Back to GetFilings.com
1
DRAFT DATED MAY 16, 2001
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ________________.
COMMISSION FILE NUMBER: 0-23001
SIGNATURE EYEWEAR, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 95-3876317
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
498 NORTH OAK STREET 90302
INGLEWOOD, CALIFORNIA
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
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes No.
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 June 12, 2001, the Registrant had 5,083,989 outstanding shares of
Common Stock, $.001 par value. The aggregate market value of the 2,532,868
shares of Common Stock held by non-affiliates of the Registrant as of June 12,
2001 was $1,899,651.
2
PART I
The discussions in this Form 10-K contain forward-looking statements that
involve risks and uncertainties. Important factors that could cause actual
results to differ materially from the Company's expectations are set forth in
"Factors That May Affect Future Results" in Item 7, as well as elsewhere in this
Form 10-K. All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by "Factors That May Affect Future Results." Those
forward-looking statements relate to, among other things, the Company's plans
and strategies, new product lines, relationships with licensors, distributors
and customers, and the business environment in which the Company operates.
ITEM 1--BUSINESS
GENERAL
Signature Eyewear, Inc. and its subsidiaries ("Signature" or the "Company")
design, market and distribute prescription eyeglass frames and sunglasses,
primarily under exclusive licenses for Laura Ashley Eyewear, Eddie Bauer
Eyewear, Hart Schaffner & Marx Eyewear, Nicole Miller Eyewear and bebe eyes, as
well as its proprietary brands, including Dakota Smith, Camelot and the
Signature line. The Company attributes its success to its brand-name development
process, high quality, creative frame designs and its innovative sales programs.
The Company's brand-name development process includes identifying a market
niche, obtaining the rights to a carefully selected brand name, producing a
comprehensive marketing plan, developing unique in-store displays and creating
innovative sales and merchandising programs for independent optical retailers
and retail chains.
The Company's best-selling product lines are Laura Ashley Eyewear and Eddie
Bauer Eyewear. Frames in the Laura Ashley Eyewear line are feminine and classic,
and are positioned in the medium to mid-high price range. The Eddie Bauer
Eyewear collection offers men's and women's styles, and is positioned in the
medium-price segment of the brand-name prescription eyewear market. Net sales of
Laura Ashley Eyewear and Eddie Bauer Eyewear together accounted for 77%, 75% and
60% of the Company's net sales in fiscal 1998, fiscal 1999 and fiscal 2000,
respectively.
To promote sales, Signature produces "turnkey" marketing, merchandising and
sales promotion programs, and provides innovative loyalty programs benefiting
the Company and its participating retailers. Under the loyalty programs, each
participating retailer agrees to purchase a specified quantity of frames of new
styles released during the program period, although the participant may cancel
at any time. These "automatic" sales programs have facilitated the widespread
placement of new styles in optical retail stores. The Company estimates that
over 15% of the independent optical retailers in the United States participated
in one or more of the Company's Loyalty Programs in fiscal 2000.
The Company distributes its products (1) to independent optical retailers
in the United States, primarily through its national direct sales force and
independent sales representatives, (2) internationally, primarily through
exclusive distributors in foreign countries and a direct sales force in Western
Europe; (3) through its own account managers to major optical retail chains,
including EyeCare Centers of America, Cole Vision Corp. and its subsidiary
Pearle Vision, LensCrafters and U.S. Vision; (4) through selected distributors
in the United States; and (5) through telemarketing.
INDUSTRY OVERVIEW (1)
The Optical Market. After several years of steady growth in the 1990s,
optical retail sales in the United States have slowed in the last three years.
Retail sales of all eyewear products - including contact lenses, sunglasses,
clip-ons, lenses, lens treatments, and prescription frames - totaled $16.5
billion in 2000, an increase of 3% over $16.0 billion in 1999, and 5% over $15.7
billion in 1998.
Correspondingly, the frame segment of the optical market has slowed, as
well: frames sales in 2000 reached $5.5 billion in 2000, up 3% from $5.3 billion
in 1999. Average retail prices for frames rose slightly in 2000
2
3
to $84.00 from $83.59 in 1999, while average sunwear prices rose to $82.47 from
$80.42 in 1999. Despite this increase in average retail frame prices, the frame
category's share of the optical sales remained flat at 33.3%
Despite slowing growth, the number of potential eyewear customers remains
large. Approximately 164 million out of a total United States population of 272
million required some type of vision correction in 1999. Out of these 164
million people, 86 million people purchased eyewear in 1999 - about 31.7% of the
total population.
Additionally, more than 93% 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
1999 % OF TOTAL % OF AGE GROUP
POPULATION PURCHASERS OF NEEDING VISION
AGE (IN MILLIONS) VISION CORRECTION CORRECTION
- ---------------- ---------------- ----------------- ---------------
0-14 58.8 5.7% 16.5%
15-24 37.5 9.3 41.2
25-44 82.5 32.2 62.7
45-64 59.1 33.4 93.4
65 and up 34.5 19.4 93.5
-------- ------
Total 272.4 100.0%
======== ======
(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 2000 U.S. Optical Industry Handbook published by Jobson
Publishing Corporation in March, 2000.
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 more
people will have vision impairment, and sales of corrective eyewear should
increase.
Perhaps the key factor contributing to growth in the frame and sunglass
market is recognizing the increasing sophistication of the consumer. Until the
mid-1970s, eyeglass frames were viewed as medical implements, which were
"dispensed" but never "sold." Because styling was not emphasized, successful
frames often remained popular for years, and sometimes for decades. In the
mid-1970s, experts from other industries introduced designer names and consumer
advertising to the optical industry, as well as sweeping design changes. These
changes resulted in increased consumer demand for the new products. Today,
eyewear is a true fashion accessory that wearers expect to coordinate with and
enhance their wardrobes and lifestyles. It is the only medical device with such
style status. The Company believes that recognizing this sophistication and
style status is key to competing successfully in the frame market.
Alternative Vision Correction Methods. Currently, there are two methods of
correcting vision impairment which compete with prescription eyeglasses: contact
lenses and surgery. Although retail sales of contact lenses remained flat from
1995 ($1.9 billion) through 2000 ($2.0 billion), their sales as a percentage of
total retail sales decreased from 13.5% in 1995 to 12.3% in 2000. The Company
believes that sales of contact lenses do not currently materially threaten
eyeglass frame sales because many people who wear contact lenses need a pair of
eyeglasses for night time and for the days when they decide not to wear their
contact lenses.
A number of surgical techniques have been developed to correct vision
problems such as myopia (nearsightedness), hyperopia (farsightedness) and
astigmatism. Vision correction surgery by laser has recently become increasingly
popular, with nearly 1 million procedures performed in the U.S. in 1999, and an
estimated 1.5 million in 2000. While the Company does not believe that these
techniques will materially and adversely affect sales of prescription eyewear in
the near future, it cannot predict the long-term competitive impact of these
techniques. The Company believes that a number of people who have had successful
eye surgery may still need
3
4
some form of corrective eyeglasses, and others may need eyeglasses at a later
date due to the onset of presbyopia. See "Management's Discussion and Analysis
of Results of Operations and Financial Condition--Factors That May Affect Future
Results--Availability of Vision Correction Alternatives."
Optical Retail Outlets. Optical retailers consist of optometrists,
opticians and ophthalmologists. There are three main types of optical retailers:
(1) independents, with one or two stores, (2) optical chains, including national
optical retailers such as LensCrafters, Cole Vision Corp. and its subsidiary
Pearle Vision, and EyeCare Centers of America; and (3) optical departments
within major mass merchandisers, including Wal-Mart and Costco. In 2000,
independent optical retailers had a 59.8% market share, national optical chain
retailers had a 33% market share, and mass merchandisers had a 5% market share.
The remaining 2.2% market share went to managed care organizations such as
Kaiser Permanente.
2001 STRATEGY
In fiscal 2000, the Company suffered a material operating loss, causing a
significant deterioration in its financial condition. In addition, during the
latter part of the year and thereafter, the Company has had a lack of liquidity.
The Company will employ a "turnaround" strategy in 2001 designed to return it to
profitability and to increase working capital. This strategy will encompass the
following activities:
Refinance Credit Facility. The Company will attempt to refinance its
existing credit facility. It is currently operating under a forbearance
agreement with its commercial bank which expires August 31, 2001. See
"Management's Discussion Analysis of Financial Condition and Results of
Operations - Financial Condition, Liquidity and Capital Resources." The Company
has received a written proposal from a new lender to refinance the credit
facility with a two-year revolving line of credit for up to $13.5 million. The
line of credit would be secured by the assets of the Company with availability
tied to eligible accounts receivable and inventory. Closing of the line of
credit is subject to satisfy to completion of due diligence and other
conditions. No assurance can be given that the Company will obtain this or any
other facility to refinance its existing bank credit facility.
Negotiate Discounts and Payment Plans with Vendors. The Company will
attempt to negotiate discounts and/or extended payment plans and improved terms
with its vendors and other obligees. In the first quarter of fiscal 2001, the
Company negotiated over $400,000 of discounts of outstanding accounts payable
and entered in extended payment programs with more than 20 vendors.
Increase Gross Profit. To increase its gross profit, the Company has
increased prices of most of its frames, will attempt to negotiate lower prices
and will use lower cost manufacturers to the extent the Company believes such
manufacturers can meet the Company's quality requirements.
Reduce Inventory and Increase Inventory Turnover Rates. The Company will
attempt to reduce its inventory to improve its cash position and will attempt to
improve inventory turnover by better matching frame purchases with customer
orders. The Company also intends to maintain a lower on-hand number of days of
selected frames, cases and point-of-purchase materials. The reduction of
inventory may adversely affect the Company's gross profit margin if it sells
inventory at lower prices.
Staff Reductions. The Company has decreased the number of full-time
employees from a high of 288 in fiscal 2000 to 204 at February 28, 2001 and has
also decreased its use of temporary employees.
Improve Performance of Direct Sales Force. The Company will attempt to
improve the performance of its direct sales force by reducing the sales
representatives' guaranteed draws and commission structure. The Company has also
terminated a number of less productive sales representatives since the end of
the fiscal year.
Reduce Selling Expenses. The Company will reduce its selling expenses by
reducing trade and consumer advertising programs, promotional expenses and trade
show participation. The Company will spend the amounts necessary to comply with
any promotional expenditure requirements under its brand licenses.
Reduce Overhead Expenses. The Company will attempt to reduce overhead by
subleasing excess space and eliminating sales support offices. The Company
subleased approximately 42,000 square feet of space from December 2000 through
March 2001.
4
5
Improve Accounts Receivable Collections. The Company will attempt to
shorten the time period for collecting accounts receivable by tightening its
credit policy, reducing credit terms to retailers and reducing the number of
retailer programs with extended credit terms.
Reduce Number of Brand Name Lines. In order to concentrate its resources,
the Company will have fewer brand name lines in 2001 due to the termination of
the Coach Eyewear line in December 2000.
No assurance can be given the Company will be able to successfully
implement any or all of the components of its turnaround strategy, that it will
return to profitability or will be able to refinance its credit facility.
BRAND DEVELOPMENT
The Company attributes its success to its brand-name development process,
its frame designs, and its innovative sales techniques, he Company's brand-name
development process includes identifying a market niche, obtaining the rights to
a carefully selected brand name, producing a comprehensive marketing plan,
designing frames consistent with each brand image, developing unique in-store
displays, and creating innovative sales and merchandising programs for
independent optical retailers and retail chains.
Identifying a Market Niche and Obtaining the Rights to a Brand Name.
Signature's brand-name development process begins with identifying an eyewear
market niche. The Company characterizes a market niche by referring to the
target customer's gender and age (e.g., adult, child, 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. The Company's existing license agreements contain
terms limiting the ability of the Company to market competing brand names. See
Item 7--"Management's Discussion and Analysis of Results of Operation and
Financial Conditions--Factors That May Affect Future Results-Limitations on
Ability to Distribute Other Brand-Name Eyeglass Frames."
After the Company has determined that a targeted brand name is available,
the Company develops (1) an in-depth understanding of the potential licensor's
market position, (2) innovative strategies for extending the brand's image to
the eyewear market, (3) preliminary plans for merchandising, advertising and
sales promotion, and (4) broad concepts for frame design. Once the Company has
acquired an exclusive eyewear license for a brand name, it develops detailed
concepts for frame designs, establishes the brand's identity within the optical
industry, and sets forth the first year's merchandising, advertising and sales
promotion plans.
Frame Design. The Company's frame styles are developed by its in-house
design team, which works in close collaboration with many respected frame
manufacturers throughout the world to develop unique designs and technologies.
Initially, each of the Company's frame designers works individually with a
factory to develop new design concepts. Once the factory develops a prototype,
the designer presents the style to the Company's frame committee for approval.
Once approved, Signature then contracts with the factory partner to manufacture
the style. By these methods, Signature is able to choose the strengths of a
variety of factories worldwide, and to avoid reliance on any one factory. To
assure quality, Signature's designers continue to work closely with the factory
at each stage of a style's manufacturing process.
The Company's metal frames generally require over 200 production steps to
manufacture, including hand soldering of bridges, fronts and endpieces. Many of
the Company's metal frames take advantage of modem technical advances, such as
thinner spring hinges (which flex outward and spring back) and lighter metal
alloys, both of which permit the manufacture of frames which are thinner and
lighter while retaining strength. The Company also takes advantage of technical
advances in plastic frames, such as laminated plastics that are layered in
opposing or complementary colors, and extra-strong plastics that can be cut
super thin.
5
6
Quality Control. The Company uses only manufacturers it believes capable of
meeting its criteria for quality, delivery and attention to design detail.
Signature specifies the materials to be used in the frames, and approves
drawings and prototypes before committing to production. The Company places its
initial orders for each style at least six months before the style is released,
and requires the factory to deliver several advance shipments of samples. The
Company's quality committee examines all sample shipments. This process provides
sufficient time to resolve problems with a style's quality before its release
date. The Company's quality committee selectively examines frames in subsequent
shipments to ensure ongoing quality standards. If, at any stage of the quality
control process, frames do not meet the Company's quality standards, then the
Company returns them to the factory with instructions to improve the specific
quality problems. If the quality does not meet the Company's standards before a
style's release date, the Company returns all frames in a style to the factory,
and the style is not released.
Marketing, Merchandising and Sales Programs. Signature produces "turnkey"
marketing, merchandising and sales promotion programs to help optical retailers,
as well as the Company's sales representatives, promote sales. For optical
retailers, the Company develops unique in-store displays, such as its Laura
Ashley Eyewear "store within a store" environments. For the sales
representatives who call on retail accounts, the Company creates presentation
materials, marketing bulletins, motivational audio and video tapes and other
sales tools to facilitate professional presentations.
Loyalty Programs. The Company attributes a significant portion of its
success with independent optical retailers in the United States to its loyalty
programs. The Company's loyalty programs benefit the Company through the
automatic sales and the reorders they generate, and benefit participating
optical retailers through early access to new styles, program-ending gifts and
from special in-store merchandising. Each domestic loyalty partner agrees to
automatically purchase or display between 30 and 200 Company frames depending on
the partner's desired participation level. There is no minimum term, and a
partner may terminate participation at any time. At October 31, 2000, the
Company's loyalty programs had approximately 4,000 domestic and approximately
500 international partners. The Company estimates that over 15% of the
independent optical retailers in the United States participated in one or more
of the Company's 2000 loyalty programs.
PRODUCTS
The Company's principal products during fiscal 2000 were eyeglass frames
sold under the brand names Laura Ashley Eyewear, Eddie Bauer Eyewear, Hart
Schaffner & Marx Eyewear, Nicole Miller Eyewear, bebe eyes, Coach Eyewear,
Dakota Smith Eyewear, Camelot and Signature.
The following table provides certain information about the market segments,
introduction dates and approximate retail prices of the Company`s products.
APPROXIMATE RETAIL
BRAND NAME/SEGMENT CUSTOMER GENDER/AGE INTRODUCTION DATE PRICES(1)
------------------ ------------------- ----------------- ------------------
Licensed Brands
bebe eyes.......................... Women May 2000
Prescription.................... $90-$125
Sunwear......................... $60-$ 75
COACH Eyewear (2).................. Unisex April 2000
Prescription.................... $170-$215
Sunwear......................... $120-$180
Eddie Bauer........................ Men/Women
Prescription.................... 1998 $100- 135
Performance Sunwear with Oakley's
patented Lenses................. Spring 2000 $ 90-140
Hart Schaffner & Marx.............. Men 1996 $125-170
6
7
APPROXIMATE RETAIL
BRAND NAME/SEGMENT CUSTOMER GENDER/AGE INTRODUCTION DATE PRICES(1)
------------------ ------------------- ----------------- ------------------
Laura Ashley
Prescription.................... Women 1992 $125 - 180
Sunwear......................... Women 1993 $ 90 - 100
Petites......................... Girls/Women 1993 $ 80- 125
Nicole Miller (3).................. Women
Prescription.................... 1993 $90-$138
Sunwear......................... 1993 $75-$95
House Brands
Camelot............................ Men/Women 1986 $70-$130
Unisex 1987 $70-$130
Boys/Girls 1987 $60-$90
Dakota Smith (3)
Prescription.................... Unisex 1992 $90-$125
Sunwear......................... Unisex 1992 $80-$100
Signature Collection
Brand X......................... Unisex 2000 $85-$95
Bravado......................... Men 1999 $80-$90
Intuition....................... Women 1999 $80-$90
Lifescape....................... Women 1999 $60-$70
Open Road....................... Unisex 2000 $80-$90
Search.......................... Unisex 1999 $80-$140
Small Print..................... Men/Women 2000 $80-$90
(1) Retail prices are established by retailers, not the Company.
(2) The Company's license with Coach Eyewear terminated in December 2000.
(3) Obtained by the Company in June 1999 in connection with its acquisition of
California Design Studio, Inc.
Laura Ashley Eyewear
The Company's first major eyewear line, and still its largest, is Laura
Ashley Eyewear, which was introduced in 1992. With net sales of $16.0 million in
fiscal 2000, The Laura Ashley Eyewear Collection remains one of the leading
women's brand-name collections in the United States.
Like Laura Ashley clothing and home furnishings, Laura Ashley Eyewear has
been designed to be feminine and classic, and fashionable without being trendy.
The hallmark of Laura Ashley Eyewear is its attention to detail, and the
collection is known for its unique designs on the styles' temples, fronts and
end pieces. The collection's new strategy will be to extend its product
selection to reach a broader audience within the feminine eyewear niche. This is
accomplished by segmenting the collection into four distinct product areas. The
"Laura Ashley Traditional Collection" is the truest interpretation of the Laura
Ashley brand. The "City Collection" is more fashion-forward, aimed at a slightly
younger women's market. The "Laura Ashley Petite Collection" come in smaller
sizes, and is aimed to reach women and girls with smaller faces, regardless of
age. Finally, the "Laura Ashley Sunwear Collection" offers sunwear styles with
distinctive Laura Ashley feminine detailing.
Signature's in-house merchandising team has conceptualized and designed
unique in-store "environments" to attract the target customer to the frames.
These "environments" are modular, so that a small display is an integral
7
8
part of a larger one, and they can be customized for large customers. Most Laura
Ashley Eyewear environments are covered with colorful Laura Ashley textured
floral-print fabric, providing the retailer with, in effect, a Laura Ashley
"store within a store."
The Company has the exclusive right to market and sell Laura Ashley Eyewear
through a license with Laura Ashley entered into in May 1991. The license covers
a specified territory including the United States, Canada, the United Kingdom,
Australia, New Zealand, Colombia, France, Belgium, Germany, Japan and the
Netherlands. The Company also has a right of first refusal to distribute Laura
Ashley Eyewear in Mexico and all other European countries. The Laura Ashley
license is automatically renewed annually so long as the Company is not in
breach of the license agreement and generates the required amount of minimum net
sales. Laura Ashley may terminate the license before its term expires under
certain circumstances, including if a material breach of the license agreement
by the Company or if 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.
Eddie Bauer Eyewear
The Eddie Bauer Eyewear collection includes men's and women's prescription
eyewear styles that are designed to capture the Eddie Bauer casual lifestyle,
offering versatility and comfort with unsurpassed quality. Eddie Bauer Eyewear's
frame designs will evolve to meet the personality of today's Eddie Bauer
customer, with frames that are appropriate for life's everyday experiences - not
just casual weekends. The style assortment remains broad in its appeal by
expressing many facets of the Eddie Bauer lifestyle. It is the intent to design
product for every Eddie Bauer customer. Several newer Eddie Bauer Eyewear styles
have been produced using high-density plastics as well as titanium, a
lightweight, extremely strong and long-lasting metal.
Along with its marketing, merchandising and sales promotion programs, the
Company has designed point-of-sale graphic displays that are also inspired by
Eddie Bauer's casual lifestyle image and use the same models shown in Eddie
Bauer catalogs to bring the Eddie Bauer image into retail optical stores. In
keeping with Eddie Bauer's commitment to value, the collection consists of
medium priced frames. Although there are now several competitor eyewear brands
competing in this niche - including Hush Puppies, Nautica, Timberland, Woolrich,
Ocean Pacific, and Sperry - Eddie Bauer Eyewear is considered to be one of the
leading eyewear collections in the casual 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 under certain circumstances, including
if (1) a person or entity acquires more than 30% of the Company's outstanding
voting securities, and thereby becomes the largest shareholder and owns more
shares than Bernard L. Weiss, Julie Heldman, Robert Fried, Robert Zeichick,
Michael Prince and Daniel Warren (all of whom are current or former directors
and/or officers of the Company), or (2) the Company commits a material breach of
the license agreement.
Hart Schaffner & Marx Eyewear
The Hart Schaffner & Marx Eyewear is the distinctively masculine collection
targeted at men who are interested in quality, comfort and craftsmanship. Hart
Schaffner & Marx, a subsidiary of Hartmarx Corporation and a leading
manufacturer of tailored clothing, has an image of enduring quality, and is a
recognized name among men who purchase apparel in the medium to high price
range. Because men are generally concerned about both function and fashion, the
frames contain features that enhance their durability - the highest quality
screws, nosepads and spring hinges - and come with a warranty. The collection is
designed to fit a broad spectrum of men, and selected styles have longer temples
and larger sizes than those generally available.
The Company has the exclusive right to market and sell Hart Schaffner &
Marx Eyewear in the United States through a license with Hart Schaffner & Marx
entered into in January 1996. The license agreement gives the
8
9
Company the right of first refusal to sell Hart Schaffner & Marx in any
additional countries. The Hart Schaffner & Marx license was renewed in April
1999, and maybe renewed for three-year terms by the Company in perpetuity
provided the Company is not in default under the license agreement. Hart
Schaffner & Marx may terminate its license with the Company before the
expiration of its term if (1) someone other than Bernard Weiss, Julie Heldman,
Robert Fried or Robert Zeichick acquires more than 50% of the Company's
outstanding voting securities, or (2) the Company fails to perform its material
obligations under the license agreement.
Nicole Miller Eyewear
In June 1999, in connection with its acquisition of California Design
Studio, Inc., the Company acquired the exclusive license to design and market
Nicole Miller Eyewear, a collection of women's and men's prescription eyewear
frames and sunwear. California Design Studio had held the Nicole Miller Eyewear
license since 1993.
Nicole Miller Eyewear is targeted at the sophisticated, style-conscious
modern woman who creates her own fashion trends in a fun, whimsical way. Nicole
Miller clothing designs feature colorful designs with interesting shapes,
without being pretentious or extreme. The Nicole Miller Eyewear collection also
features colorful designs with interesting shapes that represent a balanced
blend of youthful energy and sophistication. Most styles of Nicole Miller
Eyewear prescription eyewear frames are available either as prescription eyewear
or as sunwear, and many are available with lenses in designer colors.
The license for Nicole Miller Eyewear expires in March 2003. The licensor
may terminate the license before its stated term expires if the Company
materially breaches the license agreement.
bebe eyes
Like the bebe clothing, the "bebe eyes" collection features hip,
flirtatious styling for the discriminating bebe customer. bebe eyes also offers
sunwear, which is designed for women who take pride in their appearance, while
seeking quality and contemporary fashion at a competitive price.
The Company has the exclusive right to market and sell bebe eyes in the
United States, Canada and a number of other countries pursuant to a license
agreement the Company entered into in September 1999 with bebe stores, inc. The
license expires in March 2003. The Company may renew the license for two
consecutive three-year terms provided it meets certain minimum net sales and
royalty requirements during the preceding term. bebe may terminate the license
before its stated term expires under certain circumstances, including if the
Company materially breaches the license agreement or if, without the prior
approval of bebe, 50% or more or the outstanding common stock of the Company is
acquired by either: (A) a women's apparel company or (B) another person and the
financial and operational condition of the Company is impaired or such other
person makes or proposes to make material changes in the key management
personnel in charge of the license.
House Brands
The cost to retailers of frames in Signature's own lines is generally less
than frames with brand names, because the latter command greater retail prices,
and there are no licensing fees payable on the Company's own lines. Moreover,
the styling of Signature's own lines can be more flexible, because the Company
will be able to change the styling--as well as its merchandising--more rapidly
without the often time-consuming requirement of submitting them to the licensor
for its approval.
Dakota Smith Eyewear. Signature obtained its proprietary Dakota Smith brand
in 1999 in connection with its acquisition of California Design Studio Inc.,
which had introduced the line in 1992. Dakota Smith Eyewear targets men and
women with spirited designs capturing the diversity and mystique of the American
lifestyle.
Camelot Collection. The Company first introduced its own styles for
manufacture overseas in 1986. Those styles became the Camelot collection, which
contains a broad range of high-quality men's, women's, unisex, girls' and boys'
styles. To date, the Company has sold the Camelot collection primarily through
USA Optical, a division of Signature.
9
10
Signature Collections. The Company established its own line, Signature
Collections, in fiscal 1999. The line comprises multiple segments, each
targeting niches not otherwise filled by the Company's brand-name collections.
The Company's goals related to that line are: to position Signature to compete
more effectively against other optical companies that have direct sales forces;
to enable the Company to offer products in segments not served by the Company's
licensed collections; and to allow the Company to develop products more quickly;
and to reach different markets by offering good quality, low-cost styles.
DISTRIBUTION
The Company distributes its products (1) to independent optical retailers
in the United States, primarily through its national direct sales force, (2)
internationally, primarily through exclusive distributors in foreign countries
and through a direct sales force in Western Europe; (3) to major optical retail
chains, including EyeCare Centers of America, Cole Vision Corp. and its
subsidiary, LensCrafters and U.S. Vision, through its own account managers; (4)
through selected distributors in the United States; and (5) through
telemarketing.
The following table sets forth the Company's net sales by distribution
channel for the periods indicated:
YEAR ENDED OCTOBER 31,
---------------------------------------------------------------
1998 1999 2000
---------------- --------------- ----------------
(IN THOUSANDS)
Domestic distributors ........... $ 17,504 $ 12,281 $ 916
Optical retail chains ........... 11,252 15,709 17,041
Telemarketing(1) ................ 5,592 4,863 5,098
International ................... 3,473 3,822 6,634
Direct sales(2) ................. 3,071 7,389 25,243
---------------- --------------- ----------------
$ 40,892 $ 44,064 $ 51,932
================ =============== ================
(1) In fiscal 1998 and 1999, included net sales by Optical Surplus, a division
which sold brand name close-outs. Optical Surplus was discontinued in
fiscal 2000; and therefore net sales of Company close-outs in 2000 are
included by distribution channel.
(2) The Company began selling directly to independent optical retailers
nationally in October 1999.
Direct Sales. Before October 1, 1999, the Company sold to independent
optical retailers through its own direct sales force only in California and
Arizona. In 1999, the Company determined to change its primary method of
distributing its products to independent optical retailers in the United States
from distributors to a national direct sales force, including company and
independent sales representatives. As a result, the Company terminated
substantially all of its domestic distributors as of October 1, 1999 and added
sales representatives commencing the fourth quarter of fiscal 1999. The direct
sales force, including independent sales representatives, numbered 84 at October
31, 2000.
The Company did not increase the size of its direct sales force to the
level it originally had believed desirable due to, among other things, the
inability to attract qualified sales representatives. The Company has seen a
significant reduction in the size of its direct sales force to 55 at February
28, 2001 due to attrition and to the Company's decision to terminate
underperforming sales representatives.
Optical Retail Chains. Signature sells directly to optical retail chains,
including EyeCare Centers of America, Cole Vision Corp. and its subsidiary
Pearle Vision, LensCrafters and U.S. Vision. EyeCare Centers of America and
Pearle Vision each use in-store displays customized by the Company to feature
its products, and have dedicated prime floor space to Laura Ashley Eyewear,
Eddie Bauer Eyewear and other Company-brand eyewear.
International. The Company sells certain of its products internationally
through exclusive distributors and since June 1999 in Western Europe through a
direct sales force including Company and independent sales representatives. The
Company maintains a sales office and warehouse facility in Liege, Belgium. The
Company's international distributors have exclusive agreements for defined
territories. The Company sells to European optical retail chains through its
Belgium office. At February 28, 2001, the Company had 27 international
distributors and
10
11
15 international sales representatives. Historically, the large majority of
Signature's international sales through distributors have been of Laura Ashley
Eyewear sold in England, Canada, Australia and New Zealand.
Domestic Distributors. In connection with its decision in 1999 to
distribute its products to independent optical retailers in the United States
through a direct sales force, the Company terminated all but two of its domestic
distributors in the fourth quarter of fiscal 1999. The Company will continue to
distribute its products through selected distributors in the United States in
areas in which it believes it can achieve better penetration than through direct
sales.
Telemarketing. The Company's USA Optical division sells 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 regular basis in order to earn the premiums and trip
incentives.
CONTRACT MANUFACTURING
The Company's frames are manufactured to its specifications by a number of
contract manufacturers located outside the United States. The manufacture of
high quality metal frames is a labor-intensive process which can require over
200 production steps (including a large number of quality-control procedures)
and from 90 to 180 days of production time. In fiscal 2000, Signature used
manufacturers principally in Hong Kong/China, Japan and Italy. The Company
believes that throughout the world there are a sufficient number of
manufacturers of high-quality frames so that the loss of any particular frame
manufacturer, or the inability to import frames from a particular country, would
not materially and adversely affect the Company's business in the long-term.
However, because lead times to manufacture the Company's eyeglass frames
generally range from 90 to 180 days, an interruption occurring at one
manufacturing site that requires the Company to change to a different
manufacturer could cause significant delays in the distribution of the styles
affected. This could cause the Company not to meet delivery schedules for these
styles, which could materially and adversely affect the Company's business,
operating results and financial condition.
In determining which manufacturer to use for a particular style, the
Company considers manufacturers' expertise (based on type of material and style
of frame), their ability to translate design concepts into prototypes, their
price per frame, their manufacturing capacity, their ability to deliver on
schedule, and their ability to adhere to the Company's quality control and
quality assurance requirements.
The Company is not required generally to pay for any of its frames prior to
shipment. Payment terms for the Company's products currently range from cash
upon shipment to terms ranging between 60 and 90 days on open account. For
frames imported other than from Hong Kong manufacturers, the Company is
obligated to pay in the currency of the country in which the manufacturer is
located. In the case of frames purchased from manufacturers located in Hong
Kong/China, the currency is United States dollars. For almost all of the
Company's other frame purchases, its costs vary based on currency fluctuations,
and it generally cannot recover increased frame costs (in United States dollars)
in the selling price of the frames.
The purchase of goods manufactured in foreign countries is subject to a
number of risks. See "Management's Discussion and Analysis of Result of
Operations and Financial Condition--Factors That May Affect Future Results--
Dependence Upon Contract Manufacturers; Foreign Trade Regulation."
COMPETITION
The markets for prescription eyewear are intensely competitive. There are
thousands of frame styles, including hundreds with brand names. At retail, the
Company's eyewear styles compete with styles that do and do not have brand
names, styles in the same price range, and styles with similar design concepts.
To obtain board space at an optical retailer, the Company competes against many
companies, both foreign and domestic, including Luxottica Group S.p.A.; Safilo
Group S.p.A.; and Marchon Eyewear, Inc., as well as Signature's former
distributors. Signature's largest competitors have significantly greater
financial, technical, sales, manufacturing and other
11
12
resources than the Company. They also employ direct sales forces that have
existed for longer, and are significantly larger than the Company's. At the
major retail chains, the Company competes not only against other eyewear
suppliers, but also against the chains themselves, which license some of their
own brand names for design, manufacture and sale in their own stores. Luxottica,
one of the largest eyewear companies in the world, is vertically integrated, in
that it manufactures frames, distributes them through direct sales forces in the
United States and throughout the world, and owns LensCrafters, one of the
largest United States retail optical chains.
The Company competes in its target markets through the quality of the brand
names it licenses, its marketing and merchandising, the popularity of its frame
designs, the reputation of its styles for quality, and its pricing policies.
BACKLOG
The Company generally ships eyeglass frames upon receipt of orders, and
does not operate with a material backlog.
EMPLOYEES
At October 31, 2000, the Company had 239 full-time employees, including 97
in sales and marketing, 31 in customer service and support, 46 in warehouse
operations and shipping and 65 in general administration and finance. As part of
its turnaround strategy, the Company has reduced its number of full-time
employees to 204 at February 28, 2001. None of the Company's employees are
covered by a collective bargaining agreement. The Company considers its
relationship with its employees to be good.
ITEM 2--DESCRIPTION OF PROPERTIES
The Company leases approximately 109,000 square feet of a building located
in Inglewood, California, where it maintains its principal offices and
warehouse. The Company's lease for this facility expires in 2005, although the
Company has an option to renew the lease for an additional five years.
The Company's international division also leases approximately 2,500 square
feet warehouse and office space in Liege, Belgium, which supports the Company's
sales in Europe.
ITEM 3--LEGAL PROCEEDINGS
The Company is involved in a number of legal proceedings related
principally to its failure to pay certain accounts payable and other
obligations, some of which are in dispute or with respect to which the Company
believes it has counterclaims. While the full stated amounts of these
obligations are reflected as liabilities on the balance sheet of the Company,
the Company will incur costs of defense and may be required to pay other damages
such as interest.
These lawsuits include a lawsuit filed by Coach, Inc in February 2001 for
approximately $900,000 primarily for advertising costs Coach alleges are owed by
the Company (the non-payment of which was the basis of Coach's termination of
the eyewear license). While the Company determined not to contest the
termination of the license due to, among other things, the lack of market
acceptance of the Coach Eyewear line, the Company has responded to Coach's
lawsuit by denying Coach's claims on the basis that such claims were not valid
and its non-payment was excused by Coach's material breach of the license
agreement. In addition, the Company counterclaimed against Coach for damages
based upon such material breaches. The Company is unable to predict the outcome
of this litigation.
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
None.
12
13
PART II
ITEM 5--MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK
The Company's Common Stock was traded on the Nasdaq SmallCap Market under
the symbol "SEYE" during the periods set forth below. The Company's Common Stock
was delisted from trading on the Nasdaq Stock Market effective March 15, 2001.
The following table sets forth, for the period indicated, certain high and low
closing prices for the Common Stock.
HIGH LOW
------------- -------------
FISCAL YEAR ENDED OCTOBER 31, 1999
First Quarter ............................... $ 5.69 $ 3.38
Second Quarter............................... $ 4.72 $ 2.75
Third Quarter................................ $ 4.41 $ 2.88
Fourth Quarter............................... $ 4.19 $ 3.13
FISCAL YEAR ENDED OCTOBER 31, 2000
First Quarter ............................... $ 3.50 $ 2.50
Second Quarter .............................. $ 2.88 $ 1.50
Third Quarter................................ $ 2.00 $ 0.66
Fourth Quarter .............................. $ 2.56 $ 0.59
On June 12, 2001, the last sales price of the Common Stock as reported in
the OTC Bulletin Board was $0.75 per share. As of April 20, 2001, there were 34
holders of record of the Common Stock.
DIVIDENDS
The Company does not currently intend to pay cash dividends on its Common
Stock. Historically, the Company followed a policy of retaining earnings to
finance the growth of its business. The Company paid no dividends in fiscal
2000.
ITEM 6--SELECTED FINANCIAL DATA
The following data should be read in conjunction with the Consolidated
Financial Statements and related notes and with "Management's Discussion and
Analysis of Results of Operations and Financial Condition" appearing elsewhere
in this Form 10-K.
YEAR ENDED OCTOBER 31,
-----------------------------------------------------------------------
1996 1997 1998 1999 2000
------------- ------------- ----------- ------------- -------------
STATEMENT OF INCOME DATA:
Net sales ................................ $ 28,280 $ 33,176 $ 40,892 $ 44,056 $ 51,932
Gross profit ............................. 16,249 19,333 23,247 25,316 30,507
Total operating expenses ................. 13,927 15,323 19,041 27,461 39,709
Income (Loss) from operations ............ 2,322 4,010 4,206 (2,145) (9,202)
Net income (Loss) ........................ 2,012 3,585 2,750 (1,309) (9,439)
Net income (Loss) per share .............. 0.52 (0.26) (1.87)
Pro forma net income (1) ................. 1,265 2,340
Pro forma net income per share ........... 0.36(1) 0.61(1)
Weighted average common shares outstanding 3,546,519(2) 3,829,822 5,254,156 5,095,259 5,058,915
13
14
1996 1997 1998 1999 2000
------------- ------------- ----------- ------------- -------------
BALANCE SHEET DATA:
Current assets ........................... $ 8,989 $ 19,964 $ 23,548 $ 27,474 $ 33,006
Total assets ............................. 10,293 21,175 25,151 35,474 41,435
Current liabilities ...................... 7,207 3,860 5,498 12,334 28,142
Total liabilities ........................ 7,364 3,863 5,736 17,471 32,948
Stockholders' equity ..................... 2,929 17,312 19,415 18,003 8,487
(1) The Company was an S corporation until September 1997. The pro forma
presentation reflects a provision for income taxes as if the Company had
always been a C corporation.
(2) Pro forma.
ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis, which should be read in connection
with the Company's Consolidated Financial Statements and accompanying footnotes,
contain forward-looking statements that involve risks and uncertainties.
Important factors that could cause actual results to differ materially from the
Company's expectations are set forth in "Factors That May Affect Future Results"
in this Item 7 of this Form 10-K, as well as those discussed elsewhere in this
Form 10-K. All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by "Factors That May Affect Future Results." Those
forward-looking statements relate to, among other things, the Company's plans
and strategies, new product lines, and relationships with licensors,
distributors and customers, distribution strategies and the business environment
in which the Company operates.
The following discussion and analysis should be read in connection with the
Company's Consolidated Financial Statements and related notes and other
financial information included elsewhere in this Form 10-K.
OVERVIEW
The Company derives revenues primarily through the sale of eyeglass frames
under licensed brand names, including Laura Ashley Eyewear, Eddie Bauer Eyewear,
Hart Schaffner & Marx Eyewear, bebe eyes and Nicole Miller Eyewear, and under
its proprietary brands Dakota Smith Eyewear, Camelot and Signature.
The Company's best-selling product lines are Laura Ashley Eyewear and Eddie
Bauer Eyewear. Its most successful line is Laura Ashley Eyewear, which was
launched in 1992. Net sales of Laura Ashley Eyewear and Eddie Bauer Eyewear
together accounted for 77%, 75% and 60% of the Company's net sales in fiscal
1998, fiscal 1999 and fiscal 2000, respectively. Although the Company expects
the Laura Ashley Eyewear and Eddie Bauer lines to continue to be the Company's
leading sources of revenue for the near future, the Company expects that
increasing sales of its other licensed brands and its own proprietary brands
will reduce the percentage of total sales represented by sales of Laura Ashley
Eyewear and Eddie Bauer Eyewear in the future.
The Company's cost of sales consists primarily of payments to foreign
contract manufacturers that produce frames and cases to the Company's
specifications. The complete development cycle for a new frame design typically
takes approximately twelve months from the initial design concept to the
release. Generally, at least six months are required to complete the initial
manufacturing process.
In June 1999, the Company acquired substantially all of the assets of
California Design Studio, Inc., a designer and marketer of prescription eyeglass
frames and ready-to-wear sunglasses (the "CDS Acquisition"). Total consideration
for the assets was approximately $7.4 million, which consists of: (1) $1.4
million in cash; (2) a promissory note in the principal amount of $1.25 million
payable in monthly installments of $17,042 maturing in 2002; (3) other deferred
payments of approximately $500,000; and (4) the assumption of approximately $4.7
million of liabilities, including primarily an obligation of $4.1 million
discounted to present value to California Design Studio's principal eyeglass
frame manufacturer, which is payable in monthly installments over a three year
period. The assets acquired primarily consisted of a license to sell flames
under the Nicole Miller brand name, proprietary brand names Dakota Smith, Koko
and Nukes, inventory, machinery, furniture, equipment and accounts receivable.
14
15
California Design Studio's consolidated revenues for its fiscal year ended April
30, 1999 were $8.6 million, and its total assets at April 30, 1999 were
approximately $4.6 million. The acquisition was accounted for as a purchase.
Following many years of profitability, the Company incurred quarterly
operating losses in each of the five fiscal quarters ended October 31, 2000. The
principal reason for these losses was the change, announced in August 1999 and
effected in October 1999, by the Company in its method of distributing its
products to independent optical retailers in the United States from distributors
to a direct sales force. The Company made this conversion to stimulate sales
growth by enabling the Company to work more closely with sales representatives
who are dedicated to selling only the Company's products, and to require its
sales representatives to implement the Company's marketing plans. The Company
had anticipated that its increased gross profit, due to the higher sales prices
of its products, would more than offset increased selling expenses resulting
from the costs of its direct sales force.
The conversion did not result in the anticipated sales growth. The Company
had targeted to have a direct sales force numbering approximately 130 by the end
of fiscal 2000. However, the direct sales force did not exceed 88 during the
fiscal year and numbered 84 at fiscal year-end.
The Company incurred significant expenditures in connection with the
conversion, including the employment of additional sales executives, sales
representatives, customer service and distribution personnel and other support
personnel, and the acquisition of computer hardware and software, telephone and
warehouse distribution infrastructure. Delays and problems in the computer
software conversion resulted in greater than anticipated costs as well as
inefficiencies and delays in processing orders and returns, adversely affecting
customer relations and service and requiring the hiring of additional personnel.
In addition, following the announcement in August 1999 of the conversion,
distributors significantly reduced their selling efforts and returned inventory
and many actively sought inventory returns from their optical retailer
customers. Distributors inventory returns increased from $2.8 million in fiscal
1998 to $6.8 million in fiscal 1999, and the Company's gross sales (sales before
returns) to domestic distributors decreased from $20.3 million in fiscal 1998 to
$19.1 million in fiscal 1999. The Company has also experienced a significantly
higher return rate from independent optical retailers than it did historically
from distributors.
The Company's results of operations were also adversely affected in fiscal
2000 by the delay (of 2 to 5 months) in the launches of Coach Eyewear, bebe eyes
and Eddie Bauer Performance Sunwear. This adversely affected revenues for these
lines during the year (and the Company missed the primary purchasing market for
sunglasses for its Eddie Bauer Performance Sunwear). However, these launch
delays did not delay the launch costs for those products for advertising,
promotion and point-of-purchase displays, which were particularly high for Coach
Eyewear.
The Company has undertaken a turnaround strategy which will encompass the
following activities:
Refinance Credit Facility. The Company will attempt to refinance its
existing credit facility. It is currently operating under a forbearance
agreement with its commercial bank which expires August 31, 2001. See "Financial
Condition, Capital Resources and Liquidity."
Negotiate Discounts and Payment Plans with Vendors. The Company will
attempt to negotiate discounts and/or extended payment plans and improved terms
with its vendors and other obligees. In the first quarter of fiscal 2001, the
Company negotiated over $400,000 of discounts of outstanding accounts payable
and entered in extended payment programs with more than 20 vendors.
Increase Gross Profit. To increase its gross profit, the Company has
increased prices of most of its frames, will attempt to negotiate lower prices
and will use lower cost manufacturers to the extent the Company believes such
manufacturers can meet the Company's quality requirements.
Reduce Inventory and Increase Inventory Turnover Rates. The Company will
attempt to reduce its inventory to improve its cash position and will attempt to
improve inventory turnover by better matching frame purchases with customer
orders. The Company also intends to maintain a lower on-hand number of days of
selected
15
16
frames, cases and point-of-purchase materials. The reduction of inventory may
adversely affect the Company's gross profit margin if it sells inventory at
lower prices.
Staff Reductions. The Company has decreased the number of full-time
employees from a high of 288 in fiscal 2000 to 204 at February 28, 2001 and has
also decreased its use of temporary employees.
Improve Performance of Direct Sales Force. The Company will attempt to
improve the performance of its direct sales force by reducing the sales
representatives' guaranteed draws and commission structure. The Company has also
terminated a number of less productive sales representatives since the end of
the fiscal year.
Reduce Selling Expenses. The Company will reduce its selling expenses by
reducing trade and consumer advertising programs, promotional expenses and trade
show participation. The Company will spend the amounts necessary to comply with
any promotional expenditure requirements under its brand licenses.
Reduce Overhead Expenses. The Company will attempt to reduce overhead by
subleasing excess space and eliminating sales support offices. The Company
subleased approximately 42,000 square feet of space from December 2000 through
March 2001.
Improve Accounts Receivable Collections. The Company will attempt to
shorten the time period for collecting accounts receivable by tightening its
credit policy, reducing credit terms to retailers and reducing the number of
retailer programs with extended credit terms.
Reduce Number of Brand Name Lines. In order to concentrate its resources,
the Company will have fewer brand name lines in 2001 due to the termination of
the Coach Eyewear line in December 2000.
No assurance can be given the Company will be able to successfully
implement any or all of the components of its turnaround strategy, that it will
return to profitability or will be able to refinance its credit facility
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated selected
statements of operations data shown as a percentage of net sales.
YEAR ENDED OCTOBER 31,
-------------------------------------------------------
1998 1999 2000
--------------- -------------- --------------
Net sales.............................. 100.0% 100.0% 100.0%
Cost of sales ......................... 43.1 42.5 41.3
--------------- -------------- --------------
Gross profit........................... 56.9 57.5 58.7
--------------- -------------- --------------
Operating expenses:
Selling............................ 29.4 31.3 41.6
General and administrative ........ 17.2 25.0 34.8
Restructuring Cost ................ 0.0 6.0 0.0
--------------- -------------- --------------
Total operating expenses ....... 46.6 62.3 76.4
--------------- -------------- --------------
Income (Loss) from operations ......... 10.3 (4.8) (17.7)
--------------- -------------- --------------
Other income (expense), net ........... 0.9 0.1 (1.9)
--------------- -------------- --------------
Income (Loss) before income taxes ..... 11.2 (4.7) (19.6)
Provision (Benefit) for income taxes .. 4.5 (1.8) (1.5)
--------------- -------------- --------------
Net income (Loss)...................... 6.7% (2.9)% (18.1)%
=============== ============== ==============
Comparison of Fiscal Years 1998, 1999 and 2000
Net Sales. Net sales increased by 7.8% from $40.9 million in fiscal 1998 to
$44.1 million in fiscal 1999 and by 18% to $51.9 million in fiscal 2000. The
following table shows certain information regarding net sales for the periods
indicated:
16
17
YEAR END OCTOBER 31
-------------------------------------------------------
1998 1999 2000
-------------- -------------- --------------
(IN THOUSANDS)
Laura Ashley Eyewear .................... $ 22,902 $ 19,013 $ 16,079
Eddie Bauer Eyewear ..................... 8,532 14,100 15,136
Other ................................... 9,458 10,943 20,717
-------------- -------------- --------------
$ 40,892 $ 44,056 $ 51,932
============== ============== ==============
Net sales in fiscal 1999 were adversely affected by the Company's
termination of 22 of its domestic distributors announced at the beginning of the
fourth quarter of fiscal 1998, which resulted in materially decreased selling
efforts by the distributors during the period the Company was starting up its
direct sales force. The decrease in Laura Ashley Eyewear net sales from fiscal
1998 to fiscal 1999 was due principally to a reduction in the net number of
units sold and to distributor frame returns (aggregating $2.3 million). The
increase in net sales of Eddie Bauer Eyewear in fiscal 1999 was due to in large
part to the fact that the line was launched in March 1998, and thus was sold for
only eight months in fiscal 1998, and to increasing consumer acceptance of the
line, offset in part by distributor frame returns. The increase in other net
sales from fiscal 1998 to fiscal 1999 was due in part to the addition of the
Dakota Smith Eyewear and Nicole Miller Eyewear lines resulting from the CDS
Acquisition in June 1999.
Net sales in fiscal 2000 were 18% greater than fiscal 1999 due to the
increase in sales of Nicole Miller Eyewear and Dakota Smith Eyewear and sales
from Coach Eyewear and bebe eyewear which were launched during the fiscal year.
Net sales of Laura Ashley continued to decline in units sold in part due to the
higher than anticipated return rate in fiscal 2000, notwithstanding the increase
in price from direct sales as opposed to sales to distributors. A portion of the
returns in fiscal 2000 were attributable to the disruption in the retail market
place from the conversion from sales through distributors to direct sales. Net
sales of Eddie Bauer increased approximately 7% due to the impact of higher
prices in a direct sales distribution mode, which offset a decrease in unit
sales and the launch of Eddie Bauer Performance Sunwear.
Gross Profit and Gross Margin. Gross profit was $23.2 million in fiscal
1998, $25.3 million in fiscal 1999 and $30.5 in fiscal 2000. The increase in
gross profit from fiscal 1998 to fiscal 1999 was attributable to the increase in
net sales. The increase in gross profit from fiscal 1999 to fiscal 2000 was
attributable to the increase in net sales resulting from the higher prices from
direct sales as opposed to distributor sales. The increase in gross margin in
fiscal 2000 was due to an increase in direct sales as a percentage of total net
sales. Gross margins in all three fiscal years were aided by continuing
reductions in import duties and tariffs, a shift towards lower cost
manufacturers and realization of higher prices on close out frames.
Selling Expenses. Selling expenses were $12.0 million in fiscal 1998, $13.8
million in fiscal 1999 and $21.6 million in fiscal 2000. The 15% increase from
fiscal 1998 to fiscal 1999 resulted primarily from an increase of $1.7 million
in compensation expense relating to additional sales representatives and
full-time warehouse personnel hired during fiscal 1999 in connection with the
CDS Acquisition and the Company's decision to sell to independent optical
retailers in the United States through a national direct sales force The 58%
increase from fiscal 1999 to fiscal 2000 resulted primarily from increases of
$4.6 million in commissions and salaries for sales representatives, $1.4 million
in royalty expense, $1.1 million in promotional expenses relating principally to
the introduction of Coach Eyewear and $1.0 million of freight expenses.
General and administrative expenses. General and administrative expenses
were $7.0 million in fiscal 1998, $11.0 in fiscal 1999 and $18.1 in fiscal 2000.
The 56% increase from fiscal 1998 to fiscal 1999 resulted in large part from
increases of $1.1 million in compensation expense and related employee benefits
for middle management and other administrative personnel hired during fiscal
1999 in connection with the transition from distributor sales to direct sales,
and $0.5 million in computer systems and warehouse upgrades. The 67% increase
from fiscal 1999 to fiscal 2000 resulted in large part from increases of: (a)
$3.1 million in compensation expense and related employee benefits for middle
management and other administrative personnel hired during fiscal 1999 and $1.3
million for temporary employees hired in fiscal 2000 in connection with the
transition from distributor sales to direct sales and the Company's expanding
product lines; (b) $1.0 million in computer systems and warehouse upgrades; (c)
$0.4 million of legal, accounting and other professional fees; and (d) $0.4
million of depreciation and
17
18
amortization expense resulting primarily from the CDS Acquisition, which
amortized a full year in fiscal 2000 as opposed to four months in fiscal 1999.
Restructuring Costs. The Company recognized $2.6 million in nonrecurring
restructuring costs in fiscal 1999 relating primarily to the gross profit
previously recognized on sales of $4.4 million of products returned by the
Company's United States distributors following their termination in the fourth
quarter of 1999.
Other Income (Expense), Net. Other income, net, in fiscal 1998 was
$403,000, due primarily to interest income resulting from the Company investing
a portion of the proceeds from its initial public offering in fiscal 1997. Other
income, net, of $53,000 in fiscal 1999 reflected principally declining interest
income offset by interest expense as the Company utilized the proceeds of its
public offering and incurred bank debt. Other expense, net in fiscal 2000 of
$1,009,000 consisted primarily of $1,131,000 of interest expense as the Company
increased its bank borrowings to fund operations.
Provision (Benefit) for Income Taxes. The Company had income taxes of $1.9
million in fiscal 1998, and had income tax benefits of $783,000 in fiscal 1999
and $772,000 in fiscal 2000. As of October 31, 2000 the Company had a federal
net operating loss carryforward of approximately $4,000,000 through 2020.
Net Income (Loss). The Company had net income in fiscal 1998 of $2,750,000,
a net loss in fiscal 1999 of $1,309,000, and a net loss of $9,439,000 in fiscal
2000.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company's accounts receivable increased from $6.6 million at October
31, 1999 to $8.7 million at October 31, 2000 due to an 18% increase in net sales
and the Company's shift to direct sales to optical retailers from distributor
sales, as optical retailers historically have paid more slowly than
distributors.
The Company's inventories increased from $16.6 million at October 31, 1999
to $18.8 million at October 31, 2000. This increase was due principally to a
larger number of frame brands marketed by the Company in fiscal 2000,
lower-than-anticipated net sales and distributor returns resulting from the
conversion from distributor to direct sales to optical retailers in the United
States. The Company is attempting to reduce its inventory to improve its cash
position and is attempting to improve inventory turnover by better matching
frame purchases with customer orders.
The Company had goodwill of $5.5 million at October 31, 2000 resulting
primarily from the CDS Acquisition in 1999. See Note 2 of Notes to Consolidated
Financial Statements.
In June 2000, the Company restructured its credit facility from its
commercial bank into an accounts receivable and inventory revolving credit line
and a term loan which are secured by substantially all of the assets of the
Company. Under the credit line, the Company may obtain advances up to an amount
equal to 60% of eligible accounts receivable and 35% of eligible inventories, up
to a maximum of $5,000,000, which advances bear interest at the bank's prime
rate or 2.5% in excess of the London Interbank Offered Rate ("LIBOR"), at the
Company's option. The term loan was in the amount of $3,500,000, is payable in
monthly installments of $72,917 plus interest at the rate of 8.52% per annum.
The credit facility matured on September 30, 2000.
The Company has defaulted under its bank credit facility for various events
of default including non-payment at maturity as well other non-compliance with
various covenants and conditions. The Company entered into a forbearance
agreement in December 2000, amended in February, May and June 2001, with its
bank. Under the forbearance agreement, as amended, the bank has agreed to
refrain from exercising any rights under the loan agreement for defaults
existing at the time of default until the earliest of August 31, 2001, the
closing of a recapitalization or sale of the Company which in each case results
in the full repayment of the bank loan (a "Transaction") or a default under the
forbearance agreement or default under the loan agreement other than an existing
default. Among other things, under the forbearance agreement, the Company must
provide the bank draft documentation for a Transaction by August 15, 2001 and
definitive documentation for a Transaction by August 31, 2001. The failure to
comply with the forbearance agreement could result in the bank exercising some
or all of its remedies
18
19
under the loan agreement, including foreclosing on the assets of the Company.
The Company is actively attempting to refinance the credit facility.
The Company has received a written proposal from a new lender to refinance
the credit facility with a two-year revolving line of credit for up to $13.5
million. The line of credit would be secured by the assets of the Company with
availability tied to eligible accounts receivable and inventory. Closing of the
line of credit is subject to satisfy to completion of due diligence and other
conditions. No assurance can be given that the Company will obtain this or any
other facility to refinance its existing bank credit facility.
Long-term debt at October 31, 2000 included: (1) a $1.1 million note
payable to California Design Studio, Inc. in connection with the CDS
Acquisition; (2) an obligation to a frame vendor of California Design Studio,
Inc. (present value of $3.3 million) assumed in connection with the CDS
Acquisition; and (3) an obligation to a consultant with a present value
$667,000. See Note 6 of Notes to Consolidated Financial Statements.
Of the Company's accounts payable at October 31, 1999 and October 31, 2000,
$1.5 million and $3.2 million, respectively, were payable in foreign currency.
To monitor risks associated with currency fluctuations, the Company on a weekly
basis assesses the volatility of certain foreign currencies and reviews the
amounts and expected payment dates of its purchase orders and accounts payable
in those currencies. Based on those factors, the Company may from time to time
mitigate some portion of that risk by purchasing forward commitments to deliver
foreign currency to the Company. The Company held forward commitments for
foreign currencies in the amount of $491,000 at October 31, 2000. See Note 1 of
Notes to Consolidated Financial Statements.
The Company's bad debt write-offs were less than 0.2% of net sales for the
1998, 1999 and 2000 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.
In fiscal 2000 the Company repurchased on the open market 27,100 shares of
its Common Stock at a cost of $78,000 under a stock buyback program initiated in
September 1998. In fiscal 2000 the Company terminated its stock buyback program.
Since the fourth quarter of fiscal 2000 and the Company has experienced a
lack of liquidity. Under its forbearance agreement, it cannot increase its
borrowings from its commercial bank and must refinance the credit facility.
Assuming the Company can refinance the credit facility, reduce its inventory
levels, maintain current sales levels and generally implement the other parts of
its turnaround strategy, the Company believes it will have adequate liquidity
for the next twelve months. However, because of the uncertainties in being able
to successfully implementing the turnaround strategy, the Company may also
attempt to secure debt or equity financing in addition to refinancing its bank
credit facility. Such financing could involve the sale of control of the
Company.
QUARTERLY AND SEASONAL FLUCTUATIONS
The Company's results of operations have fluctuated from quarter to quarter
and the Company expects these fluctuations to continue in the future.
Historically, the Company's net sales in its first fiscal quarter (the quarter
ending January 31) have been lower than net sales in other fiscal quarters. The
Company attributes lower net sales in the first fiscal quarter in part to low
consumer demand for prescription eyeglasses during the holiday season and
year-end inventory adjustments by distributors and independent optical
retailers. In addition, sales were lower in the fourth quarter of fiscal 1999
due principally to distributor returns. A factor which may significantly
influence results of operations in a particular quarter is the introduction of a
new brand-name collection, which results in disproportionate levels of selling
expenses due to additional advertising, promotions, catalogs and in-store
displays. Introduction of a new brand may also generate a temporary increase in
sales due to initial stocking by retailers.
Other factors which can influence the Company's results of operations
include customer demand, the mix of distribution channels through which the
eyeglass frames are sold, the mix of eyeglass frames sold, product returns,
delays in shipment and general economic conditions.
The following table sets forth certain unaudited results of operations for
the twelve fiscal quarters ended October 31, 2000. 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.
19
20
1998 1999 2000
--------------------------------------------------------------------------------------------------
JAN APRIL JULY OCT. JAN. APRIL 30 JULY OCT. JAN. APRIL JULY OCT.
31. 30 30 31 31. 30 31 31. 30 30 31
------ ------- ------- ------- ------ ------- ------- ------ ------- ------- ------- -------
Net sales.......... $6,722 $12,173 $10,704 $11,292 $9,036 $12,426 $13,228 $9,374 $12,003 $12,390 $17,442 $10,097
Cost of sales...... 2,900 5,196 4,552 4,996 4,216 5,300 5,787 3,444 4,807 5,058 7,076 4,281
Gross profit ...... 3,822 6,977 6,152 6,296 4,820 7,126 7,441 5,930 7,196 7,332 10,366 5,818
Operating
expenses:
Selling ......... 1,771 3,491 3,270 3,477 2,885 3,646 3,461 3,895 3,587 6,066 6,858 5,171
General and
administrative.. 1,511 1,773 1,866 1,884 1,915 2,292 3,020 3,722 3,845 4,708 5,014 4,554
Restructuring
cost............ 0 0 0 0 0 0 0 2,634 0 0 0 0
Total operating
expenses ........ 3,282 5,264 5,136 5,361 4,800 5,938 6,481 10,251 7,432 10,774 11,872 9.725
Income (loss)
from
operations ...... 540 1,713 1,016 935 20 1,188 960 (4,321) (236) (3,442) (1,506) (3,907)
Other expense,
net ............. 114 103 70 116 42 31 18 (31) (184) (265) (320) (136)
Income (loss)
before pro
forma
provision for
income taxes..... 654 1,816 1,086 1,051 62 1,219 978 (4,352) (420) (3,707) (1,826) (4,043)
INFLATION
The Company does not believe its business and operations have been
materially affected by inflation.
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.
Need to Refinance Bank Credit Facility
The Company's bank credit facility matured on September 30, 2000. The
Company has defaulted under its bank credit facility by reason of various events
of default, including non-payment at maturity and breach of other covenants .
The Company entered into a forbearance agreement with its bank regarding the
defaults. Under the forbearance agreement, as amended, the bank has agreed to
refrain from exercising any rights under the loan agreement for defaults
existing at the time of default until the earliest of August 31, 2001, the
closing of a recapitalization or sale of the Company which in each case results
in the full repayment of the bank loan (a "Transaction") or a default under the
forbearance agreement or default under the loan agreement other than an existing
default. Among other things, under the forbearance agreement, the Company must
provide the bank draft documentation for a Transaction by August 15, 2001 and
definitive documentation for a Transaction by August 31, 2001. The Company has
received a written proposal from a new lender to refinance the credit facility
with a two-year revolving line of credit for up to $13.5 million. The line of
credit would be secured by the assets of the Company with availability tied to
eligible accounts receivable and inventory. Closing of the line of credit is
subject to satisfy to completion of due diligence and other conditions. No
assurance can be given that the Company will obtain this or any other facility
to refinance its existing bank credit facility. The failure to comply with the
forbearance agreement could result in the bank exercising some or all of its
remedies under the loan agreement, including foreclosing on the assets of the
Company.
Liquidity Requirements
Since the fourth quarter of fiscal 2000 and the Company has experienced a
lack of liquidity. Under the forbearance agreement with its commercial bank, it
cannot increase its borrowings from the bank and must refinance the credit
facility. Assuming the Company can refinance the credit facility, reduce its
inventory levels, maintain current sales levels and generally implement the
other parts of its turnaround strategy, the Company believes it will have
adequate liquidity for the next twelve months. However, because of the
uncertainties in being able to successfully implementing the turnaround
strategy, the Company may also attempt to secure debt or equity financing in
addition to refinancing its bank credit facility. Such financing could involve
the sale of control of the Company.
Need to Generate Increased Revenues
The Company's conversion in October 1999 from selling to independent
optical retailers in the United States through a direct national sales force
instead of distributors was not successful. The Company believed that it
20
21
needed to expand its direct sales force to approximately 130 sales
representatives by the end of fiscal 2000 to generate unit sales commensurate
with unit sales through its distributor network. The Company was unable to
attract that number of qualified sales representatives, and the domestic direct
sales force did not exceed 88 during the year. That number had decreased to 55
at February 28, 2001 due to attrition and terminations by the Company. While the
Company's turnaround strategy provides for significant reductions in costs and
expenses, the Company must also generate sufficient sales to become profitable.
Substantial Dependence upon Laura Ashley and Eddie Bauer Licenses
Net sales of Laura Ashley Eyewear and Eddie Bauer Eyewear accounted for 75%
and 60% of the Company's net sales in fiscal 1999 and fiscal 2000, respectively.
While the Company intends to continue reducing its dependence on the Laura
Ashley Eyewear and Eddie Bauer Eyewear lines through the development and
promotion of Nicole Miller Eyewear, Dakota Smith Eyewear and bebe eyes, as well
as its own house brands, the Company expects the Laura Ashley and Eddie Bauer
Eyewear lines to continue to be the Company's leading sources of revenue for the
near future. The Company markets Laura Ashley Eyewear through an exclusive
license which 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. The Company markets
Eddie Bauer Eyewear through an exclusive license which terminates in December
2002, but may be renewed by the Company at least through 2008 so long as the
Company is not in material default and meets certain minimum net sales and
royalty requirements. Each of Laura Ashley and Eddie Bauer may terminate its
respective license before its term expires under certain circumstances,
including a material default by the Company or certain defined changes in
control of the Company.
Approval Requirements of Brand-Name Licensors
The Company's business is predominantly based on its brand-name licensing
relationships. Each of the Company's licenses requires mutual agreement of the
parties for significant matters. Each of these licensors has final approval over
all eyeglass frames and other products bearing the licensor's proprietary marks,
and the frames must meet the licensor's general design specifications and
quality standards. Consequently, each licensor may, in the exercise of its
approval rights, delay the distribution of eyeglass frames beating 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 and the bebe license prohibit the Company from entering
into license agreements with companies which Eddie Bauer and bebe, respectively,
believe are its direct competitors. The Hart Schaffner & Marx license prohibits
the Company from marketing and selling another men's brand of eyeglass frames
under a well-known fashion name with a wholesale price in excess of $40. The
Company expects that each future license it obtains will contain some
limitations on competition within market segments. The Company's growth,
therefore, will be limited to capitalizing on its existing licenses in the
prescription eyeglass market, introducing eyeglass frames in other segments of
the prescription eyeglass market, and manufacturing and distributing products
other than prescription eyeglass frames such as sunglasses. In addition, there
can be no assurance that disagreements will not arise between the Company and
its licensors regarding whether certain brand-name lines would be prohibited by
their respective license agreements. Disagreements with licensors could
adversely affect sales of the Company's existing eyeglass frames or prevent the
Company from introducing new eyewear products in market segments the Company
believes are not being served by its existing products.
21
22
Dependence Upon Contract Manufacturers; Foreign Trade Regulation
The Company's frames are manufactured to its specifications by a number of
contract manufacturers located outside the United States, principally in Hong
Kong/China, Japan and Italy. The manufacture of high quality metal frames is a
labor-intensive process which can require over 200 production steps (including a
large number of quality-control procedures) and from 90 to 180 days of
production time. These long lead times increase the risk of overstocking, if the
Company overestimates the demand for a new style, or understocking, which can
result in lost sales if the Company underestimates demand for a new style. While
a number of contract manufacturers exist throughout the world, there can be no
assurance that an interruption in the manufacture of the Company's eyeglass
frames will not occur. An interruption occurring at one manufacturing site that
requires the Company to change to a different manufacturer could cause
significant delays in the distribution of the styles affected. This could cause
the Company to miss delivery schedules for these styles, which could materially
and adversely affect the Company's business, operating results and financial
condition.
In addition, the purchase of goods manufactured in foreign countries is
subject to a number of risks, including foreign exchange rate fluctuations,
economic disruptions, transportation delays and interruptions, increases in
tariffs and duties, changes in import and export controls and other changes in
governmental policies. For frames purchased other than from Hong Kong/China
manufacturers, the Company pays for its frames in the currency of the country in
which the manufacturer is located and thus the costs (in United States dollars)
of the frames vary based upon currency fluctuations. Increases and decreases in
costs (in United States dollars) resulting from currency fluctuations generally
do not affect the price at which the Company sells its frames, and thus currency
fluctuations can impact the Company's gross margin and results of operations. In
fiscal 2000, Signature used manufacturers principally in Hong Kong/China, Japan
and Italy.
International Sales
International sales accounted for approximately 8.4%, 8.7% and 12.8% of the
Company's net sales in fiscal 1998, fiscal 1999 and fiscal 2000, respectively.
These sales were primarily in England, Canada Australia, New Zealand, Holland
and Belgium. The Company's international business is subject to numerous risks,
including the need to comply with export and import laws, changes in export or
import controls, tariffs and other regulatory requirements, the imposition of
governmental controls, political and economic instability, trade restrictions,
the greater difficulty of administering business overseas and general economic
conditions. Although the Company's international sales are principally in United
States dollars, sales to international customers may also be affected by changes
in demand resulting from fluctuations in interest and currency exchange rates.
There can be no assurance that these factors will not have a material adverse
effect on the Company's business, operating results and financial condition.
Product Returns
The Company has a product return policy which it believes is standard in
the optical industry. Under that policy, the Company generally accepts returns
of non-discontinued product for credit, upon presentment and without charge. The
Company's product returns for fiscal 1998, fiscal 1999, and fiscal 2000 amounted
to 13.8%, 19.2 % and 22.4 % of gross sales (sales before returns), excluding
distributor returns of $4.4 million in fiscal 1999 in connection with the
Company's decision to terminate its relationship with domestic distributors,
respectively. The Company anticipates that it will likely experience returns at
a rate significantly exceeding its historical levels, due to the Company's
decision to sell directly to United States independent optical retailers, rather
than through distributors. The Company maintains reserves for product returns
which it considers adequate; however, an increase in returns that significantly
exceeds the amount of those reserves 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, including a procedure named LASIK. While the Company does not believe
that contact lenses, refractive surgery or other vision correction alternatives
materially and adversely impact its business at present, there can be
22
23
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 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., as well as Signature's former
distributors. Signature's largest competitors have significantly greater
financial, technical, sales, manufacturing and other resources than the Company.
They also employ direct sales forces that are significantly larger than the
Company's, and are thus able to realize a higher gross profit margin. At the
major retail chains, the Company competes not only against other eyewear
suppliers, but also against the chains themselves, which license some of their
own brand names for design, manufacture and sale in theft 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), 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. These officers may
terminate their employment at any time. The Company maintains and is the sole
beneficiary of "key person" life insurance on Messrs. Weiss, Prince, Fried and
Zeichick in the amount of $750,000 each. There can be no assurance that the
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
23
24
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.
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. The Company has no present intention to issue any shares of
Preferred Stock. However, the rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire a majority of the outstanding voting
stock of the Company, which may depress the market value of the Common Stock. In
addition, each of the Laura Ashley, Hart Schaffner & Marx, Eddie Bauer and bebe
licenses allows the licensor to terminate its license upon certain events which
under the license are deemed to result in a change in control of the Company.
The licensors' rights to terminate their licenses upon a change in control of
the Company could have the effect of discouraging a third party from acquiring
or attempting to acquire a controlling portion of the outstanding voting stock
of the Company and could thereby depress the market value of the Common Stock.
ITEM 7A--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks, which include foreign exchange
rates and changes in U.S. interest rates. The Company does not engage in
financial transactions for trading or speculative purposes.
24
25
Foreign Currency Risks. During fiscal 2000, at any month-end a maximum of
$3.4 million and a minimum of $1.8 million of the Company's accounts payable
were payable in foreign currency. These foreign currencies included Japanese
Yen, 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
$491,000 at October 31, 2000.
International sales accounted for approximately 12.8% of the Company's net
sales in fiscal 2000. 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. The Company's bank credit facility includes an accounts
receivable and inventory revolving credit line and a term loan which are secured
by substantially all of the assets of the Company. Under the credit line, the
Company may obtain advances up to an amount equal to 60% of eligible accounts
receivable and 35% of eligible inventories, up to a maximum of $5,000,000, which
advances bear interest at the bank's prime rate or 2.5% in excess of the London
Interbank Offered Rate ("LIBOR"), at the Company's option. The term loan was in
the amount of $3,500,000, is payable in monthly installments of $73,000 plus
interest at the rate of 8.52% per annum. At October 31, 2000, $8.5 million was
due to the bank under the Credit Agreement. Any interest which may in the future
become payable on the Company's bank line of credit will be based on variable
interest rates and will therefore be affected by changes in market interest
rates.
In addition, the Company has fixed income investments consisting of cash
equivalents, which are also affected by changes in market interest rates. The
Company does not use derivative financial instruments in its investment
portfolio. The Company places its cash equivalents with high-quality financial
institutions, limits the amount of credit exposure to any one institution and
has established investment guidelines relative to diversification and maturities
designed to maintain safety and liquidity.
25
26
ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2000 AND 1999
================================================================================
Page
----
INDEPENDENT AUDITORS' REPORT F-1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Changes in Stockholders' Equity F-4
Consolidated Statements of Cash Flows F-5-F-6
Notes to the Consolidated Financial Statements F-7-F-22
27
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Signature Eyewear, Inc.
We have audited the accompanying consolidated balance sheets of Signature
Eyewear, Inc. and Subsidiary as of October 31, 2000 and 1999 and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the three years in the period ended October 31, 2000. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Signature Eyewear,
Inc. and Subsidiary as of October 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
October 31, 2000, in conformity with generally accepted accounting principles.
/s/ Altschuler, Melvoin and Glasser LLP
Los Angeles, California
January 29, 2001 (except for Notes 5
and 6, which are as of May 1, 2001)
F-1
28
SIGNATURE EYEWEAR, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 2000 AND 1999
=================================================================================================================
2000 1999
------------- --------------
ASSETS
Current assets
Cash and cash equivalents $ 1,860,451 $ 463,023
Accounts receivable, trade (net of allowance for
doubtful accounts of $314,839 in 2000 and $198,363 in 1999) 8,744,254 6,550,057
Inventories 18,742,177 16,636,474
Income taxes refundable 1,262,154 999,820
Deferred tax asset 392,000
Promotion products and material