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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________.
COMMISSION FILE NUMBER: 0-23001
SIGNATURE EYEWEAR, INC.
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(Exact name of Registrant as Specified in its Charter)
CALIFORNIA 95-3876317
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
498 NORTH OAK STREET
INGLEWOOD, CALIFORNIA 90302
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(Address of Principal Executive Offices, including ZIP Code)
(310) 330-2700
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Registrant's Telephone Number, Including Area Code
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [_] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulations S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
On September 30, 2002, the Registrant had 5,583,989 outstanding shares of
Common Stock, $.001 par value. The aggregate market value of the 3,032,868
shares of Common Stock held by non-affiliates of the Registrant as of September
30, 2002 was $788,546.
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PART I
The discussions in this Form 10-K contain forward-looking statements that
involve risks and uncertainties. Important factors that could cause actual
results to differ materially from the Company's expectations are set forth in
"Factors That May Affect Future Results" in Item 7, as well as elsewhere in this
Form 10-K. All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by "Factors That May Affect Future Results." Those
forward-looking statements relate to, among other things, the Company's plans
and strategies, new product lines, relationships with licensors, distributors
and customers, and the business environment in which the Company operates.
ITEM 1--BUSINESS
GENERAL
Signature Eyewear, Inc. ("Signature" or the "Company") 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 and the Signature line. 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 75%, 60% and
61% of the Company's net sales in fiscal 1999, fiscal 2000 and fiscal 2001,
respectively.
The Company distributes its products (1) to independent optical retailers
in the United States, primarily through its national direct sales force and
independent sales representatives, (2) internationally, primarily through
exclusive distributors in foreign countries and a direct sales force in Western
Europe; (3) through its own account managers to major optical retail chains,
including EyeCare Centers of America, Cole Vision Corp. and its subsidiary
Pearle Vision, LensCrafters and U.S. Vision; (4) through selected distributors
in the United States; and (5) through telemarketing.
BUSINESS STRATEGY
The Company suffered material operating losses in its last three fiscal
years, causing a significant deterioration in its financial condition. At
October 31, 2001, the Company's stockholders' deficit was $4,946,000. The
Company has been in default under its bank credit facility since the fourth
quarter of fiscal 2000 and since December 2000 has operated under a forbearance
agreement from the bank which has been extended a number of times and currently
expires on November 8, 2002. The Company also has a forbearance agreement from a
frame vendor for an obligation in the amount of approximately $5.9 million which
will remain in effect for so long as the bank forbearance agreement is in
effect.
The Company's ability to continue operations without filing for a
reorganization under the Bankruptcy Code will depend in significant part upon
the bank extending the forbearance agreement and the Company obtaining
additional capital and refinancing its bank credit facility. If the bank does
not extend the forbearance agreement and demands full payment of the credit
facility, the Company would most likely file for protection under the Bankruptcy
Code.
The Company has been attempting to refinance its bank credit facility for
two years, and management believes it is unlikely to be able to refinance the
facility without a capital infusion. Additional capital could be obtained
directly through the sale of debt or equity securities or indirectly through a
merger with or sale to another entity. In all likelihood, any recapitalization
would involve a change of control of the Company. A change in control of the
Company could result in a default under certain of its eyewear licenses unless
the Company obtains the prior approval of the licensor under such licenses. See
"Business--Products."
2
The Company's ability to recapitalize will depend in part on an investor's
or acquiror's determination that the Company can return to operating
profitability. While the Company has significantly reduced its general,
administrative and other expenses during the past two years, its revenues have
continued to be adversely affected by the downturn in the optical frame
industry, the effects of the September 11, 2001 tragedy, the reluctance of
retailers to purchase large inventories of the Company's products due to
concerns about the Company's viability and the discontinuation of certain
product lines.
In April 2002, the Company signed a letter of intent with a private
investor which contemplated a sale to the investor of capital stock for $400,000
concurrent with a refinancing of the bank credit facility with a new lender
arranged by the investor. The letter of intent contained a covenant of the
Company not to seek other investors or acquirors. While the letter of intent and
related covenants have expired, the investor continues discussions with the
Company and its creditors concerning a recapitalization of the Company. In
addition, the Company is in discussions with other potential
investors/acquirors, and is actively seeking other investors/acquirors. However,
as of October 31, 2002, the Company had no letter of intent for any financing or
acquisition.
INDUSTRY OVERVIEW(1)
THE OPTICAL MARKET. After several years of steady, albeit slowing growth in
the 1990s, optical retail sales in the United States experienced a substantial
slowdown in 2001. Retail sales of all eyewear products--including contact
lenses, sunglasses, clip-ons, lenses, lens treatments, and prescription
frames--totaled $15.8 billion in 2001, a decrease of 4% from $16.5 billion in
2000. It was the first time since 1998 that sales were below $16 billion.
Correspondingly, the frame segment of the optical market was $5.2 billion,
down nearly 5% from $5.48 billion in 2000. This drop in sales was in spite of a
steady rise in retail frame prices over the past five years: in 2001, the
average retail price for frames and lenses/lens treatments across all retail
channels in the U.S. was approximately $175, as compared to $153 in 1997.
However, the frame category's slowing sales were accompanied by a shrinking
share of the market, dropping slightly to 32.6% in 2001 from a 33.3% share in
2000.
Sales in the remaining three product categories were down as well in 2001:
lenses/lens treatments ($8.1 billion, -2.7%); contact lenses ($1.9 billion,
- -6%); non-prescription sunwear and clip-ons ($620 million, -8%). Many industry
observers attribute the relatively smaller drop in sales of lenses/lens
treatments to consumers choosing to put off frame purchases in an uncertain
economy, and instead having new lenses fitted into existing frames. In fact, in
2001 the percentage of optical customers fitting new lenses into older frames
climbed 7% over 2000.
Despite slowing growth, the number of potential eyewear customers remains
large. With a U.S. population of 278 million in 2001, approximately 169 million
people require some type of vision correction. Out of the 169 million people
requiring vision correction, 86.3 million people purchased eyewear in 2001--or
about 31% of the population.
Typically, men and women over the age of 45 need corrective eyewear due to
presbyopia, a condition that makes it difficult to focus on nearby objects such
as small newspaper print. As more of the U.S. population exceeds age 45, the
Company believes more people will have vision impairment, and sales of
corrective eyewear should increase. The table below demonstrates how the number
of people 45 years and older will increase substantially.
- -------------------
(1) Unless otherwise noted, all the data in this Industry Overview section
relates to the eyewear market in the United States. The source for this data is
the 2002 U.S. Optical Industry Handbook published by Jobson Publishing
Corporation in March 2002.
3
CURRENT AGE BREAKDOWN OF U.S. POPULATION
AND PROJECTED GROWTH 2001-2005, 2005-2010
PROJECTED GROWTH PROJECTED GROWTH
AGE 2001 POPULATION 2001-2005 2005-2010
- -------------- --------------- ---------------- ----------------
0-14 59,000 -3.0% 3.0%
15-24 39,000 5.1% 4.9%
25-44 81,000 -2.5% -2.5%
45-64 63,000 9.5% 14.5%
65 and up 35,000 2.9% 11.1%
--------------- ---------------- ----------------
Total 278,000 3.2% 3.8%
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Perhaps the key factor contributing to growth in the frame and sunglass
market is recognizing the increasing sophistication of the consumer. Until the
mid-1970s, eyeglass frames were viewed as medical implements, which were
"dispensed" but never "sold." Because styling was not emphasized, successful
frames often remained popular for years, and sometimes for decades. In the
mid-1970s, experts from other industries introduced designer names and consumer
advertising to the optical industry, as well as sweeping design changes. These
changes resulted in increased consumer demand for the new products. Today,
eyewear is a true fashion accessory that wearers expect to coordinate with and
enhance their wardrobes and lifestyles. It is the only medical device with such
style status. The Company believes that recognizing this sophistication and
style status is key to competing successfully in the frame market.
COMPETITIVE VISION CORRECTION METHODS. Currently, there are two methods of
correcting vision impairment which compete with prescription eyeglasses: contact
lenses and surgery. Although retail sales of contact lenses remained flat from
1995 ($1.9 billion) through 2001 ($1.9 billion), their sales as a percentage of
total retail sales decreased from 13.5% in 1995 to 12.3% in 2001. The Company
believes that sales of contact lenses do not currently materially threaten
eyeglass frame sales because many people who wear contact lenses need a pair of
eyeglasses for night time and for the days when they decide not to wear their
contact lenses.
A number of surgical techniques have been developed to correct vision
problems such as myopia (nearsightedness), hyperopia (farsightedness) and
astigmatism. Vision correction surgery by laser has recently become increasingly
popular, with over 1.5 million procedures performed in the U.S. in 2000.
Revenues from the procedure reached $2.4 billion in 2001, up from $700 million
in 1997. Nonetheless, the Company believes that these techniques will not have a
material adverse affect on sales of prescription eyewear in the near future.
Many who have the procedure require follow up procedures and experience an
increased sensitivity to light. The Company believes that a number of people who
have had successful eye surgery may still need some form of corrective
eyeglasses, and others may need eyeglasses at a later date due to the onset of
presbyopia. 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 two main types of optical retailers:
independents (with one or two stores) and chains. Chains include national
optical retailers such as LensCrafters, Cole Vision Corp. and its subsidiary
Pearle Vision, and EyeCare Centers of America. A third category includes optical
departments within major mass merchandisers, including Wal-Mart and Costco. In
2001, independent optical retailers had a 57% market share, national optical
chain retailers had a 34% market share, and mass merchandisers had a 6% market
share. The remaining 3% market share went to managed care organizations such as
Kaiser Permanente.
BRAND DEVELOPMENT
The Company's brand-name development process includes identifying a market
niche, obtaining the rights to a carefully selected brand name, producing a
comprehensive marketing plan, designing frames consistent with each brand image,
developing unique in-store displays, and creating innovative sales and
merchandising programs for independent optical retailers and retail chains.
4
IDENTIFYING A MARKET NICHE AND OBTAINING THE RIGHTS TO A BRAND NAME.
Signature's brand-name development process begins with identifying an eyewear
market niche. The Company characterizes a market niche by referring to the
target customer's gender and age (e.g., adult, child, teenager), the niche's
general image and styling (e.g., feminine, masculine, casual), its price range,
and the applicable channels of distribution. Once the Company chooses a market
niche, a brand name is identified which the Company believes will appeal to the
target customer in that niche. The Company believes that for a brand name to
have the potential for widespread sales in the optical industry, the name must
have strong, positive consumer awareness, a distinctive personality and an image
of enduring quality. Brands that are aimed at narrower niches can also have
optical industry impact (albeit smaller), so long as consumer awareness exists
within the targeted niche. The Company's existing license agreements contain
terms limiting the ability of the Company to market competing brand names. See
Item 7--"Management's Discussion and Analysis of Results of Operation and
Financial Conditions--Factors That May Affect Future Results--Limitations on
Ability to Distribute Other Brand-Name Eyeglass Frames."
After the Company has determined that a targeted brand name is available,
the Company develops (1) an in-depth understanding of the potential licensor's
market position, (2) innovative strategies for extending the brand's image to
the eyewear market, (3) preliminary plans for merchandising, advertising and
sales promotion, and (4) broad concepts for frame design. Once the Company has
acquired an exclusive eyewear license for a brand name, it develops detailed
concepts for frame designs, establishes the brand's identity within the optical
industry, and sets forth the first year's merchandising, advertising and sales
promotion plans.
FRAME DESIGN. The Company's frame styles are developed by its in-house
design team, which works in close collaboration with many respected frame
manufacturers throughout the world to develop unique designs and technologies.
Initially, each of the Company's frame designers works individually with a
factory to develop new design concepts. Once the factory develops a prototype,
the designer presents the style to the Company's frame committee for approval.
Once approved, Signature then contracts with the factory partner to manufacture
the style. By these methods, Signature is able to choose the strengths of a
variety of factories worldwide and to avoid reliance on any one factory. To
assure quality, Signature's designers continue to work closely with the factory
at each stage of a style's manufacturing process.
The Company's metal frames generally require over 200 production steps to
manufacture, including hand soldering of bridges, fronts and endpieces. Many of
the Company's metal frames take advantage of modern technical advances, such as
thinner spring hinges (which flex outward and spring back) and lighter metal
alloys, both of which permit the manufacture of frames which are thinner and
lighter while retaining strength. The Company also takes advantage of technical
advances in plastic frames, such as laminated plastics that are layered in
opposing or complementary colors, and extra-strong plastics that can be cut
super thin.
QUALITY CONTROL. The Company uses manufacturers it believes are capable of
meeting its criteria for quality, delivery and attention to design detail.
Signature specifies the materials to be used in the frames, and approves
drawings and prototypes before committing to production. The Company places its
initial orders for each style at least six months before the style is released,
and requires the factory to deliver several advance shipments of samples. The
Company's quality committee examines all sample shipments. This process provides
sufficient time to resolve problems with a style's quality before its release
date. The Company's quality committee selectively examines frames in subsequent
shipments to ensure ongoing quality standards. If, at any stage of the quality
control process, frames do not meet the Company's quality standards, then the
Company returns them to the factory with instructions to improve the specific
quality problems. If the quality does not meet the Company's standards before a
style's release date, the Company returns all frames in a style to the factory,
and the style is not released.
MARKETING, MERCHANDISING AND SALES PROGRAMS. Signature produces "turnkey"
marketing, merchandising and sales promotion programs to help optical retailers,
as well as the Company's sales representatives, promote sales. For 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
5
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.
PRODUCTS
The Company's principal products during fiscal 2001 were eyeglass frames
sold under the brand names Laura Ashley Eyewear, Eddie Bauer Eyewear, Hart
Schaffner & Marx Eyewear, Nicole Miller Eyewear, bebe eyes, Dakota Smith
Eyewear, 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
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
Laura Ashley
Prescription.................. Women 1992 $125 - $180
Sunwear....................... Women 1993 $ 90 - $100
Petites....................... Girls/Women 1993 $ 80- $125
Nicole Miller (2)................ Women
Prescription.................. 1993 $90-$138
Sunwear....................... 1993 $75-$95
HOUSE BRANDS
- ------------
Camelot(3)....................... Men/Women 1986 $70-$130
Unisex 1987 $70-$130
Boys/Girls 1987 $60-$90
Dakota Smith (2)
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
6
(1) Retail prices are established by retailers, not the Company.
(2) Obtained by the Company in June 1999 in connection with its acquisition
of California Design Studio, Inc.
(3) The Company sold its rights in this line in connection with the sale of
its USA Optical division in March 2002.
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 $14.0 million in
fiscal 2001, 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 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 the royalty payment for the prior two
contract years exceeds the minimum royalty for those years. Laura Ashley may
terminate the license before its term expires under certain circumstances,
including a material breach of the license agreement by the Company, if
management or control of the Company passes from Bernard L. Weiss and Julie
Heldman to other parties whom Laura Ashley may reasonably regard as unsuitable,
or if minimum sales requirements are not met in any two years.
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
a 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.
7
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 2005 but the Company may renew it for one two-year term,
provided the Company is not in material default. Eddie Bauer may terminate the
license before the expiration of its term under certain circumstances, including
if (1) a person or entity acquires more than 30% of the Company's outstanding
voting securities, 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 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. The license period
extends through December 31, 2002, and may be renewed for three-year terms by
the Company in perpetuity provided the Company is not in default under the
license agreement. Hart Schaffner & Marx may terminate its license with the
Company before the expiration of its term if (1) someone other than Bernard L.
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. The Company will
discontinue sales of bebe sunwear by the end of 2002.
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
8
before its stated term expires under certain circumstances, including if the
Company materially breaches the license agreement, if the Company is insolvent,
or if, without the prior approval of bebe, 50% or more or the outstanding Common
Stock of the Company is acquired by either: (A) a women's apparel company or (B)
another person and the financial and operational condition of the Company is
impaired or such other person makes or proposes to make material changes in the
key management personnel in charge of the license. Because the Company has a
stockholders' deficit, it may be deemed to be insolvent, which would permit bebe
to terminate 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. The Company has sold the Camelot collection primarily through USA
Optical, a division of Signature. The Company sold its rights in the Camelot
line in connection with its sale of USA Optical in March 2002.
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; 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,
----------------------------------------------
1999 2000 2001
------------ -------------- ------------
(IN THOUSANDS)
Domestic distributors .... $ 12,281 $ 916 $ 1,640
Optical retail chains .... 15,709 17,041 12,346
Telemarketing(1) ......... 4,863 5,098 3,230
International ............ 3,822 6,634 5,029
Direct sales(2) .......... 7,381 22,243 21,147
------------ ------------ ------------
$ 44,056 $ 51,932 $ 43,392
============ ============ ============
(1) In fiscal 1999, included net sales by Optical Surplus, a division which
sold brand name close-outs. Optical Surplus was discontinued in fiscal
2000; therefore net sales of Company close-outs in fiscal 2000 and 2001
are included by distribution channel.
(2) The Company began selling directly to independent optical retailers
nationally in October 1999.
9
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 65 at October
31, 2001.
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. Net sales to Eyecare
Centers of America in fiscal 2001 amounted to 12% of the Company's total net
sales.
INTERNATIONAL. The Company sells certain of its products internationally
through exclusive distributors and since June 1999 in Western Europe through a
direct sales force including Company and independent sales representatives. The
Company maintains a sales office and warehouse facility in Liege, Belgium. The
Company's international distributors have exclusive agreements for defined
territories. The Company sells to European optical retail chains through its
Belgium office. At October 31, 2001, the Company had approximately 25
international distributors and 15 international sales representatives.
Historically, the large majority of Signature's international sales through
distributors have been of Laura Ashley Eyewear sold in England, Canada,
Australia and New Zealand.
DOMESTIC DISTRIBUTORS. 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. The Company had three distributors in the United States at October 31,
2001.
TELEMARKETING. The Company's USA Optical division sold frames through a
form of telemarketing to optical retailers, focusing on establishing long-term,
ongoing relationships. The Company sold this division in March 2002.
CONTRACT MANUFACTURING
The Company's frames are manufactured to its specifications by a number of
contract manufacturers located outside the United States. The manufacture of
high quality metal frames is a labor-intensive process which can require over
200 production steps (including a large number of quality-control procedures)
and from 90 to 180 days of production time. In fiscal 2001, 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.
10
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 resources than the Company.
They also employ direct sales forces that have existed far longer, and are
significantly larger than the Company's. At the major retail chains, the Company
competes not only against other eyewear suppliers, but also against the chains
themselves, which license some of their own brand names for design, manufacture
and sale in their own stores. Luxottica, one of the largest eyewear companies in
the world, is vertically integrated, in that it manufactures frames, distributes
them through direct sales forces in the United States and throughout the world,
and owns LensCrafters, one of the largest United States retail optical chains.
The Company competes in its target markets through the quality of the brand
names it licenses, its marketing and merchandising, the popularity of its frame
designs, the reputation of its styles for quality, and its pricing policies.
BACKLOG
The Company generally ships eyeglass frames upon receipt of orders, and
does not operate with a material backlog.
EMPLOYEES
At October 31, 2001, the Company had 199 full-time employees, including 71
in sales and marketing, 33 in customer service and support, 40 in warehouse
operations and shipping and 55 in general administration and finance. None of
the Company's employees is covered by a collective bargaining agreement. The
Company considers its relationship with its employees to be good.
ITEM 2--DESCRIPTION OF PROPERTIES
The Company leases approximately 109,000 square feet of a building located
in Inglewood, California, where it maintains its principal offices and
warehouse. The Company's lease for this facility expires in May 2005, and the
Company has an option to renew the lease for an additional five years.
As of November 1, 2001, the Company subleased approximately 26,000 square
feet of this space to an unaffiliated party through November 2003 with a renewal
option through May 2005.
The Company's international division also leases approximately 2,500 square
feet of warehouse and office space in Liege, Belgium, which supports the
Company's sales in Europe.
See Note 9 of Notes to Consolidated Financial Statements.
ITEM 3--LEGAL PROCEEDINGS
In March 2002, the Company settled the lawsuit filed by Coach, Inc in
February 2001 in which Coach sought damages of approximately $900,000 primarily
for advertising costs Coach alleged were owed by the Company (the non-payment of
which was the basis of Coach's termination of the eyewear license). In the
settlement, Coach released the Company from all actions and debts for a payment
of $250,000.
As of September 30, 2002, the Company was not involved in any material
legal proceedings.
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
None.
11
PART II
ITEM 5--MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK
The following table sets forth, for the periods indicated, high and low
reported sales prices for the Common Stock on the Nasdaq SmallCap Market through
March 15, 2001 and on the OTC Bulletin Board thereafter.
HIGH LOW
----------- -----------
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
FISCAL YEAR ENDED OCTOBER 31, 2001
First Quarter ......................... $ 0.97 $ 0.38
Second Quarter ........................ $ 0.75 $ 0.06
Third Quarter.......................... $ 0.80 $ 0.19
Fourth Quarter ........................ $ 0.65 $ 0.10
On September 30, 2002, the last sales price of the Common Stock as reported
in the OTC Bulletin Board was $0.26 per share. As of September 30, 2002, there
were 33 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 is unable to pay any dividends
as a result of its default under its bank credit facility and negative retained
earnings. The Company paid no dividends in fiscal 2001.
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,
-----------------------------------------------------------------------
1997 1998 1999 2000 2001
------------- ------------- ----------- ------------- -------------
STATEMENT OF OPERATIONS DATA:
Net sales ............................. $ 33,176 $ 40,892 $ 44,056 $ 51,932 $ 43,392
Gross profit .......................... 19,333 23,247 25,316 30,507 21,920
Total operating expenses .............. 15,323 19,041 27,461 39,709 33,942
Income (Loss) from operations ......... 4,010 4,206 (2,145) (9,202) (12,022)
Net income (loss) ..................... 3,585 2,750 (1,309) (9,439) (13,387)
Net income (loss) per share ........... 0.52 (0.26) (1.87) (2.65)
Pro forma net income (1) .............. 2,340
Pro forma net income per share ........ 0.61(1)
Weighted average common shares
outstanding ......................... 3,829,822 5,254,156 5,095,259 5,058,915 5,056,589
12
1997 1998 1999 2000 2001
------------- ------------- ----------- ------------- -------------
BALANCE SHEET DATA:
Current assets ........................ $ 19,964 $ 23,548 $ 27,474 $ 33,006 $ 17,185
Total assets .......................... 21,175 25,151 35,474 41,435 18,906
Current liabilities ................... 3,860 5,498 12,334 28,142 22,390
Long term debt and capitalized lease
obligations............................ 3 238 5,137 4,806 1,461
Total liabilities ..................... 3,863 5,736 17,471 32,948 23,851
Stockholders' equity (deficit) ........ 17,312 19,415 18,003 8,487 (4,945)
(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.
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 and Signature.
The Company's best-selling product lines are Laura Ashley Eyewear and Eddie
Bauer Eyewear. Net sales of Laura Ashley Eyewear and Eddie Bauer Eyewear
together accounted for 75%, 60% and 61% of the Company's net sales in fiscal
1999, fiscal 2000 and fiscal 2001, respectively.
The Company's cost of sales consists primarily of payments to foreign
contract manufacturers that produce frames and cases to the Company's
specifications. The complete development cycle for a new frame design typically
takes approximately twelve months from the initial design concept to the
release. Generally, at least six months are required to complete the initial
manufacturing process.
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 consisted 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 frames
under the Nicole Miller brand name, proprietary brand names Dakota Smith, Koko
and Nukes, inventory, machinery, furniture, equipment and accounts receivable.
The acquisition was accounted for as a purchase. In fiscal 2002, the Company and
the holder of the $1.25 million note agreed to modify the note to reduce the
monthly payment to $8,500 for 18 months commencing April 2002 and to extend the
maturity date to 2007.
13
Following many years of profitability, the Company incurred operating
losses in each of the last three fiscal years. The principal reason for these
losses was the change in October 1999, by the Company in its method of
distributing its products to independent optical retailers in the United States
from distributors to a direct sales force. 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 advertising, promotion and point-of-purchase displays, which were
particularly high for Coach Eyewear.
In addition, in fiscal 2001, the Company's revenues were adversely affected
by a general downturn in the optical frame business, the aftermath of the
September 11th World Trade Center tragedy, the reluctance of retailers to
purchase large inventories of the Company's products due to concerns about the
Company's viability and the discontinuation of certain product lines. The
aftermath of the September 11 tragedy included reduced sales orders resulting in
inventory build-up, slowed collection of accounts receivable, higher return
rates due to the uncertain future retail environment. The Company believes that
it lost approximately 10 days of shipments in September 2001 due to
interruptions in outgoing and incoming shipments and overall an estimated $4
million in gross sales in fiscal 2001 due to the September 11th tragedy. Lastly,
the Company expended $0.8 million in connection with an advertising campaign for
Eddie Bauer Eyewear in August and September 2001, which did not result in the
intended increase in sales of Eddie Bauer Eyewear as a result of the September
11, 2001 tragedy.
The net loss of $13.9 million in the fourth quarter of fiscal 2001 was also
the result of the write-down of $4.9 million of goodwill and inventory
write-downs of $2.9 million in the aftermath of the September 11, 2001 tragedy
due to reduced sales and inventory build-up at retailers, which accelerated the
rate of obsolescence of the Company's inventory and reduced the prices which the
Company could obtain in close-out sales.
The Company made the conversion in distribution strategy 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 but did result in increased inventory returns from
distributors, from $2.8 million in fiscal 1998 to $6.8 million in fiscal 1999.
The Company had targeted to have a direct sales force numbering approximately
130 by the end of fiscal 2000. However, the direct sales force has never
exceeded 88 and was 65 at October 31, 2001.
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.
The Company has been in default under its bank credit facility since the
fourth quarter of fiscal 2000 and since December 2000 has operated under a
forbearance agreement from the bank which has been extended a number of times
and currently expires on November 8, 2002. The Company also has a forbearance
agreement from a frame vendor for an obligation in the amount of approximately
$5.9 million which will remain in effect for so long as the bank forbearance
agreement is in effect.
In fiscal 2001 the Company implemented a turnaround strategy which
encompassed the following activities:
ATTEMPT TO REFINANCE CREDIT FACILITY. The Company has been attempting to
refinance its existing credit facility since the first quarter of fiscal 2000.
Its efforts in this regard have been hampered by continuing operating losses and
declining financial condition.
NEGOTIATE DISCOUNTS AND PAYMENT PLANS WITH VENDORS. In fiscal 2001, the
Company negotiated approximately $850,000 of discounts of accounts payable and
other obligations and entered into extended payment programs with more than 40
vendors.
INCREASE GROSS PROFIT. To increase its gross profit, in fiscal 2001 the
Company increased prices of most of its frames and used lower cost manufacturers
in situations where the Company believed such manufacturers could meet the
Company's quality requirements.
14
REDUCE INVENTORY AND INCREASE INVENTORY TURNOVER RATES. Part of the
Company's 2001 strategy was to maintain a reduced inventory to improve its cash
position and improve inventory turnover by better matching frame purchases with
customer orders. Inventory has been reduced from $18.7 million at October 31,
2000 to $10.3 million at October 31, 2001 as a result of this strategy and $1.9
million of additional reserves for obsolescent inventory. The Company also
lowered its on-hand number of days of selected frames, cases and
point-of-purchase materials. The reduction in inventory adversely affected the
Company's gross profit margin due to the increase in the reserve for
obsolescence and from close-out sales.
STAFF REDUCTIONS. The Company has decreased the number of full-time
employees from a high of 288 in fiscal 2000 to 199 at October 31, 2001,
resulting in a substantial reduction of the average monthly payroll. In
addition, the Company has reduced its use of temporary employees, resulting in a
savings of approximately $1.0 million in fiscal 2001 from fiscal 2000.
IMPROVE PERFORMANCE OF DIRECT SALES FORCE. The Company attempted 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 in fiscal 2001.
REDUCE SELLING EXPENSES. In fiscal 2001 the Company reduced its selling
expenses by reducing trade and consumer advertising programs, promotional
expenses and trade show participation.
REDUCE OVERHEAD EXPENSES. The Company reduced its overhead by subleasing
excess space and eliminating sales support offices.
IMPROVE ACCOUNTS RECEIVABLE COLLECTIONS. The Company shortened 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. The Company had fewer brand name lines
in 2001 due to the discontinuation of the Coach Eyewear line in December 2000.
Notwithstanding the implementation of the turnaround strategy, the Company
suffered a material net loss in fiscal 2001. The Company's ability to continue
operations without filing for a reorganization under the Bankruptcy Code will
depend in significant part upon the bank extending the forbearance agreement and
the Company obtaining additional capital and refinancing its bank credit
facility. If the bank does not extend the forbearance agreement and demands full
payment of the credit facility, the Company would most likely file for
protection under the Bankruptcy Code.
The Company has been attempting to refinance its bank credit facility for
almost two years, and management believes it is unlikely to be able to refinance
the facility without a capital infusion. Additional capital could be obtained
directly through the sale of debt or equity securities or indirectly through a
merger with or sale to another entity. In all likelihood, any recapitalization
would involve a change of control of the Company. A change in control of the
Company could result in a default under certain of its eyewear licenses unless
the Company obtains the prior approval of the licensor under such licenses. See
"Business--Products."
The Company's ability to recapitalize will depend in part on an investor's
or acquiror's determination that the Company can return to operating
profitability. While the Company has significantly reduced its general,
administrative and other expenses during the past two years, its revenues have
continued to be adversely affected by the downturn in the optical frame
industry, the effects of the September 11, 2001 World Trade Center tragedy, the
reluctance of retailers to purchase large inventories of the Company's products
due to concerns about the Company's viability and the discontinuation of certain
product lines.
15
In April 2002, the Company signed a letter of intent with a private
investor which contemplated a sale to the investor of capital stock for $400,000
concurrent with a refinancing of the bank credit facility with a new lender
arranged by the investor. The letter of intent contained a covenant of the
Company not to seek other investors or acquirors. While the letter of intent and
related covenants have expired, the investor continues discussions with the
Company and its creditors concerning a recapitalization of the Company. In
addition, the Company is in discussions with other potential
investors/acquirors, and is actively seeking other investors/acquirors. However,
as of October 31, 2002, the Company had no letter of intent for any financing or
acquisition.
The Company's license for bebe eyes provides that bebe may terminate the
license if the Company is insolvent. Because the Company has a stockholders'
deficit, it may be deemed to be insolvent, which would permit bebe to terminate
the license.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our financial statements requires us to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities. We
base our estimates on historical experience and on various other assumptions
that we believe to be reasonable under the circumstances, and which form the
basis for making judgments about the carrying values of assets and liabilities.
Actual results may differ from these estimates under different assumptions or
conditions.
We consider the following accounting policies to be both those most
important to the portrayal of our financial condition and those that require the
most subjective judgment:
o revenue recognition;
o inventory valuation; and
o impairment of assets.
REVENUE RECOGNITION. Revenue is recognized when merchandise is shipped. An
allowance for estimated product returns is established based upon actual returns
subsequent to year-end and estimated future returns.
INVENTORIES. Inventories (consisting of finished goods) are valued at the
lower of cost or market. Cost is computed using weighted average cost, which
approximates actual cost on a first-in, first-out basis. The Company
periodically evaluates its inventory to identify obsolete, slow-moving, damaged
or unusual materials and merchandise which may be included in inventory at
prices in excess of market or net realizable value, and establishes reserves
where management deems appropriate. The Company considers a number of factors in
determining the net realizable or market value of its inventory, including
prices received by the Company historically in connection with close-out sales
of inventory. However, changing economic and market conditions generally,
changes and developments in the optical frame industry in particular, and other
events (such as the September 11, 2001 tragedy) can result in rapid and material
changes in the market or net realizable value of the Company's inventory,
rendering historic price comparisons less meaningful.
ASSET IMPAIRMENT. The Company recognizes impairment losses when expected
future cash flows are less than the assets' carrying value. Accordingly, when
indicators of impairment are present, the Company evaluates the carrying value
of property and equipment and intangibles in relation to the operating
performance and future undiscounted cash flows of the underlying business. The
Company adjusts the net book value of the underlying assets if the sum of
expected future cash flows is less than book value.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated selected
statements of operations data shown as a percentage of net sales.
16
YEAR ENDED OCTOBER 31,
------------------------------
1999 2000 2001
-------- -------- --------
Net sales.............................. 100.0% 100.0% 100.0%
Cost of sales ......................... 42.5 41.3 49.5
-------- -------- --------
Gross profit........................... 57.5 58.7 50.5
-------- -------- --------
Operating expenses:
Selling............................ 31.3 41.7 33.1
General and administrative ........ 25.0 34.9 33.9
Restructuring cost ................ 6.0 -- --
Asset impairment charges -- -- 11.3
-------- -------- --------
Total operating expenses ....... 62.3 76.6 78.2
-------- -------- --------
Income (Loss) from operations ......... (4.8) (17.9) (27.7)
-------- -------- --------
Other income (expense), net ........... 0.1 (1.9) (3.1)
-------- -------- --------
Income (Loss) before income taxes ..... (4.7) (19.8) (30.8)
Provision (Benefit) for income taxes .. (1.8) (1.5) 0.1
-------- -------- --------
Net income (loss)...................... 6.5% (21.3)% (30.7)%
======== ======== ========
COMPARISON OF FISCAL YEARS 1999, 2000 AND 2001
NET SALES. Net sales were $43.4 million in fiscal 2001 compared to $51.9
million in fiscal 2000 and $44.1 million in fiscal 1999. The following table
shows certain information regarding net sales for the periods indicated:
YEAR END OCTOBER 31
----------------------------------------
1999 2000 2001
--------- -------------- ---------
(IN THOUSANDS)
Laura Ashley Eyewear ......... $19,013 $16,079 $13,968
Eddie Bauer Eyewear .......... 14,100 15,136 11,889
Nicole Miller Eyewear 907 4,447 5,273
Other ........................ 10,036 16,270 12,262
--------- --------- ---------
$44,056 $51,932 $43,392
========= ========= =========
Net sales in fiscal 2000 were 18% greater than net sales in 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.
Net sales in fiscal 2001 were 16.4% less than net sales in fiscal 2000 due
primarily to the general decline in the optical frame industry, the effects of
the September 11, 2001 World Trade Center tragedy (as discussed above) and the
reluctance of retailers to purchase large inventories of the Company's products
due to concerns about the Company's viability and the termination of certain
product lines.
GROSS PROFIT AND GROSS MARGIN. Gross profit was $25.3 million in fiscal
1999, $30.5 million in fiscal 2000 and $21.9 million in fiscal 2001. The
increase in gross profit in fiscal 2000 reflected increased net sales, while the
decrease in fiscal 2001 was due to lower net sales and increased inventory
write-downs.
The gross margin was 57.5% in fiscal 1999, 58.7% in fiscal 2000 and 50.5%
in fiscal 2001. The increase in gross margin in fiscal 2000 was due to an
increase in direct sales as a percentage of total net sales. The decrease in
17
fiscal 2001 was due to inventory write downs, which are included in cost of
goods sold, and the sale of close-out frames, which are sold at substantially
lower margins than other frames.
SELLING EXPENSES. Selling expenses were $13.8 million in fiscal 1999, $21.6
million in fiscal 2000 and $14.3 million in fiscal 2001. The 57% 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. The 33.7%
decrease in fiscal 2001 was due primarily to decreases of $2.9 million in
salaries for sales personnel due to a reduction in staffing, $2.3 million of
advertising expenses and $1.4 million in convention expenses.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $11.0 million in fiscal 1999, $18.1 million in fiscal 2000 and $14.7
million in fiscal 2001. 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 amortization expense resulting primarily from the CDS
Acquisition, which amortized a full year in fiscal 2000 as opposed to four
months in fiscal 1999. The 19.9% decrease in fiscal 2001 was due principally to
decreases of: (a) $3.1 million in compensation expense and related employee
benefits due to a reduction in full-time employees; and (b) $1.0 million in
temporary help. During fiscal 2001, legal and accounting expenses increased $0.7
million and collection and bad debt expenses increased $0.4 million.
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.
ASSET IMPAIRMENT CHARGES. In fiscal 2001, the Company wrote down $4.9
million of goodwill upon determining that the that there was no remaining value
of the goodwill relating to the CDS Acquisition and the acquisition of a
distributor.
OTHER INCOME (EXPENSE), NET. Other income, net of $53,000 in fiscal 1999
reflected principally 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 $1.0 million consisted primarily of $1.1 million
of interest expense as the Company increased its bank borrowings to fund
operations. Other expense, net in fiscal 2001 was $1.3 million due primarily to
interest on bank debt.
PROVISION (BENEFIT) FOR INCOME TAXES. The Company had income tax benefits
of $0.8 million in each of fiscal 1999 and fiscal 2000 and paid income taxes of
$27,000 in fiscal 2001. As of October 31, 2001 the Company had a federal net
operating loss carryforward of approximately $16 million through 2021.
NET INCOME (LOSS). The Company had net losses of $1.3 million, $9.4 million
and $13.4 million in fiscal 1999, 2000 and 2001, respectively.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company's accounts receivable (net of allowance for doubtful accounts)
decreased from $8.7 million at October 31, 2000 to $5.1 million at October 31,
2001 due to the Company's plan to shorten the time period for collecting
accounts receivable by tightening its credit policy, reducing credit terms to
retailers, reducing the number of retailer programs with extended credit terms
and the reduction in net sales (and primarily the lower net sales at the end of
fiscal 2001 following the September 11th World Trade Center tragedy).
The Company's inventories (net of obsolescence reserve) decreased from
$18.7 million at October 31, 2000 to $10.3 million at October 31, 2001 as part
of the Company's turnaround strategy to reduce inventory and improve inventory
turnover by better matching frame purchases with customer orders and an increase
of $1.9 million in the reserve for obsolescent inventory.
18
The Company's goodwill and other intangibles decreased from $5.5 million at
October 31, 2000 to $0.1 million at October 31, 2001 primarily from the write
down of the remaining goodwill relating to the CDS Acquisition and the
acquisition of a distributor.
The Company has a credit facility with a commercial bank consisting of 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 30% of eligible inventories, up to a maximum of
$4,500,000, 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 and is payable in monthly
installments of $72,917 plus interest at the rate of 8.52% per annum (revised to
13.5% per annum effective November 20, 2000). The credit facility matured on
September 30, 2000. Since that date, the Company has paid interest at the
default rate of 5% per annum in excess of the original rate.
The Company has defaulted under its bank credit facility for various events
of default including non-payment at maturity as well as other non-compliance
with various covenants and conditions. The Company entered into a forbearance
agreement with its bank in December 2000, which has been extended many times.
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 November 8, 2002 (the "Termination Date"), 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 October 1, 2002 and
definitive documentation for a Transaction by October 21, 2002. In connection
with the forbearance agreement and its extensions, the bank has also required
continuing principal paydowns of the facility. As a result, the outstanding
balance under the credit facility was $6.0 million at October 31, 2001. The
failure to comply with the forbearance agreement could result in the bank
exercising some or all of its remedies under the loan agreement at law,
including foreclosing on the assets of the Company. The Company is attempting to
refinance the credit facility. The Company has no current proposals to refinance
the credit facility.
Long-term debt at October 31, 2001 included principally a $1.0 million note
payable to California Design Studio, Inc. in connection with the CDS Acquisition
and an obligation to a frame vendor of California Design Studio, Inc. (present
value of $3.2 million) assumed in connection with the CDS Acquisition. The
Company defaulted in its obligation to the frame vendor, and subsequently
entered into a standstill agreement pursuant to which the frame vendor has
agreed to forbear from legal action relating to the breach for so long as the
forbearance agreement with the Company's commercial bank is in effect. See Note
7 of Notes to Consolidated Financial Statements.
Of the Company's accounts payable at October 31, 2000 and October 31, 2001,
$3.2 million and $1.8 million, respectively, were payable in foreign currency.
To monitor risks associated with currency fluctuations, the Company on a weekly
basis assesses the volatility of certain foreign currencies and reviews the
amounts and expected payment dates of its purchase orders and accounts payable
in those currencies. Based on those factors, the Company may from time to time
mitigate some portion of that risk by purchasing forward commitments to deliver
foreign currency to the Company. The Company held no forward commitments for
foreign currencies at October 31, 2001. See Note 1 of Notes to Consolidated
Financial Statements.
The Company's bad debt write-offs were zero, $148,000 and $175,000 in
fiscal years 1999, 2000 and 2001, respectively. In addition, as a result of the
declining economy, the Company increased its allowance for doubtful accounts
from $315,000 at October 31, 2000 to $575,000 at October 31, 2001. 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.
Since the fourth quarter of fiscal 2000, the Company has experienced a lack
of liquidity. Under its forbearance agreement, it cannot increase its borrowings
from its commercial bank, must refinance the credit facility and has had to pay
down the facility. If the bank does not extend the forbearance agreement, which
currently expires November 8, 2002, the Company will not have sufficient
liquidity to continue operations unless it obtains alternative financing. If the
bank does extend the forbearance agreement, the Company believes it will have
sufficient liquidity to continue for some time assuming no further material
reductions in sales and continued collections of accounts receivable.
19
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, in the fourth quarter of fiscal 2000 as
a result of the launch of a number of products in the second and third quarters
of fiscal 2000 and increased selling efforts during those periods, and in the
fourth quarter of fiscal 2001 as a result of the September 11th World Trade
Center tragedy. A factor which may significantly influence results of operations
in a particular quarter is the introduction of a new brand-name collection,
which results in disproportionate levels of selling expenses due to additional
advertising, promotions, catalogs and in-store displays. Introduction of a new
brand may also generate a temporary increase in sales due to initial stocking by
retailers.
Other factors which can influence the Company's results of operations
include customer demand, the mix of distribution channels through which the
eyeglass frames are sold, the mix of eyeglass frames sold, product returns,
delays in shipment and general economic conditions.
The following table sets forth certain unaudited results of operations for
the twelve fiscal quarters ended October 31, 2001. 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.
1999 2000 2001
--------------------------------------------------------------------------------------------------------
JAN. APR. JULY OCT. JAN. APR. JULY OCT. JAN. APR. JULY OCT.
31. 30 31 31 31. 30 31 31 31. 30 31 31
--------------------------------------------------------------------------------------------------------
Net sales.............. $9,036 $12,426 $13,228 $9,374 $12,003 $12,390 $17,442 $10,097 $10,889 $11,470 $11,822 $9,211
Cost of sales.......... 4,216 5,300 5,787 3,444 4,807 5,058 7,076 4,281 3,761 4,428 4,657 8,626
Gross profit........... 4,820 7,126 7,441 5,930 7,196 7,332 10,366 5,818 7,128 7,042 7,165 585
Operating expenses:
Selling.............. 2,885 3,646 3,461 3,895 3,587 6,066 6,858 5,171 3,291 3,343 2,664 5,045
General and
administrative.... 1,915 2,292 3,020 3,722 3,845 4,708 5,014 4,554 3,381 3,146 4,013 4,166
Restructuring cost... -- -- -- 2,654 -- -- -- -- -- -- -- --
Asset impairment..... -- -- -- -- -- -- -- -- -- -- -- 4,892
Total operating
expenses............. 4,800 5,938 6,481 10,251 7,432 10,774 11,872 9,725 6,672 6,488 6,677 14,105
Income (loss) from
operations........... 20 1,188 960 (4,321) (236) (3,442) (1,506) (3,907) 456 554 488 (13,520)
Other expense, net..... 42 31 18 (31) (184) (265) (320) (136) (352) (325) (329) (332)
Income (loss) before
pro forma provision
for income taxes..... 62 1,219 978 (4,352) (420) (3,707) (1,826) (4,043) 104 229 159 (13,852)
INFLATION
The Company does not believe its business and operations have been
materially affected by inflation.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued SFAS Nos. 141 and 142 "Business Combinations"
and "Goodwill and Other Intangible Assets". SFAS No. 141 replaces APB Opinion
No. 16 and eliminates pooling-of-interest accounting prospectively. It also
provides guidance on purchase accounting related to the recognition of
intangible assets and accounting for negative goodwill. SFAS No. 142 changes the
accounting for goodwill from an amortization method to an impairment-only
approach. Under SFAS No. 142, goodwill will be tested annually, or when events
or circumstances
20
occur indicating that goodwill might be impaired. SFAS No. 141 and SFAS No. 142
are effective for all business combinations initiated after June 30, 2001.
Upon adoption of SFAS No. 142, amortization of goodwill recorded for
business combinations consummated prior to July 1, 2001 will cease, and
intangible assets acquired prior to July 1, 2001 that do not meet the criteria
for recognition under SFAS No. 141 will be reclassified to goodwill. Companies
are required to adopt SFAS No. 142 for fiscal years beginning after December 15,
2001. The Company will adopt SFAS No. 142 on November 1, 2002. In connection
with the adoption of SFAS No. 142, the Company will be required to perform a
transitional goodwill impairment assessment. The Company has not yet determined
the impact these standards will have on its results of operations and financial
position.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Obligations
Associated with the Retirement of Long-Lived Assets". SFAS No. 143 establishes
accounting standards for the recognition and measurement of an asset retirement
obligation and its associated asset cost. It also provides accounting guidance
for legal obligations associated with the retirement of tangible long-lived
assets. SFAS No. 143 is effective in fiscal years beginning after June 15, 2002,
with early adoption permitted. The Company has not determined the effect of
adopting SFAS No. 143 on its consolidated results of operations or financial
position, as it plans to adopt SFAS No. 143 effective November 1, 2002.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 establishes a single
accounting model for the impairment or disposal of long-lived assets, including
discontinued operations. SFAS No. 144 superseded SFAS No. 121, "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
and APB Opinion 30, "Reporting the Results of Operations - Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions." The provisions of SFAS No. 144
are effective for fiscal years beginning after December 15, 2001, with early
adoption permitted, and in general are to be applied prospectively. The Company
has not yet determined the impact this standard will have on its consolidated
results of operations and financial position, as it plans to adopt SFAS No 144
effective November 1, 2002.
In April 2002, the FASB approved SFAS No. 145, rescission of FASB
Statements Nos. 4, 44 and 64, amendment of SFAS No. 13 and technical
corrections. SFAS No. 145 rescinds previous accounting guidance, which required
all gains and losses from extinguishment of debt be classified as an
extraordinary item. Under FAS No. 145, classification of debt extinguishment
depends on the facts and circumstances of the transaction. SFAS No. 145 is
effective for fiscal years beginning after May 15, 2002.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 requires recognition
of costs associated with exit or disposal activities when they are incurred
rather than at the date of a commitment to an exit or disposal plan. Examples of
costs covered by the standard include lease termination costs and certain
employee severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity. SFAS No. 146 is to
be applied prospectively to exit or disposal activities initiated after December
31, 2002.
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.
NET LOSSES, STOCKHOLDERS' DEFICIT AND NEED TO REFINANCE BANK CREDIT
FACILITY AND OBTAIN ADDITIONAL CAPITAL
The Company suffered material operating losses in its last three fiscal
years, causing a significant deterioration in its financial condition. At
October 31, 2001, the Company's stockholders' deficit was $4,946,000. The
Company has been in default under its bank credit facility since the fourth
quarter of fiscal 2000 and since December 2000 has operated under a forbearance
agreement from the bank which has been extended a number of times and currently
expires on November 8, 2002.
21
The Company's ability to continue operations without filing for a
reorganization under the Bankruptcy Code will depend in significant part upon
the bank extending the forbearance agreement and the Company obtaining
additional capital and refinancing its bank credit facility. If the bank does
not extend the forbearance agreement or otherwise properly demand full payment
of the credit facility, the Company would most likely file for protection under
the Bankruptcy Code at that time.
The Company has been attempting to refinance its bank credit facility for
two years, and management believes it is unlikely that the Company will be able
to refinance the facility without a capital infusion. Additional capital could
be obtained directly through the sale of debt or equity securities or indirectly
through a merger with or sale to another entity. In all likelihood, any
recapitalization would involve a change of control of the Company. A change in
control of the Company could result in a default under certain of its eyewear
licenses unless the Company obtains the prior approval of the licensor under
such licenses. See "Business--Products."
The Company's ability to recapitalize will depend in part on an investor's
or acquiror's determination that the Company can return to operating
profitability. While the Company has significantly reduced its general,
administrative and other expenses during the past two years, its revenues have
continued to be adversely affected by the downturn in the optical frame
industry, the effects of the September 11, 2001 tragedy, the reluctance of
retailers to purchase large inventories of the Company's products due to
concerns about the Company's viability and the termination of certain product
lines.
LIQUIDITY REQUIREMENTS
Since the fourth quarter of fiscal 2000, 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 and has had to
pay down the facility. If the bank does not extend the forbearance agreement,
which currently expires November 8, 2002, the Company will not have sufficient
liquidity to continue operations unless it obtains alternative financing. If the
bank does extend the forbearance agreement, the Company believes it will have
sufficient liquidity to continue for some time assuming no further material
reductions in sales, and continued collections of accounts receivable.
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 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 65 at October 31, 2001
due to attrition and terminations by the Company. Because of the significant
cost-cutting measures already undertaken by the Company, it believes that
generating additional revenues will be more critical to returning to
profitability than further cost-cutting. The Company's ability to increase
revenues will be hindered by its lack of working capital and by the downturn in
the optical frame industry. In addition, the Company's license for bebe eyes
provides that bebe may terminate the license if the Company is insolvent.
Because the Company has a stockholders' deficit, it may be deemed to be
insolvent, which would permit bebe to terminate the license.
SUBSTANTIAL DEPENDENCE UPON LAURA ASHLEY AND EDDIE BAUER LICENSES
Net sales of Laura Ashley Eyewear and Eddie Bauer Eyewear accounted for 60%
and 61% of the Company's net sales in fiscal 2000 and fiscal 2001, respectively.
While the Company intends to continue reducing its dependence on the Laura
Ashley Eyewear and Eddie Bauer Eyewear lines through the development and
promotion of Nicole Miller Eyewear, Dakota Smith Eyewear, bebe eyes and its
Signature line, the Company expects the Laura Ashley and Eddie Bauer Eyewear
lines to continue to be the Company's leading sources of revenue for the near
future. The Laura Ashley license is automatically renewed annually so long as
the Company is not in breach of the license agreement and the royalty payment
for the prior two contract years exceeds the minimum royalty for those years.
The Company markets Eddie Bauer Eyewear through an exclusive license which
terminates in December 2005, but may be renewed by the Company at least through
2007 so long as the Company is not in material default and meets certain minimum
net sales
22
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.
DEPENDENCE UPON SALES TO OPTICAL RETAIL CHAINS
Net sales to major optical retail chains, including Eyecare Centers of
America, Cole Vision Corp. and its subsidiary, LensCrafters, and U.S. Vision,
amounted to 33% and 29% of net sales in fiscal years 2000 and 2001,
respectively. Net sales to Eyecare Centers of America in fiscal 2001 amounted to
12% of the Company's net sales for such fiscal year. The loss of one or more
retail chains as a customer would have a material adverse affect on the
Company's business.
APPROVAL REQUIREMENTS OF BRAND-NAME LICENSORS
The Company's business is predominantly based on its brand-name licensing
relationships. Each of the Company's licenses requires mutual agreement of the
parties for significant matters. Each of these licensors has final approval over
all eyeglass frames and other products bearing the licensor's proprietary marks,
and the frames must meet the licensor's general design specifications and
quality standards. Consequently, each licensor may, in the exercise of its
approval rights, delay the distribution of eyeglass frames bearing its
proprietary marks. The Company expects that each future license it obtains will
contain similar approval provisions. Accordingly, there can be no assurance that
the Company will be able to continue to maintain good relationships with each
licensor, or that the Company will not be subject to delays resulting from
disagreements with, or an inability to obtain approvals from, its licensors.
These delays could materially and adversely affect the Company's business,
operating results and financial condition.
LIMITATIONS ON ABILITY TO DISTRIBUTE OTHER BRAND-NAME EYEGLASS FRAMES
Each of the Company's licenses limits the Company's right to market and
sell products with competing brand names. The Laura Ashley license prohibits the
Company from selling any range of designer eyewear that is similar to Laura
Ashley Eyewear in price and style, market position and market segment. The Eddie
Bauer license and the bebe license prohibit the Company from entering into
license agreements with companies which Eddie Bauer and bebe, respectively,
believe are its direct competitors. The Hart Schaffner & Marx license prohibits
the Company from marketing and selling another men's brand of eyeglass frames
under a well-known fashion name with a wholesale price in excess of $40. The
Company expects that each future license it obtains will contain some
limitations on competition within market segments. The Company's growth,
therefore, will be limited to capitalizing on its existing licenses in the
prescription eyeglass market, introducing eyeglass frames in other segments of
the prescription eyeglass market, and manufacturing and distributing products
other than prescription eyeglass frames such as sunglasses. In addition, there
can be no assurance that disagreements will not arise between the Company and
its licensors regarding whether certain brand-name lines would be prohibited by
their respective license agreements. Disagreements with licensors could
adversely affect sales of the Company's existing eyeglass frames or prevent the
Company from introducing new eyewear products in market segments the Company
believes are not being served by its existing products.
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 2001, Signature used manufacturers principally in Hong Kong/China, Japan
and Italy.
23
INTERNATIONAL SALES
International sales accounted for approximately 8.7%,12.8% and 11.3% of the
Company's net sales in fiscal 1999, fiscal 2000 and fiscal 2001, 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 1999, fiscal 2000 and fiscal 2001 amounted
to 19%, 22% and 23% 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 product returns may increase as a result of the
downturn in the optical frame industry and general economic conditions. The
Company maintains reserves for product returns; however, an increase in returns
that significantly exceeds the amount of those reserves would have a material
adverse impact on the Company's business, operating results and financial
condition.
AVAILABILITY OF VISION CORRECTION ALTERNATIVES
The Company's future success could depend to a significant extent on the
availability and acceptance by the market of vision correction alternatives to
prescription eyeglasses, such as contact lenses and refractive (optical)
surgery, 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 no
assurance that technological advances in, or reductions in the cost of, vision
correction alternatives will not occur in the future, resulting in their more
widespread use. Increased use of vision correction alternatives could result in
decreased use of the Company's eyewear products, which would have a material
adverse impact on the Company's business, operating results and financial
condition.
ACCEPTANCE OF EYEGLASS FRAMES; UNPREDICTABILITY OF DISCRETIONARY CONSUMER
SPENDING
The Company's success will depend to a significant extent on the market's
acceptance of the Company's brand-name eyeglass frames. If the Company is unable
to develop new, commercially successful styles to replace revenues from older
styles in the later stages of their life cycles, the Company's business,
operating results and financial condition could be materially and adversely
affected. The Company's future growth will depend in part upon the effectiveness
of the Company's marketing and sales efforts as well as the availability and
acceptance of other competing eyeglass frames released into the marketplace at
or near the same time, the availability of vision correction alternatives,
general economic conditions and other tangible and intangible factors, all of
which can change and cannot be predicted. The Company's success also will depend
to a significant extent upon a number of factors relating to discretionary
consumer spending, including the trend in managed health care to allocate fewer
dollars to the purchase of eyeglass frames, and general economic conditions
affecting disposable consumer income, such as employment business conditions,
interest rates and taxation. Any significant adverse change in general economic
conditions or uncertainties regarding future economic prospects that adversely
affect discretionary consumer spending generally, and purchasers of prescription
eyeglass frames specifically, could have a material adverse effect on the
Company's business, operating results and financial condition.
24
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 their own stores. Luxottica,
one of the largest eyewear companies in the world, is vertically integrated in
that it manufactures frames, distributes them through direct sales forces in the
United States and throughout the world, and owns LensCrafters, one of the
largest United States retail optical chains.
The Company competes in its target markets through the quality of the brand
names it licenses, its marketing, merchandising and sales promotion programs,
the popularity of its frame designs, the reputation of its styles for quality,
and its pricing policies. There can be no assurance that the Company will be
able to compete successfully against current or future competitors or that
competitive pressures faced by the Company will not materially and adversely
affect its business, operating results and financial condition.
CONTROL BY DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company own beneficially
approximately 47.0% 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. In addition, the Company is unable to pay any
dividends for so long as it is in default under its bank credit facility. In
addition, in light of the Company's current financial condition, it is not
authorized to pay dividends under the California General Corporation Law.
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
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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
unless the change of control is approved by the licensor. The licensors' rights
to terminate their licenses upon a change in control of the Company could have
the effect of discouraging a third party from acquiring or attempting to acquire
a controlling portion of the outstanding voting stock of the Company and could
thereby depress the market value of the Common Stock.
ITEM 7A--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks, which include foreign exchange
rates and changes in U.S. interest rates. The Company does not engage in
financial transactions for trading or speculative purposes.
FOREIGN CURRENCY RISKS. During fiscal 2001, 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
and euros. Any significant change in foreign currency exchange rates could
therefore materially affect the Company's business, operating results and
financial condition. To monitor risks associated with currency fluctuations, the
Company on a weekly basis assesses the volatility of certain foreign currencies
and reviews the amounts and expected payment dates of its purchase orders and
accounts payable in those currencies. Based on those factors, the Company may
from time to time mitigate some portion of that risk by purchasing forward
commitments to deliver foreign currency to the Company. The Company held no
forward commitments for foreign currencies at October 31, 2001.
International sales accounted for approximately 11.3% of the Company's net
sales in fiscal 2001. Although the Company's international sales are principally
in United States dollars, sales to international customers may also be affected
by changes in demand resulting from fluctuations in interest and currency
exchange rates. There can be no assurance that these factors will not have a
material adverse effect on the Company's business, operating results and
financial condition. For frames purchased other than from Hong Kong/China
manufacturers, the Company pays for its frames in the currency of the country in
which the manufacturer is located and thus the costs (in United States dollars)
of the frames vary based upon currency fluctuations. Increases and decreases in
costs (in United States dollars) resulting from currency fluctuations generally
do not affect the price at which the Company sells its frames, and thus currency
fluctuations can impact the Company's gross margin.
INTEREST RATE RISK. The Company's 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, as of
October 31, 2001, the Company could obtain advances up to an amount equal to 60%
of eligible accounts receivable and 30% of eligible inventories, up to a maximum
of $4,500,000, 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 and is payable in monthly
installments of $72,917 plus interest at the rate of 8.52% per annum. Since that
date, the Company has paid interest at the default rate of 5% per annum in
excess of the original rate. At October 31, 2001, $6.0 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 do