(110,000)
State 10,492 3,269 136,902
--------- --------- ---------
10,492 (987) 26,902
--------- --------- ---------
Deferred
Federal -- -- --
State -- -- --
--------- --------- ---------
-- -- --
--------- --------- ---------
TOTAL $ 10,492 $ (987) $ 26,902
========= ========= =========
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:
2003 2002 2001
----------- ----------- -----------
Computed income tax benefit at
federal statutory rate $ 1,182,754 $(1,399,643) $(4,542,538)
Increase (decrease) resulting from
State income taxes 308,920 (149,282) (529,072)
Permanent items -- 3,877 40,664
Change in valuation allowance (1,385,915) 1,516,000 5,037,000
Other, net (95,267) 28,061 20,848
----------- ----------- -----------
TOTAL $ 10,492 $ (987) $ 26,902
=========== =========== ===========
As of October 31, 2003, the Company had net operating loss carry-forwards for
federal and state income tax purposes of approximately $14,300,000 and
$6,300,000, respectively. The net operating loss carry-forwards expire through
2022. The utilization of net operating loss carry-forwards may be limited due to
the ownership change, which may have occurred in April 2003, under the
provisions of Internal Revenue Code Section 382 and similar state provisions.
During the year ended October 31, 2003, net operating losses were reduced by a
non-taxable gain on extinguishment of debt of approximately $4,098,000.
61
SIGNATURE EYEWEAR, INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2003
- --------------------------------------------------------------------------------
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 year ended October 31, 2003, the Company
used the plan's forfeitures of $25,112 as matching contributions and contributed
$0, and $157,996, for the years ended October 31, 2002 and 2001, respectively.
NOTE 11 - FOREIGN OPERATIONS
The Company operates a branch in Belgium. The following is a summary of the
Company's foreign operations:
2003 2002
----------- -----------
Balance Sheet
Identifiable assets $ 1,329,080 $ 1,376,455
2003 2002 2001
----------- ----------- -----------
Statement of operations
Net sales $ 1,985,772 $ 2,046,195 $ 2,441,946
Net income (loss) $ 187,479 $ (506,083) $ 53,559
In addition, the Company's United States' operations conducted business in
foreign countries. During the years ended October 31, 2003, 2002, and 2001, such
net sales amounted to $1,643,788, $1,291,565, and $2,168,744, respectively.
NOTE 12 - QUARTERLY INFORMATION (UNAUDITED)
The following tables represent the Company's quarterly data for the years ended
October 31, 2003, 2002, and 2001:
2003
----------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
----------- ----------- ----------- ----------- -----------
Net sales $ 7,243,119 $ 5,775,576 $ 6,302,153 $ 5,099,166 $24,420,014
Gross profit $ 4,332,617 $ 3,939,443 $ 4,001,428 $ 3,647,758 $15,921,246
Net income (loss)
available to
common share-
holders $ (213,363) $ 4,418,598 $ (394,083) $ (355,997) $ 3,455,155
Earnings
(loss) per
share $ (0.04) $ 0.79 $ (0.07) $ (0.06) $ 0.60
62
SIGNATURE EYEWEAR, INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 12 - QUARTERLY INFORMATION (UNAUDITED) (CONTINUED)
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
available
to common
share-
holders $ (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)
available to
common share-
holders $ 103,823 $ 229,031 $ 153,799 $(13,873,962) $(13,387,308)
Earnings
(loss) per
share $ 0.02 $ 0.05 $ 0.03 $ (2.74) $ (2.65)
NOTE 13 - FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of the fiscal year ended October 31, 2003, the Company
recorded the following:
o decreased its inventory reserves by $731,329, which comprised of a
$487,278 adjustment to the net realizable value of slow moving
inventory items to an estimated closeout value of $3 per frame and
$244,051 of reversals of previously reserved obsolete inventory that
was sold during the quarter.
63
SIGNATURE EYEWEAR, INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 13 - FOURTH QUARTER ADJUSTMENTS (CONTINUED)
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
reviewing 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
adjusting 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.
The effects of the adjustments were significant factors for the fourth quarter
results.
NOTE 14 - SUBSEQUENT EVENTS
In December 2003, the Company obtained a loan in the amount of $350,000, bearing
interest at 3% per annum. The loan is payable in seven monthly installments of
$50,000, commencing on April 30, 2004, with interest payable when the last
installment is due on October 29, 2004. Another loan was obtained in January
2004 in the amount of $153,000 at 12% interest per annum. This loan matures on
May 31, 2004, and principal and interest payments are not due until the maturity
date.
64
Independent Auditors' Report on Schedule II
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 for the year ended October 31,
2001. 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
SLGG SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Certified Public Accountants and Management Consultants
www.slgg.com Los Angeles Orange County Ontario
INDEPENDENT AUDITOR'S REPORT
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders
Signature Eyewear, Inc.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The 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 financial statements. This schedule has been subjected
to the auditing procedures applied in our audit of the basic financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.
/s/ SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
- ------------------------------------------
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
January 23, 2004
65
SIGNATURE EYEWEAR, INC.
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, 2003 $ 543,884 $ 52,412 $ (92,806) $ 503,490
============ ============ ============ ============
OCTOBER 31, 2002 $ 574,096 $ 432,224 $ (462,436) $ 543,884
============ ============ ============ ============
OCTOBER 31, 2001 $ 314,839 $ 434,090 $ (174,833) $ 574,096
============ ============ ============ ============
RESERVES FOR OBSOLETE INVENTORIES
OCTOBER 31, 2003 $ 2,799,940 $ 159,018 $ (1,452,951) $ 1,506,007
============ ============ ============ ============
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
============ ============ ============ ============
VALUATION ALLOWANCE FOR DEFERRED
TAX ASSETS
OCTOBER 31, 2003 $ 9,800,000 $ -- $ (1,385,915) $ 8,414,085
============ ============ ============ ============
OCTOBER 31, 2002 $ 8,284,000 $ 1,516,000 $ -- $ 9,800,000
============ ============ ============ ============
OCTOBER 31, 2001 $ 3,247,000 $ 5,037,000 $ -- $ 8,284,000
============ ============ ============ ============
RESERVES FOR CUSTOMER RETURNS
OCTOBER 31, 2003 $ 2,286,934 $ -- $ (1,667,474) $ 619,460
============ ============ ============ ============
OCTOBER 31, 2002 $ 307,500 $ 1,979,434 $ -- $ 2,286,934
============ ============ ============ ============
OCTOBER 31, 2001 $ 285,000 $ 22,500 $ -- $ 307,500
============ ============ ============ ============
66
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.
ITEM 9A -- CONTROLS AND PROCEDURES
The Company's management, with the participation of the 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, as of the
end of the period covered by this report. Based on that evaluation, the Chief
Executive Officer and the Chief Financial Officer believe that the Company's
disclosure controls and procedures reasonably ensure that information required
to be disclosed by the Company in this annual report has been made known to them
in a timely manner.
There was no change in the Company's internal control over financial
reporting during the Company's most recently completed fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
67
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 January 31, 2004:
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
2003. 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
Chief Executive Officer and has served as the Chief Financial
Chief Financial Officer Officer and as a Director of the Company
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.
Jill Gardner 36 Vice President of Design Ms. Gardner joined the Company in 2003
as Vice President of Design. From 2000
to 2003, she was the Creative Director
with Eyespace. From 1995 to 2000, Ms.
Gardner was Director of Product
Development with the Company.
68
NAME AGE POSITION PRINCIPAL OCCUPATION
- --------------------------------------------------------------------------------------------------------------
Raul Khantzis 50 Vice President of Mr. Khantzis joined the Company in 2003
International Sales as Vice President of International
Sales. From 2001 to 2003, he was Vice
President of Domestic Distribution with
Metzler International. During 2001, he
was Director-International Division of
Kenmark Optical, and from 2000 to 2001,
he was Vice President-Sales with LBI.
Mr. Khantzis was Operations Director of
the Company from 1999 to 2000.
Sheptanya Page 39 Director of Human Resources Ms. Page joined the Company as Manager
of Human Resources in 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.
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
Accounts and has served as Vice President of
Corporate Accounts since 2000. She was
appointed to the Management Executive
Committee of the Company in April 2003.
The Board of Directors has an Audit Committee which consists of Ted
Pasternack (chairman), Edward Meltzer and Drew Miller. The Board of Directors
has determined that Ted Pasternack is an "audit committee financial expert" as
defined under the rules and regulations of the Securities and Exchange
Commission, and is "independent" under the definition of "independent director"
under Nasdaq rules.
The Company has adopted a code of ethics that applies to the
Company's Chief Executive Officer and Chief Financial Officer. The Company will
provide a copy of its Code of Ethics to any person without charge upon written
request delivered to Corporate Secretary, Signature Eyewear, 498 North Oak
Street, Inglewood, California 90302.
ITEM 11 -- EXECUTIVE COMPENSATION
The following table sets forth, as to each person who served as
Chief Executive Officer at any time during the last fiscal year, and as to each
of the other persons serving as executive officers as of October 31, 2003 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.
69
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) 2003 $ 22,153 -- -- $ --
Chief Executive Officer 2002 48,000 -- -- 23,273
2001 230,000 -- -- 29,445
- -----------------------------------------------------------------------------------------------------------------------------------
Michael Prince 2003 $228,462 -- -- $18,000
Chief Executive Officer and Chief 2002 215,500 -- -- 25,825
Financial Officer(3) 2001 215,000 25,987
- -----------------------------------------------------------------------------------------------------------------------------------
Robert M. Fried(4) 2003 $215,000 -- -- $18,000
Senior Vice President-Marketing 2002 215,000 -- -- 27,486
2001 215,000 25,825
- -----------------------------------------------------------------------------------------------------------------------------------
Robert A. Zeichick(4) 2003 $215,000 -- -- $18,000
Vice President-Advertising and 2002 215,000 -- -- 27,478
Sales Promotion 2001 215,000 26,180
- -----------------------------------------------------------------------------------------------------------------------------------
Marie Welsch(5) 2003 $150,000 --
Vice President-Corporate Accounts
- -----------------------------------------------------------------------------------------------------------------------------------
Kevin D. Seifert(5) 2003 $118,385 --
Vice President-Operations
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Includes: (i) Company contribution to 401(k) Plan; and (ii) in 2001, 2002
and 2003, 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.
(3) Mr. Prince was appointed Chief Executive Officer in April 2003.
(4) Resigned effective November 15, 2003.
(5) Appointed executive officers in fiscal 2003.
OPTION GRANTS IN LAST FISCAL YEAR
There were no option grants to Named Executive Officers in fiscal
2003.
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, 2003 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, 2003 ($0.16 per share). No Named Executive
Officer exercised any stock options during fiscal 2003.
70
AGGREGATED FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXECUTED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
OCTOBER 31, 2003 AT OCTOBER 31, 2003
----------------------------------------------------------
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
Marie Welsch 9,300 0 0 0
Kevin D. Seifert 9,500 0 0 0
EMPLOYMENT AGREEMENTS
Michael Prince has entered into an employment agreement with the
Company. 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 210,000 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.
STOCK PLAN
The Company adopted the Signature Eyewear, Inc. 1997 Stock Plan (the
"Stock Plan ") in 1997. The purpose of the Stock Plan is to attract, retain and
motivate certain key employees of the Company and its subsidiaries by giving
them incentives which are linked directly to increases in the value of the
Company's Common Stock. Each executive officer, other employee, non-employee
director or consultant of the Company or any of its subsidiaries is eligible to
be considered for the grant of awards under the Stock Plan. A maximum of 800,000
shares of Common Stock may be issued pursuant to awards granted under the Stock
Plan, subject to certain adjustments to prevent dilution. No person may receive
awards representing more than 25% of the number of shares of Common Stock
covered by the Stock Plan (200,000 shares). Any shares of Common Stock subject
to an award which for any reason expires or terminates unexercised are again
available for issuance under the Stock Plan. The Stock Plan terminates in 2007.
The Stock Plan authorizes its administrator to enter into any type
of arrangement with an eligible participant that, by its terms, involves or
might involve the issuance of (i) shares of Common Stock, (ii) an option,
warrant, convertible security, stock appreciation right or similar right with an
exercise or conversion privilege at a price related to the Common Stock, or
(iii) any other security or benefit with a value derived from the value of the
Common Stock. Any stock option granted pursuant to the Stock Plan may be an
incentive stock option within the meaning of Section 422 of the Internal Revenue
Code of 1986, as amended, or a nonqualified stock option.
The Board of Directors administers the Stock Plan. Subject to the
provisions of the Stock Plan, the administrator has full and final authority to
select the participants to whom awards will be granted thereunder, to grant the
awards and to determine the terms and conditions of the awards and the number of
shares to be issued pursuant to awards.
71
COMPENSATION OF DIRECTORS
Commencing May 2003, the Board of Directors adopted a director
compensation policy in which each outside director other than Richard M. Torre
receives a monthly fee of $750 and $500 per meeting attended, and the Chairman
of each Board Committee receives a quarterly fee of $250. Mr. Torre does not
receive directors fees as a result of the consulting arrangement between the
Company and Dartmouth Commerce of Manhattan, Inc., a corporation owned by Mr.
Torre. Prior to May 2003, during fiscal 2003 outside directors received no
compensation for services as a directors. In fiscal 2003, the Company paid
$23,500 of directors fees to its outside directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In May 2003 the Board of Directions appointed a Compensation
Committee consisting of Edward Meltzer, Ted Pasternack and Michael Prince. The
Board of Directors did not have a Compensation Committee for several years prior
to that. Mr. Prince is the Chief Executive Officer and Chief Financial Officer
of the Company.
ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table provides information as of January 31, 2004
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
executive officers and directors of the Company as a group. Except as may be
indicated in the footnotes to the table and subject to applicable community
property laws, to the Company's 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 PERCENT OF NUMBER OF SHARES OF PERCENT OF
BENEFICIAL OWNER(1) BENEFICIALLY OWNED 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 26.8 -- --
Kevin D. Seifert 37,844(3) 0.6 -- --
Marie Welsch 34,200(4) 0.6 -- --
Bluebird Finance Limited
Box 957, Road Town, Tortola
British Virgin Islands -- -- 1,200,000 100%
Craig Springer
145 North Fourth Street
Grand Junction, CO 81502 700,000(5) 11.7 -- --
All directors and executive
officers as a group(10 persons) 2,721,322(6) 45.0 -- --
- -----------------------
(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 9,500 shares which may be acquired upon exercise of options.
(4) Includes 9,300 shares which may be acquired upon exercise of options.
(5) Includes (i) 550,000 shares owned by Springer Capital Corporation, a
corporation owned 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 power with respect to these shares by virtue of being a
director, officer and shareholder of that corporation.
(6) Includes 64,800 shares which may be acquired upon exercise of options and
warrants as described in footnotes (2) through (5).
72
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. Except
for the Form 3 filings for Kevin Seifert, Marie Welsch and Sheptanya Page, which
were delinquent, the Company believes that all of these persons filed all
required reports on a timely basis in fiscal 2003.
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.
ITEM 14 -- PRINCIPAL ACCOUNTING FEES AND SERVICES
Singer, Lewak, Greenbaum & Goldstein, LLP ("SLGG") audited the
Company's financial statements for fiscal 2002 and fiscal 2003. For fiscal 2002,
the fees billed for professional services by SLGG were as follows: Audit
Fees--$150,000; and Tax Fees (for preparation of federal and state income tax
returns)--$28,000. For fiscal 2003, the fees billed for professional services by
SLGG were as follows: Audit Fees--$73,000. The policy of the Audit Committee is
that it must approve in advance all services (audit and non-audit) to be
rendered by the Company's independent auditors. The Board of Directors
reestablished the Audit Committee following the Company's recapitalization in
April 2003. For at least two years prior to that, the Board of Directors did not
have an Audit Committee. The engagement of SLGG for the audit and tax services
for fiscal 2002 was approved in advance by the Board of Directors. The
engagement of SLGG for the audit for fiscal 2003 was approved in advance by the
Audit Committee.
73
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, 2002 and 2003
Consolidated Statements of Operations for the years ended October
31, 2001, 2002 and 2003
Consolidated Statements of Changes in Stockholders' Equity for the
years ended October 31, 2001, 2002 and 2003
Consolidated Statements of Cash Flows for the years ended October
31, 2001, 2002 and 2003
2. Financial Statement Schedules:
Schedule II--Valuation and Qualifying Accounts
3. Exhibits:
See attached Exhibit List
(b) Reports on Form 8-K:
None
74
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, March 17, 2004
- --------------------- Chief Financial Officer and
Michael Prince Director (Principal Financial
and Accounting Officer)
/s/ Edward Meltzer Director March 17, 2004
- ---------------------
Edward Meltzer
/s/ Drew Miller Director March 18, 2004
- ---------------------
Drew Miller
/s/ Ted Pasternack Director March 16, 2004
- ---------------------
Ted Pasternack
/s/ Richard M. Torre Chairman of the Board March 16, 2004
- ---------------------
Richard M. Torre
75
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. Further
Amending Agreement dated December 18, 2002. Letter Amendment dated as
of April 14, 2003. Incorporated by reference to Exhibit 10.5 of
Signature's Annual Report on Form 10-K for the year ended October 31,
2002. [Portions of this Exhibit have been deleted and filed separately
with the Securities and Exchange Commission pursuant to a grant of
Confidential Treatment.]
10.6 Lease Agreement, dated March 23, 1995, between Signature and Roxbury
Property Management, Guaranty of Lease, dated March 23, 1995, between
Julie Heldman and Bernard L. Weiss and Roxbury Property Management;
First Amendment to Lease, dated May 5, 1998, between Roxbury Property
Management and Signature; Second Amendment to Lease, dated June 3,
1998; and Third Amendment to Lease, dated March 2000. Incorporated by
reference to Exhibit 10.6 to Signature's Form S-1 (SEC Registration
No. 333-30017), Exhibit 10.17 to Signature's Annual Report on Form
10-K for the year ended October 31, 1999 and Exhibit 10.6 to
Signature's Annual Report on Form 10-K for the year ended October 31,
2000.
10.8 Employment Agreement dated April 23, 2003 between Signature and
Michael Prince. Incorporated by reference to Exhibit 10.8 of
Signature's Annual Report on Form 10-K for the year ended October 31,
2002.
76
10.9 License Agreement, dated June 24, 1997, between Eddie Bauer, Inc. and
Signature; First Addendum to License Agreement dated March 26, 1999;
Second Addendum to License Agreement dated July 30, 2002; and
Acknowledge of Assignment dated as of January 1, 2003. Incorporated by
reference to Exhibit 10.15 to Signature's Form S-1 (SEC Registration
No. 333-30017), Exhibit 10.2 to Signature's Quarterly Report on Form
10-Q for the quarter ended April 30, 1999 and Exhibit 10.11 of
Signature's Annual Report on Form 10-K for the year ended October 31,
2002 [Portions of this Exhibit have been deleted and filed separately
with the Securities and Exchange Commission pursuant to a grant of
Confidential Treatment.]
10.10 Agreement dated April 21, 2003: US $4,150,000 Credit Facility for
Signature provided by Bluebird Finance Limited; Security Agreement
dated April 21, 2003 between Signature as Debtor and Bluebird Finance
Limited as Secured Party.(1)
10.11 Stock Purchase Agreement dated April 21, 2003 between Bluebird Finance
Limited and Signature.(1)
10.12 Loan and Security Agreement, dated April 21, 2003, between Signature
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)
10.13 Subordination Agreement, dated April 21, 2003, among Bluebird Finance
Limited, Signature and Home Loan and Investment Company. (1)
10.14 100,000 Warrants, dated April 21, 2003, issued to Home Loan and
Investment Company. (1)
10.15 Consulting Agreement dated as of April 1, 2003 between Signature and
Dartmouth Commerce of Manhattan, Inc. Incorporated by reference to
Exhibit 10.19 to Signature's Annual Report on Form 10-K for the year
ended October 31, 2002.
10.16 License Agreement made effective as of April 1, 1993 between Signature
and Kobra International, Ltd. T/A Nicole Miller; consent to Assignment
and Waiver dated June 4, 1999; and Letter Amendment dated December 18,
2002. [Portions of this Exhibit have been deleted and filed separately
with the Securities and Exchange Commission pursuant to a request for
Confidential Treatment.]
10.17 Promissory Note dated March 26, 2003 made by Signature in favor of
Wells Fargo Equipment Finance, Inc. and US Bancorp Oliver-Allen
Technology Leasing in the principal amount of $750,000 and Security
Agreement dated March 26, 2003.
10.18 Loan Agreement dated December 11, 2003, between Signature and
Pearltime Investments Limited; and Promissory Note, dated December 11,
2003, in the principal amount of $350,000.
23.1 Consent of Altschuler, Melvoin and Glasser LLP
23.2 Consent of Singer Lewak Greenbaum & Goldstein LLP
31.1 Certification Pursuant to SEC Rule 13a-14(a)/15d-14(a)
32.1 Certification Pursuant to 18 U.S.C.ss. 1350
- ---------------
(1) Incorporated by reference from Form 8-K dated April 28, 2003.
77