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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
[_] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 2002
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:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [_] No [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. [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [_] No [X]
On June 30, 2003, the Registrant had 5,976,889 outstanding shares of Common
Stock, $.001 par value. The aggregate market value of the 2,983,732 shares of
Common Stock held by non-affiliates of the Registrant as of June 30, 2003 was
$895,120.
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PART I
The discussions in this Form 10-K contain forward-looking statements
that involve risks and uncertainties. Important factors that could cause actual
results to differ materially from the Company's expectations are set forth in
"Factors That May Affect Future Results" in Item 7, as well as elsewhere in this
Form 10-K. All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by "Factors That May Affect Future Results." Those
forward-looking statements relate to, among other things, the Company's plans
and strategies, new product lines, relationships with licensors, distributors
and customers, and the business environment in which the Company operates.
ITEM 1--BUSINESS
GENERAL
Signature Eyewear, Inc. ("Signature" or the "Company") designs,
markets and distributes prescription eyeglass frames and sunglasses, primarily
under exclusive licenses for Laura Ashley Eyewear, Eddie Bauer Eyewear, Hart
Schaffner & Marx Eyewear, Nicole Miller Eyewear, bebe eyes and Dakota Smith, as
well as its proprietary Signature line. The Company's best-selling product lines
are Laura Ashley Eyewear and Eddie Bauer Eyewear. Frames in the Laura Ashley
Eyewear line are feminine and classic, and are positioned in the medium to
mid-high price range. The Eddie Bauer Eyewear collection offers men's and
women's styles, and is positioned in the medium-price segment of the brand-name
prescription eyewear market. Net sales of Laura Ashley Eyewear and Eddie Bauer
Eyewear together accounted for 60% and 62% of the Company's net sales in fiscal
2001 and fiscal 2002, respectively.
The Company distributes its products (1) to independent optical
retailers in the United States, primarily through its national direct sales
force and independent sales representatives, (2) internationally, primarily
through exclusive distributors in foreign countries and a direct sales force in
Western Europe; (3) through its own account managers to major optical retail
chains, including EyeCare Centers of America, Cole Vision Corp. and its
subsidiary Pearle Vision, LensCrafters, U.S. Vision and Dollond & Atchitson; and
(4) through selected distributors in the United States.
RECENT RECAPITALIZATION
The Company suffered material operating losses in its last four
fiscal years, causing a significant deterioration in its financial condition. At
October 31, 2002, the Company's stockholders' deficit was $9.0 million. The
Company was in default under its bank credit facility since the fourth quarter
of fiscal 2000 and since December 2000 had operated under a forbearance
agreement from the bank. The Company also has a forbearance agreement from a
frame vendor for an obligation in the amount of approximately $5.9 million. In
April 2003 the Company completed a recapitalization involving a refinancing of
its credit facility, an equity capital infusion and a change of management and a
reconstitution of the Board of Directors. The key elements of the
recapitalization included the following:
Credit Facility with Home Loan and Investment Company. The Company
obtained a $3.5 million credit facility from Home Loan and Investment Company
("HLIC"). The credit facility includes a $3,000,000 term loan and a $500,000
revolving line of credit and is secured by all of the assets of the Company. The
term loan bears interest at a rate of 10% per annum, is payable interest only
for the first year with payments of principal and interest on a 10-year
amortization schedule commencing the second year, and is due and payable in
April 2008. The revolving credit facility bears interest at a rate of 1% per
month, payable monthly, with all advances subject to approval of HLIC, and is
due and payable in April 2008.
Issuance of Preferred Stock. The Company created a new series of
preferred stock, designated "Series A 2% Convertible Preferred Stock" (the
"Series A Preferred"), and issued 1,200,000 shares to Bluebird Finance Limited,
a British Virgin Islands corporation ("Bluebird"), for $800,000, or $0.67 per
share.
Bluebird Credit Facility. The Company obtained from Bluebird a
credit facility of up to $4,150,000 secured by the assets of the Company. The
credit facility includes a revolving credit line in the amount of $2,900,000 and
support for the $1,250,000 letter of credit securing the HLIC credit facility.
The loan bears interest at the rate of 5% per annum, payable annually for the
first two years, with payments of principal and interest on a 10-year
amortization schedule
2
commencing in the third year, and is due and payable in April 2013. Bluebird's
loan commitment will be reduced by $72,000 in July 2005 and by the same amount
every three months thereafter. This loan is subordinate to the HLIC credit
facility.
Retirement of Bank Credit Facility. The Company retired its bank
credit facility with City National Bank which had been in default since
September 30, 2000.
Retirement of Obligations to Frame Vendor. The Company retired its
obligations to a frame vendor in the aggregate amount of approximately $5.8
million (some of which were assumed in connection with the Company's acquisition
of California Design Studio, Inc. in 1999) for a payment of $2,475,000 to
Dartmouth Commerce of Manhattan, Inc. ("Dartmouth"). Dartmouth had purchased
this obligation from the frame vendor for $2,350,000. The Company recognized a
net gain of approximately $3.3 million in connection with this transaction.
Reduction in Trade Payables and Restructuring of Equipment Lease.
The Company retired $775,000 of trade payables for approximately $372,000,
resulting in a gain of approximately $400,000. In addition, the Company
purchased certain leased property and equipment, including its computer system,
for $750,000, thereby terminating the lease with aggregate future obligations of
approximately $1.7 million. To fund this payment, the Company obtained a
$750,000 loan from a commercial bank secured by the purchased assets and bearing
interest at 4% per annum payable in monthly installments of approximately
$14,000 with the balance due in February 2008.
Sale of Stock by Weiss Family Trust. The Weiss Family Trust, the
principal shareholder of the Company, sold all of the shares of the Common Stock
of the Company which it held (2,075,337 shares, representing approximately 37%
of the outstanding Common Stock of the Company) for $0.012 per share. Dartmouth
purchased 1,600,000 shares and Michael Prince purchased 475,337 shares.
Dartmouth, which is wholly owned by Richard M. Torre, is now the largest
shareholder of the Company holding approximately 28.7% of the outstanding Common
Stock of the Company. Dartmouth has agreed with Bluebird that until April 2008
it will not sell or transfer any of these shares without the prior consent of
Bluebird.
Management and Board Changes. Bernard L. Weiss resigned as Chairman
of the Board, Director and Chief Executive Officer, positions he held since
founding the Company in 1983. Richard M. Torre was appointed as Director and
Chairman of the Board and Ted Pasternack, Edward Meltzer and Drew Miller were
appointed as Directors. In addition, Michael Prince was named Chief Executive
Officer and President. The Company has also entered into a three-year consulting
agreement with Dartmouth for compensation of $55,000 per year.
The recapitalization significantly improved the Company's financial
condition and liquidity through decreasing the shareholders deficit by
approximately $5.7 million, increasing capital, reducing liabilities and
replacing current obligations with long-term obligations. Although following the
recapitalization the Company continues to have a stockholders' deficit, the
Company believes that for at least the following 12 months, assuming there are
no unanticipated material adverse developments, no material decrease in revenues
and continued compliance with its credit facilities, it will be able pay its
debts and obligations as they mature. However, the Company's long-term viability
will depend on its ability to return to profitability on a consistent basis,
which will depend in part on its ability to increase revenues.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for more information regarding the recapitalization.
BUSINESS STRATEGY
Following the recapitalization, the Company changed its business
strategy to focus its efforts primarily on increasing revenues. As part of its
turnaround strategy during the prior two years, the Company had significantly
reduced its general, administrative and other expenses to the extent that it
does not believe further material reductions are possible. Accordingly, the
ability of the Company to return to profitability will depend most importantly
on its ability to increase revenues.
3
The Company's efforts to increase revenues will focus principally
upon increasing sales to retail optical chains. Sales to existing retail optical
chain customers, most of which are based in the United States, could be
increased through the chains purchasing additional eyewear lines and/or
purchasing the Company's products for sales through additional market channels,
such as stores outside the United States or different retail outlets. In
addition, the Company will market to retail optical chains based outside of the
United States.
The Company will also attempt to increase revenues through expanding
international sales, principally through engaging additional international
distributors, and domestic sales through increasing its direct sales force for
sales to independent optical retailers within the United States.
To attract new customers and expand sales to existing customers, the
Company intends to focus even greater efforts on frame design, quality control
and quality assurance. The Company believes that the prescription eyewear frame
market is a "product-driven" business, where the quality and styling, in
addition to brand name recognition, are the principal factors in generating
sales.
INDUSTRY OVERVIEW(1)
THE OPTICAL MARKET. After several years of steady, albeit slowing
growth in the late 1990's, optical retail sales in the United States experienced
a substantial slowdown in 2001 that has only recently begun to signs of
subsiding. Retail sales of all eyewear products - including contact lenses,
sunglasses, clip-ons, lenses, lens treatments, and prescription frames - totaled
$15.8 billion in 2001, a decrease of 4% from $16.5 billion in 2000. It was the
first time since 1998 that retail sales of eyewear products was less than $16
billion. For 2002, preliminary numbers indicate a slight (2%) increase, with
retail sales inching up to $16.2 billion. But while industry observers are
hopeful for a sales rebound in 2003, trends set into motion in 2001 continue to
make the optical industry - particularly the frame portion of the market - a
challenging business.
Perhaps the biggest single factor on the optical industry and the
frame category is the move to value, led by the mass merchandiser category.
Among the four channels of eyewear sales, the mass merchandiser/warehouse clubs
are only growing segment, with a 13% increase in retail sales in 2001 to nearly
$1 billion in sales ($976 million in sales, 6% share of market). Other channels
has sales declines. The independent optical retailers (optometrists, opticians
and ophthalmologists with one or two stores) had $9 billion in sales, or 57% of
the market. Optical chains (including Pearle and LensCrafters), had $5.4 billion
and a 34% share, with HMO/hospitals $413 million and a 3% share. Characterized
by lower-priced product, the mass merchandiser/warehouse club category continues
to grow: preliminary estimates show an increased share of market in 2002, with
Wal-Mart and Costco optical solidly positioned among the top six optical
retailers in the U.S.
THE FRAME PORTION OF THE MARKET: A symptom of this value trend is a
decrease in retail frame price points. The retail price for a pair of frames
across all types of optical retailers has dropped each quarter since December
2001 from a high of $124.59 to $120.25 in September 2002. It was projected to be
$120 by the end of 2002. Other industry numbers correspond with this trend:
While unit sales of frames inched up 5% to 64.8 million in 2002, the 2002 retail
sales figure for frames was down 1% to $5.17 billion. Retail dollars in the
other industry categories (lenses, plano sunglasses, contact lenses) remained
virtually flat in 2002, with only lens treatments experiencing a slight (4%)
increase. These numbers and reports from the field indicate that while consumers
continue to purchase prescription eyewear, they are clearly seeking value in
their frame purchase.
Despite the drop in retail prices and the increased demand for
value, the Company's product remains competitively priced in what is the heart
of the business. In the U.S. market, 40% of all frame units sold and 40.4% of
frame retail dollars through March 2003 were in the $100-$149 retail price
range. The value portion of the frame market, priced under $100, had a 35% share
of units and a 22% share of retail dollars. The overwhelming majority of the
Company's frames retail in the $100-$149.
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1 Unless otherwise noted, all the data in this Industry Overview
section relates to the eyewear market in the United States. The source for this
data is the 2002 U.S. Optical Industry Handbook published by Jobson Publishing
Corporation in March 2002.
4
THE OPTICAL CUSTOMER: Even in a sluggish optical market, the number
of potential eyewear customers remains large. With a U.S. population of 278
million in 2001, approximately 169 million people require some type of vision
correction. Out of the 169 million people requiring vision correction, 86.3
million people purchased eyewear in 2001 - or about 31% of the population.
Typically, men and women over the age of 45 need corrective eyewear
due to presbyopia, a condition that makes it difficult to focus on nearby
objects such as small newspaper print. As more of the US population exceeds age
45, the Company believes more people will have vision impairment, and sales of
corrective eyewear should increase. The table below demonstrates how the number
of people 45 years and older will increase substantially.
CURRENT AGE BREAKDOWN OF U.S. POPULATION
AND PROJECTED GROWTH 2001-2005, 2005-2010
PROJECTED GROWTH
AGE 2001 POPULATION 2001-2005 PROJECTED GROWTH 2005-2010
- --------- --------------- ----------- ---------------------------
0-14 59,000 -3% 3%
15-24 39,000 5.1% 4.9%
25-44 81,000 -2.5% -2.5%
45-64 63,000 9.5% 14.5%
65 and up 35,000 2.9% 11.1%
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Total 278,000 3.2% 3.8%
=============== =========== ===========================
Perhaps the key factor contributing to growth in the frame and
sunglass market is recognizing the increasing sophistication of the consumer.
Until the mid-1970s, eyeglass frames were viewed as medical implements, which
were "dispensed" but never "sold." Because styling was not emphasized,
successful frames often remained popular for years, and sometimes for decades.
In the mid-1970s, experts from other industries introduced designer names and
consumer advertising to the optical industry, as well as sweeping design
changes. These changes resulted in increased consumer demand for the new
products. Today, eyewear is a true fashion accessory that wearers expect to
coordinate with and enhance their wardrobes and lifestyles. It is the only
medical device with such style status. The Company believes that recognizing
this sophistication and style status is key to competing successfully in the
frame market.
COMPETITIVE VISION CORRECTION METHODS. Currently, there are two
methods of correcting vision impairment which compete with prescription
eyeglasses: contact lenses and surgery. Although retail sales of contact lenses
remained flat from 1995 ($1.9 billion) through 2001 ($1.9 billion), their sales
as a percentage of total retail sales decreased from 13.5% in 1995 to 12.3% in
2001. The Company believes that sales of contact lenses do not currently
materially threaten eyeglass frame sales because many people who wear contact
lenses need a pair of eyeglasses for night time and for the days when they
decide not to wear their contact lenses.
A number of surgical techniques have been developed to correct
vision problems such as myopia (nearsightedness), hyperopia (farsightedness) and
astigmatism. Vision correction surgery by laser has recently become increasingly
popular, with over 1.5 million procedures performed in the U.S. in 2000.
Revenues from the procedure reached $2.4 billion in 2001, up from $700 million
in 1997. Nonetheless, the Company believes that these techniques will not have a
material adverse affect on sales of prescription eyewear in the near future.
Many who have the procedure require follow up procedures and experience an
increased sensitivity to light. The Company believes that a number of people who
have had successful eye surgery may still need some form of corrective
eyeglasses, and others may need eyeglasses at a later date due to the onset of
presbyopia.
OPTICAL RETAIL OUTLETS. Optical retailers consist of optometrists,
opticians and ophthalmologists. There are two main types of optical retailers:
independents (with one or two stores) and chains. Chains include national
optical retailers such as LensCrafters, Cole Vision Corp. and its subsidiary
Pearle Vision, and EyeCare Centers of America. A third category includes optical
departments within major mass merchandisers, including Wal-Mart and Costco. In
2001, independent optical retailers had a 57% market share, national optical
chain retailers had a 34% market share, and mass merchandisers had a 6% market
share. The remaining 3% market share went to managed care organizations such as
Kaiser Permanente.
5
BRAND DEVELOPMENT
The Company's brand-name development process includes identifying a
market niche, obtaining the rights to a carefully selected brand name, producing
a comprehensive marketing plan, designing frames consistent with each brand
image, developing unique in-store displays, and creating innovative sales and
merchandising programs for independent optical retailers and retail chains.
IDENTIFYING A MARKET NICHE AND OBTAINING THE RIGHTS TO A BRAND NAME.
Signature's brand-name development process begins with identifying an eyewear
market niche. The Company characterizes a market niche by referring to the
target customer's gender and age (e.g., adult, child, teenager), the niche's
general image and styling (e.g., feminine, masculine, casual), its price range,
and the applicable channels of distribution. Once the Company chooses a market
niche, a brand name is identified which the Company believes will appeal to the
target customer in that niche. The Company believes that for a brand name to
have the potential for widespread sales in the optical industry, the name must
have strong, positive consumer awareness, a distinctive personality and an image
of enduring quality. Brands that are aimed at narrower niches can also have
optical industry impact (albeit smaller), so long as consumer awareness exists
within the targeted niche. The Company's existing license agreements contain
terms limiting the ability of the Company to market competing brand names. See
Item 7--"Management's Discussion and Analysis of Results of Operation and
Financial Conditions--Factors That May Affect Future Results--Limitations on
Ability to Distribute Other Brand-Name Eyeglass Frames."
After the Company has determined that a targeted brand name is
available, the Company develops (1) an in-depth understanding of the potential
licensor's market position, (2) innovative strategies for extending the brand's
image to the eyewear market, (3) preliminary plans for merchandising,
advertising and sales promotion, and (4) broad concepts for frame design. Once
the Company has acquired an exclusive eyewear license for a brand name, it
develops detailed concepts for frame designs, establishes the brand's identity
within the optical industry, and sets forth the first year's merchandising,
advertising and sales promotion plans.
FRAME DESIGN. The Company's frame styles are developed by its
in-house design team, which works in close collaboration with many respected
frame manufacturers throughout the world to develop unique designs and
technologies. Initially, each of the Company's frame designers works
individually with a factory to develop new design concepts. Once the factory
develops a prototype, the designer presents the style to the Company's frame
committee for approval. Once approved, Signature then contracts with the factory
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
6
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.
PRODUCTS
The Company's principal products during fiscal 2002 were eyeglass
frames sold under the brand names Laura Ashley Eyewear, Eddie Bauer Eyewear,
Hart Schaffner & Marx Eyewear, Nicole Miller Eyewear, bebe eyes, Dakota Smith
Eyewear, Signature and Camelot.
The following table provides certain information about the market
segments, introduction dates and approximate retail prices of the Company's
products.
APPROXIMATE RETAIL
BRAND NAME/SEGMENT CUSTOMER GENDER/AGE INTRODUCTION DATE PRICES(1)
- ----------------------------------- ------------------- ----------------- ------------------
Licensed Brands
- ---------------
Laura Ashley
Prescription............... Women 1992 $125 - $180
Sunwear.................... Women 1993 $90 - $100
bebe eyes...................... Women May 2000
Prescription............... $100-$150
Eddie Bauer.................... Men/Women 1998
Prescription............... $95- $170
Hart Schaffner & Marx.......... Men 1996
Prescription............... 1993 $95-$180
Nicole Miller ................. Women
Prescription............... 1993 $125-$156
Sunwear.................... 1993 $75-$95
House Brands
- ------------
Dakota Smith (2)
Prescription............... Unisex 1992 $90-$150
Sunwear.................... Unisex 1992 $75-$125
Signature Collection
Intuition.................. Women 1999 $80-$90
Lifescape.................. Women 1999 $60-$70
- -------------------
(1) Retail prices are established by retailers, not the Company.
(2) The Company sold and licensed back the rights to this trademark in February
2003.
LAURA ASHLEY EYEWEAR
The Company's first major eyewear line is Laura Ashley Eyewear,
which was introduced in 1992. With net sales of $11.9 million in fiscal 2002,
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
7
will be to extend its product selection to reach a broader audience within the
feminine eyewear niche. This is accomplished by drawing inspiration from two
primary living environments consistent with the Laura Ashley lifestyle, city and
country. The city-inspired collection expands the eyewear designs to a more
sophisticated customer with an urban style and sensibility, while remaining true
to the Laura Ashley brand. And the country-inspired collection will be
identified with the more traditional and longtime Laura Ashley customer who
appreciates the floral detail and ornamentation on each frame.
Signature's in-house merchandising team has conceptualized and
designed brand new Laura Ashley point of purchase display items for 2003 and
2004. The new displays feature an integrated presentation of painted wood,
fabric accents and lifestyle graphics. Consistent with the broader focus of the
brand, the display items will draw inspiration from city and country
environments, with each reflected in specific colors, fabrics, and molding
treatments. These unique displays allow the optical retailer to create unique
in-store "environments" to attract the target customer to the frames. These
"environments" are modular, so that a small display is an integral part of a
larger one, and they can be customized for large customers. Laura Ashley Eyewear
environments are covered with colorful Laura Ashley textured floral-print fabric
with paint selected from Laura Ashley's paint palette, providing the retailer
with, in effect, a Laura Ashley "store within a store."
The Company has the exclusive right to market and sell Laura Ashley
Eyewear through a license with Laura Ashley entered into in May 1991. The
license covers a specified territory including the United States, the United
Kingdom and certain other countries. The Laura Ashley license is automatically
renewed annually through January 2008 so long as the Company is not in breach of
the license agreement and the royalty payment for the prior two contract years
exceeds the minimum royalty for those years. Laura Ashley may terminate the
license before its term expires under certain circumstances, including a
material breach of the license agreement by the Company, if management or
control of the Company passes from the present managers, shareholders or
controllers to other parties whom Laura Ashley may reasonably regard as
unsuitable, or if minimum sales requirements are not met in any two years. The
Company did not meet the minimum sales requirement for the license year ended
January 2003, but Laura Ashley waived noncompliance.
EDDIE BAUER EYEWEAR
The Eddie Bauer Eyewear collection includes men's and women's
prescription eyewear styles that are designed to capture the Eddie Bauer casual
lifestyle, offering versatility and comfort with unsurpassed quality. Eddie
Bauer Eyewear's frame designs will evolve to meet the personality of today's
Eddie Bauer customer, with frames that are appropriate for life's everyday
experiences--not just casual weekends. The style assortment remains broad in its
appeal by expressing many facets of the Eddie Bauer lifestyle and the brand's
longtime outdoor heritage. It is the intent to design a product for every Eddie
Bauer customer. In keeping with Eddie Bauer's commitment to value, the
collection consists of medium priced frames.
Along with its marketing, merchandising and sales promotion
programs, the Company has designed point-of-sale graphic displays that are also
inspired by Eddie Bauer's outdoor casual lifestyle. The new displays for
2003-2004 to bring the Eddie Bauer image into retail optical stores through
beautiful outdoor imagery and on-model photography. These displays are designed
to match the look and feel of displays found in Eddie Bauer retail stores,
further strengthening brand recognition at the optical point of sale.
The Company has the exclusive worldwide right to market and sell
Eddie Bauer Eyewear through a license agreement with Eddie Bauer Diversified
Sales LLC entered into in June 1997. Without the prior written consent of Eddie
Bauer, however, the Company may market and sell Eddie Bauer Eyewear only in the
United States and in the other countries specified in the license agreement,
most notably Japan, the United Kingdom, Germany, France, Australia and New
Zealand. The license agreement contains minimum annual net sales and minimum
annual royalty requirements. The license terminates in December 2005 but the
Company may renew it for one two-year term, provided the Company is not in
material default. Eddie Bauer may terminate the license before the expiration of
its term under certain circumstances, including if (1) a person or entity
acquires more than 30% of the Company's outstanding voting securities, or (2)
the Company commits a material breach of the license agreement.
Eddie Bauer Diversified Sales LLC, and its parent Speigel, Inc and
other affiliates, have filed voluntary petitions for reorganization under
Chapter 11 of the U.S. Bankruptcy Code. As a result, the licensor has the rights
of a debtor under the Bankruptcy Code with respect to executory contracts such
as the Eddie Bauer Eyewear license,
8
including the right to assume or reject the license. The rejection of the
license would have a material adverse affect on the Company. The Company has
received no indication or notice from the licensor regarding the licensor's
intentions with respect to the license agreement.
HART SCHAFFNER MARX EYEWEAR
The Hart Schaffner Marx Eyewear is the distinctively masculine
collection targeted at men who seek quality, comfort and fit. Hart Schaffner
Marx, a subsidiary of Hartmarx Corporation and a leading manufacturer of
tailored clothing, has an image of enduring quality, and is a recognized name
among men who purchase apparel in the medium to high price range. Because men
are generally concerned about both function and fashion, the frames contain
features that enhance their durability - the highest quality screws, nosepads
and spring hinges - and come with a warranty. Select styles feature titanium, a
material reknown for its strength and lightweight qualities. The collection is
designed to fit a broad spectrum of men, and selected styles have longer temples
and larger sizes than those generally available.
The Company has the exclusive right to market and sell Hart
Schaffner & Marx Eyewear in the United States through a license with Hart
Schaffner & Marx entered into in January 1996. The license agreement gives the
Company the right of first refusal to sell Hart Schaffner & Marx in any
additional countries. The license agreement contains minimum annual net sales
and minimum annual royalty requirements. The license expires December 31, 2005,
and may be renewed for three-year terms by the Company in perpetuity provided
the Company is not in default under the license agreement. Hart Schaffner & Marx
may terminate its license with the Company before the expiration of its term if
(1) someone acquires more than 50% of the Company's outstanding voting
securities, or (2) the Company fails to perform its material obligations under
the license agreement.
NICOLE MILLER EYEWEAR
The Company acquired the exclusive license to design and market
Nicole Miller Eyewear, a collection of women's and men's prescription eyewear
frames and sunwear, in June 1999. Nicole Miller Eyewear is targeted at the
sophisticated, style-conscious modern woman who creates her own fashion trends
in a fun, whimsical way. Created in New York City by the designer of the same
name, Nicole Miller clothing feature colorful designs with interesting shapes,
without being pretentious or extreme. The Nicole Miller Eyewear collection
captures the spirit of this exciting brand, with colorful designs and
interesting shapes that represent a balanced blend of youthful energy and
sophistication. Most styles of Nicole Miller Eyewear prescription eyewear frames
are available either as prescription eyewear or as sunwear, and many are
available with lenses in designer colors.
The license agreement for Nicole Miller Eyewear expires in March
2006. The license agreement contains minimum annual net sales and minimum annual
royalty requirements. The licensor may terminate the license agreement before
its stated term expires upon a material breach by the Company.
BEBE EYES
bebe clothing is famous for its provocative clothing for women that
turns heads. The bebe eyes eyewear collection captures the spirit of the bebe
brand through sexy, provocative eyewear and sunwear styles with
attention-getting colors and design accents. Eye-catching point of purchase
displays feature distinctive on-model imagery and frame displays. The collection
appeals to fashion-conscious women of all ages.
The Company has the exclusive right to market and sell bebe eyes in
the United States, Canada and a number of other countries pursuant to a license
agreement the Company entered into in September 1999 with bebe stores, inc. The
license expires in June 2006. The license agreement contains minimum annual net
sales requirements and minimum quarterly and annual royalty requirements. bebe
may terminate the license before its stated expiration under certain
circumstances, including if the Company materially breaches the license
agreement, if the Company is insolvent, or if, without the prior approval of
bebe, 50% or more or the outstanding Common Stock of the Company is acquired by
either: (A) a women's apparel company or (B) another person and the financial
and operational condition of the Company is impaired or such other person makes
or proposes to make material changes in the key management personnel in charge
of the license. If the Company is deemed "insolvent" within the meaning of the
license agreement as a result of its stockholders' deficit, and bebe stores has
not waived its right to terminate, then bebe stores, inc. would have the right
9
to terminate the agreement. bebe stores, inc. raised no objection to the renewal
of the license in June 2003 based on the Company's financial condition.
DAKOTA SMITH EYEWEAR
Dakota Smith Eyewear targets men and women with eclectic designs
that capture the American spirit. The Dakota Smith brand is a compelling blend
of Santa Fe spirit, Western swagger and Route 66 style. The collection will be
re-launched in late 2003, with a fall release featuring high quality titanium at
an affordable price matched by few collections in the industry. Dakota Smith
sunwear will be released in late fall, featuring superior lenses and exciting
shapes and designs at an affordable price. The collection will be highlighted at
the point of sale with unique displays created from elements and artistic styles
from the American southwest. Complementing the eyewear and sunwear collections
will be an ambitious marketing and merchandising program featuring Dakota Smith
apparel - including jackets, shirts, skirts, and headwear - as well as an
exciting on-line store to expand the reach of the brand beyond eyewear.
The Company has the exclusive right to market and sell Dakota Smith
Eyewear in the United States, Canada and a number of other countries pursuant to
a license agreement entered into in February 2003 with Axwood Investments
Limited, which had concurrently purchased the Dakota Smith eyewear trademark
from the Company. The license expires in February 2006, but is automatically
renewed for an additional two-year term unless the Company notifies the licensor
in advance that it will not renew the term. The license agreement contains
minimum annual royalty payments based on net sales. The licensor may terminate
the license for any material breach of either the license or the supply
agreement.
HOUSE BRANDS
The cost to retailers of frames in Signature's own lines is
generally less than frames with brand names, because the latter command greater
retail prices, and there are no licensing fees payable on the Company's own
lines. Moreover, the styling of Signature's own lines can be more flexible,
because the Company will be able to change the styling--as well as its
merchandising--more rapidly without thE often time-consuming requirement of
submitting them to the licensor for its approval.
The Company established the Signature Collections in fiscal 1999.
The line comprises multiple segments, each targeting niches not otherwise filled
by the Company's brand-name collections. The Company's goals related to that
line are: to position Signature to compete more effectively against other
optical companies that have direct sales forces; to enable the Company to offer
products in segments not served by the Company's licensed collections; to allow
the Company to develop products more quickly; and to reach different markets by
offering good quality, low-cost styles.
DISTRIBUTION
The Company distributes its products (1) to independent optical
retailers in the United States, primarily through its national direct sales
force; (2) internationally, primarily through exclusive distributors in foreign
countries and through a direct sales force in Western Europe; (3) to major
optical retail chains through its own account managers; and (4) through selected
distributors in the United States.
The following table sets forth the Company's net sales by
distribution channel for the periods indicated:
YEAR ENDED OCTOBER 31,
------------------------------------
2000 2001 2002
---------- ---------- ----------
(IN THOUSANDS)
Direct sales ................ $ 22,243 $ 21,147 $ 15,349
Optical retail chains ....... 17,041 12,346 11,560
International ............... 6,634 5,029 3,468
Telemarketing(1)............. 5,098 3,230 1,532
Domestic distributors........ 916 1,640 1,212
---------- ---------- ----------
$ 51,932 $ 43,392 $ 33,121
========== ========== ==========
------------
(1) In March 2002 the Company sold its USA Optical division which had sold
frames through a form of telemarketing to optical retailers, focusing
on establishing long-term, ongoing relationships. The Company no
longer sells frames in this manner.
10
DIRECT SALES. The Company distributes its products to independent
optical retailers in the United States primarily through a national direct sales
force, including company and independent sales representatives. The direct sales
force, including independent sales representatives, numbered 46 at October 31,
2002.
OPTICAL RETAIL CHAINS. Signature sells directly to optical retail
chains, including EyeCare Centers of America, Cole Vision Corp. and its
subsidiary Pearle Vision, LensCrafters, U.S. Vision and Dollond & Atchitson. Net
sales to Eyecare Centers of America amounted to 12% and 13% of the Company's net
sales for fiscal years 2001 and 2002, respectively.
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, 2002, the Company had
approximately 20 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. The Company distributes its products through
selected distributors in the United States in areas in which it believes it can
achieve better penetration than through direct sales. The Company had three
distributors in the United States at October 31, 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 2002,
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/China manufacturers, the Company is
obligated to pay in the currency of the country in which the manufacturer is
located. In the case of frames purchased from manufacturers located in Hong
Kong/China, the currency is United States dollars. For almost all of the
Company's other frame purchases, its costs vary based on currency fluctuations,
and it generally cannot recover increased frame costs (in United States dollars)
in the selling price of the frames.
11
COMPETITION
The markets for prescription eyewear are intensely competitive.
There are thousands of frame styles, including hundreds with brand names. At
retail, the Company's eyewear styles compete with styles that do and do not have
brand names, styles in the same price range, and styles with similar design
concepts. To obtain board space at an optical retailer, the Company competes
against many companies, both foreign and domestic, including Luxottica Group
S.p.A, Safilo Group S.p.A., Marchon Eyewear, Inc., Marcolin S.p.A. and De Rigo
S.p.A. Signature's largest competitors have significantly greater financial,
technical, sales, manufacturing and other resources than the Company. They also
employ direct sales forces that have existed far longer, and are significantly
larger than the Company's. At the major retail chains, the Company competes not
only against other eyewear suppliers, but also against the chains themselves,
which license some of their own brand names for design, manufacture and sale in
their own stores. Luxottica, one of the largest eyewear companies in the world,
is vertically integrated, in that it manufactures frames, distributes them
through direct sales forces in the United States and throughout the world, and
owns LensCrafters, one of the largest United States retail optical chains. De
Rigo S.p.A. is also vertically integrated, in that it manufactures frames,
distributes them throughout the world, and owns Dollond and Atchitson, one of
the largest retail optical chains in the world.
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, 2002, the Company had 152 full-time employees,
including 52 in sales and marketing, 24 in customer service and support, 31 in
warehouse operations and shipping and 45 in general administration and finance.
None of the Company's employees is covered by a collective bargaining agreement.
The Company considers its relationship with its employees to be good.
ITEM 2--PROPERTIES
The Company leases approximately 109,000 square feet of a building
located in Inglewood, California, where it maintains its principal offices and
warehouse. The Company's lease for this facility expires in May 2005, and the
Company has an option to renew the lease for an additional five years.
As of November 1, 2001, the Company subleased approximately 26,000
square feet of this space to an unaffiliated party through May 2005.
The Company'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 7 of Notes to Consolidated Financial Statements.
ITEM 3--LEGAL PROCEEDINGS
As of June 30, 2003, the Company was not involved in any material
legal proceedings.
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
None.
12
PART II
ITEM 5--MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK
Since March 15, 2001, the Company's Common Stock has been traded in
the over-the-counter market. During fiscal 2001 prior to March 15, the Common
Stock was traded on the Nasdaq SmallCap Market. The following table sets forth,
for the periods indicated, high and low last reported sales prices for the
Common Stock on the Nasdaq SmallCap Market through March 15, 2001 and in the
over-the-counter market, in each case as reported by Nasdaq.
HIGH LOW
---------- ---------
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
FISCAL YEAR ENDED OCTOBER 31, 2002
First Quarter ....................... $ 0.30 $ 0.07
Second Quarter ...................... $ 0.20 $ 0.07
Third Quarter........................ $ 0.25 $ 0.11
Fourth Quarter ...................... $ 0.45 $ 0.20
On June 30, 2003, the last reported sales price of the Common Stock
as reported by Nasdaq, was $0.30 per share. At June 30, 2003, there were 33
holders of record of the Common Stock.
DIVIDENDS
As a California corporation, under the California General
Corporation Law, generally the Company may not pay dividends in cash or property
except (i) out of positive retained earnings or (ii) if, after giving effect to
the distribution, the Company's assets would be at least 1.25 times its
liabilities and its current assets would exceed its current liabilities
(determined on a consolidated basis under generally accepted accounting
principles). At October 31, 2002, the Company had an accumulated deficit of
$23.4 million. As a result, the Company will not be able to pay dividends for
the foreseeable future. In addition, the payment of dividends is prohibited
under its credit facilities.
EQUITY COMPENSATION PLANS
The following table sets forth certain information regarding the
Company's equity compensation plans as of October 31, 2002.
13
- --------------------------------- ------------------------------- --------------------- -------------------------
(a) (b) (c)
- --------------------------------- ------------------------------- --------------------- -------------------------
Plan category Number of securities to be Weighted-average Number of securities
issued upon exercise of exercise price of remaining available for
outstanding options, warrants outstanding options, future issuance under
and rights. warrants and rights. equity compensation
plans (excluding
securities reflected in
column (a))
- --------------------------------- ------------------------------- --------------------- -------------------------
Equity compensation plans 367,300 $8.10 432,700
approved by security holders
- --------------------------------- ------------------------------- --------------------- -------------------------
Equity compensation plans not -- -- --
approved by security holders
- --------------------------------- ------------------------------- --------------------- -------------------------
Total 367,300 $8.10 432,700
- --------------------------------- ------------------------------- --------------------- -------------------------
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,
--------------------------------------------------------------------
1998 1999 2000 2001 2002
------------ ------------ ------------ ------------ ------------
(dollars in thousands, except per-share data)
STATEMENT OF OPERATIONS DATA:
Net sales ...................................... $ 40,892 $ 44,056 $ 51,932 $ 43,392 $ 33,121
Gross profit ................................... 23,247 25,316 30,507 21,920 17,653
Total operating expenses ....................... 19,041 27,461 39,754 33,942 21,092
Income (Loss) from operations .................. 4,206 (2,145) (9,247) (12,022) (3,439)
Net income (loss) .............................. 2,750 (1,309) (9,484) (13,387) (4,116)
Net income (loss) per share .................... 0.52 (0.26) (1.87) (2.65) (0.75)
Weighted average common shares outstanding ..... 5,254,156 5,095,259 5,058,915 5,056,889 5,488,396
1998 1999 2000 2001 2002
------------ ------------ ------------ ------------ ------------
BALANCE SHEET DATA:
Current assets ................................. $ 23,548 $ 27,474 $ 33,006 $ 17,184 $ 9,876
Total assets ................................... 25,151 35,474 41,435 18,906 11,944
Current liabilities ............................ 5,498 12,334 28,142 22,390 19,226
Long-term debt and capitalized lease
obligations, net of current portion........... 238 5,137 4,806 1,461 1,715
Total liabilities .............................. 5,736 17,471 32,948 23,851 20,941
Stockholders' equity (deficit) ................. 19,415 18,003 8,487 (4,945) (8,996)
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.
14
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, Nicole Miller Eyewear, Dakota
Smith Eyewear and under its proprietary Signature brand.
The Company's best-selling product lines are Laura Ashley Eyewear
and Eddie Bauer Eyewear. Net sales of Laura Ashley Eyewear and Eddie Bauer
Eyewear together accounted for 60% and 62% of the Company's net sales in fiscal
2001 and fiscal 2002, 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.
Following many years of profitability, the Company incurred
operating losses in each of its last four fiscal years. The principal reason for
these losses was the change in October 1999 by the Company in its method of
distributing its products to independent optical retailers in the United States
from distributors to a direct sales force. In addition, in fiscal 2001 and the
first quarter of fiscal 2002, the Company's revenues were adversely affected by
a general downturn in the optical frame business, the aftermath of the September
11th World Trade Center tragedy, the reluctance of retailers to purchase large
inventories of the Company's products due to concerns about the Company's
viability and the discontinuation of certain product lines. The aftermath of the
September 11 tragedy included reduced sales orders resulting in inventory
build-up, slowed collection of accounts receivable and higher return rates due
to the uncertain future retail environment.
SUBSEQUENT EVENTS
This Form 10-K has been filed after a recapitalization completed by
the Company in April 2003 which materially impacted its financial condition. The
key elements of the recapitalization and certain other material transactions
subsequent to the period covered by this Form 10-K were as follows.
Credit Facility with Home Loan and Investment Company. As part of
the recapitalization in April 2003, the Company obtained a $3.5 million credit
facility from Home Loan and Investment Company ("HLIC"). The credit facility
includes a $3,000,000 term loan and a $500,000 revolving line of credit and is
secured by all of the assets of the Company. The term loan bears interest at a
rate of 10% per annum, is payable interest only for the first year with payments
of principal and interest on a 10-year amortization schedule commencing the
second year, and is due and payable in April 2008. The revolving credit facility
bears interest at a rate of 1% per month, payable monthly, with all advances
subject to approval of HLIC, and is due and payable in April 2008. The Company
must maintain inventory, accounts receivable and cash of not less than
$7,000,000. In addition, the Company must comply with certain other covenants,
including that it may not, without the consent of HLIC, incur any additional
debt, engage in any merger or acquisition, or pay any dividends or make any
distributions to shareholders other than stock dividends. The Company may prepay
the credit facility without premium or penalty. The Company also purchased a
$250,000 debenture issued by HLIC which is additional collateral for the credit
facility. The debenture bears interest at 3% per annum, adjusted annually to the
one-year debenture rate offered by HLIC. Additional credit enhancement for the
credit facility is a $1,250,000 letter of credit issued in favor of HLIC by a
commercial bank. As further consideration for the credit facility, the Company
issued to HLIC five-year warrants to purchase 100,000 shares of Common Stock for
$0.67 per share.
Issuance of Preferred Stock. As part of the recapitalization in
April 2003, the Company created a new series of preferred stock, designated
"Series A 2% Convertible Preferred Stock" (the "Series A Preferred"), and issued
1,200,000
15
shares to Bluebird Finance Limited, a British Virgin Islands corporation
("Bluebird"), for $800,000, or $0.67 per share. The Series A Preferred provides
for cumulative dividends at the rate of 2% per annum payable in cash or
additional shares of Series A Preferred and has a liquidation preference equal
to its original purchase price plus accrued and unpaid dividends. The Company
has the right to redeem the Series A Preferred commencing April 2005 at the
liquidation preference plus accrued and unpaid dividends plus a premium of
$450,000. The Company must redeem the Series A Preferred upon certain changes of
control to the extent the Company has the funds legally available therefor, at
the same redemption price, unless the change of control occurs before April
2005, in which event the premium is 10% of either the consideration received by
the Company's shareholders or the market price, as applicable. The Series A
Preferred is convertible into Common Stock on a share-for-share basis (subject
to adjustment for stock splits, stock dividends and similar events) at any time
commencing May 2005. The holders of the Series A Preferred have no voting rights
except as required by law, provided, however, that at any time two dividend
payments are not paid in full, the Board of Directors will be increased by two
and the holders of the Series A Preferred, voting as a single class, will be
entitled to elect the additional directors. Bluebird received demand and
piggyback registration rights for the shares of Common Stock into which Series A
Preferred may be converted.
Bluebird Credit Facility. As part of the recapitalization in April
2003, the Company obtained from Bluebird a credit facility of up to $4,150,000
secured by the assets of the Company. The credit facility includes a revolving
credit line in the amount of $2,900,000 and support for the $1,250,000 letter of
credit securing the HLIC credit facility. The loan bears interest at the rate of
5% per annum, payable annually for the first two years, with payments of
principal and interest on a 10-year amortization schedule commencing in the
third year, and is due and payable in April 2013. Bluebird's loan commitment
will be reduced by $72,000 in July 2005 and by the same amount every three
months thereafter. This loan is subordinate to the HLIC credit facility. The
Company must comply with certain covenants including among others that without
the consent of Bluebird it may not make any acquisition or investment in excess
of an aggregate of $150,000 each fiscal year outside the ordinary course of
business, or enter into any merger or similar reorganization.
Retirement of Bank Credit Facility. As part of the recapitalization
in April 2003, the Company retired its bank credit facility with City National
Bank which had been in default since September 30, 2000.
Retirement of Obligations to Frame Vendor. As part of the
recapitalization in April 2003, the Company retired its obligations to a frame
vendor in the aggregate amount of approximately $5.8 million (some of which were
assumed in connection with the Company's acquisition of California Design
Studio, Inc. ("CDS") in 1999) for a payment of $2,475,000 to Dartmouth Commerce
of Manhattan, Inc. ("Dartmouth"). Dartmouth had purchased this obligation from
the frame vendor for $2,350,000. The Company recognized a net gain of
approximately $3.3 million in connection with this transaction.
Reduction in Trade Payables and Restructuring of Equipment Lease. As
part of the recapitalization in April 2003, the Company retired $775,000 of
trade payables for approximately $372,000, resulting in a gain of approximately
$400,000. In addition, the Company purchased certain leased property and
equipment, including its computer system, for $750,000, thereby terminating the
lease with aggregate future obligations of approximately $1.7 million. To fund
this payment, the Company obtained a $750,000 loan from a commercial bank
secured by the purchased assets and bearing interest at 4% per annum payable in
monthly installments of approximately $14,000 with the balance due in February
2008.
Sale of Stock by Weiss Family Trust. As part of the recapitalization
in April 2003, the Weiss Family Trust, the principal shareholder of the Company,
sold all of the shares of the Common Stock of the Company which it held
(2,075,337 shares, representing approximately 37% of the outstanding Common
Stock of the Company) for $0.012 per share. Dartmouth purchased 1,600,000 shares
and Michael Prince purchased 475,337 shares. Dartmouth, which is wholly owned by
Richard M. Torre, is now the largest shareholder of the Company holding
approximately 28.7% of the outstanding Common Stock of the Company. Dartmouth
has agreed with Bluebird that until April 2008 it will not sell or transfer any
of these shares without the prior consent of Bluebird.
Management and Board Changes. As part of the recapitalization in
April 2003, Bernard L. Weiss resigned as Chairman of the Board, Director and
Chief Executive Officer, positions he held since founding the Company in 1983.
Richard M. Torre was appointed as Director and Chairman of the Board and Ted
Pasternack, Edward Meltzer and Drew
16
Miller were appointed as Directors. In addition, Michael Prince was named Chief
Executive Officer and President. The Company has also entered into a three-year
consulting agreement with Dartmouth for compensation of $55,000 per year.
Sale/License Back of Dakota Smith Trademark. In February 2003, the
Company completed a "sale/license back" of its "Dakota Smith" trademark. In the
transaction, the Company sold to an unaffiliated entity all of its rights to the
"Dakota Smith" trademark and its Dakota Smith Eyewear inventory for $1,000,000.
Concurrently, the Company entered into a three-year exclusive license agreement,
with a two-year renewal option, to use the trademark for eyeglass frames sold
and distributed in the United States and certain other countries. Signature also
repurchased the Dakota Smith inventory for a non-interest bearing promissory
note in the amount of $400,000 payable in monthly installments though March 2004
and secured by the Company's Dakota Smith inventory.
Settlement with CDS. In February 2003, the Company entered into a
settlement agreement with CDS and CDS's sole shareholder of all remaining
obligations between the parties emanating from the Company's purchase in 1999 of
all the assets of CDS. The remaining obligations included obligations under a
consulting agreement with the CDS shareholder and the promissory note given as
part of the purchase price. The Company's net book value for these obligations
was approximately $1.1 million as of the closing. In the settlement, the Company
paid $500,000 to CDS and the CDS shareholder and the parties executed a mutual
general release. The Company recognized a gain of approximately $600,000 in
connection with this settlement.
The recapitalization significantly improved the Company's financial
condition and liquidity through decreasing the shareholders deficit by
approximately $5.7 million, increasing capital, reducing liabilities and
replacing current obligations with long-term obligations. Although following the
recapitalization the Company continues to have a stockholders' deficit, the
Company believes that for at least the following 12 months, assuming there are
no unanticipated material adverse developments, no material decrease in revenues
and continued compliance with its credit facilities, it will be able pay its
debts and obligations as they mature. However, the Company's long-term viability
will depend on its ability to return to profitability on a consistent basis,
which will depend in part on its ability to increase revenues.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. We base our estimates on historical experience and on various other
assumptions that we believe to be reasonable under the circumstances, and which
form the basis for making judgments about the carrying values of assets and
liabilities. Actual results may differ from these estimates under different
assumptions or conditions.
We consider the following accounting policies to be both those most
important to the portrayal of our financial condition and those that require the
most subjective judgment:
o revenue recognition; and
o inventory valuation.
REVENUE RECOGNITION. The Company's policy is to recognize revenue
from sales to customers when the rights and risks of ownership have passed to
the customer, when persuasive evidence of an arrangement exists, the price is
fixed and determinable and collection of the resulting receivable is reasonably
assured. In general, revenue is recognized when merchandise is shipped.
The Company has a product return policy 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 establishes an allowance for estimated product
returns based upon actual returns subsequent to year-end and estimated future
returns. The Company applies the historical ratio of sales returns to sales to
estimate future returns in addition to known information about actual returns in
the period subsequent to the balance sheet date.
17
INVENTORIES. Inventories (consisting of finished goods) are valued
at the lower of cost or market. Cost is computed using weighted average cost,
which approximates actual cost on a first-in, first-out basis. The Company
writes down its inventory for estimated obsolescence or unmarketable inventory
equal to the difference between the cost of inventory and the estimated market
value based upon assumptions about future demand, selling prices and market
conditions. Its inventories include designer prescription eye glass frames and
sunglasses, which are sold in a highly competitive industry. If actual product
demand or selling prices are less favorable than the Company estimates it may be
required to take additional inventory write-downs in the future. Similarly, if
the Company's inventory is determined to be undervalued due to write-downs below
market value, it would be required to recognize such additional operating income
at the time of sale. Significant unanticipated changes in demand could have a
material and significant impact on the future value of our inventory and
reported operating results.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated selected
statements of operations data shown as a percentage of net sales.
YEAR ENDED OCTOBER 31,
--------------------------------------------------------------------------
2000 2001 2002
------------------- ------------------- -------------------
Net sales.............................. 100.0% 100.0% 100.0%
Cost of sales ......................... 41.3 49.5 46.7
------------------- ------------------- -------------------
Gross profit........................... 58.7 50.5 53.3
------------------- ------------------- -------------------
Operating expenses:
Selling........................... 41.7 33.1 28.5
General and administrative ....... 34.9 33.9 35.2
Asset impairment charges ......... -- 11.3 --
------------------- ------------------- -------------------
Total operating expenses ..... 76.6 78.2 63.7
------------------- ------------------- -------------------
Income (Loss) from operations ......... (17.9) (27.7) (10.4)
------------------- ------------------- -------------------
Other income (expense), net ........... (1.9) (3.1) (2.0)
------------------- ------------------- -------------------
Income (Loss) before income taxes ..... (19.8) (30.8) (12.4)
Benefit (Provision) for income taxes .. 1.5 (0.1) 0.0
------------------- ------------------- -------------------
Net income (loss)...................... (18.3)% (30.9)% (12.4)%
=================== =================== ===================
COMPARISON OF FISCAL YEARS 2000, 2001 AND 2002
NET SALES. Net sales were $33.1 million in fiscal 2002 compared to
$43.4 million in fiscal 2001 and $51.9 million in fiscal 2000. The following
table shows certain information regarding net sales for the periods indicated:
YEAR ENDED OCTOBER 31,
------------------------------------------------------
2000 2001 2002
---------------- ---------------- ----------------
(in thousands)
Laura Ashley Eyewear .... $16,079 31.0% $13,968 32.2% $11,430 34.5%
Eddie Bauer Eyewear ..... 15,136 29.1 11,889 27.4 9,147 27.6
Nicole Miller Eyewear ... 4,447 8.6 5,273 12.2 4,950 14.9
Other ................... 16,270 31.3 12,262 28.2 7,594 22.9
---------------- ---------------- ----------------
$51,932 100.0% $43,392 100.0% $33,121 100.0%
================ ================ ================
Net sales declined 23.7% in fiscal 2002 and 16.4% in fiscal 2001 due
primarily to the general decline in the optical frame industry, the effects of
the September 11, 2001 World Trade Center tragedy (as discussed above) and the
reluctance of retailers to purchase large inventories of the Company's products
due to concerns about the Company's viability. In addition, net sales were
adversely affected by the termination of the Coach Eyewear line in fiscal 2001
and the sale of the USA Optical product line in fiscal 2002.
18
Net sales reflect gross sales less a reserve for product returns
established by the Company. The Company's product returns for fiscal years 2000,
2001 and 2002 amounted to 22%, 23% and 22% of gross sales, respectively.
Historically, returns have been higher from independent optical retailers in the
United States and lower from optical retail chains and international customers.
GROSS PROFIT AND GROSS MARGIN. Gross profit was $17.7 million in
fiscal 2002 compared to $21.9 million in fiscal 2001 and $30.5 million in fiscal
2000. These decreases were due to lower net sales and increased inventory
write-downs.
The gross margin was 53.3% in fiscal 2002 compared to 50.5% in
fiscal 2001 and 58.7% in fiscal 2000. The decrease in 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. The increase in fiscal 2002 reflects fewer close-out sales.
SELLING EXPENSES. Selling expenses were $9.4 million in fiscal 2002
compared to $14.3 million in fiscal 2001 and $21.6 million in fiscal 2000. The
34.2% decrease in fiscal 2002 was due primarily to lower net sales and decreases
of $2.1 million in salaries due to fewer personnel, $1.9 million in point of
purchase display expenses and $0.7 million in shipping costs. 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 of compensation expenses.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses were $11.2 million in fiscal 2002 compared to $14.7 million in fiscal
2001 and $16.8 million in fiscal 2000. The 17.8% decrease in fiscal 2002 was due
principally to decreases of $0.8 million in consulting, legal and accounting
fees, $0.7 million in employee benefit and related expenses, and $0.4 million in
operating lease expenses. The 18.8% decrease in fiscal 2001 was due principally
to decreases of $3.1 million in compensation expense and related employee
benefits due to a reduction in full-time employees and $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.
ASSET IMPAIRMENT CHARGES. In fiscal 2001, the Company wrote down
$4.9 million of goodwill upon determining that there was no remaining value of
the goodwill relating to the CDS acquisition and the acquisition of a
distributor.
OTHER INCOME (EXPENSE), NET. Other expense, net consists principally
of interest expense on bank debt. The decrease in fiscal 2002 was due to lower
interest rates as market rates declined and to reductions in the current debt.
The increase in fiscal 2001 was due to increased bank debt and a higher interest
rate, as the Company paid interest at default interest rates commencing October
2001.
PROVISION (BENEFIT) FOR INCOME TAXES. The Company had income tax
benefits of $0.8 million in fiscal 2000, paid income taxes of $27,000 in fiscal
2001 and had a small tax benefit in fiscal 2002. As of October 31, 2002 the
Company had net operating loss carryforwards for federal and state income tax
purposes of approximately $14.7 million and $8.5 million, respectively, which
expire through 2022. The Company believes that the recapitalization in April
2003 may have resulted in "ownership change" under the Internal Revenue Code, in
which event the Company's utilization of the net operating loss carryforwards
would be significantly limited.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company's accounts receivable (net of allowance for doubtful
accounts) decreased from $5.1 million at October 31, 2001 to $3.1 million at
October 31, 2002 due to lower net sales.
The Company's inventories (net of obsolescence reserve) decreased
from $10.3 million at October 31, 2001 to $5.5 million at October 31, 2002 as a
part of the Company's turnaround strategy to reduce inventory and improve
inventory turnover by better matching frame purchases with customer orders, an
increase of $0.7 million in the reserve for obsolescent inventory, and the sale
of the USA Optical product line.
The Company had a credit facility with a commercial bank consisting
of an accounts receivable and inventory revolving credit line and a term loan
which were secured by substantially all of the assets of the Company. The credit
19
facility matured on September 30, 2000, and the Company 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. This
credit facility was repaid in April 2003.
In addition to the term loan included as part of its bank credit
facility, long-term debt (including the current portion) at October 31, 2002
included principally a $1.0 million note payable to CDS in connection with the
CDS acquisition and an obligation to a frame vendor (present value of $3.2
million at October 31, 2002) assumed in connection with the CDS acquisition. As
discussed above, the Company settled its obligation to CDS in February 2003 and
with the frame vendor in April 2003. See Notes 6 and 14 of Notes to Consolidated
Financial Statements.
Of the Company's accounts payable at October 31, 2001 and October
31, 2002, $1.8 million and $1.2 million, respectively, were payable in foreign
currency. To monitor risks associated with currency fluctuations, the Company on
a weekly basis assesses the volatility of certain foreign currencies and reviews
the amounts and expected payment dates of its purchase orders and accounts
payable in those currencies. Based on those factors, the Company may from time
to time mitigate some portion of that risk by purchasing forward commitments to
deliver foreign currency to the Company. The Company held no forward commitments
for foreign currencies at October 31, 2002. See Note 3 of Notes to Consolidated
Financial Statements.
The Company's bad debt write-offs, net of recoveries, were $148,000,
$175,000 and $403,000 in fiscal years 2000, 2001 and 2002, respectively. As part
of the Company's management of its working capital, the Company performs most
customer credit functions internally, including extensions of credit and
collections.
As part of the Company's recapitalization in April 2003, the Company
obtained two long-term credit facilities. See "Subsequent Events."
Historically, the Company has generated cash primarily through
product sales in the ordinary course of business, its bank credit facility and
sales of equity securities. Following the default on its bank credit facility in
September 2000, and as a condition to numerous forbearances extended by its
bank, the Company had to regularly reduce its aggregate borrowings under its
bank credit facility, from $ 6.0 million at October 31, 2001 to $3.1 million
when the facility was repaid in April 2003. This, coupled with declining sales
and corresponding inability to raise equity capital, materially adversely
affected the Company's liquidity and working capital. To address this problem,
the Company reduced operating expenses through reduction in personnel and
subletting office space, negotiated vendor discounts and deferred payments of
trade payables, sold obsolete inventory at a deep discount, sold its USA Optical
product line and completed a sale/license back of its Dakota Smith trademark and
inventory.
The recapitalization materially improved the Company's liquidity by
replacing current obligations to its bank and a frame vendor with long-term
indebtedness and through discounted payoffs of trade payables. The Company
believes that for at least the next twelve months, assuming there are no
unanticipated material adverse developments, no material decrease in revenues
and continued compliance with its credit facilities, it will be able pay its
debts and obligations as they mature. However, the Company's current sources of
funds are not sufficient to provide the working capital for material growth, and
it would be required to obtain additional debt or equity financing to support
such growth.
QUARTERLY AND SEASONAL FLUCTUATIONS
The Company's results of operations have fluctuated from quarter to
quarter and the Company expects these fluctuations to continue in the future.
Sales were lower in the fourth quarter of fiscal 2001 and subsequent periods as
a result of the September 11th World Trade Center tragedy. A factor which may
significantly influence results of operations in a particular quarter is the
introduction of a new brand-name collection, which results in disproportionate
levels of selling expenses due to additional advertising, promotions, catalogs
and in-store displays. Introduction of a new brand may also generate a temporary
increase in sales due to initial stocking by retailers.
Other factors which can influence the Company's results of
operations include customer demand, the mix of distribution channels through
which the eyeglass frames are sold, the mix of eyeglass frames sold, product
returns, delays in shipment and general economic conditions.
20
The following table sets forth certain unaudited results of
operations for the twelve fiscal quarters ended October 31, 2002. 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.
2000 2001 2002
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........... $12,003 $12,390 $17,442 $10,097 $10,889 $11,470 $11,822 $9,211 $8,522 $8,806 $8,188 $7,605
Cost of sales....... 4,807 5,058 7,076 4,281 3,761 4,428 4,657 8,626 3,334 3,937 3,666 4,531
Gross profit........ 7,196 7,332 10,366 5,818 7,128 7,042 7,165 585 5,187 4,869 4,522 3,074
Operating expenses:
Selling............ 3,587 6,066 6,858 5,171 3,291 3,343 2,664 5,045 2,391 2,450 2,084 2,460
General and
administrative.... 3,845 4,708 5,014 4,554 3,381 3,146 4,013 4,166 3,000 2,892 3,031 2,623
Asset impairment... -- -- -- -- -- -- -- 4,892 -- -- -- --
Total operating
expenses........... 7,432 10,774 11,872 9.725 6,672 6,488 6,677 14,105 5,392 5,502 5,115 5,083
Income (loss) from
operations........ (236) (3,442) (1,506) (3,907) 456 554 488 (13,520) (205) (632) (592) (2,009)
Other expense, net.. (184) (265) (320) (136) (352) (325) (329) (332) (186) (148) (184) (160)
Income (loss) before
pro forma provision
for income taxes... (420) (3,707) (1,826) (4,043) 104 229 159 (13,852) (390) (780) (776) (2,169)
INFLATION
The Company does not believe its business and operations have been
materially affected by inflation.
NEW ACCOUNTING PRONOUNCEMENTS
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. Management
does not expect adoption of SFAS No. 144 to have a material impact on the
Company's statements of earnings, financial position or cash flows
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. Management believes
that the Company is in compliance with the provisions of SFAS 145.
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. Management does not expect adoption of SFAS No. 144 to have a material
impact on the Company's statements of earnings, financial position or cash
flows.
21
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," an amendment of SFAS No.
123. SFAS No. 148 provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require more prominent and more frequent disclosures in
financial statements about the effects of stock-based compensation. This
statement is effective for financial statements for fiscal years ending after
December 15, 2002. SFAS No. 148 will not have any impact on the Company's
financial statements as management does not have any intention to change to the
fair value method.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting and reporting for derivative instruments and hedging
activities under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 149 is effective for derivative instruments and
hedging activities entered into or modified after June 30, 2003, except for
certain forward purchase and sale securities. For these forward purchase and
sale securities, SFAS No. 149 is effective for both new and existing securities
after June 30, 2003. Management does not expect adoption of SFAS No. 149 to have
a material impact on the Company's statements of earnings, financial position or
cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for how an issuer classifies and measures in its
statement of financial position certain financial instruments with
characteristics of both liabilities and equity. In accordance with the standard,
financial instruments that embody obligations for the issuer are required to be
classified as liabilities. SFAS No. 150 will be effective for financial
instruments entered into or modified after May 31, 2003 and otherwise will be
effective at the beginning of the first interim period beginning after June 15,
2003.
FACTORS THAT MAY AFFECT FUTURE RESULTS
NEED TO INCREASE REVENUES AND TO RETURN TO PROFITABILITY; GOING
CONCERN QUALIFICATION
The Company suffered material operating losses in its last four
fiscal years, causing a significant deterioration in its financial condition. At
October 31, 2002, the Company's stockholders' deficit was $9.0 million. The
report of the independent auditors of the Company's financial statements for
fiscal year 2001 contained an explanatory paragraph describing the uncertainty
of the Company's ability to continue as a going concern as of October 31, 2001.
The Company's recapitalization in April 2003 significantly improved the
Company's financial condition and liquidity through increasing capital, reducing
liabilities and replacing current obligations and debts with long-term
obligations. However, following the recapitalization the Company continues to
have a stockholders' deficit, and the Company's long-term viability will depend
on its ability to return to profitability on a consistent basis.
During the past several years, the Company has significantly reduced
its general, administrative and other expenses to the extent that it does not
believe further material reductions are possible. Accordingly, the ability of
the Company to return to profitability will depend most significantly on its
ability to increase its revenues. The Company's revenues during the past several
years have been adversely affected by the significant downturn in the optical
frame industry and its inability to hire a direct sales force sufficient to
replace its distributor network following its conversion to direct sales in
2000. This problem has been exacerbated by the Company's impaired financial
condition. In addition, since the fourth quarter of fiscal 2001, the Company's
revenues were adversely impacted by the September 11, 2001 tragedy and the
reluctance of retailers to purchase large inventories of the Company's products
due to concerns about the Company's viability. While the Company is hopeful that
the recapitalization will generate greater customer confidence and increase its
ability to hire qualified sales personnel, no assurance can be given that this
will occur or that the Company will be able to generate materially greater
revenues or to return to consistent profitability.
SUBSTANTIAL DEPENDENCE UPON LAURA ASHLEY AND EDDIE BAUER LICENSES
Net sales of Laura Ashley Eyewear and Eddie Bauer Eyewear accounted
for 60% and 62% of the Company's net sales in fiscal years 2001 and 2002,
respectively. While the Company intends to continue reducing its dependence on
22
the Laura Ashley Eyewear and Eddie Bauer Eyewear lines through the development
and promotion of Nicole Miller Eyewear, Dakota Smith Eyewear, bebe eyes and its
Signature line, the Company expects the Laura Ashley and Eddie Bauer Eyewear
lines to continue to be the Company's leading sources of revenue for the near
future. The Laura Ashley license is automatically renewed through January 2008
so long as the Company is not in breach of the license agreement and the royalty
payment for the prior two contract years exceeds the minimum royalty for those
years. Laura Ashley may also terminate the license agreement if minimum sales
requirements are not met in any two years. The Company did not meet the minimum
sales requirement for the license year ended January 2003, but Laura Ashley
waived noncompliance. The Company markets Eddie Bauer Eyewear through an
exclusive license which terminates in December 2005, but may be renewed by the
Company at least through 2007 so long as the Company is not in material default
and meets certain minimum net sales and royalty requirements. Each of Laura
Ashley and Eddie Bauer may terminate its respective license before its term
expires under certain circumstances, including a material default by the Company
or certain defined changes in control of the Company.
BANKRUPTCY OF EDDIE BAUER
Eddie Bauer Diversified Sales LLC, the licensor on the Eddie Bauer
Eyewear license, and its parent Speigel, Inc and other affiliates, have filed
voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy
Code. As a result, the licensor has the rights of a debtor under the Bankruptcy
Code with respect to executory contracts such as the Eddie Bauer Eyewear
license, including the right to assume or reject the license. The rejection of
the license would have a material adverse affect on the Company. The Company has
received no indication or notice from the licensor regarding the licensor's
intentions with respect to the license agreement.
DEPENDENCE UPON SALES TO RETAIL OPTICAL CHAINS
Net sales to major optical retail chains amounted to 29% and 35% of
net sales in fiscal years 2001 and 2002, respectively. Net sales to Eyecare
Centers of America in fiscal 2002 amounted to 12% and 13% of the Company's net
sales for such fiscal years. The loss of one or more major optical retail chains
as a customer would have a material adverse affect on the Company's business.
APPROVAL REQUIREMENTS OF BRAND-NAME LICENSORS
The Company's business is predominantly based on its brand-name
licensing relationships. Each of the Company's licenses requires mutual
agreement of the parties for significant matters. Each of these licensors has
final approval over all eyeglass frames and other products bearing the
licensor's proprietary marks, and the frames must meet the licensor's general
design specifications and quality standards. Consequently, each licensor may, in
the exercise of its approval rights, delay the distribution of eyeglass frames
bearing its proprietary marks. The Company expects that each future license it
obtains will contain similar approval provisions. Accordingly, there can be no
assurance that the Company will be able to continue to maintain good
relationships with each licensor, or that the Company will not be subject to
delays resulting from disagreements with, or an inability to obtain approvals
from, its licensors. These delays could materially and adversely affect the
Company's business, operating results and financial condition.
LIMITATIONS ON ABILITY TO DISTRIBUTE OTHER BRAND-NAME EYEGLASS
FRAMES
Each of the Company's licenses limits the Company's right to market
and sell products with competing brand names. The Laura Ashley license prohibits
the Company from selling any range of designer eyewear that is similar to Laura
Ashley Eyewear in price and style, market position and market segment. The Eddie
Bauer license and the bebe license prohibit the Company from entering into
license agreements with companies which Eddie Bauer and bebe, respectively,
believe are its direct competitors. The Hart Schaffner & Marx license prohibits
the Company from marketing and selling another men's brand of eyeglass frames
under a well-known fashion name with a wholesale price in excess of $40. The
Company expects that each future license it obtains will contain some
limitations on competition within market segments. The Company's growth,
therefore, will be limited to capitalizing on its existing licenses in the
prescription eyeglass market, introducing eyeglass frames in other segments of
the prescription eyeglass market, and manufacturing and distributing products
other than prescription eyeglass frames such as sunglasses. In addition, there
can be no assurance that disagreements will not arise between the Company and
its licensors regarding whether certain brand-name lines would be prohibited by
their respective license agreements. Disagreements with licensors could
23
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 2002, Signature used manufacturers principally in Hong Kong/China, Japan
and Italy.
INTERNATIONAL SALES
International sales accounted for approximately 11.3% and 10.5% of
the Company's net sales in fiscal years 2001 and 2002, 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 years 2001 and 2002
amounted to 23% and 22% of gross sales (sales before returns), respectively. The
Company anticipates that product returns may increase as a result of the
downturn in the optical frame industry and general economic conditions. The
Company maintains reserves for product returns which it considers adequate;
however, an increase in returns that significantly exceeds the amount of those
reserves would have a material adverse impact on the Company's business,
operating results and financial condition.
AVAILABILITY OF VISION CORRECTION ALTERNATIVES
The Company's future success could depend to a significant extent on
the availability and acceptance by the market of vision correction alternatives
to prescription eyeglasses, such as contact lenses and refractive (optical)
surgery. While the Company does not believe that contact lenses, refractive
surgery or other vision correction alternatives materially and adversely impact
its business at present, there can be no assurance that technological advances
in, or reductions in the cost of, vision correction alternatives will not occur
in the future, resulting in their more widespread
24
use. Increased use of vision correction alternatives could result in decreased
use of the Company's eyewear products, which would have a material adverse
impact on the Company's business, operating results and financial condition.
ACCEPTANCE OF EYEGLASS FRAMES; UNPREDICTABILITY OF DISCRETIONARY
CONSUMER SPENDING
The Company's success will depend to a significant extent on the
market's acceptance of the Company's brand-name eyeglass frames. If the Company
is unable to develop new, commercially successful styles to replace revenues
from older styles in the later stages of their life cycles, the Company's
business, operating results and financial condition could be materially and
adversely affected. The Company's future growth will depend in part upon the
effectiveness of the Company's marketing and sales efforts as well as the
availability and acceptance of other competing eyeglass frames released into the
marketplace at or near the same time, the availability of vision correction
alternatives, general economic conditions and other tangible and intangible
factors, all of which can change and cannot be predicted. The Company's success
also will depend to a significant extent upon a number of factors relating to
discretionary consumer spending, including the trend in managed health care to
allocate fewer dollars to the purchase of eyeglass frames, and general economic
conditions affecting disposable consumer income, such as employment business
conditions, interest rates and taxation. Any significant adverse change in
general economic conditions or uncertainties regarding future economic prospects
that adversely affect discretionary consumer spending generally, and purchasers
of prescription eyeglass frames specifically, could have a material adverse
effect on the Company's business, operating results and financial condition.
COMPETITION
The markets for prescription eyewear are intensely competitive.
There are thousands of frame styles, including hundreds with brand names. At
retail, the Company's eyewear styles compete with styles that do and do not have
brand names, styles in the same price range, and styles with similar design
concepts. To obtain board space at an optical retailer, the Company competes
against many companies, both foreign and domestic, including Luxottica Group
S.p.A, Safilo Group S.p.A., Marchon Eyewear, Inc., Marcolin S.p.A. and De Rigo
S.p.A. Signature's largest competitors have significantly greater financial,
technical, sales, manufacturing and other resources than the Company. They also
employ direct sales forces that have existed far longer, and are significantly
larger than the Company's. At the major retail chains, the Company competes not
only against other eyewear suppliers, but also against the chains themselves,
which license some of their own brand names for design, manufacture and sale in
their own stores. Luxottica, one of the largest eyewear companies in the world,
is vertically integrated, in that it manufactures frames, distributes them
through direct sales forces in the United States and throughout the world, and
owns LensCrafters, one of the largest United States retail optical chains. De
Rigo S.p.A. is also vertically integrated, in that it manufactures frames,
distributes them throughout the world, and owns Dollond & Atchitson, one of the
largest retail optical chains in the world.
The Company competes in its target markets through the quality of
the brand names it licenses, its marketing, merchandising and sales promotion
programs, the popularity of its frame designs, the reputation of its styles for
quality, and its pricing policies. There can be no assurance that the Company
will be able to compete successfully against current or future competitors or
that competitive pressures faced by the Company will not materially and
adversely affect its business, operating results and financial condition.
CONTROL BY DIRECTORS AND EXECUTIVE OFFICERS
As of June 30, 2003, the directors and executive officers of the
Company owned beneficially approximately 52% of the Company's outstanding shares
of Common Stock. As a result, the directors and executive officers control the
Company and its operations, including the approval of significant corporate
transactions and the election of at least a majority of the Company's Board of
Directors and thus the policies of the Company. The voting power of the
directors and executive officers could also serve to discourage potential
acquirors from seeking to acquire control of the Company through the purchase of
the Common Stock, which might depress the price of the Common Stock.
NO DIVIDENDS ALLOWED
As a California corporation, under the California General
Corporation Law, generally the Company may not pay dividends in cash or property
except (i) out of positive retained earnings or (ii) if, after giving effect to
the
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distribution, the Company's assets would be at least 1.25 times its liabilities
and its current assets would exceed its current liabilities (determined on a
consolidated basis under generally accepted accounting principles). At October
31, 2002, the Company had an accumulated deficit of $23.4 million. As a result,
the Company will not be able to pay dividends for the foreseeable future. In
addition, the payment of dividends is prohibited under its credit facilities.
POSSIBLE ANTI-TAKEOVER EFFECTS
The Company's Board of Directors has the authority to issue up to
5,000,000 shares of Preferred Stock and to determine the price, rights,
preferences, privileges and restrictions, including voting rights, of those
shares without any further vote or action by the shareholders. The Preferred
Stock could be issued with voting, liquidation, dividend and other rights
superior to those of the Common Stock. The Company issued 1,200,000 shares of
Series A Preferred in the recapitalization, and has no present intention to
issue any other shares of Preferred Stock. However, the rights of the holders of
Common Stock will be subject to, and may be adversely affected by, the rights of
the holders of any Preferred Stock that may be issued in the future. The
issuance of Preferred Stock, while providing desirable flexibility in connection
with possible acquisitions and other corporate purposes, could have the effect
of making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company, which may depress the market value of
the Common Stock. In addition, each of the Laura Ashley, Hart Schaffner & Marx,
Eddie Bauer and bebe licenses allows the licensor to terminate its license upon
certain events 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 2002, at any month-end a
maximum of $1.8 million and a minimum of $1.0 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. Bas