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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 2004
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ________________.
COMMISSION FILE NUMBER: 0-23001
SIGNATURE EYEWEAR, INC.
(Exact name of Registrant as Specified in its Charter)
CALIFORNIA 95-3876317
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
498 NORTH OAK STREET
INGLEWOOD, CALIFORNIA 90302
(Address of Principal Executive Offices, including ZIP Code)
(310) 330-2700
Registrant's Telephone Number, Including Area Code
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulations S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [_] No [X]
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On February 28, 2005, the Registrant had 6,226,889 outstanding shares
of Common Stock, $.001 par value. The aggregate market value of the 3,320,367
shares of Common Stock held by non-affiliates of the Registrant as of February
28, 2005 was $332,037.
DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference, briefly
describe them and identify the part of the Form 10-KSB (e.g., Part I, Part II,
etc.) into which the document is incorporated: None
Transitional Small Business Disclosure Format (Check one):
Yes [_]; No [X]
PART I
The discussions in this Report contain forward-looking statements that
involve risks and uncertainties. Important factors that could cause actual
results to differ materially from the Company's expectations are set forth in
"Factors That May Affect Future Results" in Item 7, as well as elsewhere in this
Report. All subsequent written and oral forward-looking statements attributable
to the Company or persons acting on its behalf are expressly qualified in their
entirety by "Factors That May Affect Future Results." Those forward-looking
statements relate to, among other things, the Company's plans and strategies,
new product lines, relationships with licensors, distributors and customers, and
the business environment in which the Company operates.
ITEM 1--DESCRIPTION OF BUSINESS
GENERAL
Signature Eyewear, Inc. ("Signature" or the "Company") designs, markets
and distributes prescription eyeglass frames and sunglasses primarily under
exclusive brand name licenses from third parties. In fiscal 2004 the Company's
best selling lines were Laura Ashley Eyewear, Eddie Bauer Eyewear and Nicole
Miller Eyewear. The Company also markets eyewear under exclusive licenses for
Hart Schaffner & Marx Eyewear, bebe eyes and Dakota Smith Eyewear, as well as
its proprietary Signature line. In fiscal 2004 the Company obtained the
exclusive license to market Hummer Eyegear, which it plans to launch in March
2005.
The Company distributes its products (1) to independent optical
retailers in the United States, primarily through its national direct sales
force and independent sales representatives, (2) to national and regional
optical retail chains; (3) internationally, primarily through exclusive
distributors in foreign countries and a direct sales force in Western Europe;
and (4) through selected distributors in the United States.
The Company reported a pre-tax loss of $371,000 in fiscal 2004, a
reduction from the pre-tax loss (before extraordinary gain) of $625,000 in
fiscal 2003. Income from operations was $290,000 in fiscal 2004 compared to a
loss from operations of $862,000 in fiscal 2003. The Company was able to
accomplish this reduction by continuing to reduce operating expenses. Revenues
declined from $25.1 million in fiscal 2003 to $23.6 million in fiscal 2004. This
decrease was due primarily to greater competition, continued sluggishness in the
optical frame markets and consolidation of the national optical retail chains.
While the Company was able to generate a $1.5 million increase in net sales to
independent optical retailers during the fiscal year, sales to national optical
retail chains declined $2.4 million, and international sales declined $0.4
million. The Company had a $1.4 million decrease in product returns, due
primarily to a decrease in product return rate as a percent of gross sales, from
22% in fiscal to 2003 to 18% in fiscal 2004.
The Company was incorporated in California in 1983.
BUSINESS STRATEGY
The Company's strategy to return to profitability is based on
increasing revenues and improving its gross profit margin. The Company believes
that it has limited ability to materially reduce costs further without impairing
its ability to increase revenues. In fiscal 2005, the Company's plan to increase
revenues includes the following:
o continue to build the direct sales force in the United States at
increase sales to independent optical retailers, including
optometrists, opticians and ophthalmologists, which sales have
higher gross margins than sales to optical retail chains;
o increase efforts to sell to mid-size optical retail chains which are
less likely to manufacture their own private label eyewear than the
large national optical retail chains historically targeted by the
Company and are not experiencing consolidation like the national
chains;
o reverse the decline in international sales by engaging new
distributors and developing the market in Latin and South America;
o introduce Hummer Eyegear, which is scheduled to launch in March
2005;
3
o acquire additional brand names for licenses; and
o continue to focus on unique frame design, quality control and
quality assurance, as the Company believes that the prescription
eyewear frame market is a "product-driven" business, where the
quality and styling, in addition to brand name recognition, are the
principal factors in generating sales.
INDUSTRY OVERVIEW (1)
THE OPTICAL FRAME MARKET. Optical frame sales in the United States have
experienced a substantial slowdown in recent years, decreasing from $5.5 billion
in 2000 to an estimated $5.1 billion in 2003. The Company believes this is due
to: (1) the move to value, led by increasing sales in the mass merchandiser
category; (2) a growing number of eyewear customers are replacing their frame
lenses without purchasing new frames; and (3) a growing number of consumers
electing vision correction surgery.
A symptom of this value trend is a decrease in retail frame price
points. The retail price for a pair of frames across all types of optical
retailers has dropped each quarter since December 2001 from a high of $124.59 to
$120.25 in September 2002. It was projected to be $120 by the end of 2002. Other
industry numbers correspond with this trend: While unit sales of frames inched
up 5% to 64.8 million in 2002, the 2002 retail sales figure for frames was down
1% to $5.17 billion. Retail dollars in the other industry categories (lenses,
plano sunglasses, contact lenses) remained virtually flat in 2002, with only
lens treatments experiencing a slight (4%) increase. These numbers and reports
from the field indicate that while consumers continue to purchase prescription
eyewear, they are clearly seeking value in their frame purchase.
Despite the drop in retail prices and the increased demand for value,
the Company's product remains competitively priced in what is the heart of the
business. In the U.S. market, 40% of all frame units sold and 40.4% of frame
retail dollars through March 2003 were in the $100-$149 retail price range. The
value portion of the frame market, priced under $100, had a 35% share of units
and a 22% share of retail dollars. The overwhelming majority of the Company's
frames retail in the $100-$149.
THE OPTICAL CUSTOMER: Even in a sluggish optical market, the number of
potential eyewear customers remains large. With a U.S. population of 277 million
in 2001, approximately 169 million people require some type of vision
correction. Out of the 169 million people requiring vision correction, 86.3
million people purchased eyewear in 2001 - or about 31% of the population.
Typically, men and women over the age of 45 need corrective eyewear due
to presbyopia, a condition that makes it difficult to focus on nearby objects
such as small newspaper print. As more of the US population exceeds age 45, the
Company believes more people will have vision impairment, and sales of
corrective eyewear should increase.
- --------
1 Unless otherwise noted, all the data in this Industry Overview
section relates to the eyewear market in the United States. The source for this
data is Jobson research reports.
4
COMPETITIVE VISION CORRECTION METHODS. Currently, there are two methods
of correcting vision impairment that compete with prescription eyeglasses:
contact lenses and surgery. Although retail sales of contact lenses remained
flat from 1995 ($1.9 billion) through 2001 ($1.9 billion), their sales as a
percentage of total retail sales decreased from 13.5% in 1995 to 12.3% in 2001.
The Company believes that sales of contact lenses do not currently materially
threaten eyeglass frame sales because many people who wear contact lenses need a
pair of eyeglasses for night time and for the days when they decide not to wear
their contact lenses.
A number of surgical techniques have been developed to correct vision
problems such as myopia (nearsightedness), hyperopia (farsightedness) and
astigmatism. Vision correction surgery by laser has recently become increasingly
popular. In 2002, 1.5% of United States residents 18 and older using vision
correction had vision correction surgery, and this percentage increased to 1.8%
in 2003 and 2.4% in 2004. Revenues from the procedure reached $2.4 billion in
2001, up from $700 million in 1997. The Company believes that these techniques
will continue to have an impact on sales of prescription eyewear. The Company
believes that a number of people who have had successful eye surgery may still
need some form of corrective eyeglasses, and others may need eyeglasses at a
later date due to the onset of presbyopia.
OPTICAL RETAIL OUTLETS. Optical retailers consist of optometrists,
opticians and ophthalmologists. There are two main types of optical retailers:
independents (with one or two stores) and chains. Chains include national
optical retailers such as LensCrafters, Cole Vision Corp. and its subsidiary
Pearle Vision, and EyeCare Centers of America. A third category includes optical
departments within major mass merchandisers, including Wal-Mart and Costco. In
2001, independent optical retailers had a 57% market share, national optical
chain retailers had a 34% market share, and mass merchandisers had a 6% market
share. The remaining 3% market share went to managed care organizations such as
Kaiser Permanente.
PRODUCTS
The Company's principal products during fiscal 2004 were eyeglass
frames sold under the brand names Laura Ashley Eyewear, Eddie Bauer Eyewear,
Nicole Miller Eyewear, Hart Schaffner & Marx Eyewear, bebe eyes, Dakota Smith
Eyewear and the Signature Collection.
The following table provides certain information about the market
segments, introduction dates and approximate retail prices of the Company's
products.
5
APPROXIMATE
BRAND NAME/SEGMENT CUSTOMER GENDER/AGE INTRODUCTION DATE RETAIL PRICES(1)
------------------ ------------------- ----------------- ----------------
Licensed Brands
---------------
Laura Ashley
Prescription................. Women 1992 $125-$180
Sunwear...................... Women 1993 $90 -$100
bebe eyes........................ Women 2000
Prescription................. $100-$200
Eddie Bauer...................... Men/Women 1998
Prescription................. $95-$170
Hart Schaffner & Marx............ Men 1996
Prescription................. 1993 $95-$180
Hummer ..........................
Prescription................. Men/Women March 2005 (2) $125-$175
Sunwear...................... Men/Women March 2005 (2) $100-$250
Nicole Miller ...................
Prescription................. Women 1993 $120-$175
Sunwear...................... Women 1993 $75-$125
Dakota Smith
Prescription................. Unisex 1992 $90-$150
Sunwear...................... Unisex 1992 $75-$125
House Brands
------------
Signature Collection Men/Women 1999 $80-$120
- -------------------
(1) Retail prices are established by retailers, not the Company.
(2) Expected launch date.
FRAME DESIGN. The Company's frame styles are developed by its in-house
design team, which works in close collaboration with many respected frame
manufacturers throughout the world to develop unique designs and technologies.
Initially, each of the Company's frame designers works individually with a
factory to develop new design concepts. Once the factory develops a prototype,
the designer presents the style to the Company's frame committee for approval.
Once approved, Signature then contracts with the factory to manufacture the
style. By these methods, Signature is able to choose the strengths of a variety
of factories worldwide and to avoid reliance on any one factory. To assure
quality, Signature's designers continue to work closely with the factory at each
stage of a style's manufacturing process.
The Company's metal frames generally require over 200 production steps
to manufacture, including hand soldering of bridges, fronts and endpieces. Many
of the Company's metal frames take advantage of modern technical advances, such
as thinner spring hinges (which flex outward and spring back) and lighter metal
alloys, both of which permit the manufacture of frames which are thinner and
lighter while retaining strength. The Company also takes advantage of technical
advances in plastic frames, such as laminated plastics that are layered in
opposing or complementary colors, and extra-strong plastics that can be cut
super thin.
QUALITY CONTROL. The Company uses manufacturers it believes are capable
of meeting its criteria for quality, delivery and attention to design detail.
Signature specifies the materials to be used in the frames, and approves
drawings and prototypes before committing to production. The Company places its
initial orders for each style at least six months before the style is released,
and requires the factory to deliver several advance shipments of samples. The
Company's quality committee examines all sample shipments. This process provides
sufficient time to resolve problems with a
6
style's quality before its release date. The Company's quality comtrol team
examines all sample shipments to ensure ongoing quality standards. If, at any
stage of the quality control process, frames do not meet the Company's quality
standards, then the Company returns them to the factory with instructions to
improve the specific quality problems. Historically, the Company has had a low
defective frame rate and the manufacturers share in the cost of replacing
defective frames.
MARKETING, MERCHANDISING AND SALES PROGRAMS. Signature produces
"turnkey" marketing, merchandising and sales promotion programs to help optical
retailers, as well as the Company's sales representatives, promote sales. For
optical retailers, the Company develops unique in-store displays, such as its
Laura Ashley Eyewear "store within a store" environments. For the sales
representatives who call on retail accounts, the Company creates presentation
materials, marketing bulletins, weekly audio presentations, sales contests and
other sales tools to facilitate professional presentations.
LAURA ASHLEY EYEWEAR
The Company introduced Laura Ashley Eyewear in 1992. With net sales of
$6.3 million in fiscal 2004, the Laura Ashley Eyewear Collection remains one of
the leading women's brand-name collections. Like Laura Ashley clothing and home
furnishings, Laura Ashley Eyewear has been designed to be feminine and classic,
and fashionable without being trendy. The hallmark of Laura Ashley Eyewear is
its attention to detail, and the collection is known for its unique designs on
the styles' temples. The collection's strategy is to extend its product
selection to reach a broader audience within the feminine eyewear niche.
Signature's in-house merchandising team has conceptualized and designed
brand new Laura Ashley point of purchase display items for 2005. The new
displays feature hanging fabric banners, fabric coated displays and Victorian
era clutch cases. These pieces offer retailers multiple merchandising options
for covering large and small spaces. The clutch cases are also complimentary
with each frame purchase and therefore encourage frame sales when on display.
The Company has the exclusive right to market and sell Laura Ashley
Eyewear through a license with Laura Ashley entered into in May 1991. The
license covers a specified territory including the United States, the United
Kingdom and certain other countries. The Laura Ashley license is automatically
renewed annually through January 2008 so long as the Company is not in breach of
the license agreement and the royalty payment for the prior two contract years
exceeds the minimum royalty for those years. Laura Ashley may terminate the
license before its term expires under certain circumstances, including a
material breach of the license agreement by the Company, if management or
control of the Company passes from the present managers, shareholders or
controllers to other parties whom Laura Ashley may reasonably regard as
unsuitable, or if minimum sales requirements are not met in any two years. The
Company did not meet the minimum sales requirement for the license years ended
January 2003, 2004 and 2005, but Laura Ashley waived noncompliance.
EDDIE BAUER EYEWEAR
The Eddie Bauer Eyewear collection includes men's and women's
prescription eyewear styles that are designed to capture the Eddie Bauer casual
lifestyle, offering versatility and comfort with unsurpassed quality. Eddie
Bauer Eyewear's frame designs will evolve to meet the personality of today's
Eddie Bauer customer, with frames that are appropriate for life's everyday
experiences. Color tones are muted and reflect the finishes found in Eddie Bauer
home products. The style assortment remains broad in its appeal by expressing
many facets of the Eddie Bauer lifestyle and the brand's longtime outdoor
heritage. In keeping with Eddie Bauer's commitment to value, the collection
consists of medium priced frames.
Along with its marketing, merchandising and sales promotion programs,
the Company has designed point-of-sale graphic displays that are also inspired
by Eddie Bauer's outdoor casual lifestyle. The new displays for 2005 bring the
Eddie Bauer "outdoors-indoors" into retail optical stores through beautiful
outdoor imagery and on-model photography. These displays are designed to match
the look and feel of displays found in Eddie Bauer retail stores, further
strengthening brand recognition at the optical point of sale.
7
The Company has the exclusive worldwide right to market and sell Eddie
Bauer Eyewear through a license agreement with Eddie Bauer Diversified Sales LLC
entered into in June 1997. Without the prior written consent of Eddie Bauer,
however, the Company may market and sell Eddie Bauer Eyewear only in the United
States and in the other countries specified in the license agreement, most
notably Japan, the United Kingdom, Germany, France, Australia and New Zealand.
The license agreement contains minimum annual net sales and minimum annual
royalty requirements. The license terminates in December 2005 but the Company
may renew it for one two-year term, provided the Company is not in material
default. Eddie Bauer may terminate the license before the expiration of its term
under certain circumstances, including if (1) a person or entity acquires more
than 30% of the Company's outstanding voting securities, or (2) the Company
commits a material breach of the license agreement.
Eddie Bauer Diversified Sales LLC, and its parent Spiegel, Inc and
other affiliates, have filed voluntary petitions for reorganization under
Chapter 11 of the U.S. Bankruptcy Code. As a result, the licensor has the rights
of a debtor under the Bankruptcy Code with respect to executory contracts such
as the Eddie Bauer Eyewear license, including the right to assume or reject the
license. The rejection of the license would have a material adverse affect on
the Company. The Company has received no indication or notice from the licensor
regarding the licensor's intentions with respect to the license agreement.
HART SCHAFFNER MARX EYEWEAR
The Hart Schaffner Marx Eyewear is the distinctively masculine
collection targeted at men who seek quality, comfort and fit. Hart Schaffner
Marx, a subsidiary of Hartmarx Corporation and a leading manufacturer of
tailored clothing, has an image of enduring quality, and is a recognized name
among men who purchase apparel in the medium to high price range. Because men
are generally concerned about both function and fashion, the frames contain
features that enhance their durability. The highest quality components are
utilized for each style and unique accents of garment patterns and leather
inlays offer a distinctive touch. Select styles feature titanium, a material
renowned for its strength and lightweight qualities. The collection is designed
to fit a broad spectrum of men, and selected styles have longer temples and
larger sizes than those generally available.
The Company has the exclusive right to market and sell Hart Schaffner &
Marx Eyewear in the United States through a license with Hart Schaffner & Marx
entered into in January 1996. The license agreement gives the Company the right
of first refusal to sell Hart Schaffner & Marx in any additional countries. The
license agreement contains minimum annual net sales and minimum annual royalty
requirements. The license expires December 31, 2005, and may be renewed for
three-year terms by the Company in perpetuity provided the Company is not in
default under the license agreement. Hart Schaffner & Marx may terminate its
license with the Company before the expiration of its term if (1) someone
acquires more than 50% of the Company's outstanding voting securities, or (2)
the Company fails to perform its material obligations under the license
agreement.
NICOLE MILLER EYEWEAR
The Company acquired the exclusive license to design and market Nicole
Miller Eyewear, a collection of women's and men's prescription eyewear frames
and sunwear, in June 1999. Nicole Miller Eyewear is targeted at the
sophisticated, style-conscious modern woman who creates her own fashion trends
in a fun, whimsical way. Created in New York City by the designer of the same
name, Nicole Miller clothing feature colorful designs with interesting shapes,
without being pretentious or extreme. The Nicole Miller Eyewear collection
captures the spirit of this exciting brand, with colorful designs and
interesting shapes that represent a balanced blend of youthful energy and
sophistication. Most styles of Nicole Miller Eyewear prescription eyewear frames
are available either as prescription eyewear or as sunwear, and many are
available with lenses in designer colors.
The license agreement for Nicole Miller Eyewear expires in March 2006.
The Company may renew the license for one three-year term provided it is in
compliance with the license agreement. The license agreement contains minimum
annual net sales and minimum annual royalty requirements. The licensor may
terminate the license agreement before its stated term expires upon a material
breach by the Company.
8
BEBE EYES
bebe clothing is famous for its provocative clothing for women. The
bebe eyes eyewear collection captures the spirit of the bebe brand through sexy
eyewear with attention-getting colors and design accents. Eye-catching point of
purchase displays feature distinctive on-model imagery and frame displays. The
collection appeals to fashion-conscious women of all ages.
The Company has the exclusive right to market and sell bebe eyes in the
United States, Canada and a number of other countries pursuant to a license
agreement the Company entered into in September 1999 with bebe stores, inc. The
license expires in June 2006. The license agreement contains minimum annual net
sales requirements and minimum quarterly and annual royalty requirements. bebe
may terminate the license before its stated expiration under certain
circumstances, including if the Company materially breaches the license
agreement, if the Company is insolvent, or if, without the prior approval of
bebe, 50% or more or the outstanding Common Stock of the Company is acquired by
either: (1) a women's apparel company or (2) another person and the financial
and operational condition of the Company is impaired or such other person makes
or proposes to make material changes in the key management personnel in charge
of the license. If the Company is deemed "insolvent" within the meaning of the
license agreement as a result of its stockholders' deficit, and bebe stores,
inc. has not waived its right to terminate, then bebe stores, inc. would have
the right to terminate the agreement. bebe stores, inc. raised no objection to
the renewal of the license in June 2003 based on the Company's financial
condition.
DAKOTA SMITH EYEWEAR
Dakota Smith Eyewear targets men and women with eclectic designs that
capture the American spirit. The Dakota Smith brand is a compelling blend of
Santa Fe spirit, Western swagger and Route 66 style. The collection features
high quality titanium eyewear and sunwear at an affordable price matched by few
collections in the industry. Dakota Smith sunwear features superior polarized
lenses with backside anti-reflective coatings. The collection is showcased at
the point of sale with unique "hot rocks" displays created from earthen elements
in wooden frames from the American southwest. Complementing the eyewear and
sunwear collections is a marketing and merchandising program featuring Dakota
Smith apparel - including jackets, shirts, skirts and headwear - as well as an
exciting on-line store to expand the reach of the brand beyond eyewear.
The Company has the exclusive right to market and sell Dakota Smith
Eyewear in the United States, Canada and a number of other countries pursuant to
a license agreement entered into in February 2003 with Axwood Investments
Limited, which had concurrently purchased the Dakota Smith eyewear trademark
from the Company. The license expires in February 2006, but is automatically
renewed for an additional two-year term unless the Company notifies the licensor
in advance that it will not renew the term. The license agreement contains
minimum annual royalty payments based on net sales. The licensor may terminate
the license for any material breach of either the license or the supply
agreement.
HUMMER EYEGEAR
In July 2004 the Company obtained from General Motors Corporation the
exclusive license to market and sell Hummer Eyegear in the United States,
Canada, Mexico, Australia and most countries in Europe, Asia and Africa. Hummer
Eyegear differentiates itself by drawing from the unique image of strength,
independence and confidence that Hummer embodies. Hummer Eyegear includes
optical and sunwear styles, made from durable, innovative lens technology,
innovative materials and bold, stylish designs.
The license agreement expires on December 31, 2007, and is renewed for
a two-year term if the Company is in compliance with the license agreement and
met the minimum royalty requirement. The license agreement contains minimum
annual royalty requirements. The licensor may terminate the license for any
material breach of either the license agreement or if the Company does not
obtain the prior approval of the licensor for any change in the ownership,
control of direction of the Company's business.
9
HOUSE BRANDS
The cost to retailers of frames in Signature's own lines is generally
less than frames with brand names, because the latter command greater retail
prices, and there are no licensing fees. Moreover, the styling of Signature's
own lines can be more flexible, because the Company will be able to change the
styling--as well as its merchandising--more rapidly without the often
time-consuming requirement of submitting them to the licensor for its approval.
The Company established the Signature Collections in fiscal 1999. The
line comprises multiple segments, each targeting niches not otherwise filled by
the Company's brand-name collections. The Company's goals related to that line
are: to position Signature to compete more effectively against other optical
companies that have direct sales forces; to enable the Company to offer products
in segments not served by the Company's licensed collections; to allow the
Company to develop products more quickly; and to reach different markets by
offering good quality, low-cost styles.
DISTRIBUTION
The Company distributes its products (1) to independent optical
retailers in the United States, primarily through its national direct sales
force; (2) to national and regional optical retail chains; (3) internationally,
primarily through exclusive distributors in foreign countries and a direct sales
force in Western Europe; and (4) through selected distributors in the United
States.
The following table sets forth the Company's net sales by channel for
the periods indicated:
YEAR ENDED OCTOBER 31,
----------------------------------
2002 2003 2004
-------- -------- --------
(IN THOUSANDS)
Direct sales ................. $ 15,349 $ 12,893 $ 13,578
Optical retail chains ........ 11,560 7,074 5,041
International ................ 3,468 3,601 3,193
Telemarketing ................ 1,532 -- --
Domestic distributors ........ 1,212 852 1,123
Freight billed to customers .. 940 720 673
-------- -------- --------
$ 34,061 $ 25,140 $ 23,608
======== ======== ========
DIRECT SALES. The Company distributes its products to independent
optical retailers in the United States primarily through a national direct sales
force, including company and independent sales representatives. The direct sales
force, including independent sales representatives, numbered 55 at October 31,
2004. The Company plans to increase the number of independent sales
representatives in fiscal 2005.
OPTICAL RETAIL CHAINS. Signature sells directly to optical retail
chains. Historically, the Company has targeted national optical retail chains
using dedicated account managers. The Company's sales to national retail optical
chains have declined as those chains have experienced significant consolidation
and have increasingly marketed their own lower-cost private label frames. Part
of the Company's strategy to increase revenues in fiscal 2005 is to use its
direct sales force to target mid-size regional optical chains which are less
likely to sell their own private label eyewear than the large national optical
retail chains and are not experiencing consolidation like the national chains.
INTERNATIONAL. The Company sells certain of its products
internationally through exclusive distributors and in Western Europe through a
direct sales force including Company and independent sales representatives. The
Company maintains a sales office and warehouse facility in Liege, Belgium. The
Company's international distributors have exclusive agreements for defined
territories. The Company sells to European optical retail chains through its
Belgium office. At October 31, 2004, the Company had approximately 15
international distributors and 11 international sales representatives.
Historically, the large majority of Signature's international sales through
distributors have been of Laura Ashley Eyewear sold in England, Canada,
Australia and New Zealand. Part of the Company's strategy to increase revenues
in fiscal 2005 is to increase efforts of develop markets for the Company's
frames in Latin and South America.
10
DOMESTIC DISTRIBUTORS. The Company distributes its products through
selected distributors in the United States in areas in which it believes it can
achieve better penetration than through direct sales. The Company had 5
distributors in the United States at October 31, 2004.
CONTRACT MANUFACTURING
The Company's frames are manufactured to its specifications by a number
of contract manufacturers located outside the United States. The manufacture of
high quality metal frames is a labor-intensive process that can require over 200
production steps (including a large number of quality-control procedures) and
from 90 to 180 days of production time. In fiscal 2004, Signature used
manufacturers principally in Hong Kong/China, Japan and Italy. The Company
believes that throughout the world there are a sufficient number of
manufacturers of high-quality frames so that the loss of any particular frame
manufacturer, or the inability to import frames from a particular country, would
not materially and adversely affect the Company's business in the long-term.
However, because lead times to manufacture the Company's eyeglass frames
generally range from 90 to 180 days, an interruption occurring at one
manufacturing site that requires the Company to change to a different
manufacturer could cause significant delays in the distribution of the styles
affected. This could cause the Company not to meet delivery schedules for these
styles, which could materially and adversely affect the Company's business,
operating results and financial condition.
In determining which manufacturer to use for a particular style, the
Company considers manufacturers' expertise (based on type of material and style
of frame), their ability to translate design concepts into prototypes, their
price per frame, their manufacturing capacity, their ability to deliver on
schedule, and their ability to adhere to the Company's quality control and
quality assurance requirements.
The Company is not required generally to pay for any of its frames
prior to shipment. Payment terms for the Company's products currently range from
cash upon shipment to terms ranging between 60 and 120 days on open account. For
frames imported other than from Hong Kong/China manufacturers, the Company is
obligated to pay in the currency of the country in which the manufacturer is
located. In the case of frames purchased from manufacturers located in Hong
Kong/China, the currency is United States dollars. For almost all of the
Company's other frame purchases, its costs vary based on currency fluctuations,
and it generally cannot recover increased frame costs (in United States dollars)
in the selling price of the frames.
COMPETITION
The markets for prescription eyewear are intensely competitive. There
are thousands of frame styles, including hundreds with brand names. At retail,
the Company's eyewear styles compete with styles that do and do not have brand
names, styles in the same price range, and styles with similar design concepts.
To obtain board space at an optical retailer, the Company competes against many
companies, both foreign and domestic, including Luxottica Group S.p.A, Safilo
Group S.p.A., Marchon Eyewear, Inc. and Marcolin S.p.A. Signature's largest
competitors have significantly greater financial, technical, sales,
manufacturing and other resources than the Company. They also employ direct
sales forces that have existed far longer, and are significantly larger than the
Company's. At the major retail optical chains, the Company competes not only
against other eyewear suppliers, but also against the chains themselves, as
these chains have increasingly designed, manufactured and sold their own
lower-priced private label brands. Luxottica, one of the largest eyewear
companies in the world, is vertically integrated, in that it manufactures
frames, distributes them through direct sales forces in the United States and
throughout the world, and owns LensCrafters and Cole Vision, which combined is
the largest United States retail optical chain.
The Company competes in its target markets through the quality of the
brand names it licenses, its marketing and merchandising, the popularity of its
frame designs, the reputation of its styles for quality, its pricing policies
and the quality of its sales force.
BACKLOG
Historically, the Company ships eyeglass frames upon receipt of orders
and does not operate with a material backlog.
11
EMPLOYEES
At October 31, 2004, the Company had 105 full-time employees, including
38 in sales and marketing, 19 in customer service and support, 21 in warehouse
operations and shipping and 27 in general administration and finance. None of
the Company's employees is covered by a collective bargaining agreement. The
Company considers its relationship with its employees to be good.
ITEM 2--DESCRIPTION OF PROPERTY
The Company leases approximately 109,000 square feet of a building
located in Inglewood, California, where it maintains its principal offices and
warehouse. The Company's lease for this facility expires in May 2005. Since
November 1, 2001, the Company has subleased approximately 26,000 square feet of
this space to an unaffiliated party through May 2005. During fiscal 2004 the
Company's monthly rental expense was approximately $61,000 net of sublease
payments and excluding common area charges.
The Company and the landlord have executed a term sheet for a new lease
of approximately 64,000 square feet at the same facility. The new lease will
commence upon termination of the existing lease and will run through June 30,
2007. The Company will have the right to renew the lease for a two-year renewal
option. Under the new lease, the Company's monthly rental obligation will be
$46,400 through June 2006, increasing to $48,000 for the following 12 months and
$51,200 during the renewal term. The Company believes that 64,000 square feet is
more than adequate for its existing business and potential growth during the
next two years.
The Company also leases approximately 2,500 square feet of warehouse
and office space in Liege, Belgium, which supports the Company's sales in
Europe.
See Note 6 of Notes to Financial Statements.
ITEM 3--LEGAL PROCEEDINGS
As of February 28, 2005, the Company was a defendent in two lawsuits.
Management does not believe that the outcome of these lawsuits will have a
material adverse affect on financial condition, results of operations or cash
flows of the Company.
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
None.
12
PART II
ITEM 5--MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
COMMON STOCK
The Company's Common Stock trades in the over-the-counter market. The
following table sets forth, for the periods indicated, high and low last
reported sales prices for the Common Stock in the over-the-counter market as
reported by Nasdaq.
HIGH LOW
---------- ----------
FISCAL YEAR ENDED OCTOBER 31, 2003
First Quarter .................... $ 0.10 $ 0.03
Second Quarter ................... $ 0.30 $ 0.03
Third Quarter .................... $ 0.35 $ 0.35
Fourth Quarter ................... $ 0.30 $ 0.16
FISCAL YEAR ENDED OCTOBER 31, 2004
First Quarter .................... $ 0.15 $ 0.11
Second Quarter ................... $ 0.16 $ 0.08
Third Quarter .................... $ 0.22 $ 0.12
Fourth Quarter ................... $ 0.28 $ 0.12
On February 28, 2005, the last reported sales price of the Common Stock
in the over-the counter market as reported by Nasdaq, was $0.10 per share. At
February 28, 2005, there were 42 holders of record of the Common Stock.
DIVIDENDS
As a California corporation, under the California General Corporation
Law, generally the Company may not pay dividends in cash or property except (1)
out of positive retained earnings or (2) if, after giving effect to the
distribution, the Company's assets would be at least 1.25 times its liabilities
and its current assets would exceed its current liabilities (determined on a
consolidated basis under generally accepted accounting principles). At October
31, 2004, the Company had an accumulated deficit of $20.3 million. As a result,
the Company will not be able to pay dividends (other than stock dividends) for
the foreseeable future. In addition, the payment of dividends is prohibited
under its credit facilities.
PURCHASES OF COMMON STOCK
The Company did not repurchase any shares of its Common Stock in fiscal
2004.
ITEM 6--SELECTED FINANCIAL DATA
The following data should be read in conjunction with the Consolidated
Financial Statements and related notes and with "Management's Discussion and
Analysis of Results of Operations and Financial Condition" appearing elsewhere
in this Report.
13
YEAR ENDED OCTOBER 31,
--------------------------------------------------------------------------
2000 2001 2002 2003 2004
---------- ---------- ---------- ---------- ----------
(dollars in thousands, except per-share data)
STATEMENT OF OPERATIONS DATA:
Net sales ..................................... $ 52,883 $ 44,533 $ 34,061 $ 25,140 $ 23,609
Gross profit .................................. 31,458 23,061 18,593 16,641 14,847
Total operating expenses ...................... 40,705 35,083 22,032 17,504 14,557
Income (Loss) from operations ................. (9,247) (12,022) (3,439) (862) 290
Extraordinary item ............................ -- -- -- 4,099 --
Net income (loss) ............................. (9,484) (13,387) (4,116) 3,463 (371)
Basic and diluted income (loss) per share ..... (1.87) (2.65) (0.75) 0.60 (0.06)
Weighted average common shares outstanding .... 5,058,915 5,056,889 5,488,396 5,752,240 6,102,231
2000 2001 2002 2003 2004
---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA:
Current assets ................................ $ 33,006 $ 17,184 $ 9,876 $ 8,928 $ 8,890
Total assets .................................. 41,435 18,906 11,944 10,398 9,949
Current liabilities ........................... 28,142 22,390 19,226 8,261 8,562
Long-term debt, net of current portion ........ 4,806 1,461 1,715 6,874 6,454
Total liabilities ............................. 32,948 23,851 20,941 15,134 15,016
Stockholders' equity (deficit) ................ 8,487 (4,945) (8,996) (4,736) (5,067)
ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis, which should be read in
connection with the Company's Financial Statements and accompanying footnotes,
contain forward-looking statements that involve risks and uncertainties.
Important factors that could cause actual results to differ materially from the
Company's expectations are set forth in "Factors That May Affect Future Results"
in this Item 6 of this Report, as well as those discussed elsewhere in this
Report. All subsequent written and oral forward-looking statements attributable
to the Company or persons acting on its behalf are expressly qualified in their
entirety by "Factors That May Affect Future Results." Those forward-looking
statements relate to, among other things, the Company's plans and strategies,
new product lines, and relationships with licensors, distributors and customers,
distribution strategies and the business environment in which the Company
operates.
The following discussion and analysis should be read in connection with
the Company's Financial Statements and related notes and other financial
information included elsewhere in this Report.
OVERVIEW
The Company derives revenues through the sale of eyeglass frames under
licensed brand names, including Laura Ashley Eyewear, Eddie Bauer Eyewear, Hart
Schaffner & Marx Eyewear, bebe eyes, Nicole Miller Eyewear, and Dakota Smith
Eyewear, and under its proprietary Signature brand.
The Company's best-selling product lines are Laura Ashley Eyewear,
Eddie Bauer Eyewear and Nicole Miller Eyewear. Net sales of these lines together
accounted for 69.4% and 65.4% of the Company's net sales in fiscal 2003 and
fiscal 2004, respectively.
The Company's cost of sales consists primarily of purchases from
foreign contract manufacturers that produce frames and cases to the Company's
specifications. The complete development cycle for a new frame design typically
takes approximately eight to twelve months from the initial design concept to
the release. Generally, reorders require 75 to 150 days.
14
The Company reported a pre-tax loss of $371,000 in fiscal 2004, a
reduction from the pre-tax loss (before extraordinary gain) of $625,000 in
fiscal 2003. Income from operations was $290,000 in fiscal 2004 compared to a
loss from operations of $862,000 in fiscal 2003. The Company was able to
accomplish this reduction by continuing to reduce operating expenses. Revenues
declined from $25.1 million in fiscal 2003 to $23.6 million in fiscal 2004. This
decrease was due primarily to greater competition, continued sluggishness in the
optical frame markets and consolidation of the national optical retail chains.
While the Company was able to generate a $1.5 million increase in net sales to
independent optical retailers during the fiscal year, sales to national optical
retail chains declined $2.4 million, and international sales declined $0.4
million. The Company had a $1.4 million decrease in product returns, due
primarily to a decrease in product return rate as a percent of gross sales, from
22% in fiscal to 2003 to 18% in fiscal 2004.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of the Company's financial statements requires it to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. The Company bases its estimates on historical experience and on
various other assumptions that it believes to be reasonable under the
circumstances, and which form the basis for making judgments about the carrying
values of assets and liabilities. Actual results may differ from these estimates
under different assumptions or conditions.
The Company considers the following accounting policies to be both
those most important to the portrayal of our financial condition and those that
require the most subjective judgment:
o revenue recognition; and
o inventory valuation.
REVENUE RECOGNITION. The Company's policy is to recognize revenue from
sales to customers when the rights and risks of ownership have passed to the
customer, when persuasive evidence of an arrangement exists, the price is fixed
and determinable and collection of the resulting receivable is reasonably
assured. In general, revenue is recognized when merchandise is shipped.
The Company has a product return policy that it believes is standard in
the optical industry and is followed by most of its competitors. Under that
policy, the Company generally accepts returns of non-discontinued product for
credit, upon presentment and without charge, and as a general policy the Company
does not make cash refunds. On a quarterly basis the Company reviews and
establishes an allowance for estimated product returns based upon actual returns
subsequent to quarter-end and estimated future returns. The Company applies the
historical ratio of sales returns to sales to estimate future returns in
addition to known information about actual returns in the period subsequent to
the balance sheet date. As of October 31, 2004, the Company had an allowance for
product returns of $300,000. Management considered a range of allowances from
$200,000 to $400,000. Variances in the allowance for product returns would have
a corresponding impact on net sales for fiscal 2004. For example, if the
Company's allowance for product returns was $400,000, the Company's net sales
would have been $100,000 lower.
INVENTORIES. Inventories (consisting of finished goods) are valued at
the lower of cost or market. Cost is computed using weighted average cost, which
approximates actual cost on a first-in, first-out basis. The Company writes down
its inventory for estimated obsolescence or unmarketable inventory equal to the
difference between the cost of inventory and the estimated market value based
upon assumptions about future demand, selling prices and market conditions. Its
inventories include designer prescription eyeglass frames and sunglasses, which
are sold in a highly competitive industry. If actual product demand or selling
prices are less favorable than the Company estimates it may be required to take
additional inventory write-downs in the future. Similarly, if the Company's
inventory is determined to be undervalued due to write-downs below market value,
it would be required to recognize such additional operating income at the time
of sale. Significant unanticipated changes in demand could have a material and
significant impact on the future value of our inventory and reported operating
results.
15
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated selected
statements of operations data shown as a percentage of net sales.
2002 2003 2004
------ ------ ------
Net sales ............................................... 100.0% 100.0% 100.0%
Cost of sales ........................................... 45.4 33.8 37.1
------ ------ ------
Gross profit ............................................ 54.6 66.2 62.9
------ ------ ------
Operating expenses:
Selling ............................................ 30.5 34.1 34.0
General and administrative ......................... 34.2 35.5 27.7
------ ------ ------
Total operating expenses ....................... 64.7 69.6 61.7
------ ------ ------
Income (Loss) from operations ........................... (10.1) (3.4) 1.2
Other income (expense), net ............................. (2.0) 0.9 (2.8)
------ ------ ------
Loss before provision for (benefit from) income taxes ... (12.1) (2.5) (1.6)
and gain on extraordinary items
Provision for income taxes .............................. 0.0 0.0 0.0
------ ------ ------
Loss before gain on extraordinary item .................. (12.1) (2.5) (1.6)
Extraordinary gain on extinguishment of debt ............ -- 16.3 --
------ ------ ------
Net income (loss) ....................................... (12.1)% 13.8% (1.6%)
====== ====== ======
COMPARISON OF FISCAL YEARS 2002, 2003 AND 2004
NET SALES. Net sales were $23.6 million in fiscal 2004 compared to
$25.1 million in fiscal 2003 and $34.1 million in fiscal 2002. The following
table shows certain information regarding net sales by product line for the
periods indicated:
2002 2003 2004
------------------ ------------------ ------------------
Laura Ashley Eyewear .... $11,430 33.6% $ 7,811 31.1% $ 6,305 26.7%
Eddie Bauer Eyewear ..... 9,147 26.9 5,848 23.3 4,516 19.1
Nicole Miller Eyewear ... 4,950 14.5 3,781 15.0 4,624 19.6
Other (1) ............... 8,534 25.0 7,700 30.6 8,163 34.6
------- ------- ------- ------- ------- -------
$34,061 100.0% $25,140 100.0% $23,608 100.0%
======= ======= ======= ======= ======= =======
(1) Includes freight billed to customers.
Net sales declined 6.1 % in fiscal 2004 due primarily to increasing
competition, consolidation of national retail optical chains and continued
sluggishness in the optical frame market. Excluding close out sales, unit sales
declined and the Company maintained or slightly increased its frame prices. The
Company's efforts to increase sales to independent optical retailers, through
hiring more direct sales representatives and placing a renewed emphasis on
service to these customers, resulted in an increase of $1.5 million in sales to
these customers. However, The Company experienced a decline of $2.4 million, or
34%, in sales to national retail optical chains. These chains purchased fewer
frames, a trend the Company expects to continue, as they have experienced
industry consolidation and have increasingly marketed their own lower cost
private label frames. International sales also declined ($0.4 million or 11.3%)
due in part to close-out sales of a significant number of major global brand
name frames being liquidated due to transfer of the license relationships. Sales
of the Eddie Bauer Eyewear continued to decline, as the bankruptcy of the Eddie
Bauer group of companies is believed to have adversely affected customers'
perception of the brand.
Net sales declined 26.3% in fiscal 2003 due primarily to the general
decline in the optical frame industry and the reluctance of retailers to
purchase large inventories of the Company's products due to uncertainties about
the Company prior its recapitalization.
16
Commencing with the year ended October 31, 2004, the Company includes
freight billed to customers in net sales. Net sales for fiscal 2003 and 2002
have been revised from previously reported amounts due to reflect this change
based on EITF 00-10 "Accounting for Shipping and Handling Costs." See Notes 2
and 12 of Notes to Financial Statements.
Net sales reflect gross sales less a reserve for product returns
established by the Company based on products that the Company is aware will be
returned as of that date. The Company's reserve was $0.3 million and $0.6
million at October 31, 2004 and 2003, respectively. The Company had a $1.4
million decrease product returns in fiscal 2004 compared to fiscal 2003, due
primarily to a decrease in product returns as a percentage of gross sales, from
22% in fiscal 2003 to 18% in fiscal 2004. The Company believes this decrease in
product return rate was due principally to better sell-through due to improved
frame styles, increased confidence in the Company's viability as a result of its
recapitalization in April 2003, and tougher return policies implemented by the
Company.
The Company also maintains an allowance for product returns. See
"Critical Accounting Polices." Changes in the allowance in any period will have
a corresponding impact on net sales during the period. The Company's allowance
for product returns did not change in fiscal 2004.
GROSS PROFIT AND GROSS MARGIN. Gross profit was $14.8 million in fiscal
2004 compared to $16.6 million in fiscal 2003 and $18.6 million in fiscal 2002.
These decreases were due primarily to lower net sales and the continuing impact
of close out sales.
The gross margin was 62.9% in fiscal 2004 compared to 66.2% in fiscal
2003 and 54.6% in fiscal 2002. This decrease in 2004 was due to more close out
sales at lower margins notwithstanding sales to independent optical retailers,
which have higher gross margins, which increased from 52.8% to 59.2% of net
sales. The increase in fiscal 2003 was due to fewer close out sales and
markdowns, a general firming of prices to independent optical retailers and the
lack of discontinuation of any product lines in fiscal 2003.
SELLING EXPENSES. Selling expenses were $8.0 million in fiscal 2004
compared to $8.6 million in fiscal 2003 and $10.4 million in fiscal 2002. This
6.5% decrease in fiscal 2004 was due to decreases of $0.3 million in advertising
expenses, $0.2 million in royalties due to lower net sales, and $0.1 million
promotions expense. Compensation for sales personnel increased by $0.2 million
because of an increase in direct sales and an increase the number of direct
sales representatives from 47 at October 31, 2003 to 55 at October 31, 2004. The
17.3% decrease in fiscal 2003 was due to decreases of $0.8 million in salaries
due to fewer sales personnel, $0.6 million in premium expense due to the sale of
USA Optical in fiscal 2002, and $0.5 million in advertising expense tied to
lower net sales, offset by increases of $0.3 million in promotions expense and
$0.3 million in royalty expense due to increases in minimum royalties.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses were $6.1 million in fiscal 2004 compared to $8.4 million in fiscal
2003 and $11.2 million in fiscal 2002. This 27.6% decrease in fiscal 2004 was
due primarily to a decreases of: (1) $1.3 million in salaries, payroll taxes and
employee benefits due to a decrease in number of employees, (2) $0.3 million in
legal and accounting fees, and (3) $0.3 million in the reserve for bad debt
allowance; The 24.8% decrease in fiscal 2003 was due to decreases of $1.3
million in salaries, $0.8 million in operating lease expenses, $0.4 million in
bad debt expenses and $0.3 million in bank charges.
The lease for the Company principal offices expires in May 2005. The
Company and the landlord have executed a term sheet for a new lease for less
space at the same facility. The new lease would run through June 30, 2007 and
the Company will have the right to renew the lease for a two-year renewal
option. Under the new lease, the Company estimates a reduction in rental expense
of approximately $100,000 in fiscal 2005 and $190,000 in fiscal 2006 compared to
rental expense for these offices in fiscal 2004 (exclusive of savings from
reduced common area charges). See "Item 2--Description of Property."
OTHER INCOME (EXPENSE), NET. Sundry expense in fiscal 2004 represented
a reserve in connection with ongoing litigation. In fiscal 2003, the Company
recognized net sundry income of $0.7 million in connection with the write-offs
of Dakota Smith trademark cost in connection with the sale/license back of the
trademark in February 2003. Interest expense increased in fiscal 2004 due
primarily to increases in amount in the average debt outstanding from fiscal
2003 to fiscal 2004.
17
EXTRAORDINARY GAIN. The Company recognized a gain of $4.1 million in
fiscal 2003 resulting from the extinguishment of debt in connection with the
recapitalization.
PROVISION FOR INCOME TAXES. Because of its net losses, the Company's
taxes in fiscal 2002, 2003 and 2004 consisted of state franchise taxes. As of
October 31, 2004 the Company had net operating loss carryforwards for federal
and state income tax purposes of approximately $11.7 million and $9.2 million,
respectively, which expire through 2022. The Company has established a 100%
valuation allowance of the deferred tax asset based on operating losses in
recent years. The Company believes that the recapitalization in April 2003 may
have resulted in "ownership change" under the Internal Revenue Code. The
Company's utilization of the net operating loss carryforwards existing as of
that date would be significantly limited. During fiscal 2003, net operating
losses were reduced by the non-taxable gain on extinguishment of debt of $4.1
million.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company's accounts receivable (net of allowance for doubtful
accounts) were $2.7 million at October 31, 2004 compared to $2.3 million at
October 31, 2003. This increase was due to reductions in the allowance for
returns, due to lower levels of returns, and the allowance for doubtful
accounts.
The Company's inventories (net of obsolescence reserve) were $5.3
million at October 31, 2004 as compared to $6.0 million at October 31, 2003.
This $0.6 million decrease was due to close out frame sales and improving
inventory turnover by better matching frame purchases with customer orders.
The Company's long-term debt of $6.5 million at October 31, 2004
included principally its credit facilities with Home Loan and Investment Company
("HLIC") and Bluebird Finance Limited ("Bluebird"), and a commercial bank loan
the proceeds of which were used to purchase its computer system and related
equipment (the "Equipment Loan"). See Note 4 of Notes to Consolidated Financial
Statements.
The Company's credit facility with HLIC includes a $3,000,000 term loan
and a $500,000 revolving line of credit and is secured by all of the assets of
the Company and by a $1,250,000 letter of credit from a non-affiliate. The term
loan bears interest at a rate of 10% per annum, is payable interest only for the
first year with payments of principal and interest on a 10-year amortization
schedule commencing the second year, and is due and payable in April 2008. The
revolving credit facility bears interest at a rate of 1% per month, payable
monthly, with all advances subject to approval of HLIC, and is due and payable
in April 2008. The Company had fully utilized this credit facility as of October
31, 2004.
The Company's credit facility with Bluebird is up to $4,150,000 and
secured by the assets of the Company. The credit facility includes a revolving
credit line in the amount of $2,900,000 and support for the $1,250,000 letter of
credit securing the HLIC credit facility. The loan bears interest at the rate of
5% per annum, payable annually for the first two years, with payments of
principal and interest on a 10-year amortization schedule commencing in the
third year, and is due and payable in April 2013. Bluebird's loan commitment
will be reduced by $72,000 in July 2005 and by the same amount every three
months thereafter. This loan is subordinate to the HLIC credit facility. The
Company had fully utilized this credit facility as of October 31, 2004.
The Equipment Loan had an outstanding balance of $537,000 at October
31, 2004, is secured by the purchased assets and bears interest at 4% per annum
payable in monthly installments of approximately $14,000 with the balance of
$62,600 due in February 2008.
In December 2004 the Company obtained an unsecured term loan in the
amount of $350,000 from an unaffiliated third party. The loan bears interest at
the rate of 3% per annum, is payable in five monthly installments of $50,000
commencing May 2005 with the balance of $200,000 due and payable on November 27,
2005.
Of the Company's accounts payable at October 31, 2004, $0.9 million
were payable in foreign currency. To monitor risks associated with currency
fluctuations, the Company on a weekly basis assesses the volatility of certain
foreign currencies and reviews the amounts and expected payment dates of its
purchase orders and accounts payable in those currencies. Based on those
factors, the Company may from time to time mitigate some portion of that risk by
18
purchasing forward commitments to deliver foreign currency to the Company. The
Company held no forward commitments for foreign currencies at October 31, 2004.
The Company's bad debt write-offs, net of recoveries, were $33,000 and
$(6,394) in fiscal 2003 and 2004, respectively. As part of the Company's
management of its working capital, the Company performs most customer credit
functions internally, including extensions of credit and collections.
During the past two years, the Company has generated cash primarily
through product sales in the ordinary course of business, its bank credit
facilities and sales of equity securities. At October 31, 2004, the Company had
working capital of $0.3 million as compared to working capital of $0.7 million
at October 31, 2003. Operating activities provided a net of $0.3 million during
fiscal 2004, while financing activities used a net of $0.2 during fiscal year
2004, resulting in a net increase of $0.1 million in cash and cash equivalents.
The Company's business plan for 2005 provides for positive cash flow
from operations. The Company believes that at least through fiscal 2005,
assuming there are no unanticipated material adverse developments, no material
decrease in revenues and continued compliance with its credit facilities, its
cash flows from operations and through credit facilities will be sufficient to
enable the Company to pay its debts and obligations as they mature. To support
growth in excess of the plan, the Company may be required to obtain the working
capital through additional debt or equity financing.
CONTRACTUAL OBLIGATIONS
The following table sets forth certain information regarding the
contractual obligations of the Company as of October 31, 2004:
PAYMENTS DUE BY PERIOD
-------------------------------------------------------------------
LESS THAN 1-3 3-5 MORE THAN
TOTAL 1 YEAR YEARS YEARS 5 YEARS
----------- ----------- ----------- ----------- -----------
Long-term debt $ 7,227,045 $ 772,788 $ 4,103,016 $ 175,212 $ 2,176,029
Operating lease obligations 760,493 597,293 122,400 40,800 --
Purchase obligations 1,632,256 1,632,256 -- -- --
Other long-term obligations
reflected on the Company's
balance sheet under GAAP(1) 5,815,250 2,699,333 3,115,916
----------- ----------- ----------- ----------- -----------
Total obligations $15,435,044 $ 5,701,670 $ 7,341,332 $ 216,012 $ 2,176,029
====================================================================================================
(1) Includes minimum royalties under license agreements and employment and
consulting obligations under long-term agreements.
QUARTERLY AND SEASONAL FLUCTUATIONS
The Company's results of operations have fluctuated from quarter to
quarter and the Company expects these fluctuations to continue in the future. A
factor which may significantly influence results of operations in a particular
quarter is the introduction of a new brand-name collection, which results in
disproportionate levels of selling expenses due to additional advertising,
promotions, catalogs and in-store displays. Introduction of a new brand may also
generate a temporary increase in sales due to initial stocking by retailers.
Other factors which can influence the Company's results of operations
include customer demand, the mix of distribution channels through which the
eyeglass frames are sold, the mix of eyeglass frames sold, product returns,
delays in shipment and general economic conditions.
The following table sets forth certain unaudited results of operations
for the twelve fiscal quarters ended October 31, 2004. The unaudited information
has been prepared on the same basis as the audited financial statements
appearing elsewhere in this Report and includes all normal recurring adjustments
which management considers necessary for a fair presentation of the financial
data shown. The operating results for any quarter are not necessarily indicative
of future period results.
19
2002 2003 2004
----------------------------------------------------------------------------------------------------------
in thousands JAN. APR. JULY OCT. JAN. APR. JULY OCT. JAN. APR. JULY OCT.
31 30 31 31 31 30 31 31 31 30 31 31
----------------------------------------------------------------------------------------------------------
Net sales ............ $ 8,735 $ 9,054 $ 8,426 $ 7,845 $ 7,446 $ 5,950 $ 6,471 $ 5,273 $ 5,996 $ 6,097 $ 6,149 $ 5,367
Cost of sales ........ 3,334 3,937 3,666 4,531 2,911 1,836 2,301 1,451 2,342 2,215 2,192 2,013
Gross profit ......... 5,401 5,117 4,760 3,314 4,535 4,114 4,170 3,822 3,653 3,882 3,957 3,355
Operating expenses:
Selling ............ 2,606 2,747 2,322 2,700 2,164 2,012 2,327 2,077 1,909 2,300 2,053 1,761
General and
administrative ... 3,000 2,892 3,031 2,623 2,489 2,443 2,032 1,959 1,857 1,627 1,625 1,425
Total operating
expenses ........... 5,606 5,750 5,353 5,323 4,653 4,455 4,359 4,036 3,766 3,927 3,679 3,185
Income (loss) from
operations ......... (205) (632) (592) (2,009) (118) (341) (189) (214) (113) (45) 278 170
Other income
(expense), net ..... (186) (148) (184) (160) (96) 617 (150) (134) (136) (140) (138) (237)
Income (loss) before
provision for
income taxes ....... (390) (780) (776) (2,169) (214) 276 (339) (348) (249) (185) 140 (67)
Extraordinary gain ... -- -- -- -- 4,144 (45) -- -- -- -- --
Provision for
income taxes ....... 1 1 1 10 (2) 2 1 8 --
Net income ........... (390) (780) (777) (2,169) (215) 4,419 (394) (346) (251) (186) 132 (67)
INFLATION
The Company does not believe its business and operations have been
materially affected by inflation.
NEW ACCOUNTING PRONOUNCEMENTS
In May 2003, the FASB issued SFAS No. 150 ("SFAS No. 150"), "Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and
Equity." SFAS No. 150 established standards for how an issuer classifies and
measures in its statements of financial position certain financial instruments
with characteristics of both liabilities and equity. SFAS No. 150 requires that
an issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances) because that financial instrument
embodies an obligation of the issuer. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003 and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. SFAS No. 150 is to be implemented by reporting and cumulative effect of
change in accounting principle for financial instruments created before the
issuance date of SFAS No. 150 and still existing at the beginning of the interim
period of adoption. Restatement is not permitted. In April 2003, the Company
issued shares of its newly created Series A 2% Convertible Preferred Stock that
have mandatory redemption features if there are certain changes in control. The
Company evaluated the equity instrument and determined that the provisions under
SFAS No. 150 do not apply.
In December 2003, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 132R ("FAS 132R"), "Employers' Disclosures about Pensions
and Other Postretirement Benefits." The statement provides disclosure
requirements for defined benefit pension plans and other post-retirement benefit
plans. The statement was effective for annual financial statements with fiscal
years ending after December 15, 2003, and for interim periods beginning after
December 15, 2003. The Company adopted FAS 132R during the year ended October
31, 2004. The adoption of FAS 132R did not have any impact on the Company's
operating results or financial position.
In December 2003, the FASB published a revision to Interpretation No.
46, "Consolidation of Variable Interest Entities" ("FIN 46R"), to clarify some
of the provisions of the original interpretation, and to exempt certain entities
from its requirements. Under the revised guidance, there are new effective dates
for companies that have interests in structures that are commonly referred to as
special-purpose entities. The rules are effective in financial statements for
periods ending after March 15, 2004. FIN 46R did not impact the Company's
operating results or financial position because the Company does not have any
variable interest entities.
20
In March 2004, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairments
and Its Application to Certain Investments" ("EITF 03-1"). EITF 03-1 provides a
three-step impairment model for determining whether an investment in
other-than-temporarily impaired and requires the Company to recognize such
impairments as an impairment loss equal to the difference between the
investment's cost and fair value at the reporting date. The guidance is
effective for the Company during the first quarter of fiscal 2005. The Company
does not believe that the adoption of EITF 03-1 will have a significant effect
on its financial statements.
In November 2004, the FASB issued SFAS No. 151 "Inventory Costs - An
Amendment of ARB No. 43, Chapter 4" ("FAS 151"). FAS 151 clarifies that abnormal
amounts of idle facility expense, freight, handling costs and spoilage should be
charged to expense as incurred and not included in overhead. Further, FAS 151
requires that allocation of fixed and production facilities overhead to
conversion costs should be based on normal capacity of the production
facilities. The provisions in FAS 151 are effective for inventory costs incurred
during fiscal years beginning after June 15, 2005. The Company does not believe
that the adoption of FAS 151 will have a significant effect on its financial
statements.
In November 2004, the FASB issued SFAS No. 153 "Exchanges of
Nonmonetary Assets - An Amendment of APB Opinion No. 29" ("FAS 153"). The
provisions of this statement are effective for non monetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. This statement
eliminates the exception to fair value for exchanges of similar productive
assets and replaces it with a general exception for exchange transactions that
do not have commercial substance - that is, transactions that are not expected
to result in significant changes in the cash flows of the reporting entity. The
Company does not believe that the adoption of FAS 153 will have a significant
effect on its financial statements.
FACTORS THAT MAY AFFECT FUTURE RESULTS
NEED TO INCREASE REVENUES AND TO RETURN TO PROFITABILITY; SHAREHOLDERS'
DEFICIT
The Company has incurred net losses (excluding the extraordinary gain
in fiscal 2003) for the past several years and at October 31, 2004, its
stockholders' deficit was $5.1 million. The Company's long-term viability will
depend on its ability to return to profitability on a consistent basis. During
the past several years, the Company has significantly reduced its general,
administrative and other expenses. Except for anticipated reductions in rental
expense commencing in May 2005, the Company does not believe further material
reductions in expenses are possible consistent with the Company's plans to
support and expand its product lines. Accordingly, the ability of the Company to
return to profitability will depend primarily on its ability to increase its
revenues. The Company's revenues during the past several years have been
adversely affected by increasing competition and the continued sluggishness in
the optical frame industry. While the Company has a plan to increase revenues in
fiscal 2005, no assurance can be given that this will occur or that the Company
will be able to generate materially greater revenues or to return to consistent
profitability.
SUBSTANTIAL DEPENDENCE UPON LAURA ASHLEY, EDDIE BAUER AND NICOLE MILLER
LICENSES
Net sales of Laura Ashley Eyewear, Eddie Bauer Eyewear and Nicole
Miller Eyewear accounted for 69.4% and 65.4% of the Company's net sales in
fiscal years 2003 and 2004, respectively. While the Company intends to continue
reducing its dependence on these lines through the development and promotion of
Hummer Eyegear, Dakota Smith Eyewear, bebe eyes and its Signature line, the
Company expects these lines to continue to be the Company's leading sources of
revenue for the near future. The Laura Ashley license is automatically renewed
through January 2008 provided the Company is not in breach of the license
agreement and the royalty payment for the prior two contract years exceeds the
minimum royalty for those years. Laura Ashley may also terminate the license
agreement if minimum sales requirements are not met in any two years. The
Company did not meet the minimum sales requirement for the license years ended
January 2003, 2004 and 2005, but Laura Ashley waived noncompliance. The Company
markets Eddie Bauer Eyewear through an exclusive license that terminates in
December 2005, but may be renewed by the Company at least through 2007 so long
as the Company is not in material default and meets certain minimum net sales
and royalty requirements. The license agreement for Nicole Miller Eyewear
expires in March 2006, and may be renewed by the Company for a three-year term
provided it is not in default. Each of these licensors may terminate its
respective license before its term expires under certain circumstances,
including a material default by the Company or certain defined changes in
control of the Company.
21
BANKRUPTCY OF EDDIE BAUER
Eddie Bauer Diversified Sales LLC, the licensor on the Eddie Bauer
Eyewear license, and its parent Spiegel, Inc and other affiliates, have filed
voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy
Code. As a result, the licensor has the rights of a debtor under the Bankruptcy
Code with respect to executory contracts such as the Eddie Bauer Eyewear
license, including the right to assume or reject the license. The rejection of
the license would have a material adverse affect on the Company. The Company has
received no indication or notice from the licensor regarding the licensor's
intentions with respect to the license agreement.
DEPENDENCE UPON SALES TO NATIONAL RETAIL OPTICAL CHAINS
Net sales to national optical retail chains amounted to 30% and 22% of
net sales in fiscal years 2003 and 2004, respectively. These chains have
increasingly marketed their own lower cost private label brands and are
experiencing industry consolidation. However, two of these chains accounted for
approximately 16% of the Company's net sales in fiscal 2004. The continued
decline in sales to national retail chains, or the loss of one or more national
optical retail chains as a customer, would have a material adverse affect on the
Company's business.
APPROVAL REQUIREMENTS OF BRAND-NAME LICENSORS
The Company's business is predominantly based on its brand-name
licensing relationships. Each of the Company's licenses requires mutual
agreement of the parties for significant matters. Each of these licensors has
final approval over all eyeglass frames and other products bearing the
licensor's proprietary marks, and the frames must meet the licensor's general
design specifications and quality standards. Consequently, each licensor may, in
the exercise of its approval rights, delay the distribution of eyeglass frames
bearing its proprietary marks. The Company expects that each future license it
obtains will contain similar approval provisions. Accordingly, there can be no
assurance that the Company will be able to continue to maintain good
relationships with each licensor, or that the Company will not be subject to
delays resulting from disagreements with, or an inability to obtain approvals
from, its licensors. These delays could materially and adversely affect the
Company's business, operating results and financial condition.
LIMITATIONS ON ABILITY TO DISTRIBUTE OTHER BRAND-NAME EYEGLASS FRAMES
Each of the Company's licenses limits the Company's right to market and
sell products with competing brand names. The Laura Ashley license prohibits the
Company from selling any range of designer eyewear that is similar to Laura
Ashley Eyewear in price and style, market position and market segment. The Eddie
Bauer license and the bebe license prohibit the Company from entering into
license agreements with companies that Eddie Bauer and bebe, respectively,
believe are its direct competitors. The Hart Schaffner & Marx license prohibits
the Company from marketing and selling another men's brand of eyeglass frames
under a well-known fashion name with a wholesale price in excess of $40. The
Company expects that each future license it obtains will contain some
limitations on competition within market segments. The Company's growth,
therefore, will be limited to capitalizing on its existing licenses in the
prescription eyeglass market, introducing eyeglass frames in other segments of
the prescription eyeglass market, and manufacturing and distributing products
other than prescription eyeglass frames such as sunglasses. In addition, there
can be no assurance that disagreements will not arise between the Company and
its licensors regarding whether certain brand-name lines would be prohibited by
their respective license agreements. Disagreements with licensors could
adversely affect sales of the Company's existing eyeglass frames or prevent the
Company from introducing new eyewear products in market segments the Company
believes are not being served by its existing products.
PRODUCT RETURNS
The Company has a product return policy that it believes is standard in
the optical industry and is followed by its competitors. Under that policy, the
Company must pre-approve all product returns, which it will do only for credit
or exchange if the product has not been discontinued. As a general policy the
Company does not make cash refunds. The Company's product returns for fiscal
years 2003 and 2004 amounted to 21% and 18% of gross sales (sales before
returns), respectively. The Company maintains an allowance for product returns
that which it considers adequate; however, an increase in returns that
significantly exceeds the amount of those reserves would have a material adverse
impact on the Company's business, operating results and financial condition.
22
AVAILABILITY OF VISION CORRECTION ALTERNATIVES
The Company's future success could depend to a significant extent on
the availability and acceptance by the market of vision correction alternatives
to prescription eyeglasses, such as contact lenses and refractive (optical)
surgery. While the Company does not believe that contact lenses, refractive
surgery or other vision correction alternatives materially and adversely impact
its business at present, there can be no assurance that technological advances
in, or reductions in the cost of, vision correction alternatives will not occur
in the future, resulting in their more widespread use. Increased use of vision
correction alternatives could result in decreased use of the Company's eyewear
products, which would have a material adverse impact on the Company's business,
operating results and financial condition.
ACCEPTANCE OF EYEGLASS FRAMES; UNPREDICTABILITY OF DISCRETIONARY
CONSUMER SPENDING
The Company's success will depend to a significant extent on the
market's acceptance of the Company's brand-name eyeglass frames. If the Company
is unable to develop new, commercially successful styles to replace revenues
from older styles in the later stages of their life cycles, the Company's
business, operating results and financial condition could be materially and
adversely affected. The Company's future growth will depend in part upon the
effectiveness of the Company's marketing and sales efforts as well as the
availability and acceptance of other competing eyeglass frames released into the
marketplace at or near the same time, the availability of vision correction
alternatives, general economic conditions and other tangible and intangible
factors, all of which can change and cannot be predicted. The Company's success
also will depend to a significant extent upon a number of factors relating to
discretionary consumer spending, including the trend in managed health care to
allocate fewer dollars to the purchase of eyeglass frames, and general economic
conditions affecting disposable consumer income, such as employment business
conditions, interest rates and taxation. Any significant adverse change in
general economic conditions or uncertainties regarding future economic prospects
that adversely affect discretionary consumer spending generally, and purchasers
of prescription eyeglass frames specifically, could have a material adverse
effect on the Company's business, operating results and financial condition.
COMPETITION
The markets for prescription eyewear are intensely competitive. There
are thousands of frame styles, including hundreds with brand names. At retail,
the Company's eyewear styles compete with styles that do and do not have brand
names, styles in the same price range, and styles with similar design concepts.
To obtain board space at an optical retailer, the Company competes against many
companies, both foreign and domestic, including Luxottica Group S.p.A, Safilo
Group S.p.A., Marchon Eyewear, Inc. and Marcolin S.p.A.. Signature's largest
competitors have significantly greater financial, technical, sales,
manufacturing and other resources than the Company. They also employ direct
sales forces that have existed far longer, and are significantly larger than the
Company's. At the major retail optical chains, the Company competes not only
against other eyewear suppliers, but also against the chains themselves, as
these chains have increasingly designed, manufactured and sold their own
lower-priced private label brands. Luxottica, one of the largest eyewear
companies in the world, is vertically integrated, in that it manufactures
frames, distributes them through direct sales forces in the United States and
throughout the world, and owns LensCrafters, one of the largest United States
retail optical chains.
The Company competes in its target markets through the quality of the
brand names it licenses, its marketing, merchandising and sales promotion
programs, the popularity of its frame designs, the reputation of its styles for
quality, its pricing policies and the quality of its sales force. There can be
no assurance that the Company will be able to compete successfully against
current or future competitors or that competitive pressures faced by the Company
will not materially and adversely affect its business, operating results and
financial condition.
CONTROL BY DIRECTORS AND EXECUTIVE OFFICERS
As of February 28, 2005, the directors and executive officers of the
Company owned beneficially approximately 49.3% of the Company's outstanding
shares of Common Stock. As a result, the directors and executive officers
control the Company and its operations, including the approval of significant
corporate transactions and the election of at least a majority of the Company's
Board of Directors and thus the policies of the Company. The voting power of the
directors and executive officers could also serve to discourage potential
acquirors from seeking to acquire control of the Company through the purchase of
the Common Stock, which might depress the price of the Common Stock.
23
NO DIVIDENDS ALLOWED
As a California corporation, under the California General Corporation
Law, generally the Company may not pay dividends in cash or property except (i)
out of positive retained earnings or (ii) if, after giving effect to the
distribution, the Company's assets would be at least 1.25 times its liabilities
and its current assets would exceed its current liabilities (determined on a
consolidated basis under generally accepted accounting principles). At October
31, 2004, the Company had an accumulated deficit of $20.3 million. As a result,
the Company will not be able to pay dividends for the foreseeable future. In
addition, the payment of dividends is prohibited under its credit facilities.
POSSIBLE ANTI-TAKEOVER EFFECTS
The Company's Board of Directors has the authority to issue up to
5,000,000 shares of Preferred Stock and to determine the price, rights,
preferences, privileges and restrictions, including voting rights, of those
shares without any further vote or action by the shareholders. The Preferred
Stock could be issued with voting, liquidation, dividend and other rights
superior to those of the Common Stock. The Company issued 1,200,000 shares of
Series A Preferred in the recapitalization, and has no present intention to
issue any other shares of Preferred Stock. However, the rights of the holders of
Common Stock will be subject to, and may be adversely affected by, the rights of
the holders of any Preferred Stock that may be issued in the future. The
issuance of Preferred Stock, while providing desirable flexibility in connection
with possible acquisitions and other corporate purposes, could have the effect
of making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company, which may depress the market value of
the Common Stock. In addition, each of the Laura Ashley, Hart Schaffner & Marx,
Eddie Bauer and bebe licenses allows the licensor to terminate its license upon
certain events that under the license are deemed to result in a change in
control of the Company unless the change of control is approved by the licensor.
The licensors' rights to terminate their licenses upon a change in control of
the Company could have the effect of discouraging a third party from acquiring
or attempting to acquire a controlling portion of the outstanding voting stock
of the Company and could thereby depress the market value of the Common Stock.
ITEM 7A--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks, which include foreign exchange
rates and changes in U.S. interest rates. The Company does not engage in
financial transactions for trading or speculative purposes.
FOREIGN CURRENCY RISKS. During fiscal 2004, at any month-end a maximum
of $1.3 million and a minimum of $0.7 million of the Company's accounts payable
were payable in foreign currency. These foreign currencies included Japanese yen
and euros. Any significant change in foreign currency exchange rates could
therefore materially affect the Company's business, operating results and
financial condition. To monitor risks associated with currency fluctuations, the
Company on a weekly basis assesses the volatility of certain foreign currencies
and reviews the amounts and expected payment dates of its purchase orders and
accounts payable in those currencies. Based on those factors, the Company may
from time to time mitigate some portion of that risk by purchasing forward
commitments to deliver foreign currency to the Company. The Company held no
forward commitments for foreign currencies at October 31, 2004.
International sales accounted for approximately 11.3% of the Company's
net sales in fiscal 2004. Although the Company's international sales are
principally in United States dollars, sales to international customers may also
be affected by changes in demand resulting from fluctuations in interest and
currency exchange rates. There can be no assurance that these factors will not
have a material adverse effect on the Company's business, operating results and
financial condition. For frames purchased other than from Hong Kong/China
manufacturers, the Company pays for its frames in the currency of the country in
which the manufacturer is located and thus the costs (in United States dollars)
of the frames vary based upon currency fluctuations. Increases and decreases in
costs (in United States dollars) resulting from currency fluctuations generally
do not affect the price at which the Company sells its frames, and thus currency
fluctuations can impact the Company's gross margin.
INTEREST RATE RISK. The Company's credit facilities existing at October
31, 2004 had fixed interest rates. See Management's Discussion and Analysis of
Financial Condition and Results of Operations." Accordingly, the Company does
not believe it is subject to material interest rate risk.
24
In addition, the Company has fixed income investments consisting of
cash equivalents, which are also affected by changes in market interest rates.
The Company does not use derivative financial instruments in its investment
portfolio. The Company places its cash equivalents with high-quality financial
institutions, limits the amount of credit exposure to any one institution and
has established investment guidelines relative to diversification and maturities
designed to maintain safety and liquidity.
25
ITEM 8--FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Signature Eyewear, Inc.
We have audited the accompanying balance sheet of Signature Eyewear, Inc. as of
October 31, 2004, and the related statements of operations, shareholders'
deficit, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Signature Eyewear, Inc. as of
October 31, 2004, and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States.
/s/ Grobstein, Horwath & Company LLP
- --------------------------------------------
Grobstein, Horwath & Company LLP
Sherman Oaks, California
February 16, 2005
26
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Signature Eyewear, Inc. and subsidiary
Inglewood, California
We have audited the accompanying consolidated balance sheet of Signature
Eyewear, Inc. and subsidiary (collectively, the "Company") as of October 31,
2003 and the related consolidated statements of operations, shareholders'
deficit, and cash flows for each of the two years in the period ended October
31, 2003. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
October 31, 2003, and the results of their operations and their cash flows for
each of the two years in the period ended October 31, 2003, in conformity with
accounting principles generally accepted in the United States of America.
/s/ Singer Lewak Greenbaum & Goldstein LLP
- ------------------------------------------------
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
January 23, 2004
27
SIGNATURE EYEWEAR, INC.
BALANCE SHEET
OCTOBER 31,
================================================================================
ASSETS
2004 2003
------------ ------------
CURRENT ASSETS
Cash and cash equivalents $ 522,370 $ 413,251
Certificate of Deposit, restricted 250,000 250,000
Accounts receivable - trade, net of allowance for
doubtful accounts of $228,808 and $503,490 2,652,713 2,281,255
Inventories, net of reserves of $-0- and $1,506,007 5,334,120 5,955,253
Promotional products and materials 40,242 9,425
Prepaid expenses and other current assets 90,694 19,293
------------ ------------
Total current assets 8,890,139 8,928,477
PROPERTY AND EQUIPMENT, net 927,875 1,354,362
TOTAL DEPOSITS AND OTHER ASSETS 130,911 115,055
------------ ------------
TOTAL ASSETS $ 9,948,925 $ 10,397,894
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
28
SIGNATURE EYEWEAR, INC.
BALANCE SHEET
OCTOBER 31,
================================================================================
LIABILITIES AND SHAREHOLDERS' DEFICIT
2004 2003
------------ ------------
CURRENT LIABILITIES
Accounts payable - trade $ 5,059,198 $ 5,367,576
Accrued expenses and other current liabilities 2,428,060 1,722,825
Reserve for customer returns 302,045 619,460
Current portion of long-term debt 772,788 550,748
------------ ------------
Total current liabilities $ 8,562,091 $ 8,260,609
LONG-TERM DEBT, net of current portion 6,454,257 6,873,535
------------ ------------
Total liabilities 15,016,348 15,134,144
------------ ------------
SHAREHOLDERS' DEFICIT
Preferred stock, $0.001 par value
5,000,000 shares authorized
Series A 2% convertible preferred stock,
$0.001 par value;
1,360,000 shares authorized
1,200,000 issued and outstanding 1,200 1,200
Common stock, $0.001 par value
30,000,000 shares authorized
6,226,889 shares and 5,976,889 issued and
outstanding 6,227 5,977
Additional paid-in capital 15,275,791 15,236,041
Accumulated deficit (20,350,641) (19,979,468)
------------ ------------
Total shareholders' deficit (5,067,423) (4,736,250)
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 9,948,925 $ 10,397,894
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
27
SIGNATURE EYEWEAR, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED OCTOBER 31,
================================================================================
2004 2003 2002
------------ ------------ ------------
NET SALES $ 23,608,736 $ 25,140,360 $ 34,061,149
COST OF SALES 8,761,760 8,498,768 15,468,265
------------ ------------ ------------
GROSS PROFIT 14,846,976 16,641,592 18,592,884
------------ ------------ ------------
OPERATING EXPENSES
Selling 8,022,947 8,580,404 10,374,802
General and administrative 6,105,880 8,437,158 11,220,753
Depreciation and amortization 427,782 486,031 435,984
------------ ------------ ------------
Total operating expenses 14,556,609 17,503,593 22,031,539
------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS 290,367 (862,001) (3,438,655)
------------ ------------ ------------
OTHER INCOME (EXPENSE)
Sundry income (expense) (75,164) 213,097 18,514
Gain on sale of trademark -- 469,103 --
Interest expense (575,768) (445,239) (696,455)
------------ ------------ ------------
Total other income (expense) (650,932) 236,961 (677,941)
------------ ------------ ------------
LOSS BEFORE PROVISION FOR INCOME TAXES AND
EXTRAORDINARY ITEM (360,565) (625,040) (4,116,596)
PROVISION FOR INCOME TAXES 10,608 10,492 (987)
------------ ------------ ------------
LOSS BEFORE EXTRAORDINARY ITEM (371,173) (635,532) (4,115,609)
EXTRAORDINARY ITEM
Gain on extinguishment of debt, net -- 4,098,687 --
------------ ------------ ------------
NET INCOME (LOSS) (371,173) 3,463,155 (4,115,609)
PREFERRED STOCK DIVIDENDS -- (8,000) --
------------ ------------ ------------
NET INCOME (LOSS) AVAILABLE TO
COMMON STOCK SHAREHOLDERS $ (371,173) $ 3,455,155 $ (4,115,609)
============ ============ ============
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE
Before extraordinary item $ (0.06) $ (0.11) $ (0.75)
Extraordinary item -- 0.71 --
------------ ------------ ------------
TOTAL BASIC AND DILUTED EARNINGS
(LOSS) PER SHARE $ (0.06) $ 0.60 $ (0.75)
============ ============ ============
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING 6,102,231 5,752,240 5,488,396
============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
30
SIGNATURE EYEWEAR, INC.
STATEMENTS OF SHAREHOLDERS' DEFECIT
FOR THE YEARS ENDED OCTOBER 31,
================================================================================
SERIES A 2% CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
--------------------------- --------------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance, October 31, 2001 0 0 5,056,889 $ 5,057 $ 14,368,121 $(19,319,014) $ (4,945,836)
Issuance of common
stock in satisfaction
of the purchase price
adjustment related to
the GWO Acquisition 500,000 500 64,500 65,000
Net loss (4,115,609) (4,115,609)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance, October 31, 2002 0 0 5,556,889 5,557 14,432,621 (23,434,623) (8,996,445)
Issuance of common stock
as compensation 420,000 420 4,620 5,040
Issuance of preferred stock
in conjunction with
Bluebird financing 1,200,000 1,200 798,800 800,000
Preferred stock dividends (8,000) (8,000)
Net income 3,463,155 3,463,155
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance, October 31, 2003 1,200,000 1,200 5,976,889 5,977 15,236,041 (19,979,468) (4,736,250)
Issuance of common stock 250,000 250 39,750 40,000
Net loss (371,173) (371,173)
------------ ------------ ------------ ------------ ------------ ------------ ------------
BALANCE, OCTOBER 31, 2004 1,200,000 1,200 6,226,889 $ 6,227 $ 15,275,791 $(20,350,641) $ 5,067,423
============ ============ ============ ============ ============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
31
SIGNATURE EYEWEAR, INC.
STATEMENTS OF SHAREHOLDERS' DEFECIT
FOR THE YEARS ENDED OCTOBER 31,
================================================================================
2004 2003 2002
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (371,173) $ 3,455,155 $ (4,115,609)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Stock to be issued as compensation 5,040 --
Depreciation and amortization 427,782 486,029 435,986
Provision for bad debts (274,682) 52,412 432,224
Provision for inventory write down 93,755 159,018 2,066,213
Gain on extinguishment of debt (4,098,687)
Gain on sale of trademark (469,103)
(Increase) decrease in:
Accounts receivable - trade (96,776) 809,282 1,554,287
Inventories, net of effect of sale of
Dakota Smith and USA Optical in 2003 527,378 (599,569) 2,247,449
Income taxes refundable 2,704 107,296
Promotional products and materials (30,817) 78,487 76,636
Prepaid expenses and other current assets (71,398) 30,569 (40,910)
Increase (decrease) in:
Accounts payable - trade (308,378) 557,127 (3,256,946)