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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 2004
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ________________.
COMMISSION FILE NUMBER: 0-23001
SIGNATURE EYEWEAR, INC.
(Exact name of Registrant as Specified in its Charter)
CALIFORNIA 95-3876317
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
498 NORTH OAK STREET
INGLEWOOD, CALIFORNIA 90302
(Address of Principal Executive Offices, including ZIP Code)
(310) 330-2700
Registrant's Telephone Number, Including Area Code
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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]
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On February 28, 2005, the Registrant had 6,226,889 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 February
28, 2005 was $332,037.
DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference, briefly
describe them and identify the part of the Form 10-KSB (e.g., Part I, Part II,
etc.) into which the document is incorporated: None
Transitional Small Business Disclosure Format (Check one):
Yes [_]; No [X]
PART I
The discussions in this Report 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
Report. 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--DESCRIPTION OF BUSINESS
GENERAL
Signature Eyewear, Inc. ("Signature" or the "Company") designs, markets
and distributes prescription eyeglass frames and sunglasses primarily under
exclusive brand name licenses from third parties. In fiscal 2004 the Company's
best selling lines were Laura Ashley Eyewear, Eddie Bauer Eyewear and Nicole
Miller Eyewear. The Company also markets eyewear under exclusive licenses for
Hart Schaffner & Marx Eyewear, bebe eyes and Dakota Smith Eyewear, as well as
its proprietary Signature line. In fiscal 2004 the Company obtained the
exclusive license to market Hummer Eyegear, which it plans to launch in March
2005.
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) to national and regional
optical retail chains; (3) internationally, primarily through exclusive
distributors in foreign countries and a direct sales force in Western Europe;
and (4) through selected distributors in the United States.
The Company reported a pre-tax loss of $371,000 in fiscal 2004, a
reduction from the pre-tax loss (before extraordinary gain) of $625,000 in
fiscal 2003. Income from operations was $290,000 in fiscal 2004 compared to a
loss from operations of $862,000 in fiscal 2003. The Company was able to
accomplish this reduction by continuing to reduce operating expenses. Revenues
declined from $25.1 million in fiscal 2003 to $23.6 million in fiscal 2004. This
decrease was due primarily to greater competition, continued sluggishness in the
optical frame markets and consolidation of the national optical retail chains.
While the Company was able to generate a $1.5 million increase in net sales to
independent optical retailers during the fiscal year, sales to national optical
retail chains declined $2.4 million, and international sales declined $0.4
million. The Company had a $1.4 million decrease in product returns, due
primarily to a decrease in product return rate as a percent of gross sales, from
22% in fiscal to 2003 to 18% in fiscal 2004.
The Company was incorporated in California in 1983.
BUSINESS STRATEGY
The Company's strategy to return to profitability is based on
increasing revenues and improving its gross profit margin. The Company believes
that it has limited ability to materially reduce costs further without impairing
its ability to increase revenues. In fiscal 2005, the Company's plan to increase
revenues includes the following:
o continue to build the direct sales force in the United States at
increase sales to independent optical retailers, including
optometrists, opticians and ophthalmologists, which sales have
higher gross margins than sales to optical retail chains;
o increase efforts to sell to mid-size optical retail chains which are
less likely to manufacture their own private label eyewear than the
large national optical retail chains historically targeted by the
Company and are not experiencing consolidation like the national
chains;
o reverse the decline in international sales by engaging new
distributors and developing the market in Latin and South America;
o introduce Hummer Eyegear, which is scheduled to launch in March
2005;
3
o acquire additional brand names for licenses; and
o continue to focus on unique frame design, quality control and
quality assurance, as 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 FRAME MARKET. Optical frame sales in the United States have
experienced a substantial slowdown in recent years, decreasing from $5.5 billion
in 2000 to an estimated $5.1 billion in 2003. The Company believes this is due
to: (1) the move to value, led by increasing sales in the mass merchandiser
category; (2) a growing number of eyewear customers are replacing their frame
lenses without purchasing new frames; and (3) a growing number of consumers
electing vision correction surgery.
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 277 million
in 2001, approximately 169 million people require some type of vision
correction. Out of the 169 million people requiring vision correction, 86.3
million people purchased eyewear in 2001 - or about 31% of the population.
Typically, men and women over the age of 45 need corrective eyewear due
to presbyopia, a condition that makes it difficult to focus on nearby objects
such as small newspaper print. As more of the US population exceeds age 45, the
Company believes more people will have vision impairment, and sales of
corrective eyewear should increase.
- --------
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 Jobson research reports.
4
COMPETITIVE VISION CORRECTION METHODS. Currently, there are two methods
of correcting vision impairment that 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. In 2002, 1.5% of United States residents 18 and older using vision
correction had vision correction surgery, and this percentage increased to 1.8%
in 2003 and 2.4% in 2004. Revenues from the procedure reached $2.4 billion in
2001, up from $700 million in 1997. The Company believes that these techniques
will continue to have an impact on sales of prescription eyewear. 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.
PRODUCTS
The Company's principal products during fiscal 2004 were eyeglass
frames sold under the brand names Laura Ashley Eyewear, Eddie Bauer Eyewear,
Nicole Miller Eyewear, Hart Schaffner & Marx Eyewear, bebe eyes, Dakota Smith
Eyewear and the Signature Collection.
The following table provides certain information about the market
segments, introduction dates and approximate retail prices of the Company's
products.
5
APPROXIMATE
BRAND NAME/SEGMENT CUSTOMER GENDER/AGE INTRODUCTION DATE RETAIL 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
Hummer ..........................
Prescription................. Men/Women March 2005 (2) $125-$175
Sunwear...................... Men/Women March 2005 (2) $100-$250
Nicole Miller ...................
Prescription................. Women 1993 $120-$175
Sunwear...................... Women 1993 $75-$125
Dakota Smith
Prescription................. Unisex 1992 $90-$150
Sunwear...................... Unisex 1992 $75-$125
House Brands
------------
Signature Collection Men/Women 1999 $80-$120
- -------------------
(1) Retail prices are established by retailers, not the Company.
(2) Expected launch date.
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
6
style's quality before its release date. The Company's quality comtrol team
examines all sample 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. Historically, the Company has had a low
defective frame rate and the manufacturers share in the cost of replacing
defective frames.
MARKETING, MERCHANDISING AND SALES PROGRAMS. Signature produces
"turnkey" marketing, merchandising and sales promotion programs to help optical
retailers, as well as the Company's sales representatives, promote sales. For
optical retailers, the Company develops unique in-store displays, such as its
Laura Ashley Eyewear "store within a store" environments. For the sales
representatives who call on retail accounts, the Company creates presentation
materials, marketing bulletins, weekly audio presentations, sales contests and
other sales tools to facilitate professional presentations.
LAURA ASHLEY EYEWEAR
The Company introduced Laura Ashley Eyewear in 1992. With net sales of
$6.3 million in fiscal 2004, the Laura Ashley Eyewear Collection remains one of
the leading women's brand-name collections. 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. The collection's strategy is to extend its product
selection to reach a broader audience within the feminine eyewear niche.
Signature's in-house merchandising team has conceptualized and designed
brand new Laura Ashley point of purchase display items for 2005. The new
displays feature hanging fabric banners, fabric coated displays and Victorian
era clutch cases. These pieces offer retailers multiple merchandising options
for covering large and small spaces. The clutch cases are also complimentary
with each frame purchase and therefore encourage frame sales when on display.
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, 2004 and 2005, 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. Color tones are muted and reflect the finishes found in Eddie Bauer
home products. The style assortment remains broad in its appeal by expressing
many facets of the Eddie Bauer lifestyle and the brand's longtime outdoor
heritage. 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 2005 bring the
Eddie Bauer "outdoors-indoors" 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.
7
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 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 components are
utilized for each style and unique accents of garment patterns and leather
inlays offer a distinctive touch. Select styles feature titanium, a material
renowned 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 Company may renew the license for one three-year term provided it is in
compliance with the license agreement. 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.
8
BEBE EYES
bebe clothing is famous for its provocative clothing for women. The
bebe eyes eyewear collection captures the spirit of the bebe brand through sexy
eyewear 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: (1) a women's apparel company or (2) another person and the financial
and operational condition of the Company is impaired or such other person makes
or proposes to make material changes in the key management personnel in charge
of the license. If the Company is deemed "insolvent" within the meaning of the
license agreement as a result of its stockholders' deficit, and bebe stores,
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 features
high quality titanium eyewear and sunwear at an affordable price matched by few
collections in the industry. Dakota Smith sunwear features superior polarized
lenses with backside anti-reflective coatings. The collection is showcased at
the point of sale with unique "hot rocks" displays created from earthen elements
in wooden frames from the American southwest. Complementing the eyewear and
sunwear collections is a 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.
HUMMER EYEGEAR
In July 2004 the Company obtained from General Motors Corporation the
exclusive license to market and sell Hummer Eyegear in the United States,
Canada, Mexico, Australia and most countries in Europe, Asia and Africa. Hummer
Eyegear differentiates itself by drawing from the unique image of strength,
independence and confidence that Hummer embodies. Hummer Eyegear includes
optical and sunwear styles, made from durable, innovative lens technology,
innovative materials and bold, stylish designs.
The license agreement expires on December 31, 2007, and is renewed for
a two-year term if the Company is in compliance with the license agreement and
met the minimum royalty requirement. The license agreement contains minimum
annual royalty requirements. The licensor may terminate the license for any
material breach of either the license agreement or if the Company does not
obtain the prior approval of the licensor for any change in the ownership,
control of direction of the Company's business.
9
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. 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) to national and regional optical retail chains; (3) internationally,
primarily through exclusive distributors in foreign countries and a direct sales
force in Western Europe; and (4) through selected distributors in the United
States.
The following table sets forth the Company's net sales by channel for
the periods indicated:
YEAR ENDED OCTOBER 31,
----------------------------------
2002 2003 2004
-------- -------- --------
(IN THOUSANDS)
Direct sales ................. $ 15,349 $ 12,893 $ 13,578
Optical retail chains ........ 11,560 7,074 5,041
International ................ 3,468 3,601 3,193
Telemarketing ................ 1,532 -- --
Domestic distributors ........ 1,212 852 1,123
Freight billed to customers .. 940 720 673
-------- -------- --------
$ 34,061 $ 25,140 $ 23,608
======== ======== ========
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 55 at October 31,
2004. The Company plans to increase the number of independent sales
representatives in fiscal 2005.
OPTICAL RETAIL CHAINS. Signature sells directly to optical retail
chains. Historically, the Company has targeted national optical retail chains
using dedicated account managers. The Company's sales to national retail optical
chains have declined as those chains have experienced significant consolidation
and have increasingly marketed their own lower-cost private label frames. Part
of the Company's strategy to increase revenues in fiscal 2005 is to use its
direct sales force to target mid-size regional optical chains which are less
likely to sell their own private label eyewear than the large national optical
retail chains and are not experiencing consolidation like the national chains.
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, 2004, the Company had approximately 15
international distributors and 11 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. Part of the Company's strategy to increase revenues
in fiscal 2005 is to increase efforts of develop markets for the Company's
frames in Latin and South America.
10
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 5
distributors in the United States at October 31, 2004.
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 that 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 2004, 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 120 days on open account. For
frames imported other than from Hong Kong/China manufacturers, the Company is
obligated to pay in the currency of the country in which the manufacturer is
located. In the case of frames purchased from manufacturers located in Hong
Kong/China, the currency is United States dollars. For almost all of the
Company's other frame purchases, its costs vary based on currency fluctuations,
and it generally cannot recover increased frame costs (in United States dollars)
in the selling price of the frames.
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 optical chains, the Company competes not only
against other eyewear suppliers, but also against the chains themselves, as
these chains have increasingly designed, manufactured and sold their own
lower-priced private label brands. 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 and Cole Vision, which combined is
the largest United States retail optical chain.
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, its pricing policies
and the quality of its sales force.
BACKLOG
Historically, the Company ships eyeglass frames upon receipt of orders
and does not operate with a material backlog.
11
EMPLOYEES
At October 31, 2004, the Company had 105 full-time employees, including
38 in sales and marketing, 19 in customer service and support, 21 in warehouse
operations and shipping and 27 in general administration and finance. None of
the Company's employees is covered by a collective bargaining agreement. The
Company considers its relationship with its employees to be good.
ITEM 2--DESCRIPTION OF PROPERTY
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. Since
November 1, 2001, the Company has subleased approximately 26,000 square feet of
this space to an unaffiliated party through May 2005. During fiscal 2004 the
Company's monthly rental expense was approximately $61,000 net of sublease
payments and excluding common area charges.
The Company and the landlord have executed a term sheet for a new lease
of approximately 64,000 square feet at the same facility. The new lease will
commence upon termination of the existing lease and will run through June 30,
2007. The Company will have the right to renew the lease for a two-year renewal
option. Under the new lease, the Company's monthly rental obligation will be
$46,400 through June 2006, increasing to $48,000 for the following 12 months and
$51,200 during the renewal term. The Company believes that 64,000 square feet is
more than adequate for its existing business and potential growth during the
next two years.
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 6 of Notes to Financial Statements.
ITEM 3--LEGAL PROCEEDINGS
As of February 28, 2005, the Company was a defendent in two lawsuits.
Management does not believe that the outcome of these lawsuits will have a
material adverse affect on financial condition, results of operations or cash
flows of the Company.
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
None.
12
PART II
ITEM 5--MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
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, 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
FISCAL YEAR ENDED OCTOBER 31, 2004
First Quarter .................... $ 0.15 $ 0.11
Second Quarter ................... $ 0.16 $ 0.08
Third Quarter .................... $ 0.22 $ 0.12
Fourth Quarter ................... $ 0.28 $ 0.12
On February 28, 2005, the last reported sales price of the Common Stock
in the over-the counter market as reported by Nasdaq, was $0.10 per share. At
February 28, 2005, there were 42 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 (1)
out of positive retained earnings or (2) 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, 2004, the Company had an accumulated deficit of $20.3 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.
PURCHASES OF COMMON STOCK
The Company did not repurchase any shares of its Common Stock in fiscal
2004.
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 Report.
13
YEAR ENDED OCTOBER 31,
--------------------------------------------------------------------------
2000 2001 2002 2003 2004
---------- ---------- ---------- ---------- ----------
(dollars in thousands, except per-share data)
STATEMENT OF OPERATIONS DATA:
Net sales ..................................... $ 52,883 $ 44,533 $ 34,061 $ 25,140 $ 23,609
Gross profit .................................. 31,458 23,061 18,593 16,641 14,847
Total operating expenses ...................... 40,705 35,083 22,032 17,504 14,557
Income (Loss) from operations ................. (9,247) (12,022) (3,439) (862) 290
Extraordinary item ............................ -- -- -- 4,099 --
Net income (loss) ............................. (9,484) (13,387) (4,116) 3,463 (371)
Basic and diluted income (loss) per share ..... (1.87) (2.65) (0.75) 0.60 (0.06)
Weighted average common shares outstanding .... 5,058,915 5,056,889 5,488,396 5,752,240 6,102,231
2000 2001 2002 2003 2004
---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA:
Current assets ................................ $ 33,006 $ 17,184 $ 9,876 $ 8,928 $ 8,890
Total assets .................................. 41,435 18,906 11,944 10,398 9,949
Current liabilities ........................... 28,142 22,390 19,226 8,261 8,562
Long-term debt, net of current portion ........ 4,806 1,461 1,715 6,874 6,454
Total liabilities ............................. 32,948 23,851 20,941 15,134 15,016
Stockholders' equity (deficit) ................ 8,487 (4,945) (8,996) (4,736) (5,067)
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 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 6 of this Report, as well as those discussed elsewhere in this
Report. All subsequent written and oral forward-looking statements attributable
to the Company or persons acting on its behalf are expressly qualified in their
entirety by "Factors That May Affect Future Results." Those forward-looking
statements relate to, among other things, the Company's plans and strategies,
new product lines, and relationships with licensors, distributors and customers,
distribution strategies and the business environment in which the Company
operates.
The following discussion and analysis should be read in connection with
the Company's Financial Statements and related notes and other financial
information included elsewhere in this Report.
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, and Dakota Smith
Eyewear, and under its proprietary Signature brand.
The Company's best-selling product lines are Laura Ashley Eyewear,
Eddie Bauer Eyewear and Nicole Miller Eyewear. Net sales of these lines together
accounted for 69.4% and 65.4% of the Company's net sales in fiscal 2003 and
fiscal 2004, 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 eight to twelve months from the initial design concept to
the release. Generally, reorders require 75 to 150 days.
14
The Company reported a pre-tax loss of $371,000 in fiscal 2004, a
reduction from the pre-tax loss (before extraordinary gain) of $625,000 in
fiscal 2003. Income from operations was $290,000 in fiscal 2004 compared to a
loss from operations of $862,000 in fiscal 2003. The Company was able to
accomplish this reduction by continuing to reduce operating expenses. Revenues
declined from $25.1 million in fiscal 2003 to $23.6 million in fiscal 2004. This
decrease was due primarily to greater competition, continued sluggishness in the
optical frame markets and consolidation of the national optical retail chains.
While the Company was able to generate a $1.5 million increase in net sales to
independent optical retailers during the fiscal year, sales to national optical
retail chains declined $2.4 million, and international sales declined $0.4
million. The Company had a $1.4 million decrease in product returns, due
primarily to a decrease in product return rate as a percent of gross sales, from
22% in fiscal to 2003 to 18% in fiscal 2004.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of the Company's financial statements requires it to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. The Company bases its estimates on historical experience and on
various other assumptions that it believes 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.
The Company considers 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. On a quarterly basis the Company reviews and
establishes an allowance for estimated product returns based upon actual returns
subsequent to quarter-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. As of October 31, 2004, the Company had an allowance for
product returns of $300,000. Management considered a range of allowances from
$200,000 to $400,000. Variances in the allowance for product returns would have
a corresponding impact on net sales for fiscal 2004. For example, if the
Company's allowance for product returns was $400,000, the Company's net sales
would have been $100,000 lower.
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.
15
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated selected
statements of operations data shown as a percentage of net sales.
2002 2003 2004
------ ------ ------
Net sales ............................................... 100.0% 100.0% 100.0%
Cost of sales ........................................... 45.4 33.8 37.1
------ ------ ------
Gross profit ............................................ 54.6 66.2 62.9
------ ------ ------
Operating expenses:
Selling ............................................ 30.5 34.1 34.0
General and administrative ......................... 34.2 35.5 27.7
------ ------ ------
Total operating expenses ....................... 64.7 69.6 61.7
------ ------ ------
Income (Loss) from operations ........................... (10.1) (3.4) 1.2
Other income (expense), net ............................. (2.0) 0.9 (2.8)
------ ------ ------
Loss before provision for (benefit from) income taxes ... (12.1) (2.5) (1.6)
and gain on extraordinary items
Provision for income taxes .............................. 0.0 0.0 0.0
------ ------ ------
Loss before gain on extraordinary item .................. (12.1) (2.5) (1.6)
Extraordinary gain on extinguishment of debt ............ -- 16.3 --
------ ------ ------
Net income (loss) ....................................... (12.1)% 13.8% (1.6%)
====== ====== ======
COMPARISON OF FISCAL YEARS 2002, 2003 AND 2004
NET SALES. Net sales were $23.6 million in fiscal 2004 compared to
$25.1 million in fiscal 2003 and $34.1 million in fiscal 2002. The following
table shows certain information regarding net sales by product line for the
periods indicated:
2002 2003 2004
------------------ ------------------ ------------------
Laura Ashley Eyewear .... $11,430 33.6% $ 7,811 31.1% $ 6,305 26.7%
Eddie Bauer Eyewear ..... 9,147 26.9 5,848 23.3 4,516 19.1
Nicole Miller Eyewear ... 4,950 14.5 3,781 15.0 4,624 19.6
Other (1) ............... 8,534 25.0 7,700 30.6 8,163 34.6
------- ------- ------- ------- ------- -------
$34,061 100.0% $25,140 100.0% $23,608 100.0%
======= ======= ======= ======= ======= =======
(1) Includes freight billed to customers.
Net sales declined 6.1 % in fiscal 2004 due primarily to increasing
competition, consolidation of national retail optical chains and continued
sluggishness in the optical frame market. Excluding close out sales, unit sales
declined and the Company maintained or slightly increased its frame prices. The
Company's efforts to increase sales to independent optical retailers, through
hiring more direct sales representatives and placing a renewed emphasis on
service to these customers, resulted in an increase of $1.5 million in sales to
these customers. However, The Company experienced a decline of $2.4 million, or
34%, in sales to national retail optical chains. These chains purchased fewer
frames, a trend the Company expects to continue, as they have experienced
industry consolidation and have increasingly marketed their own lower cost
private label frames. International sales also declined ($0.4 million or 11.3%)
due in part to close-out sales of a significant number of major global brand
name frames being liquidated due to transfer of the license relationships. Sales
of the Eddie Bauer Eyewear continued to decline, as the bankruptcy of the Eddie
Bauer group of companies is believed to have adversely affected customers'
perception of the brand.
Net sales declined 26.3% in fiscal 2003 due primarily to the general
decline in the optical frame industry and the reluctance of retailers to
purchase large inventories of the Company's products due to uncertainties about
the Company prior its recapitalization.
16
Commencing with the year ended October 31, 2004, the Company includes
freight billed to customers in net sales. Net sales for fiscal 2003 and 2002
have been revised from previously reported amounts due to reflect this change
based on EITF 00-10 "Accounting for Shipping and Handling Costs." See Notes 2
and 12 of Notes to Financial Statements.
Net sales reflect gross sales less a reserve for product returns
established by the Company based on products that the Company is aware will be
returned as of that date. The Company's reserve was $0.3 million and $0.6
million at October 31, 2004 and 2003, respectively. The Company had a $1.4
million decrease product returns in fiscal 2004 compared to fiscal 2003, due
primarily to a decrease in product returns as a percentage of gross sales, from
22% in fiscal 2003 to 18% in fiscal 2004. The Company believes this decrease in
product return rate was due principally to better sell-through due to improved
frame styles, increased confidence in the Company's viability as a result of its
recapitalization in April 2003, and tougher return policies implemented by the
Company.
The Company also maintains an allowance for product returns. See
"Critical Accounting Polices." Changes in the allowance in any period will have
a corresponding impact on net sales during the period. The Company's allowance
for product returns did not change in fiscal 2004.
GROSS PROFIT AND GROSS MARGIN. Gross profit was $14.8 million in fiscal
2004 compared to $16.6 million in fiscal 2003 and $18.6 million in fiscal 2002.
These decreases were due primarily to lower net sales and the continuing impact
of close out sales.
The gross margin was 62.9% in fiscal 2004 compared to 66.2% in fiscal
2003 and 54.6% in fiscal 2002. This decrease in 2004 was due to more close out
sales at lower margins notwithstanding sales to independent optical retailers,
which have higher gross margins, which increased from 52.8% to 59.2% of net
sales. 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.
SELLING EXPENSES. Selling expenses were $8.0 million in fiscal 2004
compared to $8.6 million in fiscal 2003 and $10.4 million in fiscal 2002. This
6.5% decrease in fiscal 2004 was due to decreases of $0.3 million in advertising
expenses, $0.2 million in royalties due to lower net sales, and $0.1 million
promotions expense. Compensation for sales personnel increased by $0.2 million
because of an increase in direct sales and an increase the number of direct
sales representatives from 47 at October 31, 2003 to 55 at October 31, 2004. The
17.3% decrease in fiscal 2003 was due to 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 in fiscal 2002, and $0.5 million in advertising expense tied to
lower net sales, offset by increases of $0.3 million in promotions expense and
$0.3 million in royalty expense due to increases in minimum royalties.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses were $6.1 million in fiscal 2004 compared to $8.4 million in fiscal
2003 and $11.2 million in fiscal 2002. This 27.6% decrease in fiscal 2004 was
due primarily to a decreases of: (1) $1.3 million in salaries, payroll taxes and
employee benefits due to a decrease in number of employees, (2) $0.3 million in
legal and accounting fees, and (3) $0.3 million in the reserve for bad debt
allowance; 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 expenses and $0.3 million in bank charges.
The lease for the Company principal offices expires in May 2005. The
Company and the landlord have executed a term sheet for a new lease for less
space at the same facility. The new lease would run through June 30, 2007 and
the Company will have the right to renew the lease for a two-year renewal
option. Under the new lease, the Company estimates a reduction in rental expense
of approximately $100,000 in fiscal 2005 and $190,000 in fiscal 2006 compared to
rental expense for these offices in fiscal 2004 (exclusive of savings from
reduced common area charges). See "Item 2--Description of Property."
OTHER INCOME (EXPENSE), NET. Sundry expense in fiscal 2004 represented
a reserve in connection with ongoing litigation. 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 increased in fiscal 2004 due
primarily to increases in amount in the average debt outstanding from fiscal
2003 to fiscal 2004.
17
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 FOR INCOME TAXES. Because of its net losses, the Company's
taxes in fiscal 2002, 2003 and 2004 consisted of state franchise taxes. As of
October 31, 2004 the Company had net operating loss carryforwards for federal
and state income tax purposes of approximately $11.7 million and $9.2 million,
respectively, which expire through 2022. The Company has established a 100%
valuation allowance of the deferred tax asset based on operating losses in
recent years. The Company believes that the recapitalization in April 2003 may
have resulted in "ownership change" under the Internal Revenue Code. The
Company's utilization of the net operating loss carryforwards existing as of
that date 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.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company's accounts receivable (net of allowance for doubtful
accounts) were $2.7 million at October 31, 2004 compared to $2.3 million at
October 31, 2003. This increase was due to reductions in the allowance for
returns, due to lower levels of returns, and the allowance for doubtful
accounts.
The Company's inventories (net of obsolescence reserve) were $5.3
million at October 31, 2004 as compared to $6.0 million at October 31, 2003.
This $0.6 million decrease was due to close out frame sales and improving
inventory turnover by better matching frame purchases with customer orders.
The Company's long-term debt of $6.5 million at October 31, 2004
included principally its credit facilities with Home Loan and Investment Company
("HLIC") and Bluebird Finance Limited ("Bluebird"), and a commercial bank loan
the proceeds of which were used to purchase its computer system and related
equipment (the "Equipment Loan"). See Note 4 of Notes to Consolidated Financial
Statements.
The Company's credit facility with HLIC 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 and by a $1,250,000 letter of credit from a non-affiliate. 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 had fully utilized this credit facility as of October
31, 2004.
The Company's credit facility with Bluebird is up to $4,150,000 and
secured by the assets of the Company. The credit facility includes a revolving
credit line in the amount of $2,900,000 and support for the $1,250,000 letter of
credit securing the HLIC credit facility. The loan bears interest at the rate of
5% per annum, payable annually for the first two years, with payments of
principal and interest on a 10-year amortization schedule commencing in the
third year, and is due and payable in April 2013. Bluebird's loan commitment
will be reduced by $72,000 in July 2005 and by the same amount every three
months thereafter. This loan is subordinate to the HLIC credit facility. The
Company had fully utilized this credit facility as of October 31, 2004.
The Equipment Loan had an outstanding balance of $537,000 at October
31, 2004, is secured by the purchased assets and bears interest at 4% per annum
payable in monthly installments of approximately $14,000 with the balance of
$62,600 due in February 2008.
In December 2004 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 five monthly installments of $50,000
commencing May 2005 with the balance of $200,000 due and payable on November 27,
2005.
Of the Company's accounts payable at October 31, 2004, $0.9 million
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
18
purchasing forward commitments to deliver foreign currency to the Company. The
Company held no forward commitments for foreign currencies at October 31, 2004.
The Company's bad debt write-offs, net of recoveries, were $33,000 and
$(6,394) in fiscal 2003 and 2004, 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.
During the past two years, the Company has generated cash primarily
through product sales in the ordinary course of business, its bank credit
facilities and sales of equity securities. At October 31, 2004, the Company had
working capital of $0.3 million as compared to working capital of $0.7 million
at October 31, 2003. Operating activities provided a net of $0.3 million during
fiscal 2004, while financing activities used a net of $0.2 during fiscal year
2004, resulting in a net increase of $0.1 million in cash and cash equivalents.
The Company's business plan for 2005 provides for positive cash flow
from operations. The Company believes that at least through fiscal 2005,
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. To support
growth in excess of the plan, the Company may be required to obtain the working
capital through additional debt or equity financing.
CONTRACTUAL OBLIGATIONS
The following table sets forth certain information regarding the
contractual obligations of the Company as of October 31, 2004:
PAYMENTS DUE BY PERIOD
-------------------------------------------------------------------
LESS THAN 1-3 3-5 MORE THAN
TOTAL 1 YEAR YEARS YEARS 5 YEARS
----------- ----------- ----------- ----------- -----------
Long-term debt $ 7,227,045 $ 772,788 $ 4,103,016 $ 175,212 $ 2,176,029
Operating lease obligations 760,493 597,293 122,400 40,800 --
Purchase obligations 1,632,256 1,632,256 -- -- --
Other long-term obligations
reflected on the Company's
balance sheet under GAAP(1) 5,815,250 2,699,333 3,115,916
----------- ----------- ----------- ----------- -----------
Total obligations $15,435,044 $ 5,701,670 $ 7,341,332 $ 216,012 $ 2,176,029
====================================================================================================
(1) Includes minimum royalties under license agreements and employment and
consulting obligations under long-term agreements.
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. 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, 2004. The unaudited information
has been prepared on the same basis as the audited financial statements
appearing elsewhere in this Report and includes all normal recurring adjustments
which management considers necessary for a fair presentation of the financial
data shown. The operating results for any quarter are not necessarily indicative
of future period results.
19
2002 2003 2004
----------------------------------------------------------------------------------------------------------
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 ............ $ 8,735 $ 9,054 $ 8,426 $ 7,845 $ 7,446 $ 5,950 $ 6,471 $ 5,273 $ 5,996 $ 6,097 $ 6,149 $ 5,367
Cost of sales ........ 3,334 3,937 3,666 4,531 2,911 1,836 2,301 1,451 2,342 2,215 2,192 2,013
Gross profit ......... 5,401 5,117 4,760 3,314 4,535 4,114 4,170 3,822 3,653 3,882 3,957 3,355
Operating expenses:
Selling ............ 2,606 2,747 2,322 2,700 2,164 2,012 2,327 2,077 1,909 2,300 2,053 1,761
General and
administrative ... 3,000 2,892 3,031 2,623 2,489 2,443 2,032 1,959 1,857 1,627 1,625 1,425
Total operating
expenses ........... 5,606 5,750 5,353 5,323 4,653 4,455 4,359 4,036 3,766 3,927 3,679 3,185
Income (loss) from
operations ......... (205) (632) (592) (2,009) (118) (341) (189) (214) (113) (45) 278 170
Other income
(expense), net ..... (186) (148) (184) (160) (96) 617 (150) (134) (136) (140) (138) (237)
Income (loss) before
provision for
income taxes ....... (390) (780) (776) (2,169) (214) 276 (339) (348) (249) (185) 140 (67)
Extraordinary gain ... -- -- -- -- 4,144 (45) -- -- -- -- --
Provision for
income taxes ....... 1 1 1 10 (2) 2 1 8 --
Net income ........... (390) (780) (777) (2,169) (215) 4,419 (394) (346) (251) (186) 132 (67)
INFLATION
The Company does not believe its business and operations have been
materially affected by inflation.
NEW ACCOUNTING PRONOUNCEMENTS
In May 2003, the FASB issued SFAS No. 150 ("SFAS No. 150"), "Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and
Equity." SFAS No. 150 established standards for how an issuer classifies and
measures in its statements of financial position certain financial instruments
with characteristics of both liabilities and equity. SFAS No. 150 requires that
an issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances) because that financial instrument
embodies an obligation of the issuer. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003 and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. SFAS No. 150 is to be implemented by reporting and cumulative effect of
change in accounting principle for financial instruments created before the
issuance date of SFAS No. 150 and still existing at the beginning of the interim
period of adoption. Restatement is not permitted. In April 2003, the Company
issued shares of its newly created Series A 2% Convertible Preferred Stock that
have mandatory redemption features if there are certain changes in control. The
Company evaluated the equity instrument and determined that the provisions under
SFAS No. 150 do not apply.
In December 2003, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 132R ("FAS 132R"), "Employers' Disclosures about Pensions
and Other Postretirement Benefits." The statement provides disclosure
requirements for defined benefit pension plans and other post-retirement benefit
plans. The statement was effective for annual financial statements with fiscal
years ending after December 15, 2003, and for interim periods beginning after
December 15, 2003. The Company adopted FAS 132R during the year ended October
31, 2004. The adoption of FAS 132R did not have any impact on the Company's
operating results or financial position.
In December 2003, the FASB published a revision to Interpretation No.
46, "Consolidation of Variable Interest Entities" ("FIN 46R"), to clarify some
of the provisions of the original interpretation, and to exempt certain entities
from its requirements. Under the revised guidance, there are new effective dates
for companies that have interests in structures that are commonly referred to as
special-purpose entities. The rules are effective in financial statements for
periods ending after March 15, 2004. FIN 46R did not impact the Company's
operating results or financial position because the Company does not have any
variable interest entities.
20
In March 2004, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairments
and Its Application to Certain Investments" ("EITF 03-1"). EITF 03-1 provides a
three-step impairment model for determining whether an investment in
other-than-temporarily impaired and requires the Company to recognize such
impairments as an impairment loss equal to the difference between the
investment's cost and fair value at the reporting date. The guidance is
effective for the Company during the first quarter of fiscal 2005. The Company
does not believe that the adoption of EITF 03-1 will have a significant effect
on its financial statements.
In November 2004, the FASB issued SFAS No. 151 "Inventory Costs - An
Amendment of ARB No. 43, Chapter 4" ("FAS 151"). FAS 151 clarifies that abnormal
amounts of idle facility expense, freight, handling costs and spoilage should be
charged to expense as incurred and not included in overhead. Further, FAS 151
requires that allocation of fixed and production facilities overhead to
conversion costs should be based on normal capacity of the production
facilities. The provisions in FAS 151 are effective for inventory costs incurred
during fiscal years beginning after June 15, 2005. The Company does not believe
that the adoption of FAS 151 will have a significant effect on its financial
statements.
In November 2004, the FASB issued SFAS No. 153 "Exchanges of
Nonmonetary Assets - An Amendment of APB Opinion No. 29" ("FAS 153"). The
provisions of this statement are effective for non monetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. This statement
eliminates the exception to fair value for exchanges of similar productive
assets and replaces it with a general exception for exchange transactions that
do not have commercial substance - that is, transactions that are not expected
to result in significant changes in the cash flows of the reporting entity. The
Company does not believe that the adoption of FAS 153 will have a significant
effect on its financial statements.
FACTORS THAT MAY AFFECT FUTURE RESULTS
NEED TO INCREASE REVENUES AND TO RETURN TO PROFITABILITY; SHAREHOLDERS'
DEFICIT
The Company has incurred net losses (excluding the extraordinary gain
in fiscal 2003) for the past several years and at October 31, 2004, its
stockholders' deficit was $5.1 million. 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. Except for anticipated reductions in rental
expense commencing in May 2005, the Company does not believe further material
reductions in expenses are possible consistent with the Company's plans to
support and expand its product lines. Accordingly, the ability of the Company to
return to profitability will depend primarily on its ability to increase its
revenues. The Company's revenues during the past several years have been
adversely affected by increasing competition and the continued sluggishness in
the optical frame industry. While the Company has a plan to increase revenues in
fiscal 2005, 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, EDDIE BAUER AND NICOLE MILLER
LICENSES
Net sales of Laura Ashley Eyewear, Eddie Bauer Eyewear and Nicole
Miller Eyewear accounted for 69.4% and 65.4% of the Company's net sales in
fiscal years 2003 and 2004, respectively. While the Company intends to continue
reducing its dependence on these lines through the development and promotion of
Hummer Eyegear, Dakota Smith Eyewear, bebe eyes and its Signature line, the
Company expects these 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 provided 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, 2004 and 2005, but Laura Ashley waived noncompliance. The Company
markets Eddie Bauer Eyewear through an exclusive license that 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. The license agreement for Nicole Miller Eyewear
expires in March 2006, and may be renewed by the Company for a three-year term
provided it is not in default. Each of these licensors 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.
21
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 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 NATIONAL RETAIL OPTICAL CHAINS
Net sales to national optical retail chains amounted to 30% and 22% of
net sales in fiscal years 2003 and 2004, respectively. These chains have
increasingly marketed their own lower cost private label brands and are
experiencing industry consolidation. However, two of these chains accounted for
approximately 16% of the Company's net sales in fiscal 2004. The continued
decline in sales to national retail chains, or the loss of one or more national
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 that 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 must pre-approve all product returns, which it will do only for credit
or exchange if the product has not been discontinued. As a general policy the
Company does not make cash refunds. The Company's product returns for fiscal
years 2003 and 2004 amounted to 21% and 18% of gross sales (sales before
returns), respectively. The Company maintains an allowance for product returns
that which it considers adequate; however, an increase in returns that
significantly exceeds the amount of those reserves would have a material adverse
impact on the Company's business, operating results and financial condition.
22
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 optical chains, the Company competes not only
against other eyewear suppliers, but also against the chains themselves, as
these chains have increasingly designed, manufactured and sold their own
lower-priced private label brands. 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, its pricing policies and the quality of its sales force. 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 February 28, 2005, the directors and executive officers of the
Company owned beneficially approximately 49.3% 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.
23
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, 2004, the Company had an accumulated deficit of $20.3 million. As a result,
the Company will not be able to pay dividends for the foreseeable future. In
addition, the payment of dividends is prohibited under its credit facilities.
POSSIBLE ANTI-TAKEOVER EFFECTS
The Company's Board of Directors has the authority to issue up to
5,000,000 shares of Preferred Stock and to determine the price, rights,
preferences, privileges and restrictions, including voting rights, of those
shares without any further vote or action by the shareholders. The Preferred
Stock could be issued with voting, liquidation, dividend and other rights
superior to those of the Common Stock. The Company issued 1,200,000 shares of
Series A Preferred in the recapitalization, and has no present intention to
issue any other shares of Preferred Stock. However, the rights of the holders of
Common Stock will be subject to, and may be adversely affected by, the rights of
the holders of any Preferred Stock that may be issued in the future. The
issuance of Preferred Stock, while providing desirable flexibility in connection
with possible acquisitions and other corporate purposes, could have the effect
of making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company, which may depress the market value of
the Common Stock. In addition, each of the Laura Ashley, Hart Schaffner & Marx,
Eddie Bauer and bebe licenses allows the licensor to terminate its license upon
certain events that 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 2004, at any month-end a maximum
of $1.3 million and a minimum of $0.7 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, 2004.
International sales accounted for approximately 11.3% of the Company's
net sales in fiscal 2004. 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, 2004 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.
24
In addition, the Company has fixed income investments consisting of
cash equivalents, which are also affected by changes in market interest rates.
The Company does not use derivative financial instruments in its investment
portfolio. The Company places its cash equivalents with high-quality financial
institutions, limits the amount of credit exposure to any one institution and
has established investment guidelines relative to diversification and maturities
designed to maintain safety and liquidity.
25
ITEM 8--FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Signature Eyewear, Inc.
We have audited the accompanying balance sheet of Signature Eyewear, Inc. as of
October 31, 2004, and the related statements of operations, shareholders'
deficit, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Signature Eyewear, Inc. as of
October 31, 2004, and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States.
/s/ Grobstein, Horwath & Company LLP
- --------------------------------------------
Grobstein, Horwath & Company LLP
Sherman Oaks, California
February 16, 2005
26
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Signature Eyewear, Inc. and subsidiary
Inglewood, California
We have audited the accompanying consolidated balance sheet of Signature
Eyewear, Inc. and subsidiary (collectively, the "Company") as of October 31,
2003 and the related consolidated statements of operations, shareholders'
deficit, and cash flows for each of the two years in the period ended October
31, 2003. 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
October 31, 2003, and the results of their operations and their cash flows for
each of the two years in the period ended October 31, 2003, 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
27
SIGNATURE EYEWEAR, INC.
BALANCE SHEET
OCTOBER 31,
================================================================================
ASSETS
2004 2003
------------ ------------
CURRENT ASSETS
Cash and cash equivalents $ 522,370 $ 413,251
Certificate of Deposit, restricted 250,000 250,000
Accounts receivable - trade, net of allowance for
doubtful accounts of $228,808 and $503,490 2,652,713 2,281,255
Inventories, net of reserves of $-0- and $1,506,007 5,334,120 5,955,253
Promotional products and materials 40,242 9,425
Prepaid expenses and other current assets 90,694 19,293
------------ ------------
Total current assets 8,890,139 8,928,477
PROPERTY AND EQUIPMENT, net 927,875 1,354,362
TOTAL DEPOSITS AND OTHER ASSETS 130,911 115,055
------------ ------------
TOTAL ASSETS $ 9,948,925 $ 10,397,894
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
28
SIGNATURE EYEWEAR, INC.
BALANCE SHEET
OCTOBER 31,
================================================================================
LIABILITIES AND SHAREHOLDERS' DEFICIT
2004 2003
------------ ------------
CURRENT LIABILITIES
Accounts payable - trade $ 5,059,198 $ 5,367,576
Accrued expenses and other current liabilities 2,428,060 1,722,825
Reserve for customer returns 302,045 619,460
Current portion of long-term debt 772,788 550,748
------------ ------------
Total current liabilities $ 8,562,091 $ 8,260,609
LONG-TERM DEBT, net of current portion 6,454,257 6,873,535
------------ ------------
Total liabilities 15,016,348 15,134,144
------------ ------------
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 issued and outstanding 1,200 1,200
Common stock, $0.001 par value
30,000,000 shares authorized
6,226,889 shares and 5,976,889 issued and
outstanding 6,227 5,977
Additional paid-in capital 15,275,791 15,236,041
Accumulated deficit (20,350,641) (19,979,468)
------------ ------------
Total shareholders' deficit (5,067,423) (4,736,250)
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 9,948,925 $ 10,397,894
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
27
SIGNATURE EYEWEAR, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED OCTOBER 31,
================================================================================
2004 2003 2002
------------ ------------ ------------
NET SALES $ 23,608,736 $ 25,140,360 $ 34,061,149
COST OF SALES 8,761,760 8,498,768 15,468,265
------------ ------------ ------------
GROSS PROFIT 14,846,976 16,641,592 18,592,884
------------ ------------ ------------
OPERATING EXPENSES
Selling 8,022,947 8,580,404 10,374,802
General and administrative 6,105,880 8,437,158 11,220,753
Depreciation and amortization 427,782 486,031 435,984
------------ ------------ ------------
Total operating expenses 14,556,609 17,503,593 22,031,539
------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS 290,367 (862,001) (3,438,655)
------------ ------------ ------------
OTHER INCOME (EXPENSE)
Sundry income (expense) (75,164) 213,097 18,514
Gain on sale of trademark -- 469,103 --
Interest expense (575,768) (445,239) (696,455)
------------ ------------ ------------
Total other income (expense) (650,932) 236,961 (677,941)
------------ ------------ ------------
LOSS BEFORE PROVISION FOR INCOME TAXES AND
EXTRAORDINARY ITEM (360,565) (625,040) (4,116,596)
PROVISION FOR INCOME TAXES 10,608 10,492 (987)
------------ ------------ ------------
LOSS BEFORE EXTRAORDINARY ITEM (371,173) (635,532) (4,115,609)
EXTRAORDINARY ITEM
Gain on extinguishment of debt, net -- 4,098,687 --
------------ ------------ ------------
NET INCOME (LOSS) (371,173) 3,463,155 (4,115,609)
PREFERRED STOCK DIVIDENDS -- (8,000) --
------------ ------------ ------------
NET INCOME (LOSS) AVAILABLE TO
COMMON STOCK SHAREHOLDERS $ (371,173) $ 3,455,155 $ (4,115,609)
============ ============ ============
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE
Before extraordinary item $ (0.06) $ (0.11) $ (0.75)
Extraordinary item -- 0.71 --
------------ ------------ ------------
TOTAL BASIC AND DILUTED EARNINGS
(LOSS) PER SHARE $ (0.06) $ 0.60 $ (0.75)
============ ============ ============
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING 6,102,231 5,752,240 5,488,396
============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
30
SIGNATURE EYEWEAR, INC.
STATEMENTS OF SHAREHOLDERS' DEFECIT
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, 2001 0 0 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 0 0 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 income 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)
Issuance of common stock 250,000 250 39,750 40,000
Net loss (371,173) (371,173)
------------ ------------ ------------ ------------ ------------ ------------ ------------
BALANCE, OCTOBER 31, 2004 1,200,000 1,200 6,226,889 $ 6,227 $ 15,275,791 $(20,350,641) $ 5,067,423
============ ============ ============ ============ ============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
31
SIGNATURE EYEWEAR, INC.
STATEMENTS OF SHAREHOLDERS' DEFECIT
FOR THE YEARS ENDED OCTOBER 31,
================================================================================
2004 2003 2002
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (371,173) $ 3,455,155 $ (4,115,609)
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 427,782 486,029 435,986
Provision for bad debts (274,682) 52,412 432,224
Provision for inventory write down 93,755 159,018 2,066,213
Gain on extinguishment of debt (4,098,687)
Gain on sale of trademark (469,103)
(Increase) decrease in:
Accounts receivable - trade (96,776) 809,282 1,554,287
Inventories, net of effect of sale of
Dakota Smith and USA Optical in 2003 527,378 (599,569) 2,247,449
Income taxes refundable 2,704 107,296
Promotional products and materials (30,817) 78,487 76,636
Prepaid expenses and other current assets (71,398) 30,569 (40,910)
Increase (decrease) in:
Accounts payable - trade (308,378) 557,127 (3,256,946)
Accrued expenses and other
current liabilities 705,234 (80,027) (592,698)
Reserve for customer returns (317,415) (1,667,474) 2,172,354
------------ ------------ ------------
Net cash provided by (used in) operating activities 283,510 (1,279,037) 1,086,282
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (1,297) (15,306) (54,988)
Deposits and other assets (15,856) (2,348) 21,066
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 (17,153) 582,346 466,078
------------ ------------ ------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
32
SIGNATURE EYEWEAR, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31,
================================================================================
2004 2003 2002
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Certificate of Deposit -- (250,000) --
Net increase (decrease) in lines of credit -- (2,317,134) (911,224)
Proceeds from short-term debt 550,000
Payments on short-term debt (250,000)
Payments on long-term debt (497,238) (5,000,312) (1,093,480)
Borrowings on long-term debt -- 6,800,000 86,236
Proceeds from sale of preferred stock 800,000
Proceeds from sale of common stock 40,000 -- --
------------ ------------ ------------
Net cash provided by (used in) financing activities (157,238) 32,554 (1,918,468)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 109,119 (664,137) (366,108)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 413,251 1,077,388 1,443,496
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 522,370 $ 413,251 $ 1,077,388
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
INTEREST PAID $ 567,844 $ 365,939 $ 541,173
============ ============ ============
INCOME TAXES PAID $ 10,608 $ 77,721 $ (108,283)
============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
33
SIGNATURE EYEWEAR, INC.
NOTES TO FINANCIAL STATEMENTS
October 31, 2004
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, 2004 and 2003, the Company had operating income (loss)
from operations of $290,367 and $(862,001), respectively. At October 31, 2004,
the Company had net working capital of approximately $328,000.
The Company has a $3,500,000 credit facility with a lender consisting
of a $3,000,000 term note payable and a $500,000 revolving line of credit, both
expiring in April 2008. These credit facilities are collateralized by eligible
accounts receivable and inventories (see Note 4).
The Company also has a $4,150,000 credit facility with another lender.
This facility is collateralized by assets of the Company (see Note 4).
Subsequent to October 31, 2004, the Company obtained two additional
loans (see Note 14).
During the year ended October 31, 2004, the Company reduced general and
administrative expenses by $2.3 million from the prior year primarily by
reducing the number of employees. Additionally, the Company improved its credit
and collections function and worked with its vendors to extend payment terms
wherever possible to improve cash flow. The Company will continue to search for
areas in which to further reduce expenses. However, other than an anticipated
decrease in rental expense (see Note 14), the Company does not believe further
reductions in operating expenses are possible consistent with its plans to grow
and support its product lines.
The Company's business plan for 2005 provides for positive cash
generation from operations. The Company believes that at least through fiscal
2005, 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 continue as a going concern. The financial statements do not
include any adjustments that might result if the Company were to be unable to
continue as a going concern.
NOTE 2. 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
34
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. The Company had no
deferred revenue at October 31, 2004 and 2003. For the years ended October 31,
2004, 2003 and 2002, the Company had sales returns totaling $5,151,128,
$6,683,346 and $9,326,467, respectively.
EITF 00-10 "Accounting for Shipping and Handling Fees and Costs"
requires shipping and handling fees billed to customers to be classified as
revenue and shipping and handling costs to be either classified as cost of sales
or disclosed in the notes to the financial statements. The Company includes
shipping and handling fees billed to customers in net sales. The Company adopted
EITF 00 - 10 in the fourth quarter of fiscal 2004 and has restated its
previously issued annual and quarterly financial information affected by such
adoption. The adoption of EITF 00-10 had no effect on net income reported in all
current and prior periods. The impact of the adoption of EITF 00-10 was to
increase net sales by $673,539, $720,346 and $939,718 for the years ended
October 31, 2004, 2003 and 2002, respectively, with a corresponding increase in
selling costs. The impact on the quarterly results of operations is presented in
Note 12.
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.
SHIPPING AND HANDLING COSTS
Shipping and handling costs associated with inbound freight are
recorded in cost of sales and totaled $206,788, $377,647 and $-0- in the years
ended October 31, 2004, 2003 and 2002, respectively. Other shipping and handling
costs are included in selling, distribution and administrative expenses and
totaled $1,369,036, $1,499,511 and $1,844,452 in the years ended October 31,
2004, 2003 and 2002, respectively.
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, 2004, 2003 and 2002, 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
Cash and cash equivalents consist of cash and highly liquid securities
with original maturities of three months or less.
RESTRICTED CASH
Restricted cash consists of a debenture held as collateral for the HLIC
term loan (Note 4). Subsequent to October 31, 2004, a certificate of deposit in
a subsidiary of the lender was substituted for the debenture as collateral.
INVENTORY
Inventory consists of finished goods, which are valued at the lower of
cost or market. Cost is computed using the weighted-average cost method.
35
The Company regularly and periodically evaluates its inventory to
ensure that it is valued at the lower of cost or market based on current market
trends, product history, and turnover. During the year ended October 31, 2004,
the Company directly applied its lower of cost or market policy to the inventory
in the Company's subledger, and as a result there is no inventory reserve as of
October 31, 2004. As of October 31, 2004, 2003 and 2002, the Company's inventory
reserve was $0, $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.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews the carrying value of other long-lived assets at
least annually for evidence of impairment. When indicators of impairment are
present, the Company evaluates the carrying value of long-lived assets in
relation to the undiscounted future cash flows generated by such assets. An
impairment loss is recognized when the estimate of undiscounted future cash
flows generated by such assets is less than the carrying amount. Measurement of
the impairment loss is based on the present value of the expected future cash
flows.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments recorded at market or fair value include cash,
interest-bearing cash equivalents, short-term debt. The following methods were
used by the Company to estimate the fair value of all financial instruments that
are not otherwise carried at fair value on the accompanying balance sheets:
CERTIFICATE OF DEPOSIT, RESTRICTED. The fair value of
restricted cash is estimated using interest rates it would receive
currently for similar types of arrangements.
NOTES PAYABLE AND OTHER LONG-TERM DEBT. The fair value of
notes payable and other long-term debt is estimated using a model that
estimates fair values at market rates.
The carrying or notional amounts and fair values of the Company's
financial instruments at December 31, 2004 and 2003 were as follows:
36
2004 2003
---------------------------------- ----------------------------------
CARRYING FAIR VALUE CARRYING VALUE FAIR VALUE
VALUE
---------------- ---------------- --------------- ----------------
FINANCIAL ASSETS:
Certificate of Deposit, restricted $250,000 $250,000 $250,000 $250,000
FINANCIAL LIABILITIES:
Term note payable - HLIC 2,936,867 2,847,000 3,000,000 2,811,000
Revolving line of credit - HLIC 500,000 329,000 500,000 292,000
Term note payable - HLIC 200,000 185,000 -- --
Term note payable - Bluebird 2,900,000 2,794,000 2,900,000 2,692,000
Note payable - Commercial Bank 536,567 465,000 660,700 609,000
STOCK-BASED COMPENSATION
The Company accounts for its employee stock plan under the intrinsic
value recognition and measurement provisions of Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. As stock options have been issued with exercise prices equal to
the market value of the underlying shares on the grant date, no compensation
cost has resulted. For stock-based compensation issued to non-employees, the
Company uses the fair value method of accounting under the provisions of SFAS
No. 123 (Revised 2004) "Share Based Payments". The Company has disclosed the
pro-forma effect of using the fair value based method to account for its
stock-based compensation in Note 7.
ADVERTISING EXPENSE
The Company charges to expense all advertising costs as they are
incurred. Advertising expense for the years ended October 31, 2004, 2003 and
2002, was $341,801, $595,541 and $1,072,213, 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. 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 were immaterial for the
years ended October 31, 2004, 2003 and 2002.
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.
37
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents,
certificates of deposit and accounts receivable. The Company maintains its cash
and cash equivalents with high quality financial institutions. Cash and cash
equivalents deposited usually 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 8%, 11% and 12%
of net sales during the years ended October 31, 2004, 2003 and 2002,
respectively.
MAJOR VENDORS
The Company had purchases from two vendors which aggregated 20% and 19%
for the year ended October 31, 2004; 16% and 14% for the year ended October 31,
2003; and 8% and 12% for the year ended October 31, 2002, 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 May 2003, the FASB issued SFAS No. 150 ("SFAS No. 150"), "Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and
Equity." SFAS No. 150 established standards for how an issuer classifies and
measures in its statements of financial position certain financial instruments
with characteristics of both liabilities and equity. SFAS No. 150 requires that
an issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances) because that financial instrument
embodies an obligation of the issuer. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003 and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. SFAS No. 150 is to be implemented by reporting and cumulative effect of
change in accounting principle for financial instruments created before the
issuance date of SFAS No. 150 and still existing at the beginning of the interim
period of adoption. Restatement is not permitted. In April 2003, the Company
issued shares of its newly created Series A 2% Convertible Preferred Stock that
have mandatory redemption features if there are certain changes in control. The
Company evaluated the equity instrument and determined that the provisions under
SFAS No. 150 do not apply.
In December 2003, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 132R ("FAS 132R"), "Employers' Disclosures about Pensions
and Other Postretirement Benefits." The statement provides disclosure
requirements for defined benefit pension plans and other post-retirement benefit
plans. The statement was effective for annual financial statements with fiscal
years ending after December 15, 2003, and for interim periods beginning after
December 15, 2003. The Company adopted FAS 132R during the year ended October
31, 2004. The adoption of FAS 132R did not have any impact on the Company's
operating results or financial position.
In December 2003, the FASB published a revision to Interpretation No.
46, "Consolidation of Variable Interest Entities" ("FIN 46R"), to clarify some
of the provisions of the original interpretation, and to exempt certain entities
from its requirements. Under the revised guidance, there are new effective dates
for companies that have interests in structures that are commonly referred to as
special-purpose entities. The rules
38
are effective in financial statements for periods ending after March 15, 2004.
FIN 46R did not impact the Company's operating results or financial position
because the Company does not have any variable interest entities.
In March 2004, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairments
and Its Application to Certain Investments" ("EITF 03-1"). EITF 03-1 provides a
three-step impairment model for determining whether an investment in
other-than-temporarily impaired and requires the Company to recognize such
impairments as an impairment loss equal to the difference between the
investment's cost and fair value at the reporting date. The guidance is
effective for the Company during the first quarter of fiscal 2005. The Company
does not believe that the adoption of EITF 03-1 will have a significant effect
on its financial statements.
In November 2004, the FASB issued SFAS No. 151 "Inventory Costs - An
Amendment of ARB No. 43, Chapter 4" ("FAS 151"). FAS 151 clarifies that abnormal
amounts of idle facility expense, freight, handling costs and spoilage should be
charged to expense as incurred and not included in overhead. Further, FAS 151
requires that allocation of fixed and production facilities overhead to
conversion costs should be based on normal capacity of the production
facilities. The provisions in FAS 151 are effective for inventory costs incurred
during fiscal years beginning after June 15, 2005. The Company does not believe
that the adoption of FAS 151 will have a significant effect on its financial
statements.
In November 2004, the FASB issued SFAS No. 153 "Exchanges of
Nonmonetary Assets - An Amendment of APB Opinion No. 29" ("FAS 153"). The
provisions of this statement are effective for non monetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. This statement
eliminates the exception to fair value for exchanges of similar productive
assets and replaces it with a general exception for exchange transactions that
do not have commercial substance - that is, transactions that are not expected
to result in significant changes in the cash flows of the reporting entity. The
Company does not believe that the adoption of FAS 153 will have a significant
effect on its financial statements.
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment at October 31, 2004 and 2003 consisted of the
following:
2004 2003
---------- ----------
Computer equipment $1,498,392 $1,497,096
Leasehold improvements 1,195,190 1,195,190
Software 1,123,340 1,123,340
Office furniture and equipment 912,756 912,756
Machinery and equipment 419,815 429,394
Machinery and equipment held under
capital lease agreements 294,609 294,609
---------- ----------
5,444,102 5,452,385
Less accumulated depreciation and amortization 4,516,227 4,098,023
---------- ----------
TOTAL $ 927,875 $1,354,362
========== ==========
Depreciation and amortization expense was $427,782, $486,029 and
$435,986 for the years ended October 31, 2004, 2003 and 2002, respectively
(including depreciation expense of $-0-, $41,959 and $98,850, respectively, on
machinery and equipment held under capital lease agreements).
39
NOTE 4. LONG-TERM DEBT
Long-term debt at October 31, 2004 and 2003 consisted of the following:
2004 2003
------------ ------------
Term note payable to HLIC in the original amount of $3,000,000, bearing
interest at 10% per annum, secured by the assets of the Company, a
letter of credit in the amount of $1,250,000 and a $250,000 certificate
of deposit issued by HLIC; payments of interest only through March 2004
and thereafter monthly installments of principal and interest ($39,777)
with a payment of $2,044,206 in April 2008 $ 2,936,867 $ 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 interest at 12%
per annum on the outstanding balance, due in April 2008 500,000 500,000
Term note payable to HLIC in the original amount of $200,000, secured by the
collateral securing the HLIC term note, bearing interest at 12% per annum
and due and payable on June 29, 2005 200,000 --
Term note payable to Bluebird Finance Limited in the original amount of
$2,900,000, secured by the assets of the Company (subordinated to the
HLIC credit facility), bearing interest at 5% per annum, and payable
in quarterly installments of $72,500, commencing in July 2005 2,900,000 2,900,000
Note payable to a 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 536,567 660,700
Term note payable to Pearltime Investments in the original amount of $350,000
unsecured, bearing interest at 3% per annum payable in monthly installments
of $50,000 commencing on April 30, 2004, due on December 29, 2004 100,000 --
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 28,001 72,374
Note payable to lessor of the Company's principal offices and warehouse in
the original amount of $89,405, unsecured, payable in monthly
installments of $3,757, including interest at 8% per annum, maturing
on May 1, 2005 25,610 66,834
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
40
2004 2003
------------ ------------
Capital lease agreements for machinery and equipment bearing interest at
rates ranging from 8.19% to 11.4% per annum, maturing through August
2004 -- 34,375
------------ ------------
7,227,045 7,424,283
Less current portion 772,788 550,748
------------ ------------
LONG-TERM PORTION $ 6,454,257 $ 6,873,535
============ ============
Future maturities of long-term debt at October 31, 2004 were as
follows:
YEAR ENDING AMOUNTS
OCTOBER 31, MATURING
----------- ----------
2005 $ 772,788
2006 513,303
2007 550,957
2008 3,038,756
2009 175,212
Thereafter 2,176,029
----------
TOTAL $7,227,045
==========
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.
Additional collateral includes a letter of credit in the amount of $1,250,000
and a $250,000 certificate of deposit issued by a subsidiary of the lender.
The terms of the credit facility 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 FINANCE LIMITED ("BLUEBIRD") CREDIT FACILITY
In April 2003, the Company obtained a credit facility from Bluebird 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 a letter of
credit in the amount of $1,250,000 issued as a collateral for the HLIC credit
facility. 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, the Company 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 5. EXTINGUISHMENT OF DEBT
In April 2003, the Company entered into various agreements with certain
of its creditors and commercial banks, which resulted in the Company recognizing
a gain of $4,098,687 on extinguishment of debt, net of expenses of $233,848.
This gain has been recorded as an extraordinary item in the financial
41
statements for the year ended October 31, 2003. Income taxes are not allocable
to this gain as the Company had net operating losses to offset this gain.
NOTE 6. 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, utilities and insurance.
Effective November 1, 2001, the Company subleased a portion of its
warehouse to an unrelated third party for $18,200 in monthly rental payments
totaling $218,400 for the year ended October 31, 2004. Accordingly, the
Company's net rental expense was reduced by this amount for the year ended
October 31, 2004.
The Company leases a warehouse and office facilities in Belgium under
an operating lease that expires in August 2009. The lease provides for minimum
monthly rental payments of $3,400. The Company subleases a portion of this
facility on a month-to-month basis.
Future minimum lease payments on these leases as of October 31, 2004
were as follows:
YEAR ENDING
OCTOBER 31, LEASE PAYMENTS
----------- --------------
2005 $ 597,293
2006 40,800
2007 40,800
2008 40,800
2009 40,800
--------------
TOTAL $ 760,493
==============
Total facilities-related rent expense was $735,582, $738,406 and
$741,488 for the years ended October 31, 2004, 2003 and 2002, respectively.
See Note 14 for the terms of a new lease for the Company's principal
offices and warehouse in Inglewood, California.
EMPLOYMENT AGREEMENT
In April 2003, the Company entered into an employment agreement with
Michael Prince, the Company's President/Chief Executive Officer/Chief Financial
Officer, pursuant to which he receives a salary of $240,000 per year, subject to
an annual review.
Mr. Prince also received 420,000 shares of common stock, which are
forfeitable if certain conditions are not met as follows:
(i) 210,000 shares must be forfeited if the Company has not
achieved 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 net income.
42
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 the Company. Pursuant to the
second amendment dated May 31, 2001, the unsecured consulting obligation is
payable in varying monthly installments ranging from $3,500 to $20,000 through
April 2007. The agreement was amended on May 1, 2004 to suspend consulting
services until January 31, 2005. Total minimum payments under this consulting
obligation at October 31, 2004 were as follows:
YEAR ENDING CONSULTING
OCTOBER 31, PAYMENTS
----------- ----------
2005 $ 143,500
2006 265,000
2007 196,333
----------
TOTAL $ 604,833
==========
Total fees paid for this consulting obligation for the years ended
October 31, 2004, 2003 and 2002 amounted to $49,000, $54,000 and $66,000,
respectively.
In April 2003, the Company entered into a three-year consulting
agreement with Dartmouth Commerce of Manhattan, Inc. 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 the
payment of annual compensation in the amount of $55,000 per year. Total
consulting fees paid under this agreement during the years ended October 31,
2004 and 2003 were $55,000 and $27,500, respectively.
In April 2003, the Company entered into an eighteen-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 years ended October 31, 2004 and 2003 were $13,333 and $6,667,
respectively.
LICENSE AGREEMENTS
The Company has a license agreement with Laura Ashley Limited, which
grants the Company certain rights to use the "Laura Ashley" trademarks in
connection with the distribution, marketing and sale of 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 did not meet the minimum net sales requirement
for the most recent contract year, but Laura Ashley waived non-compliance.
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.
43
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
agreement.
The Company has a license agreement with bebe stores, inc., which
grants the Company certain rights to use the "bebe" trademark in connection with
the distribution, marketing and sale of bebe 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
31, 2004, bebe had not notified the Company that it seeks to terminate the
license.
In July 2004 the Company entered into a license agreement with General
Motors Corporation, which grants the Company certain rights to use the "Hummer"
trademark in connection with the distribution, marketing and sale of eyewear
products. The license period extends to December 31, 2007 and can be renewed for
an additional two-year term provided the Company is not in breach of the license
agreement and has met the minimum royalty requirement.
Total minimum royalties payable under all of the Company's license
agreements at October 31, 2004 were follows:
YEAR ENDING MINIMUM
OCTOBER 31, ROYALTIES
----------- ----------
2005 $2,633,333
2006 1,060,417
2007 620,000
2008 125,000
----------
TOTAL $4,438,750
==========
Total royalty expense charged to operations for the years ended October
31, 2004, 2003 and 2002, were $2,295,371, $2,456,292 and $2,160,725,
respectively.
In addition to the above minimum royalties payable, the Company is
required under certain license agreements to advertise and market licensed
trademark brands as specified in the respective agreements. The Company was in
compliance with these minimum advertising requirements for the years ended
October 31, 2004, 2003 and 2002.
SETTLEMENT AGREEMENT AND GENERAL RELEASE WITH CALIFORNIA DESIGN STUDIO, INC.
("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. This settlement resulted in the Company recording a gain of $526,487 in
the statement of operations for the year ended October 31, 2003.
44
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 which has been paid.
LAWSUIT
The Company is a defendant in two lawsuits. Management does not believe
that the outcome of these lawsuits will have a material adverse affect on the
financial condition, results of operations or cash flow of the Company.
NOTE 7. 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.
DESIGNATION AND ISSUANCE OF SERIES A 2% CONVERTIBLE PREFERRED STOCK
In April 2003, the Company designated a new series of preferred stock,
designated as "Series A 2% Convertible Preferred Stock" (the "Series A
Preferred"), authorizing 1,360,000 shares and issuing 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 $0.67
per share plus accrued and unpaid dividends. The Company has the right to redeem
the Series A Preferred, commencing in April 21, 2005 at the liquidation
preference plus accrued and unpaid dividends and 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 21, 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 on May 21, 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 of the Company 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 the
Series A Preferred may be converted. At October 31, 2004, the Board of Directors
had not declared a dividend on the Series A Preferred and dividends in arrears
were approximately $24,000.
STOCK OPTIONS AND RESTRICTED STOCK
At October 31, 2004, the Company had one stock-based employee
compensation plan, the 1997 Stock Plan. The 1997 Stock Plan provides for the
issuance from time to time of up to 800,000 shares of common
45
stock to directors, officers, employees and consultants pursuant to awards such
as stock options and restricted stock sales. The Board of Directors establishes
the terms of the awards, including price, vesting and expiration date. The plan
terminates in May 2007. As of October 31, 2004, under the plan, 250,000 shares
had been issued, 383,000 shares were subject to outstanding options and 177,000
shares were available for future awards.
On April 30, 2004, the Company sold to four non-employee directors a
total of 250,000 shares for $0.16 per share, which was more than the closing
price of the common stock on such date in the over the counter market as
reported by Nasdaq. Except for these sales, the Company has issued only stock
options under the plan.
On February 1, 2004, the Company granted to: (i) Richard M. Torre,
Chairman of the Board, an option to purchase 100,000 shares for $0.12 per share;
(ii) each of the four non-employee directors (including Richard M. Torre) an
option to purchase a 25,000 shares of common stock for shares for $0.16 per
share; and (iii) several executive officers options to purchase a total of
62,500 shares for $0.20 per share, of which 37,500 expired subsequent to October
31, 2004 because the Company did not generate net earnings for the year ended
October 31, 2004. The closing sales price of the common stock on January 30,
2004 (the last trading day before the grant) was $0.11 per share.
The following is a summary of stock option activity under the plan for
the years ended October 31, 2004, 2003 and 2002:
NUMBER WEIGHT AVG
OF SHARES RANGE EXERCISE PRICE
----------------- ----------------- -----------------
Outstanding, October 31, 2001 457,500 $4-$10 $8.07
Canceled (90,200) $4-$10 $7.92
----------------- ----------------- -----------------
Outstanding, October 31, 2002 367,300 $4-$10 $8.10
Canceled (149,500) $4-$10 $8.25
----------------- ----------------- -----------------
Outstanding, October 31, 2003 217,800 $4-$10 $7.99
Granted 262,500 $.12-$.20 $0.15
Canceled (97,300) $.20-$10 $8.56
----------------- ----------------- -----------------
Outstanding, October 31, 2004 383,000 $.12-$10 $2.48
EXERCISABLE, OCTOBER 31, 2004 120,500 $4-$10 $7.54
The term of options granted in the year ended October 31, 2004 was
three years and seven months. Other outstanding options have a term of 10 years.
The options typically vest one year from their grant date.
The Company accounts for this plan under the recognition and
measurement principles of APB Opinion No. 25 ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, and related interpretations. No stock-based employee compensation
plan cost is reflected in net income, as all options granted under this plan had
an exercise price not less than the market value of the underlying common stock
on the date of grant. The following table illustrates the effect on net income
and earnings per share for the year ended October 31, 2004 if the Company had
applied the fair value recognition provisions of FASB Statement No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION, to stock-based employee compensation.
2004
-------------
Loss for the year - as reported $(371,173)
Compensation expense - net of tax (17,030)
-------------
Loss for the year - pro forma $(388,203)
-------------
Basic and diluted loss per year - as reported $ (0.06)
-------------
Basic and diluted loss per year - pro forma $ (0.06)
-------------
46
Compensation expense for the options that were issued prior to fiscal
2004 would have no impact on the pro-forma disclosures as all costs associated
with the options would have been incurred as of fiscal 2001.
The weighted average fair value of stock options granted during the
year ended October 31, 2004 was $0.065. The Company used the Black-Scholes
option pricing model to estimate the value at each grant date, under the
following weighted average assumptions:
2004
----------
Risk free interest rate 1.84%
Expected dividend yield --
Expected volatility 130.00%
Expected life (in years) 2
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 $12.00
per share. The warrants expired without being exercised on September 16, 2002.
In connection with the acquisition of Great Western Optical in 1999,
the Company issued warrants to purchase 50,000 shares of its common stock for
$7.50 per share. The warrants expired on September 10, 2004.
In April 2003, the Company issued warrants to purchase 100,000 shares
of the Company's common stock for $0.67 per share to HLIC in connection with the
HLIC credit facility (see Note 4).
The following is a summary of warrants outstanding:
NUMBER WEIGHT AVG
OF SHARES RANGE EXERCISE PRICE
----------------- ----------------- -----------------
Outstanding, October 31, 2001 230,000 $7.50-$12 $11.02
Canceled (180,000) $12.00 $12.00
----------------- ----------------- -----------------
Outstanding, October 31, 2002 50,000 $7.50 $7.50
Issued 100,000 $0.67 $0.67
----------------- ----------------- -----------------
Outstanding, October 31, 2003 150,000 $0.67-$7.50 $2.95
Canceled (50,000) $7.50 $7.50
----------------- ----------------- -----------------
OUTSTANDING, OCTOBER 31, 2004 100,000 $0.67 $0.67
=================
EXERCISABLE, OCTOBER 31, 2004 100,000 $0.67 $0.67
=================
47
The weighted average fair value of warrants outstanding during the year ended
October 31, 2004 was $0.069. The Company used the Black-Scholes option pricing
model to estimate the value at each grant date, under the following weighted
average assumptions:
2004
----------
Risk-free interest rate 3.01%
Expected dividend yield --
Expected volatility 130.00%
Expected life (in years) 5
NOTE 8. 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 during the year.
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.
The following potential common shares have been excluded from the
computations of diluted (loss) per share for the years ended October 31, 2004,
2003 and 2002 because the effect would have been anti-dilutive:
2004 2003 2002
------------ ------------ ------------
Preferred Shares 1,200,000 1,200,000 --
Stock Options 383,000 217,800 367,300
Warrants 100,000 150,000 50,000
------------ ------------ ------------
TOTAL 1,683,000 1,567,800 417,300
============ ============ ============
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, 2004 and 2003
consisted of the following:
2004 2003
------------ ------------
Deferred tax assets
Allowance for doubtful accounts $ 98,000 $ 216,000
Capitalization of inventory costs 259,000 38,000
Inventory reserve -- 645,000
Sales returns reserve 129,000 92,000
Legal accrual 36,000 --
Depreciation and amortization of
property and equipment 2,133,000 2,221,000
Net operating loss carry-forward 5,933,000 5,600,000
Other 52,000 72,000
Valuation allowance (8,294,000) (8,399,000)
------------ ------------
Total deferred tax assets 346,000 485,000
Deferred tax liability
State taxes (346,000) (485,000)
------------ ------------
Net deferred taxes $ -- $ --
============ ============
The Company has established a 100% valuation allowance of the deferred
tax asset, based on operating losses in recent years.
48
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, 2004 and 2003.
2004 2003 2002
---------- ---------- ----------
Current
Federal $ -- $ -- $ (4,256)
State 10,608 10,492 3,269
---------- ---------- ----------
10,608 10,492 (987)
---------- ---------- ----------
Deferred
Federal -- -- --
State -- -- --
---------- ---------- ----------
TOTAL $ 10,608 $ 10,492 $ (987)
========== ========== ==========
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 for the years ended October 31, 2004 and 2003 is as
follows:
2004 2003 2002
------------ ------------ ------------
Computed income tax benefit at
federal statutory rate $ (122,591) $ 1,182,754 $ (1,399,643)
Increase (decrease) resulting from
State income taxes 41,928 308,920 (149,282)
Permanent items 1,320 -- 3,877
Change in valuation allowance 89,951 (1,385,915) 1,516,000
Other, net -- (95,267) 28,061
------------ ------------ ------------
TOTAL $ 10,608 $ 10,492 $ (987)
============ ============ ============
As of October 31, 2004, the Company had net operating loss
carry-forwards for federal and state income tax purposes of approximately
$16,115,000 and $5,150,000, respectively. The net operating loss carry-forwards
expire through 2023. 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
income tax 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.
As of October 31, 2004 and 2003, the Company had available alternative
minimum tax credit carry-forwards of approximately $114,000 which may be used
indefinitely to reduce federal income taxes until exhausted.
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. In January 2005, for the plan's year ended December
31, 2004, the Company used the plan's forfeitures of $10,000 and provided
matching contributions of $10,000. For the year ended October 31, 2003, the
Company used the plan's forfeitures of $25,112 as matching contributions. The
Company did not make any contributions for the year ended October 31, 2002.
49
NOTE 11. FOREIGN OPERATIONS
The Company operates a branch in Belgium. The following is a summary of
the Company's foreign operations:
2004 2003
---------- ----------
Balance Sheet
Identifiable assets $1,087,154 $1,329,080
2004 2003 2002
---------- ---------- ----------
Statement of Operations
Net sales $1,737,621 $1,985,772 $2,046,195
Net income (loss) $ 43,666 $ 187,479 $ (506,083)
In addition, the Company's United States' operations sold product in
foreign countries. During the years ended October 31, 2004, 2003 and 2002, such
net sales amounted to $1,471,957, $1,643,788 and $1,291,565, respectively.
NOTE 12. QUARTERLY INFORMATION (UNAUDITED)
The following tables represent the Company's quarterly data for the
years ended October 31, 2004, 2003 and 2002
2004
----------------------------------------------------------------------------
FIRST SECOND THIRD
QUARTER QUARTER QUARTER FOURTH
RESTATED RESTATED RESTATED QUARTER TOTAL
------------ ------------ ------------ ------------ ------------
Net sales $ 5,996,168 $ 6,096,578 $ 6,148,486 $ 5,367,504 $ 23,608,736
Gross profit $ 3,653,761 $ 3,881,096 $ 3,956,557 $ 3,355,562 $ 14,846,976
Net income (loss) available
to common shareholders $ (254,545) $ (185,985) $ 132,734 $ (63,377) $ (371,173)
Earnings (loss) per share $ (0.04) $ (0.03) $ 0.02 $ (0.01) $ (0.05)
2003 - RESTATED
----------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------------ ------------ ------------ ------------ ------------
Net sales (restated - See
Note 2) $ 7,446,147 $ 5,949,270 $ 6,471,621 $ 5,273,322 $ 25,140,360
Gross profit $ 4,535,645 $ 4,113,137 $ 4,170,896 $ 3,821,914 $ 16,641,592
Net income (loss) available
to common shareholders $ (213,363) $ 4,418,598 $ (394,083) $ (355,997) $ 3,455,155
Loss per share $ (0.04) $ 0.79 $ (0.07) $ (0.06) $ 0.62
50
2002 - RESTATED
----------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------------ ------------ ------------ ------------ ------------
Net sales (restated - See
Note 2) $ 8,735,661 $ 9,054,689 $ 8,426,074 $ 7,844,725 $ 34,061,149
Gross profit $ 5,401,248 $ 5,117,919 $ 4,760,140 $ 3,313,577 $ 18,592,884
Net loss available to common
shareholders $ (390,643) $ (780,291) $ (777,077) $ (2,167,598) $ (4,115,609)
Loss per share $ (0.07) $ (0.14) $ (0.14) $ (0.39) $ (0.74)
The Company has adjusted the net sales for the freight revenue. The
impact of this adjustment was to increase net sales by $673,539,$720,346 and
$939,718 for the years ended October 31, 2004, 2003 and 2002. The adjustments
have no affect on net income.
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 consisted 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 adjustment to previously reserved inventory that
was sold during the quarter.
The effects of the adjustments were significant factors for the fourth
quarter results.
NOTE 14. SUBSEQUENT EVENTS
In December 2004, the Company obtained a loan of $350,000 from Eagle
Star Finance Limited, bearing interest at a rate of 3% per annum. The loan is
payable in five monthly installments of $50,000, and one payment of $100,000
commencing in May 2005, with interest due and payable on November 27, 2005.
In February 2005, the Company obtained a loan of $406,000 from Home
Loan Industrial Bank, a subsidiary of HLIC. The loan bears interest at a rate of
12% per annum and the principal and interest are due and payable in June 2006.
The Company used a portion of the proceeds of the loan to pay off existing
indebtedness to HLIC in the principal amount of $202,000. The Company expects
that the balance of the loan will be used for general corporate purposes.
In January 2005, the Company executed a term sheet to extend the
Company's lease of its primary facility in Inglewood, California. The new lease
will take effect in May 2005 upon the expiration of its current lease. The new
lease will cover approximately 64,000 square feet, which is a 45,000 square foot
reduction from the existing 109,000 square feet (26,000 square feet of the
warehouse has been subleased to an unaffiliated third party, which sublease
expires concurrent with the expiration of the lease in May 2005). The new lease
will run through June 30, 2007 and the Company will have the option to renew the
lease for a two-year period. Under the new lease, the Company's monthly rental
obligation will be $46,400 through June 2006, increasing to $48,000 for the
following 12 months and $51,200 during the renewal term. This will result in an
estimated reduction in rental expense of approximately $120,000 for fiscal 2005
and $190,000 in fiscal 2006 compared to rental expense for these facilities in
fiscal 2004 (exclusive of savings from reduced common area charges). The Company
believes that 64,000 square feet is more than adequate for its existing business
and potential growth during the next two years.
51
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.
o excluded 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 from operations and financing activities.
DURING THE YEAR ENDED OCTOBER 31, 2002, THE COMPANY:
o entered into a Stock Issuance and Release Agreement on December 20,
2001, whereby the Company issued 500,000 shares of common stock and
paid $3,000 to Springer Capital Corporation in satisfaction of the
purchase price adjustment relating to the Great Western Optical
("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 Note 4.)
52
Independent Auditors' Report on Schedule II
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Signature Eyewear, Inc.
Our audits were conducted in accordance with the standards of the Public Company
Accounting Oversight Board (United States) and were made for the purpose of
forming an opinion on the basic consolidated 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
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in our audits of the basic consolidated financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic consolidated financial statements taken as a whole.
/s/ Singer Lewak Greenbaum & Goldstein LLP
- -----------------------------------------------------------
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
January 23, 2004
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Signature Eyewear, Inc.
The audit referred to in our report dated February 16, 2005 relating to the
financial statements of Signature Eyewear, Inc., which is contained in Item 8 of
this Form 10-K included the audit of the financial statements schedule listed in
the accompanying index. This financial statement schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audit.
In our opinion the financial statement schedule presents fairly, in all material
respects, the information set forth within.
Grobstein, Horwath & Company LLP
Sherman Oaks, California
February 16, 2005
53
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, 2004 $ 503,490 $ (274,682) $ -- $ 228,808
============ ============ ============ ============
OCTOBER 31, 2003 $ 543,884 $ 52,412 $ (92,806) $ 503,490
============ ============ ============ ============
OCTOBER 31, 2002 $ 574,096 $ 432,224 $ (462,436) $ 543,884
============ ============ ============ ============
RESERVES FOR SLOW MOVING INVENTORIES
OCTOBER 31, 2004 $ 1,506,007 $ 94,000 $ (1,600,007) $ --
============ ============ ============ ============
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
============ ============ ============ ============
VALUATION ALLOWANCE FOR DEFERRED
TAX ASSETS
OCTOBER 31, 2004 $ 8,399,000 $ -- $ (105,000) $ 8,294,000
============ ============ ============ ============
OCTOBER 31, 2003 $ 9,800,000 $ -- $ (1,401,000) $ 8,399,000
============ ============ ============ ============
OCTOBER 31, 2002 $ 8,284,000 $ 1,516,000 $ -- $ 9,800,000
============ ============ ============ ============
RESERVES FOR CUSTOMER RETURNS
OCTOBER 31, 2004 $ 619,460 $ -- $ (317,415) $ 302,045
============ ============ ============ ============
OCTOBER 31, 2003 $ 2,286,934 $ -- $ (1,667,474) $ 619,460
============ ============ ============ ============
OCTOBER 31, 2002 $ 307,500 $ 1,979,434 $ -- $ 2,286,934
============ ============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
54
ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Inapplicable.
ITEM 9A--CONTROLS AND PROCEDURES
The Company's management, with the participation of Michael Prince, 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.
ITEM 9B--OTHER INFORMATION
Inapplicable.
55
PART III
ITEM 10--DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
DIRECTORS
The following information is provided regarding the directors of the
Company.
YEAR FIRST
ELECTED OR
AGE AT APPOINTED
NAME 1/05 DIRECTOR PRINCIPAL OCCUPATION
- --------------------------------------------------------------------------------
Edward Meltzer 69 2003 Mr. Meltzer has been the President
of Elanday Equities, Inc., an
exporter of various products, since
1987.
- --------------------------------------------------------------------------------
Drew Miller 46 2003 Mr. Miller has been the President of
Heartland Consulting Group since
1994, and has been the President of
Global Vantage Securities and
Heartland Management Consulting
Group. Mr. Miller is a Certified
Management Accountant, Certified
Mergers and Acquisitions Advisor,
Certified Financial Planner and a
Certified Government Financial
Manager.
- --------------------------------------------------------------------------------
Ted Pasternack 62 2003 Mr. Pasternack 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 55 1994 Mr. Prince joined the Company in
1993 and has served as the Chief
Financial Officer and as a Director
of the Company since March 1994, 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.
- --------------------------------------------------------------------------------
Richard M. Torre 59 2003 Mr. Torre has served as Chairman of
the Board since April 2003. For the
past seven years, he has been
Chairman of Dartmouth Associates,
Inc., a merchant and investment bank
with diverse holdings in commercial
banking, fish processing, office
products and technology.
Additionally, in 2001/02, he was
Chairman of Global Vantage
Securities, Inc., a broker-dealer,
and Chairman of its affiliated
investment bank. He is currently
also Chairman of Dauntless Capital
Partners, LLC.; Chairman, The
Hydrogen Fund; Chairman, Dartmouth
Commerce of Manhattan, Inc. and
Vice-Chairman, JLM Foodservices,
Inc.
- --------------------------------------------------------------------------------
56
EXECUTIVE OFFICERS
The following table sets forth certain information regarding our
executive officers of the Company (other than Mr. Prince, whose information is
set forth under "Directors")
NAME AGE POSITION PRINCIPAL OCCUPATION
- -----------------------------------------------------------------------------------------------------
Jill Gardner 37 Vice President of Design Ms. Gardner joined the Company in
2003 as Vice President of Design. She
was appointed to the Management
Executive Committee of the Company in
October 2003. 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.
- -----------------------------------------------------------------------------------------------------
Raul Khantzis 51 Vice President of International Mr. Khantzis joined the Company in 2003
Sales as Vice President of International
Sales. He was appointed to the
Management Executive Committee of the
Company in October 2003. 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 41 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 42 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 45 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.
- -----------------------------------------------------------------------------------------------------
AUDIT COMMITTEE
The Audit Committee was reestablished in May 2003 and is comprised of
two directors, Ted Pasternack (Chairman) and Drew Miller. Each of these
directors is "independent" under the listing standards of the National
Association of Securities Dealers. In addition, the Board of Directors has
determined that Mr. Pasternack, a member of the Audit Committee, is an "audit
committee financial expert" as that term is defined in Regulation S-K of the
Securities and Exchange Commission. The Audit Committee has adopted a charter a
copy of which may be obtained by request addressed to the Corporate Secretary,
Signature Eyewear, Inc., 498 North Oak Street, Inglewood, California 90302.
CODE OF ETHICS
The Company has a code of ethics that applies to its directors,
officers and employees. The Company will provide without charge a copy of the
code of ethics to any person who so requests by a letter addressed to the
Corporate Secretary, Signature Eyewear, Inc., 498 North Oak Street, Inglewood,
California 90302.
57
COMPLIANCE WITH SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's directors, executive officers and 10% shareholders to
file reports with the Securities and Exchange Commission on changes in their
beneficial ownership of Common Stock and to provide us with copies of the
reports. The Company believes that all of these persons filed all required
reports on a timely basis in fiscal 2004 except: (1) Jill Gardner and Raul
Khantzis were late in filing their Form 3s; (ii) Richard M. Torre, Edward
Meltzer, Drew Miller, Ted Pasternack, Jill Gardner, Raul Khantzis, Sheptanya
Page, Kevin D. Seifert and Marie Welsch were late in filing Form 4s reporting
options granted on February 1, 2004.
ITEM 11--EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
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, 2004 whose
compensation exceeded $100,000 during the last fiscal year (the "Named Executive
Officers"), information concerning all compensation paid for services to the
Company in all capacities during the last three fiscal years.
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
------------
NUMBER OF
FISCAL YEAR ANNUAL COMPENSATION SECURITIES
ENDED ------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION OCTOBER 31, SALARY BONUS OPTIONS COMPENSATION(1)
- --------------------------------------------------------------------------------------------------------------
Michael Prince 2004 $240,000 -- -- $18,462
Chief Executive Officer and 2003 228,462 -- -- 18,000
Chief Financial Officer(2) 2002 215,500 -- -- 25,825
- --------------------------------------------------------------------------------------------------------------
Marie Welsch(3) 2004 $150,000 -- 12,500 --
Vice President-Corporate 2003 150,000 -- -- --
Accounts
- --------------------------------------------------------------------------------------------------------------
Kevin D. Seifert(3) 2004 $110,835 -- 12,500 --
Vice President-Operations 2003 118,385 -- -- --
- --------------------------------------------------------------------------------------------------------------
Raul Khantzis(3) (4)
Vice President of 2004 $110,000 -- 12,500 --
International Sales 2003 58,580 -- -- --
- --------------------------------------------------------------------------------------------------------------
- -----------------------
(1) Includes Company contribution to 401(k) Plan and cash-out of a portion
of unused vacation.
(2) Mr. Prince was appointed Chief Executive Officer in April 2003.
(3) Appointed executive officers in fiscal 2003.
(4) Commenced employment in June 2003.
OPTION GRANTS IN LAST FISCAL YEAR
The following table presents the number of stock options granted to the
Named Executive Officers during the year ended October 31, 2004.
58
OPTIONS GRANTED DURING 2004
Potential Realizable
Value at Assumed Annual
Rates of Stock Price
Appreciation for
Option Term
Percent of
Total
Options
Number of Granted to
Securities Employees
Underlying in Exercise
Options Fiscal Price Expiration
Name Granted(#) Year ($/Sh) Date 5% 10%
Michael Prince 0 -- -- -- -- --
Marie Welsch 12,500 (1) 20% $ 0.20 9/1/2007 $ 1,375 $ 1,925
Kevin D. Seifert 12,500 (1) 20% $ 0.20 9/1/2007 $ 1,375 $ 1,925
Raul Khantzis 12,500 (1) 20% $ 0.20 9/1/2007 $ 1,375 $ 1,925
(1) The options vest on January 1, 2005; provided that options to purchase 7,500
shares vest if and only if the Company generates net income during the year
ended October 31, 2005 and the optionee is employed by the Company on December
31, 2005.
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, 2004 and the value of options held
at fiscal year end based upon the last reported sales price of the Common Stock
on the Pink Sheets over-the-counter electronic trading system under the symbol
"SEYE" as of October 31, 2004 ($0.27 per share). No Named Executive Officer
exercised any stock options during fiscal 2004.
AGGREGATED FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXECUTED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
OCTOBER 31, 2004 AT OCTOBER 31, 2004
---------------------------------------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---------------------------------------------------------------
Michael Prince 44,000 0 $ 0 $ 0
- ------------------------------------------------------------------------------------
Marie Welsch 9,300 12,500 0 $ 875
- ------------------------------------------------------------------------------------
Kevin D. Seifert 9,500 12,500 0 $ 875
- ------------------------------------------------------------------------------------
Raul Khantzis 0 12,500 -- $ 875
- ------------------------------------------------------------------------------------
EMPLOYMENT AGREEMENT
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 the Company 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 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
59
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 that 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 that 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.
COMPENSATION OF DIRECTORS
Commencing May 2003, the Board of Directors of the Company 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 director's fees as a result of the consulting arrangement
between the Company and Dartmouth Commerce of Manhattan, Inc., a corporation
owned by Mr. Torre. In fiscal 2004, we paid $40,000 of directors' fees to our
outside directors. The Company may also from time to time grant options or sell
stock to our directors under our 1997 Stock Plan. In fiscal 2004, under the 1997
Stock Plan: (1) the Company sold to four non-employee directors a total of
250,000 shares for $0.16 per share; (2) granted to Richard M. Torre, Chairman of
the Board, an option to purchase 100,000 shares for $0.12 per share; and (3)
granted to each of the four non-employee directors (including Richard M. Torre)
an option to purchase 25,000 shares of common stock for $0.16 per share. The
market price of the common stock in the over-the-counter market as reported by
Nasdaq on the date of each sale/grant was less than the sale/exercise price of
the stock/option.
ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table provides information as of February 28, 2005
regarding the Common Stock and Series A Convertible 2% Preferred Stock ("Series
A Preferred") owned by: (i) each person we know 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 Named Executive Officers and (iv) all of
the Company's executive officers and directors as a group. Except as may be
indicated in the footnotes to the table and subject to applicable community
property laws, 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.
60
NUMBER OF
NUMBER OF SHARES OF SHARES OF
NAME AND ADDRESS OF COMMON STOCK PERCENT SERIES PERCENT OF
BENEFICIAL OWNER(1) BENEFICIALLY OWNED OF CLASS A PREFERRED CLASS
- -----------------------------------------------------------------------------------------------------
Edward Meltzer 87,500(2) 1.4 -- --
- -----------------------------------------------------------------------------------------------------
Drew Miller 87,500(2) 1.4 -- --
- -----------------------------------------------------------------------------------------------------
Ted Pasternack 94,900(2) 1.5 -- --
- -----------------------------------------------------------------------------------------------------
Michael Prince 1,039,278(3) 16.6 -- --
- -----------------------------------------------------------------------------------------------------
Richard M. Torre 1,787,500(4) 28.1 -- --
- -----------------------------------------------------------------------------------------------------
Kevin D. Seifert 50,344(5) 0.8 -- --
- -----------------------------------------------------------------------------------------------------
Marie Welsch 46,700(6) 0.7 -- --
- -----------------------------------------------------------------------------------------------------
Raul Khantzis 12,500(7) 0.2 -- --
- -----------------------------------------------------------------------------------------------------
Bluebird Finance Limited -- -- 1,200,000 100
Box 957, Road Town, Tortola
British Virgin Islands
- -----------------------------------------------------------------------------------------------------
Craig N. Springer 700,000(8) 11.7 -- --
145 North Fourth Street
Grand Junction, CO 81502
- -----------------------------------------------------------------------------------------------------
All directors and executive 3,233,822(9) 49.3 -- --
officers as a group (10 persons)
- -----------------------------------------------------------------------------------------------------
- -----------------------
(1) The business address of each director and executive officer (each person
identified in the table other than Bluebird Finance Limited) is c/o
Signature Eyewear, Inc., 498 North Oak Street, Inglewood, CA 90302.
(2) Includes 25,000 shares which may be acquired upon exercise of options.
(3) Includes 44,000 shares which may be acquired upon exercise of options.
(4) Includes 125,000 shares which may be acquired upon exercise of options.
(5) Includes 22,000 shares which may be acquired upon exercise of options.
(6) Includes 21,800 shares which may be acquired on exercise of options.
(7) Includes shares which may be acquired upon exercise of options.
(8) Includes (i) 550,000 shares owned by Springer Capital Corporation, a
corporation owned by Mr. Springer; (ii) 50,000 shares issuable upon
exercise of warrants owned by Springer Capital Corporation; and (iii)
100,000 shares issuable upon exercise of warrants owned by Home Loan
Investment Company; Mr. Springer shares voting and investment power with
respect to these shares by virtue of being a director, officer and
shareholder of that corporation.
(9) Includes 327,300 shares which may be acquired upon exercise of options as
described in footnotes (2) through (7).
EQUITY COMPENSATION PLANS
The following table sets forth certain information regarding the
Company's equity compensation plans as of October 31, 2004.
61
- -------------------------------------------------------------------------------------------------------
(a) (b) (c)
- -------------------------------------------------------------------------------------------------------
Plan category Number of securities to Weighted-average Number of securities
be issued upon exercise exercise price of remaining available for
of outstanding options, outstanding options, future issuance under
warrants and rights warrants and rights equity compensation
plans (excluding
securities reflected in
column (a))
- -------------------------------------------------------------------------------------------------------
Equity compensation 383,000 $2.48 177,000
plans approved by
security holders
- -------------------------------------------------------------------------------------------------------
Equity compensation -- -- --
plans not approved by
security holders
- -------------------------------------------------------------------------------------------------------
Total 383,000 $2.48 177,000
- -------------------------------------------------------------------------------------------------------
ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In April 2003, the Company entered into a three-year consulting
agreement with Dartmouth Commerce of Manhattan, Inc. 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 the
payment of annual compensation in the amount of $55,000 per year.
ITEM 14--PRINCIPAL ACCOUNTING FEES AND SERVICES
Singer, Lewak, Greenbaum & Goldstein, LLP ("SLGG") audited the
Company's financial statements for fiscal 2003. SLGG resigned as the Company's
auditors on July 26, 2004. For fiscal 2003, the fees billed for professional
services by SLGG were as follows: Audit Fees--$79,000; Audit-Related Fees--$0;
Tax Fees--$30,000; and All Other Fees--$9,000. For fiscal 2004, the fees billed
for professional services by SLGG were as follows: Audit Fees--27,000 (relating
to reviews of the Company's Quarterly Report on Form 10-Q for the quarters ended
January 31, 2004 and April 30, 2004. [OTHER?]
Grobstein, Horwath & Company, LLP ("GHC") audited the Company's
financial statements for fiscal 2004. For fiscal 2004, the fees billed for
professional services by GHC were as follows: Audit Fees--$22,000 (including
review of the Company's Quarterly Report on Form 10-Q for the quarter ended July
31, 2004); Audit-Related Fees--$0; Tax Fees--$0; and All Other Fees--$0.
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 Audit Committee approved in advance the engagements of SLGG and
GHC for their services in fiscal 2003 and 2004.
62
PART IV
ITEM 15--EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Documents Filed as Part of Report:
1. Financial Statements:
Independent Auditor's Report
Consolidated Balance Sheets at October 31, 2003 and 2004
Consolidated Statements of Operations for the years ended October
31, 2002, 2003 and 2004
Consolidated Statements of Changes in Stockholders' Equity for the
years ended October 31, 2002, 2003 and 2004
Consolidated Statements of Cash Flows for the years ended October
31, 2002, 2003 and 2004
2. Financial Statement Schedules:
Schedule II--Valuation and Qualifying Accounts
3. Exhibits:
See attached Exhibit List
63
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
--------- ----- ----
Chief Executive Officer, Chief Financial
/s/ Michael Prince Officer and Director (Principal Financial March 14, 2005
- ----------------------------------- and Accounting Officer)
Michael Prince
/s/ Edward Meltzer Director March 14, 2005
- -----------------------------------
Edward Meltzer
/s/ Drew Miller Director March 14, 2005
- -----------------------------------
Drew Miller
/s/ Ted Pasternack Director March 14, 2005
- -----------------------------------
Ted Pasternack
/s/ Richard M. Torre Chairman of the Board March 14, 2005
- -----------------------------------
Richard M. Torre
64
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. Form of Stock Purchase Agreement used
for sales to Directors in April 2004.
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. Term Sheet dated January 21, 2005 for new
lease.
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.
65
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 grant of Confidential Treatment.]
10.17 Promissory Note dated March __, 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 Grobstein, Horwath & Company, 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.
66