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EX-32.1 - 906 CERTIFICATION - SIGNATURE EYEWEAR INC | ex32-1_16685.htm |
EX-31 - 302 CERTIFICATION - SIGNATURE EYEWEAR INC | ex31-1_16685.htm |
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, 2009
or
o
|
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 Incorporation or Organization)
|
(I.R.S.
Employer 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 if the registrant is a well known seasoned issuer, as defined in
Rule 405 of the Securities Act. ý
Yes ¨ No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. ¨
Yes ý No
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. ý
Yes ¨ No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulations S-K (§229.405 of this chapter) 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. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company in
Rule 12b-2 of the Exchange Act.
Large
Accelerated Filer¨
|
Accelerated
Filer
¨
|
|
Non-accelerated
Filer ¨
|
(Do
not check if a smaller reporting company)
|
Smaller
reporting companyý
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). ¨
Yes ý No
State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant’s most recently completed second fiscal
quarter. $876,400
On
January 14, 2010, the Registrant had 6,955,639 outstanding shares of Common
Stock, $.001 par value. The aggregate market value of the 3,651,667
shares of Common Stock held by non-affiliates of the Registrant as of January
14, 2010 was $1,314,600.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant’s definitive proxy statement for the 2010 annual meeting of
shareholders, expected to be filed within 120 days of the registrant’s fiscal
year-end, are incorporated by reference into Part III of this Form
10-K.
2
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 our expectations are set forth in “Management’s
Discussion of Financial Condition and Results of Operations--Factors That May
Affect Future Operating Results” in Item 7, as well as discussed elsewhere in
this Report. All subsequent written and oral forward-looking
statements attributable to us or to persons acting on our behalf are expressly
qualified in their entirety by these factors. Those forward-looking
statements relate to, among other things, our plans and strategies, new product
lines, relationships with licensors, distributors and customers, and the
business environment in which we operate.
References
in this Report to the “Company”, “Signature”, “we” or “us” refer to Signature
Eyewear, Inc.
Item
1—Description of Business
General
Signature
designs, markets and distributes prescription eyeglass frames and sunwear
primarily under exclusive brand name licenses. In our fiscal year
ended October 31, 2009, our eyewear lines included bebe eyewear, Carmen Marc
Valvo Eyewear, Cutter & Buck Eyewear, Dakota Smith Eyewear, Hart Schaffner
Marx Eyewear, Hummer Eyegear, Laura Ashley Eyewear, Nicole Miller Eyewear,
Michael Stars Eyewear, and our proprietary Signature line.
We sell
and distribute our products: (1) to independent optical retailers in the United
States, primarily through our national direct sales force and independent sales
representatives; (2) to retail chains and department stores; (3)
internationally, primarily through exclusive distributors in foreign countries;
and (4) through selected distributors in the United States.
Business
Strategy
Our focus
in fiscal 2010 will be to maintain market position of our brands while
generating greater revenues from our newer brands and our Signature
collection. Growth in revenues will be challenging in light of the
troubled domestic and world economies, continued flat revenues in the optical
frame industry and increasing price competition.
Our 2010
plan includes the following:
·
|
increase
efforts to sell to mid-size retail optical chains and department
stores;
|
·
|
continue
to build the direct sales force in the United States to increase sales to
independent optical retailers, including optometrists, opticians and
ophthalmologists, which sales have higher gross margins than sales to
retail optical chains;
|
·
|
develop
international sales by expanding into smaller foreign markets;
and
|
·
|
continue
to focus on unique frame design, outstanding customer service and quality
control.
|
Our
longer-term strategy for increasing revenues includes the acquisition of
additional eyewear and sunwear licenses and companies engaged in the
distribution and sale of eyewear and/or sunwear.
3
Industry
Overview
The total
vision care industry in the United States generated $32.4 billion in revenues
during the 12 months ended September 30, 2009, a 3.3% decrease when
compared to the prior 12-month period. Frame sales represented the
largest share (25.9%) of the vision care market, generating revenues of
approximately $8.4 billion, a 2.0% decrease over the prior 12
months. During this 12-month period, independent optical retailers
represented 46.7% of the frame market as compared to 46.3% the prior year.
Products
Our
products include prescription eyeglass frames and sunwear. The
following table provides certain information about the market segments,
introduction dates and approximate retail prices of our products as of January
2010:
Brand Name/Segment
|
Customer Gender
|
Year Introduced
|
Approximate Retail
Prices(1)
|
bebe
eyewear
|
|||
Prescription
|
Women
|
2000
|
$100-$250
|
Sunwear
|
Women
|
2005
|
$100-$200
|
Carmen
Marc Valvo
|
|||
Prescription
|
Women
|
2008
|
$175-$350
|
Sunwear
|
Women
|
2008
|
$100-$300
|
Cutter
& Buck
|
|||
Prescription
|
Men/Women
|
2006
|
$100-$150
|
Sunwear
|
Men/Women
|
2006
|
$90-$150
|
Dakota
Smith
|
|||
Prescription
|
Unisex
|
1992
|
$90-$150
|
Sunwear
|
Unisex
|
1992
|
$75-$125
|
Hart
Schaffner Marx
|
|||
Prescription
|
Men
|
1996
|
$120-$200
|
Hummer
|
|||
Prescription
|
Men/Women
|
2005
|
$100-$175
|
Sunwear
|
Men/Women
|
2005
|
$100-$250
|
Laura
Ashley
|
|||
Prescription
|
Women
|
1992
|
$125-$180
|
Sunwear
|
Women
|
1993
|
$75-$100
|
Michael
Stars
|
|||
Prescription
|
Women
|
2009
|
$85-$150
|
Sunwear
|
Women
|
2009
|
$75-$130
|
Nicole
Miller
|
|||
Prescription
|
Women
|
1993
|
$120-$250
|
Sunwear
|
Women
|
1993
|
$75-$175
|
Signature
Collection
|
|||
Prescription
|
Men/Women
|
1999
|
$60-$100
|
|
(1)
Retail prices are established by retailers, not by
us.
|
Frame
Design. Frame styles are developed by our in-house design
team, which works in close collaboration with many respected frame manufacturers
throughout the world to develop unique designs and technologies. Once
the factory develops a prototype, we present the style to the licensor for
approval. Following approval, we contract to manufacture the
style. By these methods, we are able to choose from the strengths of
a variety of factories worldwide and to avoid reliance on any one
factory. Our designers continue to work closely with the factory at
every stage of the manufacturing process to assure quality.
4
Our metal
frames generally require over 200 production steps to manufacture, including
hand soldering of bridges, fronts and endpieces. Many of our 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 that are thinner and lighter while
retaining strength. We also take advantage of technical advances in
plastic frames, such as laminated plastics that are layered in contrasting
and/or complementary colors, as well as laser carving these materials to add
unique design details.
Quality
Control. We only use manufacturers we believe are capable of
meeting our criteria for quality, delivery and attention to design
detail. We specify the materials to be used in our frames, and
approve drawings and prototypes before committing to production. We
place our initial orders for each style approximately six months before the
style is released, and require the factory to deliver samples for our quality
assurance program. Our designers examine all sample shipments and
this process provides sufficient time to resolve problems with a style’s quality
before its release date. If, at any stage of the quality control
process, frames do not meet our quality standards, we return them to the factory
with instructions to improve the specific quality
problems. Historically, we have had a low defective frame rate and
our manufacturers share in the cost of replacing defective frames.
Our frame
manufacturers test all of our sunwear for optical clarity based on United
States, European and Australian standards. All our prescription
frames must pass eye shape tolerance requirements with specialized Gerber
testing equipment.
Our
products are subject to governmental health safety regulations in the United
States and most countries. Our products are also subject to import
duties and tariffs on frames exported to countries outside of the United
States. We regularly inspect our products to ensure compliance with
applicable requirements and safety standards.
Marketing, Merchandising and Sales
Programs. We produce marketing, merchandising and sales
promotion programs to help optical retailers, as well as our sales
representatives, promote sales. For optical retailers, we develop
unique in-store displays that are custom made to complement our
brands. We also believe product packaging is essential and can be
used at point of sale or on displays as an added selling
feature. Additionally, we create presentation materials, marketing
bulletins, catalogues, graphics and posters, and other sales tools to facilitate
professional presentations by our sales representatives. We motivate
our sales representatives by sales contests and individual performance
awards.
Cases. Our frames
are sold with cases that are designed and manufactured to our specifications to
complement the brand. In many circumstances, the cases are used in
our in-store displays.
Brands
bebe
eyewear
The “bebe
look,” with its signature hint of sensuality, appeals to hip, sophisticated
women who seek current fashion trends interpreted to suit their style and
budget. The bebe eyewear collection captures the spirit of the bebe
brand through sexy, provocative styles with bold colors and logo
accents. During the last two fiscal years, we expanded the
prescription sunwear line. Eye-catching point-of-purchase displays
feature distinctive on-model imagery, and frame displays were revised to reflect
the image of the brand at retail.
5
We have
the exclusive right to market and sell bebe eyewear in the United States, Canada
and a certain other countries pursuant to a license agreement that expires in
June 2010. The license agreement contains minimum net sales and
minimum royalty requirements. The licensor may terminate the license
if, without the prior approval of the licensor, a majority of our Common Stock
is acquired by either (i) a women’s apparel company or (ii) another entity and
either our financial and operational condition is impaired or the acquirer makes
material changes in the key management personnel in charge of the
license.
Carmen
Marc Valvo Eyewear
Carmen
Marc Valvo is a well-known American designer with celebrity clientele whose
collections include couture gowns, evening cocktail dresses and
swimwear. Carmen Marc Valvo Eyewear includes both sunwear and
prescription eyeglass frames of contemporary elegance, with the attention to
detail as seen in Carmen’s couture clothing and lace designs. The
collection includes styles for women over 30, with coloration, fine attention to
detail and a fit range that appeals to women worldwide.
We have
the exclusive worldwide right to market and sell Carmen Marc Valvo Eyewear
pursuant to a license agreement that expires in January 2012. We have the right to
renew the license for an additional three years provided we are in compliance
with the license agreement. The license agreement contains minimum
royalty requirements.
Cutter
& Buck Eyewear
Cutter
& Buck Eyewear is designed to appeal to the consumer who is looking for
time-honored styling that has been updated with today’s advancements in frame
technology. Inspired by Cutter & Buck’s country club heritage,
the frames embody classic American styling and incorporate spring hinges and
memory metal construction to provide the ultimate in comfort and
durability.
We have
the exclusive worldwide right to market and sell Cutter & Buck Eyewear
pursuant to a license agreement that expires in December 2011. The
license agreement contains minimum royalty requirements.
Dakota
Smith Eyewear
Dakota
Smith Eyewear targets men and women with eclectic designs that capture the
American spirit. The collection features high quality titanium and
colorful plastic prescription frames and sunwear at an affordable
price. Dakota Smith sunwear features superior lens
optics. The collection is showcased at the point of sale with unique
displays and casual lifestyle images.
We have
the exclusive right to market and sell Dakota Smith Eyewear in the United
States, Canada and certain other countries pursuant to a license agreement that
expires in February 2012. The license
agreement contains minimum royalty requirements.
Hart
Schaffner Marx Eyewear
The Hart
Schaffner Marx Eyewear collection is distinctively masculine, 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 with 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.
6
We have
the exclusive right to market and sell Hart Schaffner Marx Eyewear in the United
States and certain other countries through a license agreement that expires on
December 31, 2010. We may renew the license agreement for one
two-year period provided we are not in default under the license
agreement. The license agreement contains minimum net sales and
minimum royalty requirements. The licensor may terminate the license
agreement if someone acquires more than 50% of our outstanding voting
securities.
Hummer
Eyegear
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.
We have
the exclusive right to market and sell Hummer Eyegear in the United States and
certain other countries through a license agreement with General Motors
Corporation that expires in June 2010. The license agreement contains
minimum royalty requirements. The licensor may terminate the license
agreement if we do not obtain the prior approval of the licensor for any change
in the ownership, control or direction of our business.
Laura
Ashley Eyewear
As a
reflection of one of Europe’s most well known retailers, Laura Ashley Eyewear is
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 temples of the
frames. Our strategy for this collection for 2009 was to introduce a
small group of contemporary frames for a new audience. This has
proven successful and will be a large part of the design direction for
2010.
We have
the exclusive right to market and sell Laura Ashley Eyewear in the United
States, the United Kingdom and certain other countries through a license
agreement that expires in December 2011. We may
renew the license agreement for one three-year period provided we are not in
default under the license agreement. The license agreement contains
minimum royalty requirements. The licensor may terminate the license
agreement if a competitor acquires 51% or more of our voting
securities.
Michael
Stars Eyewear
We
introduced Michael Stars Eyewear, including prescription frames and sunwear for
women, in the spring of 2009. Michael Stars specializes in beachside
lifestyle and sells more than 200 styles of T-shirts, as well as maternity,
cashmere and dress collections and, most recently, active wear for
women. The Michael Stars Eyewear collection conveys a relaxed, casual
lifestyle emphasizing color and style, with subtle logo
applications. The frame color palates are derived from the array of
seasonal fabrics inspired by the Michael Stars clothing line.
We have
the exclusive worldwide right to market and sell Michael Stars Eyewear through a
license agreement that expires October 31, 2011. We have the right to
renew the license for one additional two-year term provided we are in compliance
with the license agreement. The license agreement contains minimum
royalty requirements.
7
Nicole
Miller Eyewear
Nicole
Miller Eyewear is targeted at the sophisticated, style-conscious modern woman
who creates her own fashion trends with contemporary elegance. For
more than 25 years, Nicole Miller has designed beautifully cut garments in
exquisitely drawn prints in New York City. The Nicole Miller Eyewear
collection exudes the essence of Nicole’s vision with unusual color treatments
and design elements, complementing Nicole’s clothing, handbags and
accessories.
We have
the exclusive right to market and sell frames and sunwear using the Nicole
Miller trademark throughout the world, excluding Japan, through a license
agreement that expires in March 2012. The license agreement contains
minimum royalty requirements and minimum sales requirements.
Signature
Collections
Our house
brand Signature Collections comprise multiple segments, each targeting niches
not otherwise filled by our brand-name collections. Our goals related
to that line are to position us to compete more effectively against other
optical companies that have direct sales forces; to enable us to offer products
in segments not served by our licensed collections; to allow us to develop
products more quickly; and to reach the value markets by offering good quality,
lower-priced styles.
The cost
to retailers of frames in our own lines is generally less than frames with brand
names, because the latter command greater retail prices, and we pay no licensing
fees on our own lines. Moreover, the styling of our own lines can be
more flexible, because we are able to change the styling and merchandising more
rapidly without the often time-consuming requirement of obtaining licensor
approval. In 2010, we will continue to expand the product offerings
in our Signature Collections to enhance sales.
Customers
Our
products are currently sold in the United States and in approximately 30 other
countries. In fiscal 2009, we sold frames to approximately 6,000
independent optical retailers in the United States and to retail chains and
department stores that sell our products at more than 1,000
locations. We have a broad customer base and no customer accounted
for 10% or more of net sales during the fiscal year.
Sales
and Distribution
We sell
and distribute our products (1) to independent optical retailers in the United
States, primarily through our national direct sales force; (2) to retail chains
and department stores; (3) internationally, primarily through exclusive
distributors in foreign countries; and (4) through selected distributors in the
United States.
The
following table sets forth our net sales by channel for the fiscal years
indicated:
8
Year
Ended October 31,
|
||||||||
2008
|
2009
|
|||||||
(in
thousands)
|
||||||||
Direct
sales
|
$ | 16,515 | $ | 15,990 | ||||
Retail
chains and department stores
|
3,364 | 3,941 | ||||||
International
|
2,372 | 1,372 | ||||||
Domestic
distributors
|
1,352 | 1,184 | ||||||
Freight
billed to customers/other
|
882 | 803 | ||||||
Total
|
$ | 24,485 | $ | 23,290 |
Direct Sales. We
sell our products to independent optical retailers in the United States
primarily through a national direct sales force, including company and
independent sales representatives. Our direct sales force, including
independent sales representatives, numbered 59 at October 31, 2009. We plan to
increase the number of sales representatives in fiscal 2010.
Retail Chains and Department
Stores. We sell directly to retail chains and department
stores. For several years, national retail optical chains have
increasingly marketed their own lower-cost private label
frames. Thus, we have focused, and plan to continue to focus, our
efforts on increasing sales to mid-size regional optical chains which are less
likely to sell their own private label eyewear than the large national retail
optical chains and are not experiencing consolidation like the national
chains. We also intend to focus on sales of sunwear to department
stores, a growing segment of our sunwear market.
International. We
distribute certain of our products internationally through exclusive
distributors. Our international distributors have exclusive
agreements for defined territories. At October 31, 2009, we had
approximately 25 international distributors and four international sales representatives. Part of our strategy to
increase revenues in fiscal 2010 is to develop sales opportunities for our
frames in smaller markets throughout the world while reducing our expenses in
operating and promoting international sales.
Domestic
Distributors. We distribute our products through selected
distributors in the United States in areas in which we believe we can achieve
better penetration than through direct sales. We had six distributors
in the United States at October 31, 2009.
Contract
Manufacturing
Our
frames are manufactured to our 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 2009, we used manufacturers in
China, Japan and Italy.
In
determining which manufacturer to use for a particular style, we consider each
manufacturer’s expertise (based on type of material and style of frame), its
ability to translate design concepts into prototypes, its price per frame, its
manufacturing capacity, its ability to deliver on schedule, and its ability to
adhere to our rigid quality control standards and quality assurance
requirements.
We are
not generally required to pay for any of our frames prior to
shipment. Payment terms currently range from 30 to 120 days on open
account. For frames imported other than from China manufacturers, we
are 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 China, we pay in United States dollars. For almost all of our
other frame purchases, our costs vary based on currency fluctuations, and we
generally cannot recover increased frame costs (in United States dollars) in the
selling price of the frames.
9
Competition
The
markets for prescription eyeglass frames and sunwear are intensely
competitive. There are thousands of frame styles, including thousands
with brand names many of which have global recognition. At retail,
our 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, we compete
against many companies, both foreign and domestic, including Luxottica Group
S.p.A, Safilo Group S.p.A., and Marchon Eyewear, Inc. Our largest
competitors have significantly greater financial, technical, sales,
manufacturing and other resources than us. They also employ direct
sales forces that have existed longer and are significantly larger than our
direct sales force. At the major retail optical chains, we compete
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 Group, the
largest eyewear company in the world, is vertically integrated, in that it
manufactures frames, distributes them through a direct sales force in the United
States and throughout the world, and owns LensCrafters, Sunglass Hut, Pearle
Vision and Cole Vision, which combined is the largest worldwide retail optical
chain.
We
compete in our target markets based on the quality of our brand name frames, our
marketing and merchandising, the popularity of our frame designs, the reputation
of our styles for quality, our pricing policies and the experience of our sales
force.
Backlog
Our
backlog of orders believed to be firm was approximately $265,000 at October 31,
2009 and $350,000 at October 31, 2008. Historically, we ship our
products upon receipt of orders and do not operate with a material
backlog.
Employees
At
October 31, 2009, we had 110 full-time employees, including 45 in sales and
marketing, 15 in customer service and support, 20 in warehouse operations and
shipping and 16 in general administration and finance. Our employees
are not covered by a collective bargaining agreement.
Item
1A—Risk Factors
Not
applicable.
Item
1B—Unresolved Staff Comments
Not
applicable.
Item
2—Properties
We lease
approximately 64,000 square feet of a building located in Inglewood, California,
where we maintain our principal offices and warehouse. The lease
expires on June 30, 2011 and we have a two-year renewal option. In
fiscal 2009, monthly rental payments under the lease were $51,200 through June
2009 and $48,000 for the rest of the fiscal year. The rental payments
will be $48,000 per month through June 2010 and $49,000 per month
thereafter. We are also responsible for our share of common area
operating expenses, utilities and insurance (approximately $6,600 per
month). We believe that these facilities are suitable and adequate
through the end of the lease.
We
sublease a portion of our premises for $11,000 per month for a
term that expires concurrently with the expiration of our
lease.
10
Item
3—Legal Proceedings
As of
January 15, 2010, we
were not involved in any material legal proceedings.
Item
4—Submission of Matters to a Vote of Security-holders
We did
not submit any matters to the vote of our shareholders in the fourth quarter of
fiscal 2009.
PART
II
Item
5—Market for Registrant’s Common Equity, Related Stockholder Matters and Small
Business Issuer Purchases of Equity Securities
Common
Stock
Our
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 our Common Stock in the over-the-counter market.
High
|
Low
|
||||
Fiscal
Year Ended October 31, 2008
|
|||||
First
Quarter
|
$
0.70
|
$
0.56
|
|||
Second
Quarter
|
$
0.65
|
$
0.55
|
|||
Third
Quarter
|
$
0.75
|
$
0.46
|
|||
Fourth
Quarter
|
$
0.70
|
$
0.35
|
|||
Fiscal
Year Ended October 31, 2009
|
|||||
First
Quarter
|
$
0.36
|
$
0.25
|
|||
Second
Quarter
|
$
0.34
|
$
0.24
|
|||
Third
Quarter
|
$
0.39
|
$
0.25
|
|||
Fourth
Quarter
|
$
0.39
|
$
0.23
|
|||
On
January 14, 2010, the last reported sales price of the Common Stock in the
over-the counter market was $0.36 per share. At January 14, 2010 ,
there were 43 holders of record of our Common Stock.
Dividends
As a
California corporation, under the California General Corporation Law, generally
we may not pay dividends in cash or property except (1) out of positive retained
earnings or (2) if, after giving effect to the distribution, our assets would be
at least 1.25 times our liabilities and our current assets would exceed our
current liabilities (determined under generally accepted accounting
principles). At October 31, 2009, we had an accumulated deficit
of $14.1 million and shareholders’ equity of $1.6 million. As a
result, we will not be able to pay cash dividends for the foreseeable
future. In addition, under our principal credit facilities, we may
not pay dividends without the consent of the lenders.
11
Purchases
of Common Stock
We did
not repurchase any shares of our Common Stock in fiscal 2009. Under
California law, repurchases of Common Stock are subject to the same restrictions
as payment of dividends.
Item
6—Selected Financial Data
Not
applicable.
Item
7—Management’s Discussion and Analysis of Financial Condition and Results of
Operations
The
following discussion and analysis should be read in connection with our
Financial Statements and related notes and other financial information included
elsewhere in this Report.
Overview
We
generate revenues through the sale of prescription eyeglass frames and sunwear
under licensed brand names, including bebe, Carman Marc Valvo, Cutter &
Buck, Dakota Smith, Hart Schaffner Marx, Hummer, Laura Ashley, Nicole Miller and
Michael Stars, and under our proprietary Signature brand. Our cost of
sales consists primarily of purchases from foreign contract manufacturers that
produce frames and cases to our specifications.
Our net
sales decreased 4.9% from $24.5 million in fiscal 2008 to $23.3 million in
fiscal 2009. The decrease in net sales in fiscal 2009 was primarily
due to decreases in international sales, as a result of the weak global economy,
the acquisition of major international customers by competitors and deep
discounting in many international markets. We were able to maintain
domestic sales relatively constant between the years despite the economic
downturn and weak optical frame market.
Our net
income increased from $622,000 in fiscal 2008 to $675,000 in fiscal 2009. The increase in
net income was principally due to a $520,000 reduction in general and
administrative expenses, a $300,000 reduction in selling expenses, and a $79,000
decrease in interest expense.
In light
of the continuing adverse economic conditions, we continued our efforts to
improve our balance sheet. We reduced inventories from $5.6 million
at October 31, 2008 to $3.8 million at October 31, 2009, which greatly reduced
our financing requirements. As a result, we were able to reduce our
accounts payable and accrued expenses by $1.8 million and our long-term debt
(including current portion) decreased by $700,000 to $4.2 million at October 31,
2009.
Critical
Accounting Policies and Estimates
The
preparation of our financial statements requires management to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosure of contingent assets and
liabilities. Management 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.
12
We
consider the following accounting policies to be both those most important to
the portrayal of our financial condition and those that require the most
subjective judgment:
·
|
revenue
recognition;
|
·
|
inventory
valuation; and
|
·
|
valuation
of deferred tax asset.
|
Revenue
Recognition. Our 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.
We have a
product return policy that we believe is standard in the optical industry and is
followed by most of our competitors. Under that policy, we generally
accept returns of non-discontinued product for credit, upon presentment and
without charge, and as a policy we do not make cash refunds. On a
quarterly basis we review and establish an allowance for estimated product
returns based upon actual returns subsequent to quarter-end and estimated future
returns. We apply 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.
Inventory
Valuation. Inventory (consisting of finished goods) is 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. We write down our 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. Our inventory includes designer
prescription eyeglass frames and sunwear, which are sold in a highly competitive
industry. If actual product demand or selling prices are less
favorable than our estimates we may be required to take additional inventory
write-downs in the future. Similarly, if our inventory is determined
to be undervalued due to write-downs below market value, we 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.
Valuation of Deferred Tax
Assets. Prior to 2003, we generated material net operating
loss carryforwards and differences between the tax bases of assets and
liabilities and their financial reporting amounts. These
carryforwards and differences resulted in the recognition of a net deferred tax
asset.
Realization
of our deferred tax assets is dependent on our ability to generate future
taxable income. Management believes that it is more likely than not
that we will generate taxable income sufficient to realize a portion of our
deferred tax assets and we have established a valuation allowance against the
other portion of these assets. We review this determination at least
annually, and adjust the valuation allowance to cover that portion of our
deferred tax assets that management does not believe that it is more likely than
not be realized. However, there can be no assurance that we will meet
our expectation of future income. As a result, the amount of deferred
tax assets considered realizable could be reduced in the near term if estimates
of future taxable income are reduced. Such occurrence could
materially adversely affect our results of operations and financial
condition.
13
Results
of Operations
The
following table sets forth for the fiscal years indicated selected statements of
operations data shown as a percentage of net sales.
2008
|
2009
|
|||||||
Net
sales
|
100.0 | % | 100.0 | % | ||||
Cost
of sales
|
35.8 | 35.9 | ||||||
Gross
profit
|
64.2 | 64.1 | ||||||
Operating
expenses:
|
||||||||
Selling
|
36.6 | 37.1 | ||||||
General
and administrative
|
23.5 | 22.4 | ||||||
Depreciation
and amortization
|
0.4 | 0.7 | ||||||
Total
operating expenses
|
60.5 | 60.2 | ||||||
Income
from operations
|
3.7 | 3.9 | ||||||
Other
expense
|
(1.1 | ) | (0.9 | ) | ||||
Income
before provision for income taxes
|
2.6 | 3.0 | ||||||
Provision
for income taxes – net
|
0.1 | 0.1 | ||||||
Net
income
|
2.5 | % | 2.9 | % |
Comparison
of Fiscal Years 2008 and 2009
Net Sales. Net
sales were $23.3 million in fiscal 2009 compared to $24.5 million in fiscal
2008. The following table shows certain information regarding net
sales by product line for the fiscal years indicated:
2008
|
2009
|
|||||||||||||||
bebe
eyewear
|
$ | 8,947 | 36.5 | % | $ | 9,844 | 42.3 | % | ||||||||
Nicole
Miller Eyewear
|
5,764 | 23.5 | 4,645 | 19.9 | ||||||||||||
Laura
Ashley Eyewear
|
3,849 | 15.7 | 2,834 | 12.2 | ||||||||||||
Other
|
5,925 | 24.3 | 5,967 | 25.6 | ||||||||||||
Total
|
$ | 24,485 | 100.0 | % | $ | 23,290 | 100.0 | % |
While we
did not increase wholesale frame prices in fiscal 2009, the average price of
frames sold increased in fiscal 2009 due to a greater sales of higher-priced
frames. Unit sales of frames decreased 8% in fiscal
2009.
International
sales decreased $1,000,000 in fiscal 2009 as a result of the weak global
economy, acquisition of major international customers by competitors and deep
discounting in many international markets.
Net sales
equal gross sales less returns and allowances. Our product returns as
a percentage of gross sales was 12.4% in fiscal 2008 and 13.3% in fiscal
2009. Although there were lower net sales in fiscal 2009, product
returns were $3.5 million in both fiscal 2008 and fiscal 2009.
We also
maintain 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. We made changes
in our allowance for product returns in fiscal 2008 and fiscal
2009.
14
Gross Profit and Gross
Margin. Gross profit was $14.9 million in fiscal 2009 compared
to $15.7 million in fiscal 2008. The decrease in gross profit in
fiscal 2009 was primarily due to the reduction in sales. Our gross
margin was 64.1% in fiscal 2009 compared to 64.2% in fiscal 2008.
Selling
Expenses. Selling expenses were $9.0 million and $8.7 million
in fiscal 2008 and 2009, respectively. Convention expense decreased
$151,000, international selling expense decreased $96,000 and salaries and
commissions decreased $129,000 from fiscal 2008 to fiscal 2009, which decreases
were partially offset by a $113,000 increase in promotional
expenses
General and Administrative
Expenses. General and administrative expenses were $5.8
million and $5.2 million in fiscal 2008 and fiscal 2009,
respectively. This expense reduction was primarily from decreases of
$214,000 in international operations, $79,000 in insurance expense and $59,000
in legal, accounting and consulting expenses. The balance of the
reduction was from smaller decreases in numerous categories.
Depreciation and Amortization
Expenses. Depreciation and amortization expenses increased
$45,000 from fiscal 2008 to fiscal 2009.
Interest
Expense. Interest expense decreased to $202,000 in fiscal 2009
from $281,000 in fiscal 2008. The decrease in fiscal 2009 was
primarily due to a lower weighted average interest rate on our borrowings and a
reduction in debt.
Provision for Income
Taxes. Our provision for income taxes was $20,800 in fiscal
2009 and $8,000 in fiscal 2008.
As of
October 31, 2009, we had net operating loss carry-forwards for federal and state
income tax purposes of approximately $15.4 million and $4.5 million,
respectively, which expire at various times from 2021 through 2028.
As of October 31, 2009, our deferred tax assets were $8.0 million
against which we had established a valuation allowance of $5.0 million,
resulting in a net deferred tax asset of $3.0 million.
Financial
Condition, Liquidity and Capital Resources
Our
accounts receivable (net of allowance for doubtful accounts) were $2.6 million at
October 31, 2009 and $2.8 million at October 31, 2008.
Our
inventory (at lower of cost or market) was $3.8 million at October 31, 2009 and
$5.6 million at October 31, 2008. This decrease was primarily due to
our strategy to reduce inventory as the global recession caused a reduction in
demand.
Our
accounts payable and our accrued expenses were $5.1 million at October 31, 2009
compared to $6.9 million at October 31, 2008. This reduction was due
to improved cash flow.
At
October 31, 2009, our long-term debt included principally a revolving line of
credit with Comerica Bank with an outstanding principal balance of $2.5 million
and a revolving line of credit with Bluebird Finance Limited (“Bluebird”) with
an outstanding principal balance of $1.6 million. See Note 4 of Notes
to Financial Statements for further information regarding our long-term
debt. Our long-term debt (including current portion) decreased from
$4.9 million at October 31, 2008 to $4.2 million at October 31, 2009 due
principally to continued amortization of the Bluebird credit
facility.
15
Borrowing
availability under the Comerica Bank revolving line of credit is based on
eligible accounts receivable, inventory and a letter of credit, up to a maximum
of $4.0 million outstanding at any time. At December 31, 2009,
we had $1.2 million of additional borrowing availability under this revolving
line of credit. The revolving line of credit bears interest payable
monthly at either Comerica Bank’s base rate plus 1.0% or LIBOR plus 3.00%, as
selected in advance by us, and will expire on December 1, 2011. At
October 31, 2009, the interest rate on this revolving line of credit was 3.5%
per annum.
Our
credit facility with Bluebird consists of a revolving credit line and support
for the $1,250,000 letter of credit securing the Comerica Bank credit
facility. Bluebird’s commitment on the revolving credit facility was
$1.6 million as of October 31, 2009, and reduces by $72,500 each
quarter. The revolving credit line bears interest at the rate of 5%
per annum, with payments of principal and interest on a 10-year amortization
schedule that commenced in fiscal 2005, and is due and payable in April
2013. The credit facility is secured by a security interest in our
assets that is subordinate to the Comerica Bank credit facility.
Our
shareholders’ equity increased from $888,000 at October 31, 2008 to $1.6 million
at October 31, 2009 due to our net income of $675,000.
Of our
accounts payable at October 31, 2009, $183,000 were payable in foreign
currency. To monitor risks associated with currency fluctuations, we
from time to time assess the volatility of certain foreign currencies and review
the amounts and expected payment dates of our purchase orders and accounts
payable in those currencies.
During
the past two years, we have generated cash primarily through product sales in
the ordinary course of business, our bank credit facilities and sales of equity
securities. At October 31, 2009, we had working capital of $2.2
million as compared to working capital of $2.4 million at October 31,
2008. Operating activities provided a net of $1,054,000 during fiscal
2009, while financing activities used a net of $690,000 and investing activities
used a net of $239,000 during fiscal year 2009, resulting in a net increase of
$125,000 in cash and cash equivalents.
Our
business plan for 2010 provides for positive cash flow from
operations. We believe that, at least through fiscal 2010, assuming
there are no unanticipated material adverse developments, and continued
compliance with our credit facilities, our cash flows from operations and credit
facilities will be sufficient to enable us to pay our debts and obligations as
they mature.
Quarterly
and Seasonal Fluctuations
Our
results of operations have fluctuated from quarter to quarter and we expect
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 our 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 eight
fiscal quarters ended October 31, 2009. 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.
16
2008
|
2009
|
|||||||||||||||||||||||||||||||
JAN.
31
|
APR.
30
|
JULY
31
|
OCT.
31
|
JAN.
31
|
APR.
30
|
JULY
31
|
OCT.
31
|
|||||||||||||||||||||||||
Net
sales
|
$ | 5,555 | $ | 6,686 | $ | 6,362 | $ | 5,882 | $ | 5,959 | $ | 6,111 | $ | 5,933 | $ | 5,287 | ||||||||||||||||
Cost
of sales
|
1,979 | 2,411 | 2,406 | 1,961 | 2,110 | 2,204 | 2,200 | 1,837 | ||||||||||||||||||||||||
Gross
profit
|
3,576 | 4,275 | 3,956 | 3,921 | 3,849 | 3,907 | 3,733 | 3,450 | ||||||||||||||||||||||||
Operating
expenses:
|
||||||||||||||||||||||||||||||||
Selling
|
1,933 | 2,494 | 2,248 | 2,283 | 2,139 | 2,220 | 2,181 | 2,117 | ||||||||||||||||||||||||
General
and administrative
|
1,411 | 1,497 | 1,462 | 1,490 | 1,459 | 1,417 | 1,327 | 1,181 | ||||||||||||||||||||||||
Total
operating expenses
|
3,344 | 3,991 | 3,710 | 3,773 | 3,598 | 3,637 | 3,508 | 3,298 | ||||||||||||||||||||||||
Income
from operations
|
232 | 284 | 246 | 148 | 251 | 270 | 225 | 152 | ||||||||||||||||||||||||
Other
expense, net
|
(80 | ) | (71 | ) | (64 | ) | (66 | ) | (51 | ) | (53 | ) | (51 | ) | (47 | ) | ||||||||||||||||
Income
before provision for income taxes
|
152 | 213 | 182 | 82 | 200 | 217 | 174 | 105 | ||||||||||||||||||||||||
Provision
for income taxes
|
1 | 1 | 6 | 1 | 1 | 1 | 19 | 0 | ||||||||||||||||||||||||
Net
income
|
$ | 151 | $ | 212 | $ | 176 | $ | 81 | $ | 199 | $ | 216 | $ | 155 | $ | 105 |
Inflation
We do not
believe our business and operations have been materially affected by
inflation.
Recently
Issued Accounting Pronouncements
For a
description of recently issued accounting pronouncements that may affect us, see
Note 2 of Notes to Financial Statements.
Factors
That May Affect Our Future Operating Results
The
loss of any material brand name license would have a material adverse effect on
our results of operations.
Net sales
of bebe eyewear, Nicole Miller Eyewear and Laura Ashley Eyewear accounted for
42.3%, 19.9% and 12.2%, respectively, or a total of 74.4%, of our net sales in
fiscal year 2009. While we intend to continue efforts to expand sales
of our other eyewear lines and may acquire other brand name eyewear licenses, we
expect these three lines to continue to be our leading sources of revenue for
the near future. Our licenses for bebe eyewear Nicole Miller Eyewear
and Laura Ashley Eyewear expire in June 2010, March 2012 and December 2014
(assuming we exercise our renewal option), respectively. These
licenses may be terminated prior to expiration for material default and the
failure to meet minimum sales and/or royalty requirements. The
termination of any of these licenses would have a material adverse effect on our
results of operations.
17
Our
product return policy permits returns of our products for credit or exchange,
which can materially adversely affect our net sales.
We have a
product return policy that we believe is standard in the optical industry and is
followed by our competitors. Under that policy, we must pre-approve
all product returns, which we will do only for credit or exchange if the product
has not been discontinued. As a general policy, we do not make cash
refunds. Our product returns for fiscal years 2008 and 2009 amounted
to 12.4% and 13.3%, respectively, of gross sales (sales before
returns). We maintain an allowance for product returns that we
consider adequate; however, an increase in returns that significantly exceeds
the amount of those reserves would have a material adverse impact on our results
of operations and financial condition.
We
compete in a highly competitive environment with companies that have greater
resources.
The
markets for prescription eyewear and sunwear are intensely
competitive. There are thousands of frame styles, including thousands
with brand names many of which have global recognition. At retail,
our 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, we compete
against many companies, both foreign and domestic, including Luxottica Group
S.p.A, Safilo Group S.p.A., and Marchon Eyewear, Inc. Our largest
competitors have significantly greater financial, technical, sales,
manufacturing and other resources than us. They also employ direct
sales forces that have existed longer, and are significantly larger, than our
direct sales force. At the major retail optical chains, we compete
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, the largest
eyewear company in the world, is vertically integrated, in that it manufactures
frames, distributes them through a direct sales force in the United States and
throughout the world, and owns LensCrafters, Sunglass Hut, Pearle Vision and
Cole Vision, which combined is the largest worldwide retail optical
chain.
We
compete in our target markets through the quality of the brand names we license,
our marketing, merchandising and sales promotion programs, the popularity of our
frame designs, the reputation of our styles for quality, our pricing policies
and the quality of our sales force. We cannot assure you that we will
be able to compete successfully against current or future competitors or that
the competitive pressures we face will not materially and adversely affect our
business, operating results and financial condition.
The
loss of or material reduction in purchases by one or more retail optical chains
would adversely affect our business.
Net sales
to retail optical chains and department stores amounted to 13.7% and 16.9% of
net sales in fiscal years 2008 and 2009, respectively, most of which were to
retail optical chains. Retail optical chains have increasingly
marketed their own lower-cost private label brands and are experiencing industry
consolidation. The loss of one or more retail optical chains or
department stores as a customer could have a material adverse affect on our
business.
The
increasing availability and acceptance of vision correction alternatives may
reduce consumer demand for frames.
Our
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 we do not believe that contact lenses, refractive
surgery or other vision correction alternatives materially and adversely impact
our business at present, there can be no assurance that technological advances
in, or reductions in the cost of, or greater consumer acceptance 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 our eyewear products, which would have a material
adverse impact on our results of operations and financial
condition.
18
If
we have a “change of ownership” as defined under the Internal Revenue Code, our
ability to use our net operating loss carryforwards (“NOLs”) would be
significantly limited.
As of
October 31, 2009, we had NOLs for federal and state income tax purposes of
approximately $15.4 million and $4.5 million, respectively, that expire at
various dates from 2021 through 2028. If a “change of ownership” of
Signature occurs within the meaning of Section 382 of the Internal Revenue Code,
our ability to use these NOLs in the future would be significantly
limited.
If
our net income decreases materially over an extended period of time, we may need
to increase the valuation allowance on our deferred tax asset relating to our
net operating loss carryforwards, which would further adversely affect our
results of operations for the affected periods.
Prior to
2003, we generated net operating loss carryforwards that resulted in a deferred
tax asset. Because of the uncertainty of realizing the benefits of
this asset, we established a valuation allowance in the full amount of the
asset. As a result of generating net income during the past several
fiscal years, we reduced this valuation allowance by $243,000 in fiscal year
2008 and $94,000 in fiscal 2009. The change in the valuation
allowance did not materially change our net income for these
periods. If we incur net losses over a sustained period in the
future, we may increase the allowance, which would adversely affect our results
of operations in those periods.
Our
directors and executive officers beneficially own 47.5% of our outstanding
Common Stock and thus control Signature.
As of
January 15, 2010 our directors and executive officers owned beneficially 47.5%
of the outstanding shares of our Common Stock. As a result, the
directors and executive officers control Signature and its operations not only
as a result of their current positions, but because of their ability to elect a
majority of the Board of Directors and therefore retain control of the
Board. The voting power of the directors and executive officers could
also serve to discourage potential acquirers from seeking to acquire control of
us through the purchase of our Common Stock, which might depress the market
price of our Common Stock.
We
are unable to pay any cash dividends for the foreseeable future.
As a
California corporation, under the California General Corporation Law, we may not
pay dividends in cash or property except (i) out of positive retained earnings
or (ii) if, after giving effect to the distribution, our assets would be at
least 1.25 times our liabilities and our current assets would exceed our current
liabilities (determined on a consolidated basis under generally accepted
accounting principles). At October 31, 2009, we had an
accumulated deficit of $14.1 million and shareholders’ equity of $1.6
million. As a result, we will not be able to pay dividends for the
foreseeable future. In addition, under our principal credit
facilities, we may not pay dividends without the consent of the
lenders.
19
Provisions
in our license agreements that allow the licensors to terminate the licenses
upon a change of control effected without their approval could have the effect
of discouraging a third party from acquiring or attempting to acquire a
controlling portion of our outstanding voting stock and could thereby depress
the market value of our Common Stock.
Each of
the Laura Ashley Eyewear, Hart Schaffner Marx Eyewear, bebe eyewear and Hummer
Eyegear 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
Signature unless the change of control is approved by the
licensor. The licensors’ rights to terminate their licenses upon a
change in control of Signature could have the effect of discouraging a third
party from acquiring or attempting to acquire a controlling portion of our
outstanding voting stock and could thereby depress the market value of our
Common Stock.
The
ability of our Board of Directors to authorize the issuance of preferred stock
could have the effect of discouraging a third party from acquiring or attempting
to acquire a controlling portion of our outstanding voting stock and could
thereby depress the market value of our Common Stock.
Our Board
of Directors has the authority to cause Signature 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 our Common Stock. We have outstanding 1,200,000 shares of
Series A Preferred and have no present intention to issue any other shares of
Preferred Stock. However, the rights of the holders of our 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 our
outstanding voting stock, which may depress the market value of our Common
Stock.
Item
7A—Quantitative and Qualitative Disclosures About Market Risk
Not
applicable.
Item
8—Financial Statements and Supplementary Data
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, 2009 and the related statements of income, shareholders’ equity 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
audit.
We
conducted our audit 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. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also 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
audit provides 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 the Company as of October 31, 2009
and the results of its operations and its cash flows for the year then ended, in
conformity with generally accepted accounting principles in the United
States.
/s/
Squar, Milner, Peterson, Miranda & Williamson, LLP
Newport
Beach, California
January
15, 2010
20
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, 2008 and the related statements of income, shareholders’ equity 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
audit.
We
conducted our audit 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. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also 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
audit provides 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 the Company as of October 31, 2008
and the results of its operations and its cash flows for the year then ended, in
conformity with U.S. generally accepted accounting principles.
/s/ Crowe
Horwath LLP
Sherman
Oaks, California
February
11, 2009
21
SIGNATURE
EYEWEAR, INC.
BALANCE
SHEETS
October 31,
ASSETS
|
||||||||
2009
|
2008
|
|||||||
Current
assets
|
||||||||
Cash and cash equivalents | $ | 431,037 | $ | 305,628 | ||||
Accounts receivable - trade, net of allowance for doubtful accounts of $42,163 | 2,565,125 | 2,809,135 | ||||||
Inventory | 3,843,793 | 5,607,178 | ||||||
Promotional products and materials | 209,847 | 133,618 | ||||||
Prepaid expenses and other current assets | 263,594 | 394,934 | ||||||
Deferred income taxes | 376,500 | 376,500 | ||||||
Total current assets | 7,689,896 | 9,626,993 | ||||||
Property and equipment,
net
|
313,324 | 369,935 | ||||||
Deposits
and other assets
|
250,500 | 107,656 | ||||||
Deferred
income taxes
|
2,600,700 | 2,600,700 | ||||||
Total assets | $ | 10,854,420 | $ | 12,705,284 |
The
accompanying notes are an integral part of these financial
statements.
22
SIGNATURE
EYEWEAR, INC.
BALANCE
SHEETS
October 31,
LIABILITIES
AND SHAREHOLDERS' EQUITY
2009
|
2008
|
|||||||
Current
liabilities
|
||||||||
Accounts payable - trade | $ | 3,532,159 | $ | 5,053,341 | ||||
Accrued expenses and other current liabilities | 1,538,516 | 1,853,586 | ||||||
Current portion of long-term debt | 415,000 | 290,000 | ||||||
Total current liabilities | 5,485,675 | 7,196,927 | ||||||
Long-term debt, net of
current portion
|
3,805,000 | 4,620,000 | ||||||
Total liabilities | 9,290,675 | 11,816,927 | ||||||
Commitments
and contingencies
|
||||||||
Shareholders'
equity
|
||||||||
Preferred stock, $0.001 par value | ||||||||
5,000,000 shares authorized | ||||||||
Series A 2% convertible preferred stock, $0.001 | ||||||||
par value; liquidation preference (approximately | ||||||||
$915,000 and $897,000 at October 31, 2009 and 2008, respectively) | ||||||||
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 | ||||||||
6,955,639 shares issued and outstanding | 6,956 | 6,956 | ||||||
Additional paid-in capital | 15,656,812 | 15,656,812 | ||||||
Accumulated deficit | (14,101,223 | ) | (14,776,611 | ) | ||||
Total shareholders' equity | 1,563,745 | 888,357 | ||||||
Total liabilities and shareholders' equity | $ | 10,854,420 | $ | 12,705,284 |
The
accompanying notes are an integral part of these financial
statements.
23
SIGNATURE
EYEWEAR, INC.
STATEMENTS
OF INCOME
For
the Years Ended October 31,
2009
|
2008
|
|||||||
Net
sales
|
$ | 23,290,257 | $ | 24,485,402 | ||||
Cost
of sales
|
8,350,909 | 8,757,048 | ||||||
Gross
profit
|
14,939,348 | 15,728,354 | ||||||
Operating
expenses
|
||||||||
Selling
|
8,657,584 | 8,958,077 | ||||||
General
and administrative
|
5,231,107 | 5,751,792 | ||||||
Depreciation
and amortization
|
152,365 | 107,553 | ||||||
Total
operating expenses
|
14,041,056 | 14,817,422 | ||||||
Income
from operations
|
898,292 | 910,932 | ||||||
Interest
expense
|
(202,032 | ) | (281,097 | ) | ||||
Income
before taxes
|
696,260 | 629,835 | ||||||
Income
taxes
|
20,872 | 8,320 | ||||||
Net
income
|
675,388 | 621,515 | ||||||
Preferred
stock dividends
|
$ | (17,990 | ) | $ | (17,635 | ) | ||
Net
income available to common shareholders
|
$ | 657,398 | $ | 603,880 | ||||
Basic
earnings per share
|
$ | 0.09 | $ | 0.09 | ||||
Diluted
earnings per share
|
$ | 0.08 | $ | 0.08 | ||||
Weighted-average
common shares
|
||||||||
outstanding
- Basic
|
6,955,639 | 6,908,516 | ||||||
Weighted-average
common shares
|
||||||||
outstanding
- Diluted
|
8,320,964 | 8,246,990 | ||||||
The
accompanying notes are an integral part of these financial
statements.
24
SIGNATURE
EYEWEAR, INC.
STATEMENT
OF SHAREHOLDERS' EQUITY
For
the Years Ended October 31,
Series
A 2% Convertible
|
Additional
|
|||||||||||||||||||||||||||
Preferred Stock
|
Common Stock
|
Paid-in
|
Accumulated
|
|||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Deficit
|
Total
|
||||||||||||||||||||||
Balance,
October 31, 2007
|
1,200,000 | $ | 1,200 | 6,855,639 | $ | 6,856 | $ | 15,589,912 | $ | (15,398,126 | ) | $ | 199,842 | |||||||||||||||
Issuance
of common stock
|
— | — | 100,000 | 100 | 66,900 | — | 67,000 | |||||||||||||||||||||
Net
income
|
— | — | — | — | — | 621,515 | 621,515 | |||||||||||||||||||||
Balance,
October 31, 2008
|
1,200,000 | 1,200 | 6,955,639 | 6,956 | 15,656,812 | (14,776,611 | ) | 888,357 | ||||||||||||||||||||
Issuance
of common stock
|
— | — | — | — | — | — | ||||||||||||||||||||||
Net
income
|
— | — | — | — | — | 675,388 | 675,388 | |||||||||||||||||||||
Balance,
October 31, 2009
|
1,200,000 | $ | 1,200 | 6,955,639 | $ | 6,956 | $ | 15,656,812 | $ | (14,101,223 | ) | $ | 1,563,745 |
The
accompanying notes are an integral part of these financial
statements.
25
SIGNATURE
EYEWEAR, INC.
STATEMENTS
OF CASH FLOWS
For
the Years Ended October 31,
2009
|
2008
|
|||||||
Cash
flows from operating activities
|
||||||||
Net
income
|
$ | 675,388 | $ | 621,515 | ||||
Adjustments
to reconcile net income
|
||||||||
to
net cash provided by
|
||||||||
operating
activities:
|
||||||||
Depreciation
and amortization
|
152,365 | 107,553 | ||||||
Provision
for bad debts
|
— | (10,673 | ) | |||||
Reserve
for customer returns
|
— | (9,631 | ) | |||||
(Increase)
decrease in:
|
||||||||
Accounts
receivable - trade
|
244,010 | 85,629 | ||||||
Inventories
|
1,763,385 | (842,689 | ) | |||||
Promotional
products and materials
|
(76,229 | ) | 42,602 | |||||
Prepaid
expenses and other current assets
|
131,340 | (95,004 | ) | |||||
Increase
(decrease) in:
|
||||||||
Accounts
payable - trade
|
(1,521,182 | ) | 296,132 | |||||
Accrued
expenses and other current liabilities
|
(315,070 | ) | (81,047 | ) | ||||
. | ||||||||
Net
cash provided by operating activities
|
1,054,007 | 114,387 | ||||||
Cash
flows from investing activities
|
||||||||
Purchase
of property and equipment
|
(95,754 | ) | (84,352 | ) | ||||
Deposits
and other assets
|
(142,844 | ) | (14,887 | ) | ||||
Net
cash used in investing activities
|
(238,598 | ) | (99,239 | ) | ||||
Cash
flows from financing activities
|
||||||||
Net
(decrease) increase in lines of credit
|
(400,000 | ) | 200,000 | |||||
Payments
on short-term debt
|
— | (75,100 | ) | |||||
Payments
on long-term debt
|
(290,000 | ) | (362,500 | ) | ||||
Proceeds
from sale of common stock
|
— | 67,000 | ||||||
Net
cash used by financing activities
|
(690,000 | ) | (170,600 | ) | ||||
Net
increase (decrease) in cash and cash equivalents
|
125,409 | (155,452 | ) | |||||
Cash
and cash equivalents, beginning of period
|
305,628 | 461,080 | ||||||
Cash
and cash equivalents, end of period
|
$ | 431,037 | $ | 305,628 | ||||
Supplemental
disclosures of cash
|
||||||||
flow
information
|
||||||||
Interest
paid
|
$ | 113,399 | $ | 172,961 | ||||
Income
taxes paid
|
$ | 20,872 | $ | 8,620 |
The
accompanying notes are an integral part of these financial
statements.
26
SIGNATURE
EYEWEAR, INC.
NOTES TO
FINANCIAL STATEMENTS
October
31, 2009 and 2008
NOTE
1. ORGANIZATION AND LINE OF BUSINESS
Signature
Eyewear, Inc. (the “Company”) designs, markets and distributes eyeglass frames
throughout the United States and internationally. The Company
conducts its operations primarily from its principal executive offices and a
warehouse in Inglewood, California.
NOTE
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use
of Estimates
The
preparation of the financial statements in conformity with generally accepted
accounting principles (“GAAP”) requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates. Management prepares estimates for a number of
factors. The Company believes its estimates of product returns,
inventory valuation and valuation of the deferred tax assets, as further
discussed below, to be the most sensitive estimates impacting financial position
and results of operations in the near term.
Cash
and Cash Equivalents
Cash and
cash equivalents consist of cash and highly liquid securities with original
maturities of three months or less.
Accounts
Receivable and Allowance for Doubtful Accounts
Accounts
receivable consists of amounts billed and currently due from
customers. The Company monitors the aging of its accounts receivable
and related facts and circumstances to determine if an allowance should be
established for doubtful accounts. Although the Company expects to
collect amounts due, actual collections may differ.
Inventory
Inventory
consists of finished goods, which are valued at the lower of cost or
market. Cost is computed using the weighted-average cost, which
approximates actual cost on a first-in, first-out basis.
The
Company regularly and periodically evaluates its inventory to ensure that it is
valued at the lower of cost or market based on current market trends, product
history, and turnover.
Property
and Equipment
Property
and equipment are recorded at cost. Depreciation and amortization are
provided using the straight-line method over the estimated useful lives of the
assets as follows:
27
Office
furniture and equipment
|
7
years
|
Computer
equipment
|
3
years
|
Software
|
3
years
|
Machinery
and equipment
|
5
years
|
Leasehold
improvements
|
Term
of the lease or the estimated life of the related improvements, whichever
is shorter
|
Expenditures
for major renewals and betterments that extend the useful lives of property and
equipment are capitalized.
Impairment
of Long-Lived Assets
The
Company reviews the carrying value of other long-lived assets at least annually
for evidence of impairment. When indicators of impairment are
present, the Company evaluates the carrying value of long-lived assets in
relation to the undiscounted future cash flows generated by such
assets. An impairment loss is recognized when the estimate of
undiscounted future cash flows generated by such assets is less than the
carrying amount. Measurement of the impairment loss is based on the
present value of the expected future cash flows. The Company believes
no indication of impairment existed as of October 31, 2009.
Fair
Value of Financial Instruments
Financial
instruments include cash and cash equivalents, accounts receivable and payable,
other current liabilities and long-term debt. The carrying amounts
reported in the balance sheets for cash and cash equivalents, accounts
receivable and payable and other current liabilities approximate fair value due
to the short-term nature of these items. The Company used the
following methods to estimate the fair value of all financial instruments whose
carrying amounts do not approximate fair value on the accompanying balance
sheets:
Long-Term
Debt. The fair value of long-term debt is estimated using a
model that estimates fair values at market rates.
The
carrying or notional amounts and fair values of the Company’s financial
instruments at October 31, 2009 and 2008 were as follows:
2009
|
2008
|
|||||||||||||||
Carrying
Value
|
Fair
Value
|
Carrying
Value
|
Fair
Value
|
|||||||||||||
Financial
Assets:
|
||||||||||||||||
Financial
Liabilities:
|
||||||||||||||||
Revolving
line of credit –Comerica Bank
|
$ | 2,500,000 | $ | 2,500,000 | $ | 2,900,000 | $ | 2,900,000 | ||||||||
Term
note payable-Ashford
|
$ | 125,000 | $ | 125,000 | $ | 125,000 | $ | 125,000 | ||||||||
Revolving
line of credit– Bluebird
|
$ | 1,595,000 | $ | 1,215,492 | $ | 1,885,000 | $ | 1,373,919 |
28
Revenue
Recognition
For
transactions satisfying the conditions for revenue recognition under Accounting
Standards Codification (“ASC”) 605-25, “Sales of Products when Right of
Return Exists,” and Securities and Exchange Commission, Staff Accounting
Bulletin (“SAB”) No. 104, “Revenue Recognition,” product
revenue is recorded at the time of shipment, net of estimated allowances and
returns. For transactions not satisfying the conditions for revenue
recognition under ASC 605-25 and SAB No. 104, product revenue is deferred until
the conditions are met, net of an estimate for cost of sales. The
Company had no deferred revenue at October 31, 2009 and 2008. For the
fiscal years ended October 31, 2009 and 2008, the Company had sales returns
totaling $3,465,856 and $3,478,510, respectively.
The
Company performs periodic credit evaluations of its customers and maintains
allowances for potential credit losses based on management’s evaluation of
historical experience and current industry trends. Although the
Company expects to collect amounts due, actual collections may
differ.
Shipping
and Handling Costs
ASC
605-45-19 “Shipping and
Handling Fees and Costs” requires shipping and handling fees billed to
customers to be classified as revenue and shipping and handling costs to be
either classified as cost of sales or disclosed in the notes to the financial
statements. The Company includes shipping and handling fees billed to
customers in net sales. Shipping and handling costs associated with
inbound freight are recorded as a component of cost of sales, which totaled
$298,174 and $456,125 in the fiscal years ended October 31, 2009 and 2008,
respectively. Other shipping and handling costs are included in
selling expenses and totaled $1,453,250 and $1,477,680 in the fiscal years ended
October 31, 2009 and 2008, respectively.
Advertising
Expense
The
Company expenses all advertising costs as they are
incurred. Advertising expense for the fiscal years ended October 31,
2009 and 2008 was $553,828 and $534,798, respectively.
Stock-Based
Compensation
The
Company accounts for stock-based compensation under ASC 718, “Compensation — Stock
Compensation” which requires the fair value
of all option grants or stock issuances made to employees or directors on or
after the beginning of fiscal 2006, as well as a portion of the fair value of
each option and stock grant made to employees or directors prior to that date
which represents the non-vested portion of these share-based awards as of such
implementation date, to be recognized as an expense. These amounts
are expensed over the respective vesting periods of each award using the
straight-line attribution method. The Company calculates stock
option-based compensation by estimating the fair value of each option as of its
date of grant using the Black-Scholes option pricing model
During
the fiscal years ended October 31, 2009 and 2008, the Company did not issue any
stock-based compensation and at October 31, 2009 no compensatory stock options
were outstanding.
Income
Taxes
The
Company provides for income taxes under the liability
method. Deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
as measured by the enacted tax rates which are expected to be in effect when
these differences reverse. To the extent net deferred tax assets are
not realizable on a more likely than not basis, a
29
valuation
allowance is provided against such net deferred tax assets. In the
year ended October 31, 2008, the Company adopted the accounting guidance as
codified in ASC 740-10, Income
Taxes — Uncertainty in Income Taxes (previously FASB Interpretation 48,
Accounting for Uncertainty in
Income Taxes: An Interpretation of FASB Statement No. 109, Interpretation
48), which establishes the criterion that an individual tax position has to meet
for some or all of the benefits of that position to be recognized in the
Company’s financial statements. The Company’s adoption of ASC 740-10
had no effect on the financial statements presented.
Basic
and Diluted Net Income per Share
Basic net
income per share is based upon the weighted average number of shares of common
stock outstanding. Diluted net income per share is based on the
assumption that options, warrants and other instruments convertible into common
shares are included in the calculation of diluted net income per share, except
when their effect would be anti-dilutive. For instruments in which
consideration is to be received for exercise, such as options or warrants,
dilution is computed by applying the treasury stock method. Under
this method, options and warrants are assumed to be exercised at the beginning
of the period (or at the time of actual issuance, if later), and as if funds
obtained thereby were used to purchase common stock at the average market price
during the period. Cumulative dividends on the Company’s cumulative
convertible preferred stock, although not declared, constitute a preferential
claim against future dividends, if any, and are treated as an incremental
decrease in net income from continuing operations or increase in net loss from
continuing operations for purposes of determining basic net income (loss) from
continuing operations per common share. Such preferred dividends, if
dilutive, are added back to the net income or loss from continuing operations as
it is assumed that the preferred shares were converted to common shares as of
the beginning of the period for purposes of determining diluted net income
(loss) from continuing operations per common share.
Comprehensive
Income
ASC 220,
“Comprehensive Income”
establishes standards for reporting comprehensive income and its components in a
financial statement. Comprehensive income as defined includes all
changes in equity (net assets) during a period from non-owner
sources. Examples of items to be included in comprehensive income,
which are excluded from net income, include foreign currency translation
adjustments and unrealized gains and losses on available-for-sale
securities. For the fiscal years ended October 31, 2009 and 2008,
comprehensive income is not presented in the Company’s financial statements
because the Company did not have any material translation adjustments or any of
the other items of comprehensive income in any period presented.
Foreign
Currency Translation
The
Company’s former Belgium branch’s functional currency was the Euro and the
Company’s
reporting currency is the dollar. Assets and liabilities were
translated at exchange rates in effect at the balance sheet
date. Income and expense accounts were translated at average
rates.
Some of
the Company’s liabilities are denominated in foreign currencies. Such
liabilities are converted into U.S. Dollars at the exchange rate prevailing at
the balance sheet date. The resulting gains or losses were immaterial
for the fiscal years ended October 31, 2009 and 2008.
30
Concentrations
of Credit Risk
Financial
instruments, which potentially expose the Company to concentration of credit
risk, consist primarily of cash and cash equivalents, a restricted certificate
of deposit and trade accounts receivable. The Company’s deposits with
financial institutions are guaranteed by the Federal Deposit Insurance
Corporation up to $250,000. The Company may be exposed to risk for
the amount of funds held in any financial institution in excess of the insurance
limit. In assessing the risk, the Company’s policy is to maintain
cash balances with well capitalized financial institutions.
The
Company sells its products primarily to independent optical retailers, retail
optical chains, and distributors. These customers can be
significantly affected by changes in economic, competitive or other
factors. In order to minimize the risk of loss, the Company routinely
assesses the financial strength of its customers and the Company maintains an
allowance for doubtful accounts.
The
Company purchases its frames from a number of contract
manufacturers. The Company had purchases from four vendors amounting
to 30% 19%, 13% and 11%, respectively, of total product purchases for the fiscal
year ended October 31, 2009 and from four vendors amounting to 24%, 18%, 17% and
12%, respectively, for the fiscal year ended October 31, 2008.
Derivatives
A
derivative is an instrument whose value is “derived” from an underlying
instrument or index such as a future, forward, swap, option contract, or other
financial instrument with similar characteristics, including certain derivative
instruments embedded in other contracts (“embedded derivatives”) and for hedging
activities. As a matter of policy, the Company does not invest in
separable financial derivatives or engage in hedging
transactions. However, the Company has from time to time financed its
operations with financial instruments containing certain features that have
resulted in the instruments being deemed derivatives or containing embedded
derivatives. Derivatives and embedded
derivatives, if applicable, are measured at fair value and marked to market
through earnings. However, such new and/or complex instruments may
have immature or limited markets. As a result, the pricing models
used for valuation often incorporate significant estimates and assumptions,
which may impact the level of precision in the financial
statements. At October 31, 2009, the fair value of derivatives was
not material.
Recently
Adopted Accounting Pronouncements
Effective
September 30, 2009, the Company adopted the Financial Accounting Standards Board
(“FASB”) new Accounting Standard Codification (“ASC” or “Codification”) as the
single source of authoritative accounting guidance under the Generally Accepted
Accounting Principles Topic. The ASC does not create new accounting
and reporting guidance, rather it reorganizes U.S. GAAP pronouncements into
approximately 90 topics within a consistent structure. All guidance
in the ASC carries an equal level of authority. Relevant portions of
authoritative content, issued by the U.S. Securities and Exchange Commission
(“SEC”) for SEC reporting entities, have been included in the
ASC. After the effective date of the Codification, all
non-grandfathered, non-SEC accounting literature not included in the ASC is
superseded and deemed non-authoritative. Adoption of the Codification
also changed how the U.S. GAAP is referenced in financial
statements.
Effective
July 31, 2009, the Company adopted new guidance to the Subsequent Events Topic
of the ASC. The Subsequent Events Topic establishes general standards
of accounting for and disclosure of events that occur after the balance sheet
date but before financial statements are issued or are available to be
issued. In particular, the Subsequent Events Topic sets forth the
period after the balance sheet date during which management of an SEC reporting
entity should evaluate events or transactions that may
31
occur for
potential recognition or disclosure in the financial statements, the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date of its financial statements, and the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. Entities are required to
disclose the date through which subsequent events were evaluated as well as the
date the financial statements were issued or available to be
issued. Adoption of this guidance did not have any impact on the
financial statements presented. The Company evaluated subsequent
events through the filing date of its Annual Report on Form 10-K for the year
ended October 31, 2009 on January 14,
2010.
Effective
November 1, 2008, the Company adopted new guidance to the “Business
Combinations Topic” of the FASB
ASC. This guidance establishes principles and requirements for how an
acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any non-controlling interest in
the acquiree, recognizes and measures the goodwill acquired in the business
combination and determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination. The adoption of this guidance had no impact on
the financial statements presented.
In April
2009, the FASB issued additional guidance under the “Fair Value Measurements and
Disclosures Topic” of the ASC. This topic relates to determining fair
values when there is no active market or where the price inputs being used
represent distressed sales. This additional guidance requires the
entity to (i) evaluate certain factors to determine whether there has been a
significant decrease in the volume and level of activity for the asset or
liability when compared with normal market activity, (ii) consider whether the
preceding indicates that transactions or quoted prices are not determinative of
fair value and, if so, whether a significant adjustment thereof is necessary to
estimate fair value, and (iii) ignore the intent to hold the asset or liability
when estimating fair value. This additional guidance also provides
guidance in determining whether a transaction is orderly (or not orderly) when
there has been a significant decrease in the volume and level of activity for
the asset or liability, based on the weight of available
evidence. The Company adopted this additional guidance as of July 31,
2009. The adoption of this additional guidance did not have any
impact on the financial statements presented.
In April
2009, the FASB issued additional guidance under the “Financial Instruments
Topic” of the ASC. This topic
requires disclosure of the carrying amount and the fair value of all financial
instruments for interim and annual financial statements of SEC-reporting
entities (even if the financial instrument is not recognized in the balance
sheet), including the methods and significant assumptions used to estimate the
fair values and any changes in such methods and assumptions. This
topic also requires disclosures in summarized financial information in interim
financial statements. The Company adopted this additional guidance as
of July 31, 2009. The adoption of this additional guidance did not
have any impact on the financial statements presented.
In April
2009, the FASB issued additional guidance under the “Investments – Debt and
Equity Securities Topic” of the ASC. This topic requires the entity
to consider (i) whether the entire amortized cost basis of the security will be
recovered (based on the present value of expected cash flows), and (ii) its
intent to sell the security. Based on the factors described in the
preceding sentence, this topic also explains the process for determining the
other than temporary impairment (“OTTI”) to be recognized in “other
comprehensive income” (generally, the impairment charge for other than a credit
loss) and in earnings. This topic does not change existing
recognition or measurement guidance related to OTTI of equity
securities. Certain transition rules apply to debt securities held at
the beginning of the interim period of adoption when an OTTI was previously
recognized. The Company adopted this additional guidance as of July
31, 2009. The adoption of this additional guidance did not have any
impact on the financial statements presented.
32
Recently
Issued Accounting Pronouncements
In
December 2007, the FASB issued guidance as codified in ASC 810-10, Consolidation — Noncontrolling
Interests (previously SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements — Amendments of ARB
No. 51). ASC 810-10 states that accounting and
reporting for minority interests will be recharacterized as noncontrolling
interests and classified as a component of equity. ASC 810-10
also establishes reporting requirements that provide sufficient disclosures that
clearly identify and distinguish between the interests of the parent and the
interests of the noncontrolling owners. SFAS No. 160 is
effective for fiscal years beginning after December 15, 2008, which for the
Company is its fiscal ending October 31, 2010. The Company does not
expect the adoption of this guidance to have a material impact on either its
financial position or results of operations during its fiscal year ending
October 31, 2010.
In March
2008, the FASB issued guidance as codified in ASC 815-10, Derivatives and Hedging
(previously SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities — an Amendment of FASB Statement No.
133”). ASC 815-10 requires entities with derivative
instruments to disclose information that should enable financial-statement users
to understand how and why the entity uses derivative instruments, how derivative
instruments and related hedged items are accounted for under ASC 815-10 and
how derivative instruments and related hedged items affect an entity’s financial
position, financial performance and cash. ASC 815-10 is effective for
fiscal years and interim periods beginning after November 15,
2008. The Company does not expect the adoption of ASC 815-10 to have
a material impact on its financial statements for the fiscal year ending October
31, 2010.
The FASB
recently amended its guidance surrounding an entity’s analysis to determine
whether any of its variable interests constitute controlling financial interests
in a variable interest entity. This analysis identifies the primary
beneficiary of a variable interest entity as the enterprise that has both of the
following characteristics: (a) the power to direct the activities of a variable
interest entity that most significantly impact the entity’s economic
performance; and (b) the obligation to absorb losses of the entity that could
potentially be significant to the variable interest entity or the right to
receive benefits from the entity that could potentially be significant to the
variable interest entity. Additionally, an enterprise is required to
assess whether it has an implicit financial responsibility to ensure that a
variable interest entity operates as designed when determining whether it has
the power to direct the activities of the variable interest entity that most
significantly impact the entity’s economic performance. The amended
guidance also requires ongoing reassessments of whether an enterprise is the
primary beneficiary of a variable interest entity. The amended
guidance is effective for the first annual reporting period that begins after
November 15, 2009. The Company will reevaluate any interests in
variable interest entities for the period beginning on January 1, 2010 to
determine that the entities are reflected properly in the financial statements
as investments or consolidated entities. The Company does not expect
the adoption of this guidance to have a material impact on either its financial
position or results of operations for the fiscal year ending October 31,
2010.
33
NOTE
3. PROPERTY AND EQUIPMENT
Property
and equipment at October 31, 2009 and 2008 consisted of the
following:
2009
|
2008
|
|||||||
Computer
equipment
|
$ | 1,645,847 | $ | 1,628,670 | ||||
Leasehold
improvements
|
1,279,886 | 1,275,386 | ||||||
Software
|
1,311,188 | 1,224,098 | ||||||
Office
furniture and equipment
|
914,975 | 914,975 | ||||||
Machinery
and equipment
|
708,772 | 721,785 | ||||||
5,860,668 | 5,764,914 | |||||||
Less
accumulated depreciation and amortization
|
(5,547,344 | ) | (5,394,979 | ) | ||||
Total
|
$ | 313,324 | $ | 369,935 |
Depreciation
and amortization expense was $152,365 and $107,553 for the fiscal years ended
October 31, 2009 and 2008, respectively.
NOTE
4. LONG-TERM DEBT
Long-term
debt at October 31, 2009 and 2008 consisted of the following:
2009
|
2008
|
|||||||
Revolving
line of credit from Comerica Bank
|
$ | 2,500,000 | $ | 2,900,000 | ||||
Revolving
line of credit from Bluebird Finance Limited
|
1,595,000 | 1,885,000 | ||||||
Term
note payable to Ashford Capital, LLC.
|
125,000 | 125,000 | ||||||
Total
|
4,220,000 | 4,910,000 | ||||||
Less
current portion
|
(415,000 | ) | (290,000 | ) | ||||
Long-term
portion
|
$ | 3,805,000 | $ | 4,620,000 |
Future
maturities of long-term debt at October 31, 2009 were as follows:
Year
Ending
October
31,
|
Amounts
Maturing
|
|||
2010
|
$ | 415,000 | ||
2011
|
290,000 | |||
2012
|
2,790,000 | |||
2013
|
290,000 | |||
2014
|
290,000 | |||
Thereafter
|
145,000 | |||
Total
|
$ | 4,220,000 |
34
Comerica
Bank Revolving Line of Credit
In
September 2007, the Company obtained a revolving line of credit from Comerica
Bank. Borrowing availability is based on eligible accounts
receivable, inventory and a letter of credit, up to a maximum of $4.8 million
outstanding at any time. Through December 15, 2009, the revolving
line of credit bore interest payable monthly at either Comerica Bank’s base rate
plus 0.5% or LIBOR plus 3.25%, as selected in advance by the Company, and was
due to expire on February 28, 2010. At October 31, 2009, the interest
rate on this revolving line of credit was 3.50%. The Company pays
an annual facility fee equal to 0.25% of its credit limit.
On
December 15, 2009, the Company and Comerica amended the credit facility to
extend the maturity date of the facility to December 1, 2011. In
addition, the amendment changes the interest rate margins over the applicable
reference rates to the bank’s prime rate plus 1.0% or LIBOR plus
3.0%. Lastly, and at the Company’s request, the maximum borrowing
capacity under the facility was reduced from $4.8 million to $4.0 million,
principally because the Company’s outstanding borrowings under the facility have
been substantially less than $4.0 million.
The
revolving line of credit is secured by the assets of the Company and a letter of
credit in the amount of $1,250,000. Financial and operating covenants
include: (i) quarterly minimum pre-tax income, (ii) quarterly maximum ratio of
total liabilities minus subordinated debt to subordinated liabilities and net
worth, (iii) quarterly minimum ratio of cash and accounts receivables to current
liabilities and revolving debt minus subordinated debt, (iv) annual capital
expenditures limitations, and (v) limitations on acquisitions and incurring
future indebtedness without the bank’s consent. The Company was in
compliance with these covenants at October 31, 2009.
Interest
expense on this revolving credit facility was $113,399 and $172,961 for the
fiscal years ended October 31, 2009 and 2008, respectively.
Bluebird
Finance Limited (“Bluebird”) Credit Facility
In April
2003, the Company obtained a credit facility from Bluebird of up to $4,150,000
secured by the assets of the Company. The credit facility includes a
revolving credit line in the original amount of $2,900,000 bearing interest at
the rate of 5% per annum and a letter of credit in the amount of $1,250,000 that
presently serves as collateral for the Comerica Bank revolving line of
credit. The maximum amount on the revolving line of credit declines
$72,500 per quarter, commencing in 2005, and was $1,595,000 at October 31,
2009. This credit facility is subordinate to the Comerica Bank
revolving line of credit. The Company must comply with certain
financial and non-financial covenants, which include that without the consent of
Bluebird, the Company may not make any acquisition or investment in excess of an
aggregate of $150,000 each fiscal year outside the ordinary course of business
or enter into any merger or similar reorganization. The Company was
in compliance with these covenants at October 31, 2009.
Interest
expense on this credit facility was $87,576 and $102,487 for the fiscal years
ended October 31, 2009 and 2008, respectively. Accrued interest
payable to Bluebird as of October 31, 2009 and 2008 was $782,285 and $694,709,
respectively.
Bluebird
owns all of the outstanding Series A 2% Convertible Preferred Stock of the
Company. On an as-converted basis, these shares would represent
approximately 16.4% of the outstanding Common Stock of the Company as of October
31, 2009. See Note 6.
35
Ashford
Capital, LLC Note
In May
2007, the Company issued at par an unsecured note to Ashford Capital, LLC in the
amount of $125,000 bearing interest at 8% per annum, principal and interest
payable on May 15, 2010.
Interest
expense on the Ashford Capital, LLC note was $10,000 and $10,000 for the
fiscal years ended October 31, 2009 and 2008, respectively, all of which was
accrued and unpaid.
NOTE
5. COMMITMENTS AND CONTINGENCIES
Leases
The
Company maintains its principal offices and warehouse in leased facilities in
Inglewood, California. The lease expires in June 2011 and provides
for monthly rental payments of $48,000 for the year ending June 30, 2010 and
$49,000 for the year ending June 30, 2011. The Company is also
responsible for the monthly payment of $6,624 for the common area operating
expenses, utilities and insurance.
The
Company subleases a portion of the offices and warehouse in the leased
facilities in Inglewood, California. These subleases expire in June
2011 and provide for monthly rents of $11,180 for the remaining terms of the
lease.
The
Company operated a warehouse and sales office in Belgium under a lease that
expired in September 2009. In October 2009, the Company terminated
its Belgium operations.
Future
minimum lease payments on leases as of October 31, 2009 were as
follows:
Year Ending
October
31,
|
Lease
Payments
|
|||
2010
|
$ | 697,281 | ||
2011
|
473,358 | |||
2012
|
16,168 | |||
Thereafter
|
-0- | |||
Total
|
$ | 1,186,807 |
Future
minimum lease receipts on the subleases as of October 31, 2009 were as
follows:
Year Ending
October
31,
|
Sublease
Receipts
|
|||
2010
|
$ | 134,160 | ||
2011
|
92,620 | |||
Thereafter
|
-0- | |||
Total
|
$ | 226,780 |
Rent
expense was $521,636 and $568,626 for the fiscal years ended October 31, 2009
and 2008, respectively (net of sublease income of $40,260 and $36,000,
respectively).
36
Employment
Agreements
In March
2008 the Company entered into employment agreements with its four executive
officers. The employment agreement with Michael Prince, the Company’s
President, Chief Executive Officer and Chief Financial Officer, superseded his
prior employment agreement. Under these employment agreements, the
officers’ base salaries as of October 31, 2009 were as
follows: Michael Prince--$312,000; Kevin Seifert--$126,000; Raul
Khantzis--$126,000 and Jill Gardner--$115,500. The annual base
salaries increase a minimum of 5% on April 15 each year. In addition,
the Company has agreed to make contributions to the officers’ accounts in the
Company's 401(k) plan each year in an amount equal to a specified percentage,
ranging from 40% to 100% depending on the officer’s age, of the maximum
allowable employee contribution for such year under the rules of the Internal
Revenue Service, up to a maximum of $30,000 each year. The Company
may terminate an officer’s employment at any time and each officer may terminate
his or her employment at any time upon 30 days' prior notice. If an
officer’s employment is terminated by the Company without cause or by the
officer for "good reason," the officer will be entitled to continue to receive
base salary until the later to occur of six months from termination of
employment or March 1, 2011 (2013 for Mr. Prince) and continuation of certain
other benefits. "Good reason" is defined to include, among other
things, an adverse change in the employee's position, responsibilities or
duties, a reduction in compensation or assignment to an office or location
outside the Los Angeles metropolitan area on other than a temporary
basis.
Consulting
Agreement
The
Company has a consulting agreement with Dartmouth Commerce of Manhattan, Inc.
that provides for compensation of $55,000 per year. Richard M. Torre,
the Chairman of the Board of the Company, owns Dartmouth
Commerce. The Consulting Agreement may be terminated by either party
at any time. As a result of this Consulting Agreement, Mr. Torre does
not receive cash director’s fees. The Company paid consulting fees
under this agreement of $55,000 in each of the fiscal years ended October 31,
2009 and 2008.
License
Agreements
The
Company has entered into license agreements that grant to it the exclusive right
to distribute, market and sell prescription eyeglass frames and in certain cases
sunwear under various brand names in the United States and other designated
territories. All of these license agreements contain minimum net
sales and/or minimum royalty requirements, and certain of the license agreements
have minimum advertising expenditure requirements. All of the license
agreements permit the licensor to terminate the license upon material breach or
default by the Company. The Company was in compliance with its
license agreements as of October 31, 2009.
License
|
Expiration
Date
|
Renewable
Through
|
||
bebe
eyewear
|
June
2010
|
—
|
||
Carmen
Marc Valvo Eyewear
|
January
2012
|
January
2015
|
||
Cutter
& Buck Eyewear
|
December
2011
|
—
|
||
Dakota
Smith Eyewear
|
February
2012
|
—
|
||
Hart
Schaffner Marx Eyewear
|
December
2010
|
December
2012
|
||
Hummer
Eyegear
|
June
2010
|
—
|
||
Laura
Ashley Eyewear
|
December
2011
|
December
2014
|
||
Michael
Stars Eyewear
|
October
2011
|
October
2013
|
||
Nicole
Miller Eyewear
|
March
2012
|
—
|
37
The
Company may not renew a license if it is in material default under the license
agreement or, in certain cases, does not meet certain minimum sales and/or
royalty requirements.
Total
minimum royalties payable under all of the Company’s license agreements at
October 31, 2009 were as follows:
Year
Ending October 31,
|
Minimum
Royalties
|
|||
2010
|
$ | 1,571,667 | ||
2011
|
546,000 | |||
2012
|
308,333 | |||
Thereafter
|
75,000 | |||
Total
|
$ | 2,501,000 |
Total
royalty expense for the fiscal years ended October 31, 2009 and 2008, was
$2,073,228 and $1,995,727, respectively.
Litigation
At
October 31, 2009, the Company was not involved in any material
litigation.
NOTE
6. SHAREHOLDERS’ EQUITY
General
The
Company’s Articles of Incorporation authorize 5,000,000 shares of preferred
stock, par value $0.001 per share, and 30,000,000 shares of Common Stock, par
value $0.001 per share. The Board of Directors has the authority to
issue the preferred stock in one or more series with such designations, rights,
and preferences as may be determined from time to time by the Board of Directors
without shareholder approval.
Designation
and Issuance of Series A 2% Convertible Preferred Stock
In April
2003, Board of Directors authorized a new series of preferred stock, consisting
of 1,360,000 shares and designated the “Series A 2% Convertible Preferred Stock”
(the “Series A Preferred”). Pursuant to such authorization, the
Company issued 1,200,000 shares to Bluebird for $800,000, or $0.6667 per
share. The Series A Preferred provides for cumulative dividends at
the rate of 2% per annum payable in cash or additional shares of Series A
Preferred, and has a liquidation preference equal to $0.67 per share plus
accrued and unpaid dividends. The Company has the right to redeem the
Series A Preferred at the liquidation preference plus accrued and unpaid
dividends and a premium of $450,000.
The
Company must redeem the Series A Preferred upon certain changes of control, as
defined in the agreement, to the extent the Company has the funds legally
available at the same redemption price. The Series A Preferred is
convertible into Common Stock on a share-for-share basis, subject to adjustments
for stock splits, stock dividends, and similar events.
The
holders of the Series A Preferred do not have voting rights, except as required
by law, provided, however, that at any time two dividend payments are not paid
in full, the Board of Directors of the Company will be increased by two and the
holders of the Series A Preferred, voting as a single class, will be entitled to
elect the additional directors. Bluebird received demand and
piggyback registration
38
rights
for the shares of Common Stock into which the Series A Preferred may be
converted. As of October 31, 2009, the Board of Directors had not
declared any dividends on the Series A Preferred and dividends in arrears were
approximately $110,768 (165,325 shares of Series A
Preferred). Accordingly, the holders of the Series A Preferred have
the right to increase the size of the Board by two and elect the two new
directors. There is only one holder of record of the Series A
Preferred, and that holder of the Series A Preferred has waived that right
through 2010.
Stock
Options
The
Company had one stock-based compensation plan, the 1997 Stock Plan, which
terminated in May 2007. As of October 31, 2009, there were no
outstanding options under that Plan.
The
following is a summary of stock option activity under the 1997 Stock Plan for
the fiscal years ended October 31, 2009 and 2008:
Number
of Shares
|
Exercise
Price
|
Weighted
Average Exercise Price
|
||||||||||
Outstanding,
October 31, 2007
|
37,300 | $ | 4.00 | $ | 4.00 | |||||||
Canceled
|
(3,000 | ) | $ | 4.00 | $ | 4.00 | ||||||
Outstanding,
October 31, 2008
|
34,300 | $ | 4.00 | $ | 4.00 | |||||||
Canceled
|
(34,300 | ) | $ | 4.00 | $ | 4.00 | ||||||
Outstanding,
October 31, 2009
|
0 | — | — | |||||||||
Warrants
The
following is a summary of warrants activity for the fiscal years ended October
31, 2009 and 2008:
Number
of Shares
|
Exercise
Price
|
Weighted
Average
Exercise
Price
|
||||||||||
Outstanding,
October 31, 2007
|
400,000 | $ | 0.67-$0.6875 | $ | 0.6831 | |||||||
Exercised
|
(100,000 | ) | $ | 0.67 | $ | 0.67 | ||||||
Outstanding,
October 31, 2008
|
300,000 | $ | 0.6875 | $ | 0.6875 | |||||||
Exercised
|
— | — | — | |||||||||
Outstanding,
October 31, 2009
|
300,000 | $ | 0.6875 | $ | 0.6875 | |||||||
Exercisable,
October 31, 2009
|
300,000 | $ | 0.6875 | $ | 0.6875 |
39
The
warrants outstanding at October 31, 2009 are held by Ashford Capital, LLC and
expire on May 15, 2010. If the Company issues any common stock or
common stock equivalents for a purchase price less than the current exercise
price of the warrants, the exercise price of the warrants will be reduced by
200% of the difference between the exercise price of the warrants and the
purchase price of such common stock. Ashford Capital, LLC has agreed
not to exercise the warrants if such exercise would result in it beneficially
owning more than 9.9% of the outstanding common stock of the
Company. At the date of issuance, the value of these warrants was
determined to be nominal.
NOTE
7. EARNINGS PER SHARE
Basic
earnings per share for any period is computed based upon the weighted average
number of common shares outstanding during the period. Diluted
earnings per share is computed similar to basic earnings per share, except that
the denominator is increased to include the number of additional common shares
that would have been outstanding if the potential common shares had been issued
and if the additional common shares were dilutive.
The
following is a reconciliation of the numerators and denominators of the basic
and diluted earnings per share computations:
Year
ended October 31, 2009
|
Income
(Numerator)
|
Shares
(Denominator)
|
Per
Share
Amount
|
|||||||||
Basic
earnings per share
|
$ | 657,398 | 6,955,639 | $ | 0.09 | |||||||
Conversion
of preferred stock
|
17,990 | 1,365,325 | (0.01 | ) | ||||||||
Diluted
earnings per share
|
$ | 675,388 | 8,320,964 | $ | 0.08 | |||||||
Year
ended October 31, 2008
|
Income
(Numerator)
|
Shares
(Denominator)
|
Per
Share
Amount
|
|||||||||
Basic
earnings per share
|
$ | 603,880 | 6,908,516 | $ | 0.09 | |||||||
Conversion
of preferred stock
|
17,635 | 1,338,474 | (0.01 | ) | ||||||||
Diluted
earnings per share
|
$ | 621,515 | 8,246,990 | $ | 0.08 |
The
following potential common shares have been excluded from the computation of
diluted earnings per share because the effect would have been
anti-dilutive:
2009
|
2008
|
|||||||
Stock
options
|
— | 34,300 | ||||||
Warrants
|
300,000 | 300,000 | ||||||
Total
|
300,000 | 334,300 |
NOTE
8. INCOME TAXES
On
November 1, 2007, the Company adopted the accounting guidance as codified in ASC
740-10, Income Taxes —
Uncertainty in Income Taxes (previously FASB Interpretation 48,
Accounting for Uncertainty in Income Taxes: An Interpretation of FASB Statement
No. 109, Interpretation 48), which establishes the criterion that an
individual tax position has to meet for some or all of the benefits of that
position to be recognized in the Company’s financial
statements. There was no impact on the financial statements present
resulting from the Company’s adoption of ASC 740-10 as the Company had no
material uncertain income tax positions that would result in a liability to the
Company. The Company recognized no interest or penalties on income
taxes in its statement of income for the years ended October 31, 2009 and
2008. Management believes that with few exceptions, the Company is no
longer subject to income tax examinations by any tax authorities for years
before October 31, 2004.
40
Significant
components of the Company’s deferred tax assets and liabilities for federal and
state income taxes as of October 31, 2009 and 2008 consisted of the
following:
2009
|
2008
|
|||||||
Allowance
for doubtful accounts
|
$ | 18,000 | $ | 18,000 | ||||
Capitalization
of inventory costs
|
181,000 | 259,000 | ||||||
Sales
returns reserve
|
5,300 | 125,000 | ||||||
Depreciation
and amortization
|
2,458,000 | 2,441,000 | ||||||
Net
operating loss carry-forward
|
5,621,000 | 5,530,000 | ||||||
Other
|
14,000 | 18,000 | ||||||
Valuation
allowance
|
(5,320,100 | ) | (5,413,800 | ) | ||||
Net
deferred tax assets
|
$ | 2,977,200 | $ | 2,977,200 |
The
following table presents the current and deferred income tax provision for
(benefit from) federal and state income taxes for the fiscal years ended October
31, 2009 and 2008:
2009
|
2008
|
|||||||
Current
|
||||||||
Federal
|
$ | — | $ | — | ||||
State
|
20,872 | 8,320 | ||||||
20,872 | 8,320 | |||||||
Deferred
taxes
|
||||||||
Federal,
current
|
— | — | ||||||
Federal,
non-current
|
— | — | ||||||
— | — | |||||||
Total
provision for income taxes
|
$ | 20,872 | $ | 8,320 |
A
reconciliation of the benefit from income taxes and the amount computed by
applying the federal statutory rate to income before benefit for income taxes
for the fiscal years ended October 31, 2009 and 2008 is as follows:
2009
|
2008
|
|||||||
Computed
income tax provision at federal statutory rate
|
$ | 229,632 | $ | 214,144 | ||||
Increase
resulting from State
income taxes
|
44,057 | 37,193 | ||||||
Permanent
items
|
2,604 | 2,596 | ||||||
Change
in valuation allowance
|
(255,421 | ) | (243,013 | ) | ||||
Other,
net
|
— | (2,600 | ) | |||||
Total
|
$ | 20,872 | $ | 8,320 |
As of
October 31, 2009, the Company had net operating loss carry-forwards for federal
and state income tax purposes of approximately $15,374,000 and $4,458,000,
respectively, which expire at various times from 2021 through
2028. As of October 31, 2008, the Company had net operating loss
carry-forwards for federal and state income tax purposes of approximately
$15,156,000 and $4,271,000, respectively.
41
The
Company has net operating loss carry-forwards for which partial benefit for
income taxes has been provided. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not a portion of deferred tax assets will not be realized.
Realization
of this deferred tax asset is dependent on the Company’s ability to generate
future taxable income. Management believes that it is more likely
than not that the Company will generate taxable income to utilize some of the
tax carry-forwards before their expiration. However, there can be no
assurance that the Company will meet its expectation of future
income. As a result, the amount of the deferred tax asset considered
realizable could be reduced in the near term if estimates of future taxable
income are reduced. Such occurrence could materially adversely affect
the Company’s results of operations and financial condition.
As of
October 31, 2009 and 2008, the Company had available alternative minimum tax
credit carry-forwards for tax purposes of approximately $114,000 that may be used
indefinitely to reduce regular federal income tax until exhausted.
NOTE
9. EMPLOYEE BENEFIT PLAN
The
Company has a 401(k) profit sharing plan covering all eligible
employees. Eligible employees may elect to contribute up to $15,500
of their annual compensation and, if they are 50 years old or above, may elect a
catch–up contribution of $5,000. The Company may also elect to make
discretionary contributions. In the fiscal years ended October 31,
2009 and 2008 the Company provided matching contributions of $ -0- and $27,500,
respectively.
NOTE
10. FOREIGN OPERATIONS
All
foreign operations were closed as of October 31, 2009.
The
Company operated a warehouse and sales office in Belgium until October
2009. The following is a summary of the Company’s foreign
operations:
2009
|
2008
|
|||||||
Balance
Sheet
|
||||||||
Identifiable
assets
|
$ | 49,248 | $ | 391,367 | ||||
2009 | 2008 | |||||||
Statement
of Operations
|
||||||||
Net
sales
|
$ | 254,754 | $ | 871,491 | ||||
Net
income (loss)
|
$ | (208,645 | ) | $ | (55,216 | ) |
The
Company also exports directly from the United States to foreign
countries. During the fiscal years ended October 31, 2009 and 2008,
exports from the United States amounted to $1,117,325 and $1,500,926,
respectively.
42
Item
9—Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
Nothing
to report.
Item
9A—Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures (as defined in Exchange Act Rule
13a-15(e)) that are designed to assure that information required to be disclosed
in our Exchange Act reports is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission’s
rules and forms, and that such information is accumulated and communicated to
management, including the Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required
disclosures.
In
designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide reasonable assurance only of achieving the desired control
objectives, and management necessarily is required to apply its judgment in
weighting the costs and benefits of possible new or different controls and
procedures. Limitations are inherent in all control systems, so no
evaluation of controls can provide absolute assurance that all control issues
and any fraud within we have been detected.
As
required by Exchange Act Rule 13a-15(b), as of the end of the period covered by
this report, management, under the supervision and with the participation of our
Chief Executive Officer and Chief Financial Officer (the same person has both
titles), evaluated the effectiveness of our disclosure controls and
procedures. Based on this evaluation, management concluded that our
disclosure controls and procedures were effective as of that date.
Management’s
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, and for performing an assessment of the
effectiveness of internal control over financial reporting as of October 31,
2009. Internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles.
Our
system of internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of our assets; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
our receipts and expenditures are being made only in accordance with
authorizations of our management and directors ; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a
material effect on the financial statements.
Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer (the same person has both titles),
we have conducted an evaluation of the effectiveness of our internal control
over financial reporting based on the framework in “Internal Control—Integrated
Framework” issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
43
Based on
the above evaluation, our management has concluded that, as of October 31, 2009,
we did not have any material weaknesses in our internal control over financial
reporting and our internal control over financial reporting was
effective.
This
annual report does not include an attestation report of a registered public
accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit the Company to provide only management's report in this
annual report.
Changes
in Internal Controls
There was
no change in our internal control over financial reporting during our most
recently completed fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
Item
9B—Other Information
Nothing
to report.
PART
III
Item
10—Directors, Executive Officers, Promoters and Control Persons; Compliance with
Section 16(a) of the Exchange Act
The
information under the captions “Election of Directors – Information About the
Nominees, and – Board Committees – Audit Committee” and “Other Information –
Executive Officers, - Compliance with Section 16(a) Beneficial Ownership
Reporting and - Code of Ethics” in our definitive proxy statement for the 2009
Annual Meeting of Shareholders (the “Proxy Statement”) is incorporated herein by
reference.
Item
11—Executive Compensation
The
information under the caption “Other Information – Compensation of Executive
Officers” in the Proxy Statement is incorporated herein by
reference.
Item
12—Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
The
information under the captions “Other Information - Security Ownership of
Principal Shareholders, Directors and Executive Officers” in the Proxy Statement
is incorporated herein by reference.
Item
13—Certain Relationships and Related Transactions
The
information under the caption “Other Information – Certain Relationships and
Related Transactions” in the Proxy Statement is incorporated herein by
reference.
Item
14—Principal Accountant Fees and Services
The
information under the caption “Independent Public Accountants” in the Proxy
Statement is incorporated herein by reference.
44
PART
IV
Item
15—Exhibits and Financial Statement Schedules
(a)
|
Documents
Filed as Part of Report:
|
1.
|
Financial
Statements:
|
Report of
Squar, Milner, Peterson, Miranda & Williamson, LLP
Report of
Crowe Horwath LLP
Balance
Sheets at October 31, 2009 and 2008
Statements
of Income for the years ended October 31, 2009 and 2008
Statements
of Changes in Shareholders’ Equity for the years ended October 31, 2009 and
2008
Statements
of Cash Flows for the years ended October 31, 2009 and 2008
2.
|
Exhibits:
|
See
attached Exhibit List
45
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SIGNATURE EYEWEAR, INC. | |||
Date:
January 19, 2010
|
By:
|
/s/ MICHAEL PRINCE | |
Michael Prince | |||
Chief Executive Officer | |||
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature
|
Title
|
Date
|
/s/
Michael Prince
Michael Prince |
Chief
Executive Officer, Chief Financial Officer and Director (Principal
Financial and Accounting Officer)
|
January
19, 2010
|
/s/
Edward Meltzer
Edward Meltzer |
Director
|
January
19, 2010
|
/s/
Drew Miller
Drew Miller |
Director
|
January
19, 2010
|
/s/
Ted Pasternack
Ted Pasternack |
Director
|
January
19, 2010
|
/s/
Richard M. Torre
Richard M. Torre |
Chairman
of the Board
|
January
19, 2010
|
46
EXHIBIT
INDEX
Exhibit
Number
|
Exhibit Description
|
|
3.1
|
Restated
Articles of Incorporation of Signature Eyewear, Inc.
(“Signature”). Certificate of Determination of Series A 2%
Convertible Preferred Stock of Signature Eyewear, Inc., filed April 21,
2003 with the California Secretary of State. Incorporated by
reference to Exhibit 3.1 to Signature’s Annual Report on Form 10-K for the
year ended October 31, 2008.
|
|
3.2
|
Amended
and Restated Bylaws of Signature. Incorporated by reference to
Exhibit 3.2 to Signature’s Form S-1 (SEC Registration No. 333-30017),
filed with the Commission on June 25, 1997, as amended.
|
|
4.1
|
Specimen
Stock Certificate for Common Stock. Incorporated by reference
to Exhibit 4.1 to Signature’s Form S-1 (SEC Registration No. 333-30017),
filed with the Commission on June 25, 1997, as amended.
|
|
4.2
|
Specimen
Stock Certificate for Series A 2% Convertible Preferred
Stock. Incorporated by reference to Exhibit 4.2 to Signature’s
Annual Report on Form 10-K for the year ended October 31,
2008.
|
|
10.1
|
Form
of Indemnification Agreement for Directors and
Officers. Incorporated by reference to Exhibit 10.3 to
Signature’s Form S-1 (SEC Registration No. 333-30017), filed with the
Commission on June 25, 1997, as amended.
|
|
10.2
|
License
Agreement dated May 28, 1991, between Laura Ashley Manufacturing B.V. and
Signature, as amended August 2, 1993; Further Amending Agreement dated
December 18, 2002; Letter Amendment dated as of April 14, 2003; and Letter
Agreement dated February 9, 2007. Incorporated by
reference to Exhibit 3.1 to Signature’s Annual Report on Form 10-K for the
year ended October 31, 2008. [Portions of this Exhibit have
been deleted and filed separately with the Commission pursuant to a grant
of Confidential Treatment.]
|
|
10.3
|
Lease
Agreement, dated March 7, 2005, between Signature and Roxbury
Property Management. Incorporated by reference to Exhibit 10.1 to
Signature’s Quarterly Report on Form 10-Q for the quarter ended April 30,
2005. First
Amendment to Lease dated January 26, 2009. Incorporated by reference to
Exhibit 10.1 to Signature’s Quarterly Report on Form 10-Q for the quarter
ended January 31, 2009.
|
|
10.4
|
Agreement
dated April 21, 2003: US $4,150,000 Credit Facility for Signature provided
by Bluebird Finance Limited; Security Agreement dated April 21, 2003
between Signature as Debtor and Bluebird Finance Limited as Secured
Party. Incorporated by reference to Exhibit 10.6 to Signature’s
Annual Report on Form 10-K for the year ended October 31,
2008.
|
|
10.5
|
Stock
Purchase Agreement dated April 21, 2003 between Bluebird Finance Limited
and Signature. Incorporated by reference to Exhibit 10.7 to
Signature’s Annual Report on Form 10-K for the year ended October 31,
2008.
|
|
10.6
|
Consulting
Agreement dated as of April 1, 2003 between Signature and Dartmouth
Commerce of Manhattan, Inc. Incorporated by reference to
Exhibit 10.8 to Signature’s Annual Report on Form 10-K for the year ended
October 31, 2008.
|
|
47
10.7
|
Trademark
License Agreement dated October 12, 2005 between Signature and Kobra
International, Ltd. T/A Nicole Miller. Incorporated by
reference to Exhibit 10.16 of Signature’s Annual Report on Form 10-K for
the year ended October 31, 2005. [Portions of this Exhibit have been
deleted and filed separately with the Securities and Exchange Commission
pursuant to a grant of Confidential Treatment.] Amendment One dated July
7, 2008 to the License Agreement by and between Kobra International, Ltd.
d/b/a Nicole Miller and the Company, dated October 12,
2005. Incorporated by reference to Exhibit 10.1 of Signature’s
Quarterly Report on Form 10-Q for the quarter ended July 31, 2008.
[Portions of this Amendment have been deleted and filed separately with
the Commission pursuant to a grant of Confidential
Treatment.]
|
|
10.8
|
License
Agreement dated September 23, 1999 between Signature and bebe stores,
inc.; Amendment dated September 23, 1999; Amendment Two dated June 4,
2002; Amendment Three dated July 3, 2003; and Amendment Four dated April
5, 2005. Incorporated by reference to Exhibit 10.19 of
Signature’s Annual Report on Form 10-K for the year ended October 31,
2005. Amendment Five dated June 28,
2006. Incorporated by reference to Exhibit 10.16 of Signature’s
Annual Report on Form 10-K for the year ended October 31,
2006. Amendment Six dated December 31,
2006. Incorporated by reference to Exhibit 10.2 of Signature’s
Quarterly Report on Form 10-Q for the quarter ended January 31,
2007. Amendment Seven dated August 23,
2007. Incorporated by reference to Exhibit 10.16 of Signature’s
Annual Report on Form 10-K for the year ended October 31,
2007. [Portions of this Exhibit have been deleted and filed
separately with the Securities and Exchange Commission pursuant to a grant
of Confidential Treatment.]
|
|
10.9
|
Loan
and Security Agreement dated September 14, 2007 between Signature and
Comerica Bank. Incorporated by reference to Exhibit 10.17 of Signature’s
Annual Report on Form 10-K for the year ended October 31,
2007. [Portions of this Exhibit have been deleted and filed
separately with the Securities and Exchange Commission pursuant to a grant
of Confidential Treatment.]
|
|
10.10
|
Employment
Agreement dated March 11, 2008 between Signature and Michael
Prince. Incorporated by reference to Exhibit 10.1 of
Signature’s Quarterly Report on Form 10-Q for the quarter ended April 30,
2008.
|
|
10.11
|
Employment
Agreement dated March 11, 2008 between Signature and Jill
Gardner. Incorporated by reference to Exhibit 10.2 of
Signature’s Quarterly Report on Form 10-Q for the quarter ended April 30,
2008.
|
|
10.12
|
Employment
Agreement dated March 11, 2008 between Signature and Raul
Khantzis. Incorporated by reference to Exhibit 10.3 of
Signature’s Quarterly Report on Form 10-Q for the quarter ended April 30,
2008.
|
|
10.13
|
Employment
Agreement dated March 11, 2008 between Signature and Kevin D.
Seifert. Incorporated by reference to Exhibit 10.4 of
Signature’s Quarterly Report on Form 10-Q for the quarter ended April 30,
2008.
|
|
31.1
|
Certification
Pursuant to SEC Rule 13a-14(a)/15d-14(a)
|
|
32.1
|
Certification
Pursuant to 18 U.S.C. § 1350
|
|
48