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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended October 31, 1998
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
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SIGNATURE EYEWEAR, INC.
(Exact name of Registrant as Specified in its Charter)
California 95-3876317
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation Or Organization) Identification No.)
498 North Oak Street
Inglewood, California 90302
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (310) 330-2700
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each Class Name of each Exchange on which Registered
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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. [_]
On January 21, 1999, the Registrant had 5,096,489 outstanding shares of
Common Stock, $.001 par value. The aggregate market value of the 2,202,080
shares of Common Stock held by non-affiliates of the Registrant as of January
21, 1999 was $9,083,580.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement for its 1999 Annual Meeting of
Shareholders are incorporated by reference into Part III of this Form 10-K.
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PART I
The discussions in this Form 10-K contain forward-looking statements that
involve risks and uncertainties. Important factors that could cause actual
results to differ materially from the Company's expectations are set forth in
"Year 2000" and "Factors That May Affect Future Results" in Item 7 of this
Form 10-K, as well as those discussed elsewhere in this Form 10-K. All
subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by "Year 2000" and "Factors That May Affect Future Results." Those
forward-looking statements relate to, among other things, the Company's plans
and strategies, new product lines, relationships with licensors, distributors
and customers, and the business environment in which the Company operates.
Item 1--Business
General
Signature Eyewear, Inc. ("Signature" or the "Company") designs, markets and
distributes prescription eyeglass frames primarily under exclusive licenses
for Laura Ashley Eyewear, Eddie Bauer Eyewear and Hart Schaffner & Marx
Eyewear, as well as its own private labels. The Laura Ashley Eyewear
collection is one of the leading women's brand-name collections in the United
States. The Company attributes its success to its brand-name development
process and high quality, creative frame designs. The Company's brand-name
development process includes identifying a market niche, obtaining the rights
to a carefully selected brand name, producing a comprehensive marketing plan,
developing unique in-store displays and creating innovative sales and
merchandising programs for independent optical retailers and retail chains.
Signature's in-house designers work with many respected frame manufacturers
throughout the world to develop high-quality, creative designs which are
consistent with each brand-name image.
The Company's best-selling product line is Laura Ashley Eyewear, which was
launched in 1992. Signature's in-house teams design frames and in-store
displays which seek to capture the distinctive, feminine image associated with
Laura Ashley clothing and home furnishings. Laura Ashley Eyewear styles are
feminine and classic, and are positioned in the medium to mid-high price range
to reach a broad segment of the women's eyewear market. The Company's net
sales of Laura Ashley Eyewear have increased from $2.2 million in fiscal 1992
to $23.1 million in fiscal 1998.
In March 1998, Signature launched the Eddie Bauer Eyewear collection. The
Company had pursued the Eddie Bauer brand name, which had not previously been
licensed for prescription eyewear, for its widespread recognition, outdoor
heritage, casual styling, and reputation for value and quality. The Eddie
Bauer Eyewear collection offers men's and women's styles and is positioned in
the medium-price segment of the brand-name prescription market. After the
collection was eight months on the market, Eddie Bauer Eyewear's fiscal 1998
net sales of $8.5 million accounted for 20.9% of the Company's net sales,
making it the Company's second most popular brand.
Signature produces "turnkey" marketing, merchandising and sales promotion
programs to promote sales at each level in the distribution chain. 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, whether they are employed by
distributors or by Signature, the Company creates presentation materials,
marketing bulletins, motivational audio and video tapes and other sales tools
to facilitate professional presentations, and the Company offers attractive
incentive awards for reaching targeted sales levels. For its distributors who
sell to independent optical retailers, Signature provides innovative loyalty
programs.
Under the loyalty programs, which generally last from six to ten months,
each participating retailer agrees to purchase a specified quantity of frames
of new styles released during the program period. Although a participating
retailer may cancel at any time, historically most have completed the program
and renewed their participation in ensuing years. These "automatic" sales
programs have facilitated the widespread placement of new styles in optical
retail stores, have increased the Company's leverage with its manufacturers
due to the large
2
size of the Company's orders, and have improved the Company's inventory
planning. The Company's largest loyalty program is its Laura Ashley Eyewear
Loyal Partners program, which at October 31, 1998 had over 4,200 participating
retailers in the United States as well as approximately 700 international
participants. Capitalizing on the success of the Laura Ashley Loyal Partners
program, the Company began its Eddie Bauer Eyewear Loyal Partners Program
simultaneously with the launch of the new collection. At October 31, 1998 the
initial Eddie Bauer Eyewear Loyal Partners Program had over 3,700
participating retailers. Over 15% of the independent optical retailers in the
United States participated in the 1998 Laura Ashley Eyewear Loyal Partners
Program and/or the 1998 Eddie Bauer Eyewear Loyal Partners Program.
The Company's frame styles are developed by its in-house design team, which
works in close collaboration with many prominent frame manufacturers
throughout the world to develop unique designs and technologies. Signature
then contracts with the factories to manufacture the styles they have
developed. Signature sells its frames through distributors in the United
States and through exclusive distributors in foreign countries. In addition,
the Company sells directly through its own sales representatives to major
retail chains, including EyeCare Centers of America, Pearle Vision, and
LensCrafters, and to independent optical retailers in California and Arizona.
Industry Overview (1)
Eyewear Consumers. Optical retail sales in the United States have increased
during the 1990s. Retail sales of all eyewear products increased from $11.4
billion in 1990 to $15.4 billion in 1997. Correspondingly, retail sales of
eyeglass frames increased from $3.87 billion in 1990 to approximately $5.0
billion in 1997. In 1997, approximately 160.8 million Americans, just over 60%
of the nation's population, needed some form of vision correction (either
eyeglass frames with corrective lenses or contact lenses). More than 91% of
people over the age of 45 need corrective eyewear, many due to presbyopia, a
condition which makes it difficult to focus on nearby objects, such as small
newspaper print. The table below demonstrates how the number of people needing
vision correction increases with age.
Age Breakdown of U.S. Population Needing Vision Correction
Age Group of
Purchasers as
1997 % of Total % of Age
Population Purchasers of Group Needing
Age (In Millions) Vision Correction Vision Correction
--- ------------- ----------------- -----------------
0-14....................... 58.3 5.7% 15.5%
15-24...................... 36.3 9.5 42.1
25-44...................... 83.5 33.4 64.3
45-64...................... 55.4 31.6 91.7
65 and up.................. 34.1 19.8 93.4
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Total...................... 267.6 100.0%
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(1) Unless otherwise noted, all the data in this Industry Overview section
relates to the eyewear market in the United States. The source for this
data is the 1998 U.S. Optical Industry Handbook published by Jobson
Publishing Corporation in May 1998.
The average age of the United States population is expected to increase over
the next 25 years, due to the aging of the "baby-boomers" born between 1946
and 1964. As more of the baby-boomers exceed age 45, the Company believes
sales of corrective eyewear should increase.
Sales of eyewear have also increased due to the evolution of eyewear into a
fashion accessory. Until the mid-1970s, eyeglass frames were viewed as medical
implements which were "dispensed" but never "sold." Because styling was not
emphasized, successful frames often remained popular for years, and sometimes
for decades. In the mid-1970s, experts from other industries introduced
designer names and consumer advertising to
3
the optical industry, as well as sweeping design changes. These changes
resulted in increased consumer demand for the new products. Although eyeglass
frames are a fashion accessory for many people, the styles are not subject to
seasonal changes, and they change less rapidly than styles in the apparel
industry.
Competitive Vision Correction Methods. Currently, there are two methods of
correcting vision impairment which compete with prescription eyeglasses:
contact lenses and surgery. Although retail sales of contact lens remained
flat from 1995 through 1997 at $1.9 billion, their sales as a percentage of
total retail sales decreased from 13.5% in 1995 to 12.5% in 1997. 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. The Company does not believe that these techniques will
materially and adversely affect sales of prescription eyewear in the near
future. 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, and mass merchandisers such as
Wal-Mart and Price Club. In 1997, independent optical retailers had a 61.5%
market share, chains had a 32.5% market share, mass merchandisers had a 4.0%
market share, and managed care organizations had a 2.0% market share.
Growth Strategy
The Company intends to capitalize on the success of the Laura Ashley Eyewear
and Eddie Bauer Eyewear lines by further diversifying into new lines, adding
new products and expanding its distribution. Specific elements of the
Company's growth strategy include:
. Existing Brands. The Company intends to continue to create innovative
marketing, merchandising and sales promotion programs to increase the
market penetration of its existing lines of brand-name eyewear.
. Additional Brands. The Company will continue its efforts to acquire
exclusive brand-name licenses to market prescription eyeglass frames in
market niches in which the Company does not currently compete.
. New Product Lines. The Company intends to expand the marketing of its own
private-label collections of frames and may develop one or more
additional private-label lines.
. Sunwear. The Company plans to acquire new brand-name licenses for
sunglass frames.
. International Sales. The Company plans to continue expanding the
international markets into which it distributes its eyewear lines.
. Acquisitions. The Company is exploring the possibility of growth through
acquisition of one or more companies whose employees, products or
services would help the Company improve its market penetration or expand
into new markets.
Brand Development
The Company attributes its success to its brand-name development process and
frame designs. The Company's brand-name development process includes
identifying a market niche, obtaining the rights to a carefully selected brand
name, producing a comprehensive marketing plan, designing frames consistent
with each brand image, developing unique in-store displays, and creating
innovative sales and merchandising programs for independent optical retailers
and retail chains.
4
Identifying a Market Niche and Obtaining the Rights to a Brand
Name. Signature's brand-name development process begins with identifying an
eyewear market niche. The Company characterizes a market niche by referring to
the target customer's gender and age (e.g., adult, child, teenage), the
niche's general image and styling (e.g., feminine, masculine, casual), its
price range, and the applicable channels of distribution. Once the Company
chooses a market niche, a brand name is identified which the Company believes
will appeal to the target customer in that niche. The Company believes that
for a brand name to have the potential for widespread sales in the optical
industry, the name must have strong, positive consumer awareness, a
distinctive personality and an image of enduring quality. Brands that are
aimed at narrower niches can also have optical industry impact (albeit
smaller), so long as consumer awareness exists within the targeted niche.
After the Company has determined that a targeted brand name is available,
the Company develops a preliminary marketing plan to present to the potential
licensor. The development process is a team effort which includes determining
the market position of the brand name outside the optical industry and the
availability of cross-marketing opportunities. The preliminary marketing plan
demonstrates the Company's (i) in-depth understanding of the potential
licensor's market position, (ii) innovative strategies for extending the
brand's image to the eyewear market, (iii) preliminary plans for
merchandising, advertising and sales promotion, and (iv) broad concepts for
frame design.
The Company then formally presents the preliminary marketing plan to the
potential licensor. The final steps in acquiring an exclusive eyewear license
for a brand name are receiving the licensor's approval and entering into a
license agreement.
The Company's existing license agreements contain terms limiting the ability
of the Company to market competing brand names. See "Factors That May Affect
Future Results--Limitations on Ability to Distribute Other Brand-Name Eyeglass
Frames."
Final Marketing Plan. Once the Company has acquired an exclusive eyewear
license for a brand name, it creates a final marketing plan. The final
marketing plan contains detailed concepts for frame designs, establishes the
brand's identity within the optical industry, and sets forth the first year's
merchandising, advertising and sales promotion plans. The Company's ongoing
focus on its marketing plans, including annual updates, provides a framework
for keeping the Company's marketing and sales strategies current with changes
in the eyewear industry and the licensor's marketing.
Frame Design and Quality. 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. Signature then contracts with its factory partners to
manufacture the styles they have co-developed. By these methods, Signature is
able to choose the strengths of a variety of factories worldwide, and to avoid
reliance on any one factory. Signature's design team currently consists of two
designers and a management frame committee, which reviews each style.
Signature's designers continue to work closely at each stage of a style's
development to assure quality. The Company's frames generally require over 200
production steps to manufacture, including hand soldering of bridges, fronts
and endpieces.
Quality Control. The Company uses only manufacturers capable of meeting
Signature's 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 every frame in the sample
shipments. This process provides sufficient time to resolve problems with a
style's quality before its release date. The Company's quality committee
selectively examines frames in subsequent shipments to ensure ongoing quality
standards. If, at any stage of the quality control process, frames do not meet
the Company's quality standards, then the Company returns them to the factory
with instructions to improve their quality. If the quality does not meet the
Company's standards before a style's release date, the style is not released.
5
Limited Quantity of Style Releases. The Company has launched its brand-name
collections with five or fewer styles. Further, although for each brand the
Company has many designs in different stages of development, it has released
no more than three styles per brand per month (each style generally comes in
two or three colors and one or two sizes). This strategy has contrasted with
many of the Company's competitors, who release many more styles than
Signature. The Company believes that its limited release strategy helps to
ensure focus on each new style. Further, the Company believes that this
strategy has resulted in larger orders per style, which has increased its
leverage with the contract manufacturers of its frames.
Marketing, Merchandising and Sales Programs. Signature produces "turnkey"
marketing, merchandising and sales promotion programs to promote sales at each
level in the distribution chain. 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, whether they are employed by distributors or by Signature, the
Company creates presentation materials, marketing bulletins, motivational
audio and video tapes and other sales tools to facilitate professional
presentations, and the Company offers attractive incentive awards for reaching
targeted sales levels. For its distributors who sell to independent optical
retailers, Signature provides its innovative loyalty programs.
Loyalty Programs. The Company attributes a significant portion of its
success with independent optical retailers in the United States to its loyalty
programs. Under these programs, which generally last from six to ten months,
each participating retailer agrees to purchase a specified quantity of frames
(generally three to six frames per month) of new styles released for that
brand during the program period. The Company's loyalty programs benefit the
Company, its distributors and participating retailers. The Company and its
distributors benefit from the automatic sales and the reorders they generate.
The distributors also benefit from the retailers' agreement not to change
distributors for that specific program. Retailers benefit from sales of new
styles, program-ending gifts, and from the special in-store merchandising
(often available first--or only--to participating retailers). Although a
retailer may drop out of a loyalty program at any time without penalty,
historically the majority of participating retailers have completed the
program and renewed their participation in ensuing years. The Company believes
this is principally because the frames have sold well and retailers have
wanted to earn the attractive incentive awards provided by the Company and its
distributors at the end of the program.
At October 31, 1998, the 1998 Laura Ashley Eyewear Loyal Partners Program
had over 4,200 United States participants and over 700 international
participants. Each United States participant in the 1998 program agreed to
purchase at least 37 Laura Ashley Eyewear frames in accordance with its
distributor's release schedule.
Capitalizing on the success of the Laura Ashley Loyal Partners program, the
Company began its Eddie Bauer Eyewear Loyal Partners Program simultaneously
with the launch of the new collection. At October 31, 1998 the initial Eddie
Bauer Eyewear Loyal Partners Program had over 3,700 participating retailers.
Each United States participant in the 1998 program agreed to purchase a total
of 30 Eddie Bauer Eyewear frames in accordance with its distributor's release
schedule.
Over 15% of the independent optical retailers in the United States
participated in the 1998 Laura Ashley Eyewear Loyal Partners Program and/or
the 1998 Eddie Bauer Eyewear Loyal Partners Program.
Products
The Company's principal products during fiscal 1998 were eyeglass frames
sold under the brand names Laura Ashley Eyewear, Eddie Bauer Eyewear, Hart
Schaffner & Marx Eyewear, and Jean Nate Eyewear. The Company also has a
division that distributes eyeglass frames both under the Company's own
private-label brand as well as other companies' brands, and a division that
sells brand-name close-outs at discounted prices.
6
The following table provides certain information about the market segments,
introduction dates and approximate retail prices of the Company's products.
Approximate
Customer Introduction Retail
Brand Name/Segment Gender/Age Date Prices(1)
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Laura Ashley
Prescription........................ Women March 1992 $125 - 180
Sunwear............................. Women March 1993 $ 80 - 100
Children............................ Girls June 1993 $ 80 - 100
Jean Nate Eyewear(2).................. Women April 1996 $ 70 - 90
Hart Schaffner & Marx................. Men September 1996 $140 - 170
Eddie Bauer........................... Men/Women March 1998 $100 - 135
Signature's Lines Private Labels...... Men/Women 1986 $ 70 - 130
Unisex 1987 $ 70 - 130
Boys/Girls 1987 $ 60 - 90
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(1) Retail prices are established by retailers, not the Company.
(2) The license for Jean Nate Eyewear was not renewed and the line was
discontinued as of September 30, 1998.
Laura Ashley Eyewear
Signature's sales growth since 1992 has been primarily attributable to the
success of its Laura Ashley Eyewear collection. The Company's net sales of
Laura Ashley Eyewear increased from $2.2 million in fiscal 1992 to $24 million
in fiscal 1997. Net sales of Laura Ashley Eyewear in fiscal 1998 decreased by
3.8% to $23.1 million as compared to fiscal 1997. Nonetheless, the Laura
Ashley Eyewear Collection remains one of the leading women's brand-name
collections in the United States.
Signature pursued Laura Ashley for its strong female following; its feminine
styling and image which are renowned worldwide; its significant worldwide
retail presence; its distinctive, high quality fabrics, home furnishings and
clothing; and its reputation for producing products of enduring quality. Like
Laura Ashley clothing and home furnishings, Laura Ashley Eyewear has been
designed to be feminine and classic, to be fashionable without being trendy.
Signature uses the phrase "premier feminine collection" to describe Laura
Ashley Eyewear. The hallmark of Laura Ashley Eyewear is its attention to
detail, and the collection is known for its unique designs on the styles'
temples, fronts and end pieces. Laura Ashley Eyewear styles have been designed
to fit many different face shapes and sizes. The majority of Laura Ashley
Eyewear styles have been designed to reach a broad segment of the women's
eyewear market. The designs sold as the "City Collection," which was
introduced in fiscal 1998, are more fashion-forward, and are aimed at a
slightly younger women's market. The more recent Laura Ashley Eyewear styles
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.
Signature's in-house merchandising team has conceptualized and designed
unique in-store "environments" to attract the target customer to the frames.
These "environments" are modular, so that a small display is an integral part
of a larger one, and retailers of varying sizes can use the displays. In
addition, Signature's merchandising team has custom designed point-of-sale
displays for its key accounts. The original and second-generation Laura Ashley
Eyewear environments were covered with colorful Laura Ashley textured floral-
print fabric, which provided the retailer with an instant new look, and, in
effect, a Laura Ashley "store within a store." The third-generation display
environments have as their centerpiece a wooden chest modeled after antique
English furniture. In fiscal 1998, these environments were displayed with a
subdued Laura Ashley fabric to provide a subtle feminine accent. The Company
intends to introduce new Laura Ashley Eyewear environments in fiscal 1999
retaining the wooden chest, but returning to the use of colorful Laura Ashley
fabrics.
7
The principal market segment for Laura Ashley Eyewear is women's
prescription eyewear. With the addition of the City Collection in fiscal 1998,
the Company released 18 Laura Ashley women's eyewear styles, of which 12 were
traditional, and six styles were from the City Collection. In addition to
these styles, the Company released two styles from its Laura Ashley Sunwear
collection, and two styles from Laura Ashley for Girls (see below). Net sales
for women's prescription eyewear in the Laura Ashley Eyewear collection were
$19.0 million in fiscal 1996, $ 21.6 million in fiscal 1997, and $21.4 million
in fiscal 1998.
Each year since 1993, the Company has released Laura Ashley Sunwear styles
during its second fiscal quarter. These frames are delivered to optical
retailers with ready-to-wear non-prescription sunglass lenses containing
quality UV 400 protection. These lenses can be replaced with prescription
sunglass lenses if the customer desires. Net sales of Laura Ashley Sunwear
were $0.9 million in fiscal 1996, $0.8 million in fiscal 1997 and $0.7 million
in fiscal 1998. In addition to Laura Ashley Sunwear, almost all of the
Company's styles can be fitted with sunglass lenses to make them into sunwear.
Fiscal 1998 net sales of Laura Ashley Sunwear were impacted by the Company's
decision to release only two of the three styles scheduled, because one style
did not meet the Company's quality standards.
Each Summer since 1993, Signature has released Laura Ashley for Girls
styles, with their own graphics, targeting girls aged 7-13. Because the frames
are designed and produced in small sizes, they have also been purchased from
time to time by petite women. Net sales of Laura Ashley for Girls Eyewear were
$1.2 million in fiscal 1996, $1.6 million in fiscal 1997, and $1.0 million in
fiscal 1998. The $600,000 decrease in net sales of Laura Ashley for Girls in
fiscal 1998 from fiscal 1997 was due in large part to the decision by many
chains to develop and import their own styles. In fiscal 1999, the Company
intends to reposition the Laura Ashley for Girls line, to broaden its appeal
by renaming it the "Petites" collection, and by releasing styles aimed to
reach women and girls with smaller faces, regardless of age.
The Company has the exclusive right to market and sell Laura Ashley Eyewear
through a license with Laura Ashley entered into in May 1991. The license
covers a specified territory including the United States, Canada, the United
Kingdom, Australia, New Zealand, Colombia, France, Belgium, and the
Netherlands. The Company also has a right of first refusal to distribute Laura
Ashley Eyewear in Mexico and all other European countries. The Laura Ashley
license terminates in 2001, but may be renewed by the Company at least through
January 2006 so long as the Company is not in breach of the license agreement
and generates the required amount of minimum net sales. Laura Ashley may
terminate the license before its term expires if (i) the Company commits a
material breach of the license agreement and fails to cure that breach within
30 days after notice is given, (ii) the management or control of the Company
passes from Bernard Weiss and Julie Heldman to other parties whom Laura Ashley
may reasonably regard as unsuitable, (iii) the Company fails to propose a
selection of styles of eyewear which Laura Ashley in exercising good faith is
willing to approve for manufacture and distribution, (iv) the Company fails to
have net sales of Laura Ashley Eyewear sufficient to generate minimum
royalties in each of any two years, (v) the Company is unable to pay its debts
in the ordinary course of business or enters into liquidation, becomes
bankrupt or insolvent, or is placed in the control of a receiver or trustee,
or (vi) the Company in any year fails to spend a specified percentage of net
sales of Laura Ashley Eyewear on advertising and promotion. For purposes of
renewal and early termination of the license agreement, the Company must
generate total Laura Ashley Eyewear minimum net sales of $10.0 million, $11.0
million, and $12.0 million for the contract years ending January 31, 1999,
2000, and 2001, respectively. The Company has substantially exceeded its
minimum net sales requirements each year under the license agreement.
Eddie Bauer Eyewear
In June 1997, the Company acquired the exclusive license from Eddie Bauer to
market Eddie Bauer Eyewear, a collection of men's and women's prescription
eyewear styles. Eddie Bauer, which was founded in 1920, is a subsidiary of
Spiegel, Inc. The Company pursued the Eddie Bauer name, which had not
previously been licensed for prescription eyewear, for its widespread name
recognition, outdoor heritage, casual styling, and reputation for value and
quality. Eddie Bauer currently has over 500 retail stores worldwide, and
annually distributes approximately 120 million Eddie Bauer merchandise
catalogs.
8
The Eddie Bauer Eyewear collection, which the Company launched in March
1998, is aimed at a different market niche than any of the Company's other
brand names. In accordance with the Company's marketing plan, the collection's
frame designs and its marketing, merchandising and sales promotion programs
are coordinated so that they capture the Eddie Bauer casual lifestyle image,
and its outdoor heritage. Inspired by Eddie Bauer's home furnishings and
casual image, Eddie Bauer Eyewear's 1998 frame designs are known for their
innovative weathered colorations and granular treatments. The Company also
uses customized components on each Eddie Bauer Eyewear frame, to create a
uniform image for the entire collection. Moreover, the Company designed point-
of-sale graphics displays using the same models shown in Eddie Bauer catalogs,
to bring the Eddie Bauer image into retail optical stores. In keeping with
Eddie Bauer's commitment to value, the collection consists of medium priced
frames, a market-pricing niche which does not currently have many brand-name
competitors. The Company believes that its purchasing power and its commitment
to frame quality provide it with a competitive advantage in its targeted
market niche.
The Company has the exclusive worldwide right to market and sell Eddie Bauer
Eyewear through a license agreement with Eddie Bauer entered into in June
1997. Without the prior written consent of Eddie Bauer, however, the Company
may market and sell Eddie Bauer Eyewear only in the United States and in the
other countries specified in the license agreement, most notably Japan, the
United Kingdom, Germany, France, Australia and New Zealand. The license
agreement terminates in December 2002, but the Company may renew it for two
three-year terms provided the Company meets certain minimum net sales and
royalty requirements and is not in material default. Eddie Bauer may terminate
the license before the expiration of its term if (i) a person or entity
acquires more than 30% of the Company's outstanding voting securities, and
thereby becomes the largest shareholder and owns more shares than Bernard L.
Weiss, Julie Heldman, Robert Fried, Robert Zeichick, Michael Prince and Daniel
Warren (all of whom are currently directors and/or officers of the Company),
or (ii) the Company commits a material breach of the license agreement and
fails to cure that breach within 30 days after notice is given.
Hart Schaffner & Marx Eyewear
Signature expanded its presence to the brand-name men's eyewear market in
fiscal 1996 when it acquired a license from Hart Schaffner & Marx, a
subsidiary of Hartmarx Corporation, a leading manufacturer of tailored
clothing. Hart Schaffner & Marx has an image of enduring quality, and is a
recognized name among men who purchase apparel in the medium to high price
range.
The Hart Schaffner & Marx Eyewear collection is targeted at men who are
somewhat conservative and interested in quality, comfort and craftsmanship.
The Company determined that men are generally concerned about both function
and fashion, so the frames contain features which enhance their durability--
the highest quality screws, nosepads and spring hinges--and come with a two-
year "no fault, worry-free" warranty. The collection is designed to fit a
broad spectrum of men, and selected styles have longer temples and larger
sizes than those generally available. Further, some of the styles integrate
Hart Schaffner & Marx fabric patterns into the frame designs.
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 provides that Hart
Schaffner & Marx may not grant to any third person the right to distribute
eyeglass and sunglass frames, lenses and other eyewear products under the Hart
Schaffner & Marx brand name in any country in the world without first offering
the Company the exclusive right to do so. As of January 20, 1999, the Company
has begun selling Hart Schaffner & Marx Eyewear in Australia and New Zealand,
after obtaining the rights from Hart Schaffner & Marx. The Hart Schaffner &
Marx license terminates in June 1999, but 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 (i) someone other than Bernard
Weiss, Julie Heldman, Robert Fried or Robert Zeichick acquires more than 50%
of the Company's outstanding voting securities, (ii) all of Ms. Heldman and
Messrs. Weiss, Zeichick and Fried cease to be involved in a significant manner
in the exploitation of Hart Schaffner & Marx Eyewear
9
before June 30, 1999 and after the last of such four persons ceases to be
involved the Company fails within 90 days to submit a marketing plan for Hart
Schaffner & Marx Eyewear that is acceptable to Hart Schaffner & Marx, (iii)
the Company sells or otherwise transfers substantially all its assets used in
the manufacture, promotion and distribution of eyeglass frames, (iv) the
Company does not generate the minimum net sales required by the license for
two consecutive years, (v) the Company fails to perform its material
obligations under the license agreement and fails to cure that breach within
30 days after notice is given, or (vi) after written notice in the event any
of the Company's representations and warranties are not correct in any
material respect.
Jean Nate Eyewear
In 1995, the Company obtained the license for Jean Nate Eyewear, and
developed a collection targeted at women seeking to pay an affordable price
(approximately $70 to $90 at retail) for quality brand-name frames which offer
unique designs, attention to details, and brand-name identification. "Jean
Nate" is a registered trademark of Revlon. The Company commenced selling Jean
Nate Eyewear in June 1996, but did not pursue the renewal of the Jean Nate
Eyewear license, which terminated on September 30, 1998. Pursuant to the Jean
Nate license agreement, the Company may continue the sales of Jean Nate
Eyewear through March 1999 to sell down the remaining inventory.
Signature's Private-Label Collections
From its inception in 1983 until 1986, the Company, then known as USA
Optical Distributors, Inc., sold only brand-name frames purchased from other
frame suppliers. To take advantage of the increased margins available to
importers, the Company in 1986 began designing its own styles for contract
manufacture overseas. Those styles became the Camelot collection, which
contains a broad range of high-quality men's, women's, unisex, girls' and
boys' styles.
To date, the Company has sold the Camelot collection primarily through USA
Optical, which is now a division of Signature. Commencing in fiscal 1998, the
Company expanded its private-label collections to add different designs and a
collection aimed at the growing managed vision care market segment. Net sales
of the Company's private-label collections, including the Camelot collection,
were $2.0 million, $2.1 million, and $1.6 million in fiscal 1996, fiscal 1997
and fiscal 1998, respectively. USA Optical continues to sell frames from other
suppliers as part of its sales mix. USA Optical had total net sales of $3.7
million in fiscal 1996, $3.9 million in fiscal 1997, and $3.5 million in 1998.
Brand Name Close-Outs
Another Signature division, Optical Surplus, sells brand-name close-outs
(discontinued styles) at discounts. Optical Surplus has also served as a
useful outlet for selling the Company's overstocks of its own brand-name
products and its own Camelot collection. Using Optical Surplus, the Company is
able to control the distribution of its overstocks without disturbing the
market. Optical Surplus had total net sales of $1.2 million in fiscal 1996,
$1.0 million in fiscal 1997, and $2.0 million in fiscal 1998.
Distribution
The Company distributes its products through its distributors in the United
States and through exclusive distributors in foreign countries; through its
own account managers to major optical retail chains, including EyeCare Centers
of America, Pearle Vision and LensCrafters; through its own direct sales
force, which sells directly to independent optical retailers in California and
Arizona; and through telemarketing (USA Optical and Optical Surplus).
10
The following table sets forth the Company's net sales by distribution
channel for the periods indicated:
Year Ended October 31,
-----------------------
1996 1997 1998
------- ------- -------
(In Thousands)
Domestic distributors................................ $12,965 $14,402 $17,504
Optical retail chains................................ 7,120 9,297 11,252
Telemarketing(1)..................................... 4,862 4,871 5,592
International distributors........................... 2,486 2,540 3,473
Direct sales(2)...................................... 847 2,066 3,071
------- ------- -------
$28,280 $33,176 $40,892
- --------
(1) USA Optical and Optical Surplus.
(2) The Company began selling directly to independent optical retailers in
California in 1996 and Arizona in 1997.
Domestic Distributors. The Company believes that, to maximize sales of its
brand-name eyeglass frames, it must selectively limit its distributors to
those who (i) adhere to and implement the Company's marketing strategies, (ii)
distribute eyewear to optical retailers that market products consistent with
each brand's image and pricing strategy, and (iii) provide a high level of
customer service and technical expertise. Moreover, Signature's marketing
plans require a significant commitment of time, effort and money on the part
of the distributors. At October 31, 1998, the Company had 24 domestic
distributors.
Because its distributors sell frames supplied by more than one company, the
Company attempts to motivate the distributors' sales representatives to show
Signature's frames first. The Company provides them with various sales tools,
which have included automatic sales through its loyalty programs, and other
tools which are created and produced by the Company's in-house team, including
motivational audio tapes and videotapes, marketing bulletins and high impact
sales promotions. The Company also offers incentive awards, such as first-
class trips, for reaching targeted sales levels.
The Company has no written agreements with its domestic distributors except
written understandings not to resell or divert Laura Ashley Eyewear through
unauthorized channels of distribution, and not to expand the territories in
which they sell the Company's products without the Company's prior consent.
Accordingly, the relationships may be terminated by either party at any time,
without penalty (subject, in Signature's case, to any restrictions under
applicable state law). See "Factors That May Affect Future Results--
Relationships with Domestic Distributors."
Optical Retail Chains. Signature sells directly, through its own key account
managers, to optical retail chains whose images are compatible with the images
of the Company's brand-name eyewear, including EyeCare Centers of America,
Pearle Vision and LensCrafters. EyeCare Centers of America and Pearle Vision
have each used in-store displays customized by the Company to feature its
products, and have dedicated prime floor space to Laura Ashley Eyewear and
Eddie Bauer Eyewear.
Telemarketing. The Company's USA Optical and Optical Surplus divisions sell
frames through a form of telemarketing to optical retailers, focusing on
establishing long-term, ongoing relationships. USA Optical offers its
customers premium incentives, such as first class vacations, electronic
equipment and household items for purchasing specified numbers of frames. Many
USA Optical customers buy frames from the Company on a monthly basis in order
to earn the premiums they have chosen to pursue. USA Optical's annual
vacations have been among its most successful premiums, and since 1991 over
300 USA Optical customers have attended one or more of its trips.
International Distributors. Since 1993, the Company has sold Laura Ashley
Eyewear internationally through distributors who have exclusive agreements for
defined territories. Before establishing a distributor relationship, Signature
reviews the distributor's financial condition and its ability to work closely
with the Company in marketing and selling its brand-name products.
International distributors must meet specific unit
11
volumes within specified time periods. The large majority of international
sales have been of Laura Ashley Eyewear in England, Canada and Australia. The
Company began selling Eddie Bauer Eyewear to three international distributors
in its third quarter of fiscal 1998. During fiscal 1998, the Company entered
into an agreement with a Japanese company to distribute Eddie Bauer Eyewear in
Japan, with sales due to begin in the first quarter of fiscal 1999.
Direct Sales (California and Arizona). Signature began selling directly to
independent optical retailers in California in 1996 and in Arizona in 1997.
Direct net sales to independent optical retailers in California and Arizona in
fiscal 1998 were $3,071,000, a 50% increase over fiscal 1997 net sales. One
reason for the increase in net sales is the higher unit price the Company
receives when it sells directly to the optical retailer. Another reason was an
increase in the number of units sold in California from 49,074 in fiscal 1997
to 81,361 in fiscal 1998. The Company believes the combined increase in dollar
and unit volume in California is attributable to the Company's ability to work
closely with its own direct sales representatives, who, unlike distributors'
sales representatives, are dedicated to selling only the Company's products,
and the Company's ability to require its sales representatives to implement
the Company's marketing plans.
Contract Manufacturing
The Company's frames are manufactured to its specifications by a number of
contract manufacturers located outside the United States. The manufacture of
high quality metal frames is a labor-intensive process which can require over
200 production steps (including a large number of quality-control procedures)
and from 90 to 180 days of production time. Signature has used manufacturers
principally in Japan, Hong Kong/China, Italy and France.
Historically, most of the Company's frames were manufactured in Japan, which
accounted for approximately 39.9% and 48.9% (in cost) of the frames purchased
by the Company in fiscal 1996 and fiscal 1997, respectively. During the past
several years, the Company has expanded the number and geographic locations of
its contract manufacturers. In fiscal 1998, contract manufacturers in Japan
accounted for only 26.7% (in cost) of the frames purchased by the Company, and
most of the remaining frames designed by the Company were purchased from
contract manufacturers in Hong Kong that have manufacturing facilities in
China (40.4%), and in Italy (17.5%). 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 to pay for any of its frames prior to shipment.
Payment terms for the Company's products currently range from cash upon
shipment (with a 1% to 3% discount) to terms ranging from 60 to 90 days on
open account. For frames imported other than from Hong Kong manufacturers, the
Company is obligated to pay in the currency of the country in which the
manufacturer is located. In the case of frames purchased from manufacturers
located in Hong Kong/China, the currency is United States dollars. For almost
all of the Company's other frame purchases, its costs vary based on currency
fluctuations, and it generally cannot recover increased frame costs (in United
States dollars) in the selling price of the frames.
12
The purchase of goods manufactured in foreign countries is subject to a
number of risks. See "Factors That May Affect Future Results--Dependence Upon
Contract Manufacturers; Foreign Trade Regulation."
Competition
The markets for prescription eyewear are intensely competitive. There are
thousands of frame styles, including hundreds with brand names. At retail, the
Company's eyewear styles compete with styles that do and do not have brand
names, styles in the same price range, and styles with similar design
concepts. To obtain board space at an optical retailer, the Company competes
against many companies, both foreign and domestic, including Luxottica Group
S.p.A.; Safilo Group S.p.A.; and Marchon Eyewear, Inc. Signature's largest
competitors have significantly greater financial, technical, sales,
manufacturing and other resources than the Company. They also employ direct
sales forces that are significantly larger than the Company's, and are thus
able to realize a higher gross profit margin. At the distributor level, sales
representatives often carry lines of eyewear from other companies, and the
Company must vie for their attention. At the major retail chains, the Company
competes not only against other eyewear suppliers, but also against the chains
themselves, which license some of their own brand names for design,
manufacture and sale in their own stores. Luxottica, one of the largest
eyewear companies in the world, is vertically integrated, in that it
manufactures frames, distributes them through direct sales forces in the
United States and throughout the world, and owns LensCrafters, one of the
largest United States retail optical chains.
The Company competes in its target markets through the quality of the brand
names it licenses, its marketing and merchandising, the popularity of its
frame designs, the reputation of its styles for quality, and its pricing
policies. See "Brand Development" and "Products".
Backlog
The Company generally ships eyeglass frames upon receipt of orders, and does
not operate with a material backlog.
Employees
At October 31, 1998, the Company had 130 full-time employees, including 52
in sales and marketing, 15 in customer service and support, 35 in warehouse
operations and shipping and 28 in general administration and finance. None of
the Company's employees is covered by a collective bargaining agreement. The
Company considers its relationship with its employees to be good.
Item 2--Description of Properties
In the third quarter of fiscal 1998, the Company entered into amendments to
its lease to add 20,000 square feet. It took possession of 8,000 square feet
of the additional space in fiscal 1998, thus bringing the total leased space
to approximately 52,000 square feet, and made certain leasehold improvements
to add increased office space. The Company intends to occupy the remaining
12,000 square feet during fiscal 1999. The building is used as the Company's
principal executive offices and as a warehouse. The lease for this facility
expires in 2005. The Company believes that its existing facility is well
maintained and in good operating condition.
Item 3--Legal Proceedings
The Company is not involved in any material legal proceedings.
Item 4--Submission of Matters to a Vote of Securityholders
None.
13
PART II
Item 5--Market for Registrant's Common Equity and Related Stockholder Matters
Common Stock
The Company's Common Stock has been traded on the Nasdaq National Market
System under the symbol "SEYE" since the commencement of the Company's initial
public offering on September 11, 1997. Before that time, there was no public
market for the Company's Common Stock. The following table sets forth, for the
period indicated, certain high and low prices for the Common Stock as reported
by the Nasdaq Stock Market.
High Low
------- ------
Fiscal Year Ended October 31, 1997
Fourth Quarter (beginning September 11, 1997)............... $11.875 $8.50
Fiscal Year Ended October 31, 1998
First Quarter............................................... $ 9.125 $6.75
Second Quarter.............................................. $10.375 $7.875
Third Quarter .............................................. $ 9.50 $7.00
Fourth Quarter.............................................. $ 7.50 $3.125
On January 21, 1999, the last sales price of the Common Stock as reported on
the Nasdaq Stock Market was $4.125 per share. As of January 21, 1999, there
were 24 holders of record of the Common Stock.
Dividends
The Company was treated as an S Corporation from 1990 through September 15,
1997, the date immediately preceding the closing of its initial public
offering. During the period the Company was an S Corporation, its income,
whether or not distributed, was taxed for federal and state income tax
purposes directly to the holders of the Common Stock, rather than to the
Company. As a result of the Company's treatment as an S Corporation, the
Company historically provided its shareholders, through dividends, with funds
for the payment of income taxes on the earnings of the Company which were
included in their taxable income. In addition, the Company paid dividends to
shareholders to provide them with a return on their investment. The Company
paid dividends of $1,328,000 for fiscal 1996 and $3,982,000 for fiscal 1997.
Since September 16, 1997, the Company has been treated as a C Corporation, and
has become subject to federal and state corporate income taxes. The Company
does not currently intend to pay dividends on its Common Stock and plans to
follow a policy of retaining earnings to finance the growth of its business.
The Company paid no dividends in fiscal 1998.
14
Item 6--Selected Financial Data
The following data should be read in conjunction with the Financial
Statements and related notes and with "Management's Discussion and Analysis of
Results of Operations and Financial Condition" appearing elsewhere in this
Form 10-K.
Year Ended October 31,
---------------------------------------------------
1994 1995 1996 1997 1998
------- ------- --------- --------- ---------
(In Thousands, Except Per Share Data)
Statement Of Income Data:
Net sales................. $20,051 $23,571 $28,280 $33,176 $40,892
Gross profit.............. 10,385 12,582 16,349 19,677 24,343
Total operating expenses.. 9,079 10,780 14,027(1) 15,667 20,137
Income from operations.... 1,306 1,802 2,322 4,010 4,206
Net income................ 1,107 1,635 2,012 3,585 2,750
Net income per share...... 0.52
Pro forma net income (2).. 690 1,030 1,265 2,340
Pro forma net income per
share.................... 0.36(2) 0.61(2)
Weighted average common
shares outstanding....... 3,546,519(3) 3,829,822 5,254,156
At October 31,
---------------------------------------------------
1994 1995 1996 1997 1998
------- ------- --------- --------- ---------
Balance sheet data:
Current assets............ $ 4,676 $ 6,462 $ 8,989 $19,964 $23,548
Total assets.............. 5,211 7,260 10,293 21,175 25,151
Current liabilities....... 3,490 4,602 7,207 3,860 5,736
Total liabilities......... 4,350 5,314 7,364 3,863 5,736
Stockholders' equity...... 861 1,946 2,929 17,312 19,415
- --------
(1) Includes $300,000 in compensation expense recognized by the Company in
connection with the issuance of 108,016 shares of Common Stock to an
executive officer.
(2) The pro forma presentation reflects a provision for income taxes as if the
Company had always been a C corporation.
(3) Pro forma.
Item 7--Management's Discussion and Analysis of Results of Operations and
Financial Condition
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 "Year 2000" and "Factors That May
Affect Future Results" in this Item 7 of this Form 10-K, as well as those
discussed elsewhere in this Form 10-K. All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on
its behalf are expressly qualified in their entirety by "Year 2000" and
"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, 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 Form 10-K.
Overview
The Company derives revenues primarily through the sale of brand-name
eyeglass frames, including Laura Ashley Eyewear, Eddie Bauer Eyewear, and Hart
Schaffner & Marx Eyewear. The Company also has a division
15
which distributes the Company's own Camelot brand as well as other brands and
a division which sells brand-name close-outs at discounted prices.
Since 1993, the Laura Ashley Eyewear collection has been the leading source
of revenue for the Company. Net sales of Laura Ashley Eyewear accounted for
74.6%, 72.5%, and 56.4% of the Company's net sales during fiscal 1996, fiscal
1997, and fiscal 1998, respectively. In March 1998, the Company launched the
Eddie Bauer Eyewear collection, which accounted for 20.9% of the Company's
1998 fiscal year net sales although it was on the market for only eight months
of that fiscal year. While the Company intends to continue reducing its
dependence on the Laura Ashley Eyewear line through the development of Eddie
Bauer Eyewear and other brand names and product offerings, the Company expects
the Laura Ashley Eyewear line to continue to be one of the Company's leading
sources of revenue for the foreseeable future. See "Factors That May Affect
Future Results--Substantial Dependence Upon Laura Ashley License."
The Company's cost of sales consists primarily of payments to foreign
contract manufacturers that produce frames to the Company's specifications.
The complete development cycle for a new frame design typically takes
approximately twelve months from the initial design concept to the release.
Generally, at least six months are required to complete the initial
manufacturing process.
In 1994, the Company recognized that it was dependent on frame manufacturers
located in Japan. Starting in 1995, the Company implemented a program to
reduce that dependence by purchasing an increasing percentage of its frames
from manufacturers located in other countries, particularly in Hong Kong/China
and to a lesser extent in Italy and France. The use of Hong Kong/China
manufacturers has also reduced the Company's average frame cost, which has
increased the Company's gross margin. In fiscal 1996, fiscal 1997, and fiscal
1998, approximately 39.9%, 48.9%, and 26.7%, respectively, of the Company's
eyeglass frames were manufactured by companies in Japan, and approximately
40.0%, 36.6%, and 40.4%, respectively, of the Company's eyeglass frames were
manufactured by companies headquartered in Hong Kong that have manufacturing
facilities in China. See "Factors That May Affect Future Results-- Dependence
Upon Contract Manufacturers; Foreign Trade Regulation."
Effect of Change in Form from an S Corporation to a C Corporation
The Company was treated as an S Corporation from 1990 through September 15,
1997. During the period the Company was an S Corporation, its income, whether
or not distributed, was taxed for federal and state income tax purposes
directly to the holders of the Common Stock, rather than to the Company. In
addition, for California franchise tax purposes, S Corporations were taxed at
1.5% of taxable income in 1995, 1996 and 1997, net of income tax credits under
the Los Angeles Revitalization Zone Act.
The Company paid dividends to its shareholders of $550,000, $1,328,000, and
$3,982,000 in fiscal 1995, fiscal 1996, and fiscal 1997, respectively. These
dividends were paid to the shareholders to pay their income taxes and as a
return of their investment. No dividends were paid in fiscal 1998.
Since September 16, 1997, the Company has been a C Corporation, subject to
federal and state corporate income taxes. As a result of this conversion, the
Company has adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." See Note 1 of Notes to Financial Statements.
Currently, the highest federal tax rate for C Corporations is 39% (although
the majority of the taxable income is taxed at 34%) and the corporate tax rate
in California is 8.84%. The pro forma provision for income taxes in the
statement of income data included elsewhere in this Form 10-K shows results as
if the Company had always been a C Corporation.
Financial Accounting Standards No. 109 requires the use of the "liability
method" of accounting for income taxes. Under that method, deferred income tax
assets and liabilities are recognized for the expected future tax consequences
of events that have been included in a company's financial statements or tax
returns. At October 31, 1998, the Company recorded deferred income tax assets
of $368,000 resulting primarily from temporary differences arising from
capitalization of inventory costs of $236,000 and state deferred tax
liabilities of $101,000. See Note 4 of Notes to Financial Statements.
16
Results of Operations
The following table sets forth for the periods indicated selected statements
of income data shown as a percentage of net sales. Pro forma operating results
reflect adjustments to the historical operating results for federal and state
income taxes as if the Company had been taxed as a C Corporation rather than
an S Corporation.
Year Ended
October 31,
-------------------
1996 1997 1998
----- ----- -----
Net sales............................................... 100.0% 100.0% 100.0%
Cost of sales........................................... 42.2 40.7 40.5
----- ----- -----
Gross profit............................................ 57.8 59.3 59.5
----- ----- -----
Operating expenses:
Selling............................................... 29.4 29.5 32.0
General and administrative............................ 19.9 17.7 17.2
Relocation expense.................................... 0.3 0.0 0.0
----- ----- -----
Total operating expenses............................ 49.6 47.2 49.2
----- ----- -----
Income from operations.................................. 8.2 12.1 10.3
----- ----- -----
Other income (expense), net............................. (1.1) (0.9) 0.9
----- ----- -----
Income before provision for income taxes................ 7.1 11.2 11.2
Provision for income taxes.............................. 4.5
Pro forma provision for income taxes.................... 2.6 4.1
----- ----- -----
Net income.............................................. 6.7%
=====
Pro forma net income.................................... 4.5% 7.1%
===== =====
Comparison of Fiscal Years 1996, 1997and 1998
Net Sales. Net sales increased by 17.3% from $28,280,000 for fiscal 1996 to
$33,176,000 in fiscal 1997 and by 23.3% to $40,892,000 in fiscal 1998. The
increase in net sales from fiscal 1996 to fiscal 1997 resulted from a 14%
increase in net sales of Laura Ashley Eyewear to $24,129,000, a 127% increase
in net sales of Hart Schaffner & Marx Eyewear to $2,277,000, and a 65%
increase in net sales of Jean Nate Eyewear to $1,467,000. The increase in net
sales from fiscal 1997 to fiscal 1998 resulted from the launch of Eddie Bauer
Eyewear resulting in net sales of $8,532,000 for that line in fiscal 1998.
Those additional net sales were offset by a 3.8% decrease in net sales of
Laura Ashley Eyewear to $23,100,000, a 4% decrease in net sales of Hart
Schaffner & Marx sales to $2,190,000, and an 8% decrease in net sales of Jean
Nate Eyewear to $1,346,000. The increase in Laura Ashley Eyewear net sales
from fiscal 1996 to fiscal 1997 was due principally to an increase in unit
sales and to a lesser extent to an increase in prices for selected frames. The
decrease in Laura Ashley Eyewear net sales from fiscal 1997 to fiscal 1998 was
due principally to optical market conditions, including increased competition,
a decrease in the average price per frame, and to a lesser extent to a
decrease in units sold. The increase in net sales of Hart Schaffner & Marx
Eyewear and Jean Nate Eyewear from fiscal 1996 to fiscal 1997 was due to an
increase in unit sales. The decrease in net sales of Hart Schaffner & Marx
Eyewear in fiscal 1998 was due principally to optical market conditions,
including increased competition. The decrease in net sales of Jean Nate
Eyewear in fiscal 1998 was due in large part to the Company's decision not to
pursue the renewal of the license, which expired September 30, 1998.
Gross Profit. Gross profit was $16,349,000 in fiscal 1996, $19,677,000 in
fiscal 1997, and $24,343,000 in fiscal 1998. These increases in gross profit
were attributable to increases in net sales as well as improvements in the
gross margin, which increased from 57.8% in fiscal 1996 to 59.3% in fiscal
1997 and 59.5% in fiscal 1998. During these years, the Company utilized lower
cost frame manufacturers for an increasing percentage of its frames, which has
resulted in lower average frame costs. This positive impact on gross margin
was augmented
17
in fiscal 1996 and fiscal 1997 due to beneficial currency fluctuations and by
increases in the average selling price of frames. Gross margins in all three
fiscal years were aided by continuing reductions in import duties and tariffs
and favorable currency exchange. Gross margins remained constant in fiscal
1998 due to the Company's ongoing policies regarding pricing and its
maintenance of lower average frame costs.
Operating Expenses. Operating expenses were $14,027,000 in fiscal 1996,
$15,667,000 in fiscal 1997, and $20,137,000 in fiscal 1998. The increase from
fiscal 1996 to fiscal 1997 resulted predominantly from increased selling
expenses. The increase from fiscal 1997 to fiscal 1998 resulted primarily from
higher selling expenses commensurate with growth as well as the launch of the
Eddie Bauer Eyewear line in March 1998.
Selling expenses were $8,328,000 in fiscal 1996, $9,797,000 in fiscal 1997,
and $13,103,000 in fiscal 1998, representing 29%, 30%, and 32%, respectively,
of net sales for such periods. The 18% increase from fiscal 1996 to fiscal
1997 resulted from a $568,000 increase in in-store display expenditures, due
primarily to the introduction of new Laura Ashley Eyewear store displays. In
addition, in fiscal 1997, convention and trade show expenses increased by
$194,000, royalty expense increased by $273,000, and sales salaries and
commissions increased by $158,000. The 34% increase from fiscal 1997 to fiscal
1998 resulted primarily from expenditures for in-store displays for Eddie
Bauer Eyewear amounting to $850,000; an increase of $748,000 in expenditures
in fiscal 1998, for additional eyeglass cases given to certain independent
optical retailers; an increase in royalty expenses of $727,000; a $621,000
increase in promotional expenses, due primarily to the introduction of the
Eddie Bauer Eyewear line; and a $293,000 increase in promotional expenses for
Laura Ashley Eyewear. These increases were offset in part by a $406,000
decrease in expenditures for Laura Ashley Eyewear in-store displays.
General and administrative expenses were $5,612,000 in fiscal 1996,
$5,870,000 in fiscal 1997, and $7,035,000 in fiscal 1998, representing 20%,
18%, and 17%, respectively, of net sales in these periods. The 5% increase
from fiscal 1996 to fiscal 1997 resulted from a $682,000 increase in salaries,
and a $214,000 increase in depreciation expense, offset in part by a decrease
of $340,000 in employee bonuses, and a $300,000 decrease in stock compensation
expenses. The 20% increase from fiscal 1997 to fiscal 1998 resulted in large
part from a $571,000 increase in salaries and employee bonuses, due mostly to
new employees hired during fiscal 1998 to accommodate the Company's growth and
continuing investment in its infrastructure.
Other Income (Expense), Net. Other expense, net, consisted principally of
interest expense in fiscal 1996 and fiscal 1997. Interest expense was $338,000
in fiscal 1996 and $360,000 in fiscal 1997. The increase from fiscal 1996 to
fiscal 1997 of $22,000 was predominantly due to the increase in borrowings
through the bank's credit line as a result of (i) an increase in accounts
receivable resulting from higher sales, (ii) a higher level of inventories
that the Company maintained to support higher sales levels and better customer
service, (iii) capital expenditures relating to improvements of the Company's
facilities and the modernization of its computer equipment; and (iv) larger S
corporation distributions. Other income, net, in fiscal 1998 was $403,000, due
to the Company's repayment of its bank financing in the fourth quarter of
fiscal 1997 with the net proceeds of its September 1997 initial public
offering, and the interest income resulting from the Company investing a
portion of those proceeds.
Provisions for Income Taxes. On a pro forma basis, income taxes (unaudited)
would have amounted to $748,000 in fiscal 1996 and $1,374,000 in fiscal 1997.
Income taxes in fiscal 1998 were $1,859,000.
Net Income. Pro forma net income (unaudited) was $1,265,000 in fiscal 1996
and $2,340,000 in fiscal 1997. Net income in fiscal 1998 was $2,750,000.
Liquidity and Capital Resources
At October 31, 1998, the Company had $4,257,000 in cash or cash equivalents,
of which $3,612,000 was invested in commercial paper with interest rates
ranging from 4.84% to 5.53%, and $332,000 was invested in money market funds
bearing interest at 4.31%.
18
In October 1997, the Company entered into a credit agreement with its
commercial bank (the "Credit Agreement"). Under the Credit Agreement, the bank
has agreed to provide to the Company an unsecured revolving line of credit up
to an aggregate of $5,000,000. At the Company's option, interest may be based
on the London Interbank Offered Rate ("LIBOR") plus 2% or at the bank's prime
rate. At October 31, 1998, no amounts were due to the bank under the Credit
Agreement.
Of the Company's accounts payable at October 31, 1997 and October 31, 1998,
$851,000 and $2,174,000, respectively, were payable in foreign currency. To
monitor risks associated with currency fluctuations, the Company on a weekly
basis assesses the volatility of certain foreign currencies and reviews the
amounts and expected payment dates of its purchase orders and accounts payable
in those currencies. Based on those factors, the Company may from time to time
mitigate some portion of that risk by purchasing forward commitments to
deliver foreign currency to the Company. The Company held forward commitments
for foreign currencies in the amount of $59,000 at October 31, 1998. See Note
1 of Notes to the Financial Statements.
The Company's bad debt write-offs were less than 0.2% of net sales for the
1996, 1997 and 1998 fiscal years. As part of the Company's management of its
working capital, the Company performs most customer credit functions
internally, including extensions of credit and collections.
As of October 31, 1998, the Company had repurchased on the open market
148,690 shares of its Common Stock at a cost of $646,254 under a stock buyback
program initiated in September 1998. The program allows the Company to
repurchase up to $1.0 million of its Common Stock from time to time on the
open market at prevailing prices.
The Company believes that its current cash and cash equivalents, cash
generated from operations, borrowings under its credit facility, and credit
from its suppliers will be sufficient to fund its working capital requirements
at least through fiscal 1999.
Quarterly and Seasonal Fluctuations
The Company's results of operations have fluctuated from quarter to quarter
and the Company expects these fluctuations to continue in the future.
Historically, the Company's net sales in its first fiscal quarter (the quarter
ending January 31) have been lower than net sales in other fiscal quarters.
The Company attributes lower net sales in the first fiscal quarter in part to
low consumer demand for prescription eyeglasses during the holiday season and
year-end inventory adjustments by distributors and independent optical
retailers. 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.
19
The following table sets forth certain unaudited results of operations for
the twelve fiscal quarters ended October 31, 1998. The unaudited information
has been prepared on the same basis as the audited financial statements
appearing elsewhere in this Form 10-K and includes all normal recurring
adjustments which management considers necessary for a fair presentation of
the financial data shown. The operating results for any quarter are not
necessarily indicative of future period results.
1996 1997
---------------------------------- -----------------------------------
JAN. 31 APRIL 30 JULY 31 OCT. 31 JAN. 31 APRIL 30 JULY 31 OCT. 31
------- -------- ------- ------- ------- -------- ------- -------
Net sales............... $5,308 $7,744 $7,050 $8,178 $6,802 $9,236 $8,318 $8,820
Cost of sales........... 2,449 3,177 2,895 3,410 2,882 3,750 3,370 3,496
Gross profit............ 2,859 4,567 4,155 4,768 3,920 5,486 4,948 5,324
Operating expenses:
Selling................ 1,472 2,209 2,055 2,592 2,021 2,680 2,403 2,694
General and
administrative........ 969 1,334 1,554 1,755 1,364 1,443 1,540 1,523
Relocation expense..... 30 19 17 21 0 0 0 0
Total operating
expenses............... 2,471 3,562 3,626 4,368 3,385 4,123 3,943 4,217
Income from operations.. 388 1,005 529 400 535 1,363 1,005 1,107
Other expense, net...... (67) (92) (84) (66) (85) (106) (104) (1)
Income before pro forma
provision for income
taxes.................. 321 913 445 334 450 1,257 901 1,106
1998
-----------------------------------
JAN. 31 APRIL 30 JULY 31 OCT. 31
------- -------- ------- -------
Net sales................................................ $6,722 $12,173 $10,704 $11,292
Cost of sales............................................ 2,751 4,826 4,254 4,718
Gross profit............................................. 3,971 7,347 6,450 6,574
Operating expenses:
Selling................................................. 1,920 3,860 3,568 3,755
General and administrative.............................. 1,511 1,773 1,866 1,884
Relocation expense...................................... 0 0 0 0
Total operating expenses................................. 3,431 5,633 5,434 5,639
Income from operations................................... 540 1,713 1,016 935
Other income, net........................................ 114 103 70 116
Income before provision for income taxes................. 654 1,816 1,086 1,051
Inflation
The Company does not believe its business and operations have been
materially affected by inflation.
Year 2000
Commencing 1996, the Company began a project to address the potential impact
of the Year 2000 problem on the processing of date-sensitive information by
the information technology systems used by the Company and its key customers
and vendors. The Year 2000 problem is the result of computer programs being
written using two digits to define the applicable year. As a result, certain
computer programs may recognize a date using "00" as the year 1900 rather than
2000, which could cause miscalculations or system failures. The objectives of
the Company's Year 2000 project are to determine and assess the risks of the
Year 2000 problem and to plan and institute mitigating actions to minimize
those risks to acceptable levels.
The Company is not heavily dependent upon internally developed information
technology systems. The Company's core operations systems are largely standard
package systems for business management and inventory control, which have been
developed by vendors whose products are widely used in the industry. The
Company has already contacted its major information technology vendors and
suppliers, and has obtained
20
assurances that the technology is Year 2000 compliant. Between now and its
1999 fiscal year end, the Company will contact its remaining information
technology vendors and suppliers as to their Year 2000 compliance to determine
what changes, if any, must be made to the information technology systems used
by the Company in its operations. The Company does not presently anticipate
any material Year 2000 issues or significant expenses from the conversion of
its own information systems, databases or programs. However, if the Company's
current estimates of the resources required to address and resolve Year 2000
issues prove to be understated, the additional costs and resources required to
address the Year 2000 problem could result in a material financial risk. There
can be no assurance that there will not be a delay in, or increased costs
associated with, the implementation of the necessary systems and changes to
address the Year 2000 issues, and the Company's inability to implement such
systems and changes in a timely manner could have a material adverse effect on
future results of operations.
Because third party failures could have a material impact on the Company's
ability to conduct business, the Company will be sending questionnaires to
substantially all of the Company's key vendors and business partners,
including manufacturers of the Company's eyeglass frames and significant
retailers of the Company's products. The purposes of these questionnaires are
to obtain reasonable assurances about the Year 2000 readiness status of these
key vendors and business partners, and their plans to become Year 2000
compliant. The returned questionnaires will be assessed by the Company,
categorized based upon readiness for the Year 2000, and prioritized in order
of significance to the business of the Company. To the extent that vendors and
business partners do not provide the Company with satisfactory evidence of
their readiness to handle Year 2000 issues, contingency plans will be
developed. At this time, the Company does not know what measures its customers
and vendors have taken to address the Year 2000 problem or how that problem's
effect on its customers and vendors will impact the Company. Based on the
Company's current assessment, the costs of addressing potential problems are
not currently expected to have a material adverse impact on the Company's
financial position, results of operations or cash flows in future periods.
However, the failure by any of these key vendors or customers to adequately
address the Year 2000 problem could result in disruptions in the supply or
sale of the Company's products, either of which would have a material adverse
effect on the Company's business, financial condition and results of
operations. Accordingly, the Company plans to devote the necessary resources
to resolve all significant Year 2000 issues in a timely manner.
Factors That May Affect Future Results
The following is a discussion of certain factors that may affect the
Company's financial condition and results of operations.
Substantial Dependence upon Laura Ashley License
Net sales of Laura Ashley Eyewear accounted for 74.6%, 72.5%, and 56.4% of
the Company's net sales in fiscal 1996, fiscal 1997, and fiscal 1998,
respectively. In March 1998, the Company launched the Eddie Bauer Eyewear
collection, which accounted for 20.9% of the Company's 1998 fiscal year net
sales although it was on the market for eight months of that fiscal year.
While the Company intends to continue reducing its dependence on the Laura
Ashley Eyewear line through the development of Eddie Bauer Eyewear and other
brand names and product offerings, the Company expects the Laura Ashley
Eyewear line to continue to be one of the Company's leading sources of revenue
for the foreseeable future. The Company manufactures Laura Ashley Eyewear
through an exclusive license with Laura Ashley entered into in 1991. The Laura
Ashley license terminates in 2001, but may be renewed by the Company at least
through January 2006 so long as the Company is not in breach of the license
agreement and meets certain minimum net sales requirements. Laura Ashley may
terminate the license before its term expires if (i) the Company commits a
material breach of the license agreement and fails to cure that breach within
30 days after notice is given, (ii) the management or control of the Company
passes from Bernard Weiss and Julie Heldman to other parties whom Laura Ashley
may reasonably regard as unsuitable, (iii) the Company fails to propose a
selection of styles of eyewear which Laura Ashley in exercising good faith is
willing to approve for manufacture and distribution, (iv) the Company fails to
have net sales of Laura Ashley Eyewear sufficient to generate minimum
royalties in each of any two years, (v) the Company is
21
unable to pay its debts in the ordinary course of business or enters into
liquidation, becomes bankrupt or insolvent, or is placed in the control of a
receiver or trustee, or (vi) the Company in any year fails to spend a
specified percentage of net sales of Laura Ashley Eyewear on advertising and
promotion. For purposes of renewal and early termination of the license
agreement, the Company must generate total Laura Ashley Eyewear minimum net
sales of $10,000,000, $11,000,000, and $12,000,000 for the contract years
ending January 31, 1999, 2000 and 2001, respectively. The Company has
substantially exceeded its minimum net sales requirements each year under the
license agreement. The termination of the Laura Ashley Eyewear license would
have a material adverse effect on the Company's business, operating results
and financial condition.
Approval Requirements of Brand-Name Licensors
The Company's business is predominantly based on its brand-name licensing
relationships. In addition to its licensing relationship with Laura Ashley,
the Company licenses the right to use proprietary marks from Eddie Bauer and
Hart Schaffner & Marx. Each of the Laura Ashley, Eddie Bauer and Hart
Schaffner & Marx 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 any of style, market position and market segment.
The Eddie Bauer license prohibits the Company from entering into license
agreements with companies which Eddie Bauer believes 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 may
adversely affect sales of the Company's existing eyeglass frames or prevent
the Company from introducing new eyewear products in market segments the
Company believes are not being served by its existing products.
Dependence Upon Contract Manufacturers; Foreign Trade Regulation
The Company's frames are manufactured to its specifications by a number of
contract manufacturers located outside the United States, principally in
Japan, Hong Kong/China, France and Italy. The manufacture of high quality
metal frames is a labor-intensive process which can require over 200
production steps (including a large number of quality-control procedures) and
from 90 to 180 days of production time. These long lead times increase the
risk of overstocking, if the Company overestimates the demand for a new style,
or understocking, which can result in lost sales if the Company underestimates
demand for a new style. While a number of contract manufacturers exist
throughout the world, there can be no assurance that an interruption in the
manufacture of the Company's eyeglass frames will not occur. An interruption
occurring at one manufacturing site that requires the Company to change to a
different manufacturer could cause significant delays in the distribution of
the styles
22
affected. This could cause the Company to miss delivery schedules for these
styles, which could materially and adversely affect the Company's business,
operating results and financial condition.
In addition, the purchase of goods manufactured in foreign countries is
subject to a number of risks, including foreign exchange rate fluctuations,
economic disruptions, transportation delays and interruptions, increases in
tariffs and duties, changes in import and export controls and other changes in
governmental policies. For frames purchased other than from Hong Kong/China
manufacturers, the Company pays for its frames in the currency of the country
in which the manufacturer is located and thus the costs (in United States
dollars) of the frames vary based upon currency fluctuations. Increases and
decreases in costs (in United States dollars) resulting from currency
fluctuations generally do not affect the price at which the Company sells its
frames, and thus currency fluctuations can impact the Company's gross margin
and results of operations.
In fiscal 1996, fiscal 1997, and fiscal 1998 approximately 39.9%, 48.9%, and
26.7% respectively, of the Company's eyeglass frames were manufactured by
companies in Japan, and approximately 40.0%, 36.6%, and 40.4% respectively, of
the Company's eyeglass frames were manufactured by companies headquartered in
Hong Kong that have manufacturing facilities in China. Recent economic
developments have resulted in a stronger U.S. dollar and instability in the
Asian-Pacific economies and financial markets. These economic developments
have resulted in improved profit margins for the Company, as its cost of goods
has decreased for frames purchased in foreign currencies. There can be no
assurance, however, that the Asian-Pacific economic instability will not
result in an adverse future impact on the business operations of some of the
Company's contract manufacturers, which could force the Company to move the
manufacture of some styles to other factories. The resulting disruption to the
Company's business could have a material adverse effect on the Company's
business, operating results and financial condition.
Effective July 1, 1997, the exercise of sovereignty over the British Crown
Colony of Hong Kong was transferred from the United Kingdom to China pursuant
to a treaty between the two countries, and Hong Kong became a part of China.
Any political or economic disruptions in Hong Kong or China may force the
Company to manufacture its eyeglass frames in other countries which could
increase frame costs. The Company is uncertain as to the impact that the
change in government will have on its business operations in Hong Kong.
Further, China currently enjoys Most Favored Nation trading status with the
United States. Under the Trade Act of 1974, the President of the United States
is authorized, upon making specific findings, to waive certain restrictions
that would render China ineligible for Most Favored Nation treatment. The
President has waived these provisions every year since 1979. No assurance can
be given that China will continue to enjoy Most Favored Nation status in the
future. Any legislation or administrative action by the United States
government that revokes or places further conditions on China's Most Favored
Nation status, or otherwise limits imports of Chinese eyeglass frames into the
United States, could, if enacted, have a material adverse effect on the
Company's business, operating results and financial condition.
Relationships with Domestic Distributors
The Company distributes its eyeglass frames to independent optical retailers
in the United States (other than California and Arizona) largely through
distributors who sell competing lines of eyeglass frames. The optical industry
is undergoing a period of consolidation, and during fiscal 1997 and fiscal
1998, three of the Company's distributors were acquired by other companies.
Although the Company believes that its distributors currently devote a great
deal of time and resources to promoting the Company's products, there can be
no assurance that these distributors will continue to do so. The Company does
not have written agreements with its domestic distributors except for written
understandings not to resell or divert Laura Ashley Eyewear through
unauthorized channels of distribution, and not to expand the territories in
which they sell the Company's products without the Company's prior consent.
Accordingly, the Company's domestic distributors may spend an increased amount
of effort and resources marketing competing products, and may terminate their
relationships with the Company at any time without penalty. There can be no
assurance that the informal nature of the Company's relationships with its
domestic distributors will not lead to disagreements between the Company and
its
23
distributors or between the distributors themselves, which could have a
material adverse impact on the Company's business, operating results and
financial condition. See "Business--Distribution."
International Sales
International sales accounted for approximately 8.8%, 7.7% and 8.4% of the
Company's net sales in fiscal 1996, fiscal 1997, and fiscal 1998 respectively.
These sales were primarily in England, Canada, Australia, New Zealand, France
and the Netherlands. The Company's international business is subject to
numerous risks, including the need to comply with export and import laws,
changes in export or import controls, tariffs and other regulatory
requirements, the imposition of governmental controls, political and economic
instability, trade restrictions, the greater difficulty of administering
business overseas and general economic conditions. Although the Company's
international sales are principally in United States dollars, sales to
international customers may also be affected by changes in demand resulting
from fluctuations in interest and currency exchange rates. There can be no
assurance that these factors will not have a material adverse effect on the
Company's business, operating results and financial condition.
Product Returns
The Company has a product return policy which it believes is standard in the
optical industry. Under that policy, the Company generally accepts returns of
non-discontinued product for credit, upon presentment and without charge.
According to the 1996 U.S. Optical Industry Handbook, the existence of this
policy in the optical business has led to some companies having return rates
as high as 20%. While the Company's product returns for fiscal 1996, fiscal
1997, and fiscal 1998 amounted to 12.1%, 12.5%, and 13.8% of gross sales
(sales before returns), respectively, and while the Company maintains reserves
for product returns which it considers adequate, the possibility exists that
the Company could experience returns at a rate significantly exceeding its
historical levels, which could have a material adverse impact on the Company's
business, operating results and financial condition.
Availability of Vision Correction Alternatives
The Company's future success could depend to a significant extent on the
availability and acceptance by the market of vision correction alternatives to
prescription eyeglasses, such as contact lenses and refractive (optical)
surgery. 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 market place at or near the same time, the availability of vision
correction alternatives, general economic conditions and other tangible and
intangible factors, all of which can change and cannot be predicted.
The Company's success also will depend to a significant extent upon a number
of factors relating to discretionary consumer spending, including the trend in
managed health care to allocate fewer dollars to the purchase of eyeglass
frames, and general economic conditions affecting disposable consumer income,
such as
24
employment business conditions, interest rates and taxation. Any significant
adverse change in general economic conditions or uncertainties regarding
future economic prospects that adversely affect discretionary consumer
spending generally, and purchasers of prescription eyeglass frames
specifically, could have a material adverse effect on the Company's business,
operating results and financial condition.
Competition
The markets for prescription eyewear are intensely competitive. There are
thousands of styles, including hundreds with brand names. At retail, the
Company's eyewear styles compete with styles that do and do not have brand
names, styles in the same price range, and styles with similar design
concepts. To obtain board space at an optical retailer, the Company competes
against many companies, both foreign and domestic, including Luxottica Group
S.p.A. (operating in the United States through a number of its subsidiaries),
Safilo Group S.p.A. (operating in the United States through a number of its
subsidiaries) and Marchon Eyewear, Inc. Signature's largest competitors have
significantly greater financial, technical, sales, manufacturing and other
resources than the Company. They also employ direct sales forces that are
significantly larger than the Company's, and are thus able to realize a higher
gross profit margin. At the distributor level, sales representatives often
carry many lines of eyewear, and the Company must vie for their attention. At
the major retail chains, the Company competes not only against other eyewear
suppliers, but also against the chains themselves, which license some of their
own brand names for design, manufacture and sale in their own stores.
Luxottica, one of the largest eyewear companies in the world, is vertically
integrated in that it manufactures frames, distributes them through direct
sales forces in the United States and throughout the world, and owns
LensCrafters, one of the largest United States retail optical chains.
The Company competes in its target markets through the quality of the brand
names it licenses, its marketing, merchandising and sales promotion programs,
the popularity of its frame designs, the reputation of its styles for quality,
and its pricing policies. There can be no assurance that the Company will be
able to compete successfully against current or future competitors or that
competitive pressures faced by the Company will not materially and adversely
affect its business, operating results and financial condition.
Dependence on Key Personnel
The Company's success has and will continue to depend to a significant
extent upon its executive officers, including Bernard Weiss (Chief Executive
Officer), Julie Heldman (President), Michael Prince (Chief Financial Officer),
Robert Fried (Senior Vice President of Marketing) and Robert Zeichick (Vice
President of Advertising and Sales Promotion). The loss of the services of one
or more of these key employees could have a material adverse effect on the
Company. The Company has entered into employment agreements with each of
Ms. Heldman and Messrs. Weiss, Prince, Fried and Zeichick, pursuant to which
they have agreed to render services to the Company until October 31, 2000. The
Company maintains and is the sole beneficiary of "key person" life insurance
on Ms. Heldman and Messrs. Weiss, Prince, Fried and Zeichick in the amount of
$1,500,000 each. In the event of the death of an executive officer, a portion
of the proceeds of the applicable policy would be used to pay the Company's
obligation under the officer's employment agreement. There can be no assurance
that the remaining proceeds of these policies will be sufficient to offset the
loss to the Company due to the death of that executive officer. In addition,
the Company's future success will depend in large part upon its ability to
attract, retain and motivate personnel with a variety of creative, technical
and managerial skills. There can be no assurance that the Company will be able
to retain and motivate its personnel or attract additional qualified members
to its management staff. The inability to attract and retain the necessary
managerial personnel could have a material adverse effect on the Company's
business, operating results and financial condition.
Management of Growth
The Company has grown rapidly in recent years, with net sales increasing
from $20.1 million in fiscal 1994 to $40.9 million in fiscal 1998, and the
number of employees increasing from approximately 50 at October 31, 1994 to
130 at October 31, 1998. The Company's growth has placed substantial burdens
on its management
25
resources, and as a result of its growth, the Company has made additions to
its management team. The Company's ability to manage its growth effectively
will require it to continue to improve its operational, financial and
management information systems and controls and to train, motivate and manage
a larger number of employees. There can be no assurance that the Company will
be able to sustain its historic rate of revenue growth, continue its
profitable operations or manage future growth successfully.
Control by Directors and Executive Officers
The directors and executive officers of the Company own approximately 56.8%
of the Company's outstanding shares. As a result, the directors and executive
officers control the Company and its operations, including the approval of
significant corporate transactions and the election of at least a majority of
the Company's Board of Directors and thus the policies of the Company. The
voting power of the directors and executive officers could also serve to
discourage potential acquirors from seeking to acquire control of the Company
through the purchase of the Common Stock, which might depress the price of the
Common Stock.
Quarterly and Seasonal Fluctuations
The Company's results of operations have fluctuated from quarter to quarter
and the Company expects these fluctuations to continue in the future.
Historically, the Company's net sales in the quarter ending January 31 (its
first quarter) have been lower than net sales in other fiscal quarters. The
Company attributes lower net sales in the first fiscal quarter in part to low
consumer demand for prescription eyeglasses during the holiday season and
year-end inventory adjustments by distributors and independent optical
retailers. A factor which may significantly influence results of operations in
a particular quarter is the introduction of a brand-name collection, which
results in disproportionate levels of selling expenses due to additional
advertising, promotions, catalogs and in-store displays. Introduction of a new
brand may also generate a temporary increase in sales due to initial stocking
by retailers. Other factors which can influence the Company's results of
operations include customer demand, the mix of distribution channels through
which the eyeglass frames are sold, the mix of eyeglass frames sold, product
returns, delays in shipment and general economic conditions.
No Dividends Anticipated
The Company does not currently intend to declare or pay any cash dividends
and intends to retain earnings, if any, for the future operation and expansion
of the Company's business.
Possible Anti-Takeover Effects
The Company's Board of Directors has the authority to issue up to 5,000,000
shares of Preferred Stock and to determine the price, rights, preferences,
privileges and restrictions, including voting rights, of those shares without
any further vote or action by the shareholders. The Preferred Stock could be
issued with voting, liquidation, dividend and other rights superior to those
of the Common Stock. Following the Offering, no shares of Preferred Stock of
the Company will be outstanding, and the Company has no present intention to
issue any shares of Preferred Stock. However, the rights of the holders of
Common Stock will be subject to, and may be adversely affected by, the rights
of the holders of any Preferred Stock that may be issued in the future. The
issuance of Preferred Stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of making it more difficult for a third party to acquire a majority
of the outstanding voting stock of the Company, which may depress the market
value of the Common Stock. In addition, each of the Laura Ashley, Hart
Schaffner & Marx, and Eddie Bauer licenses allows the licensor to terminate
its license upon certain events which under the license are deemed to result
in a change in control of the Company. See "--Substantial Dependence Upon
Laura Ashley License." 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.
26
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 1998, a maximum of $2,174,000 and a
minimum of $667,000 of the Company's accounts payable were payable in foreign
currency. These foreign currencies included Japanese Yen, Italian Lire and
French Francs. Any significant change in foreign currency exchange rates could
therefore materially affect the Company's business, operating results and
financial condition. To monitor risks associated with currency fluctuations,
the Company on a weekly basis assesses the volatility of certain foreign
currencies and reviews the amounts and expected payment dates of its purchase
orders and accounts payable in those currencies. Based on those factors, the
Company may from time to time mitigate some portion of that risk by purchasing
forward commitments to deliver foreign currency to the Company. The Company
held forward commitments for foreign currencies in the amount of $59,000 at
October 31, 1998.
International sales accounted for approximately 8.4% of the Company's net
sales in fiscal 1998. Although the Company's international sales are
principally in United States dollars, sales to international customers may
also be affected by changes in demand resulting from fluctuations in interest
and currency exchange rates. There can be no assurance that these factors will
not have a material adverse effect on the Company's business, operating
results and financial condition. For frames purchased other than from Hong
Kong/China manufacturers, the Company pays for its frames in the currency of
the country in which the manufacturer is located and thus the costs (in United
States dollars) of the frames vary based upon currency fluctuations. Increases
and decreases in costs (in United States dollars) resulting from currency
fluctuations generally do not affect the price at which the Company sells its
frames, and thus currency fluctuation can impact the Company's gross margin.
Interest Rate Risk. Under the Company's Credit Agreement, its bank has
agreed to provide the Company an unsecured revolving line of credit up to an
aggregate of $5,000,000. At the Company's option, interest may be based on the
London Interbank Offered Rate ("LIBOR") plus 2%, or at the bank's prime rate.
At October 31, 1998, no amounts were due to the bank under the Credit
Agreement. Any interest which may in the future become payable on the
Company's bank line of credit will be based on variable interest rates and
will therefore be affected by changes in market interest rates.
In addition, the Company has fixed income investments consisting of cash
equivalents, which are also affected by changes in market interest rates. The
Company does not use derivative financial instruments in its investment
portfolio. The Company places its cash equivalents with high-quality financial
institutions, limits the amount of credit exposure to any one institution and
has established investment guidelines relative to diversification and
maturities designed to maintain safety and liquidity.
27
Item 8--Financial Statements And Supplementary Data
SIGNATURE EYEWEAR, INC.
INDEX TO FINANCIAL STATEMENTS
Page
----
INDEPENDENT AUDITORS' REPORT.............................................. 29
FINANCIAL STATEMENTS:
Balance Sheets, October 31, 1998 and 1997............................... 30
Statement of Income, Years Ended October 31, 1998, 1997 and 1996........ 31
Statement of Changes in Stockholders' Equity, Years Ended October 31,
1998, 1997 and 1996.................................................... 32
Statement of Cash Flows, Years Ended October 31, 1998, 1997 and 1996.... 33
Notes to the Financial Statements....................................... 34
28
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Signature Eyewear, Inc.
We have audited the accompanying balance sheets of SIGNATURE EYEWEAR, INC.
as of October 31, 1998 and 1997 and the related statements of income, changes
in stockholders' equity and cash flows for each of the three years in the
period ended October 31, 1998. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above, present fairly,
in all material respects, the financial position of Signature Eyewear, Inc. as
of October 31, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended October 31, 1998, in
conformity with generally accepted accounting principles.
/s/ Altschuler, Melvoin & Glasser LLP
Los Angeles, California
December 24, 1998
29
SIGNATURE EYEWEAR, INC.
BALANCE SHEETS
October 31, 1998 and 1997
ASSETS 1998 1997
------ ------------ -----------
Current Assets:
Cash and cash equivalents........................... $ 4,256,655 $ 8,133,423
Accounts receivable, trade (net of allowance for
doubtful accounts of $71,468 in October 31, 1998
and $60,316 in 1997)............................... 5,854,722 4,013,518
Inventories................