<PAGE>
FILED PURSUANT TO RULE 424(b)(1)
REGISTRATION STATEMENT NO. 333-30017
1,800,000 SHARES
[LOGO OF SIGNATURE EYEWEAR]
COMMON STOCK
Of the 1,800,000 shares of Common Stock of Signature Eyewear, Inc.
("Signature" or the "Company") offered hereby (the "Offering"), 1,600,000
shares are being sold by the Company and 200,000 shares are being sold by
certain shareholders of the Company (the "Selling Shareholders"). See
"Principal and Selling Shareholders." The Company will not receive any
proceeds from the sale of shares by the Selling Shareholders. Prior to the
Offering, there has been no public market for the Common Stock. For
information relating to the factors considered in determining the initial
offering price to the public, see "Underwriting." The Common Stock has been
approved for quotation on the Nasdaq National Market under the symbol "SEYE."
SEE "RISK FACTORS" ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS IN THE COMMON STOCK OFFERED BY THIS
PROSPECTUS.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.......... $10.00 $0.70 $9.30 $9.30
- -------------------------------------------------------------------------------
Total (3).......... $18,000,000 $1,260,000 $14,880,000 $1,860,000
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Does not include compensation to Fechtor, Detwiler & Co., Inc. and Van
Kasper & Company (the "Representatives") in the form of (i) an obligation
to reimburse the Representatives for expenses of up to $135,000; and (ii)
warrants to purchase up to 180,000 shares of Common Stock. The Company and
the Selling Shareholders have also agreed to indemnify the Underwriters
against certain liabilities, including liabilities under the Securities
Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company, estimated at $600,000.
(3) The Company and the Selling Shareholders have granted to the Underwriters
a 30-day option to purchase up to an aggregate of 67,500 additional shares
from the Company and 202,500 additional shares from the Selling
Shareholders on the same terms and conditions set forth above solely to
cover over-allotments of shares, if any (the "Over-Allotment Option"). See
"Underwriting." If the Over-Allotment Option is exercised in full, the
total Price to Public will be $20,700,000, Underwriting Discounts and
Commissions will be $1,449,000, Proceeds to the Company will be
$15,507,750, and Proceeds to the Selling Shareholders will be $3,743,250.
---------------
The shares of Common Stock are offered by the several Underwriters named
herein on a "firm commitment" basis, subject to prior sale, when, as and if
issued by the Company, delivered to and accepted by the Underwriters and
subject to the right of the Underwriters to reject any order in whole or in
part and to certain other conditions. It is expected that delivery of the
certificates representing the Common Stock will be made against payment
therefor at the offices of Fechtor, Detwiler & Co., Inc., 225 Franklin Street,
Boston, MA 02110 on or about September 16, 1997.
---------------
FECHTOR, DETWILER & CO., INC. VAN KASPER & COMPANY
THE DATE OF THIS PROSPECTUS IS SEPTEMBER 11, 1997.
<PAGE>
[PICTURES]
INSIDE FRONT COVER:
Reversing out of solid back is the copy line in all caps "The Signature Brand
Names of Signature Eyewear".
INSIDE FRONT COVER TWO PAGE COLOR FOLD OUT:
Laura Ashley Eyewear lifestyle photograph depicting a woman wearing Laura
Ashley Eyewear, sitting up in her bed, reading the newspaper. The Laura Ashley
Eyewear logo is placed at the bottom of the image with the brand's trade
theme-line "The Premier Feminine Collection" resting just below the logo. At
the bottom of the page are the lines "Made by Signature Eyewear under license
from Laura Ashley" and "Laura Ashley Eyewear net sales were 73% of the
Company's net sales in the six months ended April 30, 1997."
Eddie Bauer Eyewear lifestyle photograph depicting a couple wearing Eddie
Bauer Eyewear. The Eddie Bauer Eyewear logo is at the bottom of the image. At
the bottom of the page are the lines "Sold by Signature Eyewear under license
from Eddie Bauer" and "Launch planned for the Spring of 1998. To date the
Company has had no revenues from Eddie Bauer Eyewear."
<PAGE>
No dealer, salesperson or other person has been authorized to give any
information or to make any representation not contained in this Prospectus
and, if given or made, such information or representation must not be relied
upon as having been authorized by the Company or any Underwriter. This
Prospectus does not constitute an offer to sell or a solicitation of an offer
to buy any of the securities offered hereby in any jurisdiction in which such
offer or solicitation would be unlawful. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that the information herein is correct as of any time
subsequent to the date hereof or that there has been no change in the affairs
of the Company since that date.
Until October 6, 1997 (25 days after commencement of the Offering) all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 4
Risk Factors............................................................. 7
The Company.............................................................. 14
Termination of S Corporation Status...................................... 14
Capitalization........................................................... 15
Use of Proceeds.......................................................... 15
Dilution................................................................. 16
Dividend Policy.......................................................... 16
Selected Financial Data.................................................. 17
Management's Discussion and Analysis of Results of Operations and
Financial Condition .................................................... 18
Business................................................................. 23
Management............................................................... 34
Certain Relationships and Related Transactions........................... 39
Principal and Selling Shareholders....................................... 40
Description of Capital Stock............................................. 41
Shares Eligible For Future Sale.......................................... 42
Underwriting............................................................. 43
Legal Matters............................................................ 45
Experts.................................................................. 45
Additional Information................................................... 45
Index to Financial Statements............................................ F-1
</TABLE>
----------------
"Laura Ashley" is a registered trademark of Laura Ashley Manufacturing B.V.
and Laura Ashley Limited (collectively, "Laura Ashley"), "Hart Schaffner &
Marx" is a registered trademark of Hart Schaffner & Marx ("Hart Schaffner &
Marx"), "Jean Nate" is a registered trademark of Revlon Consumer Products
Corporation ("Revlon"), and "Eddie Bauer" is a registered trademark of Eddie
Bauer, Inc. ("Eddie Bauer").
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED IN THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors," "Business" and the Financial Statements
and notes thereto, appearing elsewhere in this Prospectus. The statements which
are not historical facts contained in this Prospectus are forward-looking
statements that involve risks and uncertainties, including those described
under "Risk Factors." Prospective purchasers of the securities offered by this
Prospectus should carefully consider the "Risk Factors" section, as well as the
other information and data included in this Prospectus, before making an
investment in the securities offered hereby.
THE COMPANY
Signature designs, markets and distributes prescription eyeglass frames
primarily under exclusive licenses for Laura Ashley Eyewear, Hart Schaffner &
Marx Eyewear and Jean Nate Eyewear, as well as its own Camelot label. The Laura
Ashley Eyewear collection is one of the leading women's brand-name collections
in the United States. The Company attributes its success to its brand-name
development process and frame designs. The Company's brand-name development
process includes identifying a market niche, obtaining the rights to a
carefully selected brand name, producing a comprehensive marketing plan,
developing unique in-store displays, and creating innovative sales and
merchandising programs for independent optical retailers and retail chains.
Signature's in-house designers work with many respected frame manufacturers
throughout the world to develop high-quality, creative designs which are
consistent with each brand-name image.
In June 1997, Signature acquired the exclusive license to design and market
an Eddie Bauer Eyewear collection, which the Company plans to launch in the
Spring of 1998. The Company pursued the Eddie Bauer brand name, which had not
previously been licensed for prescription eyewear, for its widespread
recognition, outdoor heritage, casual styling and reputation for value and
quality. The Eddie Bauer Eyewear collection will offer men's and women's styles
and will be positioned in the medium-price segment of the brand-name
prescription eyewear market.
In 1996, domestic retail sales of all eyewear products were $14.6 billion,
and domestic retail sales of eyeglasses were $4.6 billion. Just over 60% of the
nation's entire population, and more than 90% of people over the age of 45,
needed corrective eyewear in 1996. The average age of the United States
population is expected to increase over the next 25 years due to the aging of
the "baby-boomers" who were born between 1946 and 1964. As more of the baby-
boomers exceed age 45, the Company believes sales of corrective eyewear should
increase.
Signature produces "turnkey" marketing, merchandising and sales promotion
programs to promote sales at each level in the distribution chain. For optical
retailers, the Company develops unique in-store displays, such as its Laura
Ashley Eyewear "store within a store" environments. For the sales
representatives who call on retail accounts, whether they are employed by
distributors or by Signature, the Company creates presentation materials,
marketing bulletins, motivational audio and video tapes and other sales tools
to facilitate professional presentations, and the Company offers attractive
incentive awards for reaching targeted sales levels. For its distributors who
sell to independent optical retailers, Signature provides its innovative
loyalty programs.
Under the loyalty programs, which generally last from six to ten months, each
participating retailer agrees to purchase a specified quantity of frames of new
styles released during the program period. Although a participating retailer
may cancel at any time, historically most have completed the program and
renewed their participation in ensuing years. These "automatic" sales programs
have facilitated the widespread placement of new styles in optical retail
stores, have increased the Company's leverage with its manufacturers due to the
large size of the Company's orders, and have assisted its inventory planning.
The Company's largest loyalty program is its Laura Ashley Loyal Partners
program, which at April 30, 1997 had over 4,750 participating retailers in the
United States (approximately 16% of all independent optical retailers in the
United States) as well as over 800 international participants.
4
<PAGE>
The Company contracts with overseas factories to manufacture the frames it
designs. Signature distributes its frames through distributors in the United
States and through exclusive distributors in foreign countries. In addition,
the Company sells directly through its own sales representatives to major
retail chains, including LensCrafters, Pearle Vision and Eyecare Centers of
America, and to independent optical retailers in California.
The Company's principal product line is Laura Ashley Eyewear, which was
launched in 1992. Signature designs frames and in-store displays which seek to
capture the distinctive, feminine image associated with Laura Ashley clothing
and home furnishings. Laura Ashley Eyewear styles are feminine and classic, and
are positioned in the medium to mid-high price range to reach a broad segment
of the women's eyewear market. The Company's net sales of Laura Ashley Eyewear
have increased from $2.2 million in fiscal 1992 to $21.1 million in fiscal
1996.
Capitalizing on Signature's customer relationships and the success of Laura
Ashley Eyewear, the Company launched Jean Nate Eyewear in March 1996 and Hart
Schaffner & Marx Eyewear in September 1996. Jean Nate Eyewear is targeted at
women seeking to pay an affordable price for high-quality frames which offer
unique designs, attention to detail and brand-name identification. Hart
Schaffner & Marx Eyewear is a mid-high priced line targeted at men desiring
quality, comfort and craftsmanship.
The Company's growth strategy includes: (i) continuing to increase the market
penetration of its existing lines of brand-name prescription eyewear; (ii)
launching Eddie Bauer Eyewear in the Spring of 1998; (iii) acquiring additional
exclusive brand-name licenses to market prescription eyeglass frames; (iv)
developing new product lines, which may include expanding the marketing of its
own Camelot collection; (v) expanding market penetration of its existing Laura
Ashley Sunwear line and acquiring additional exclusive brand-name licenses for
sunglass frames; and (vi) continuing to expand its international sales efforts.
THE OFFERING
Common Stock offered by the Company.......... 1,600,000 shares
Common Stock offered by the Selling
Shareholders................................ 200,000 shares
Common Stock outstanding after the Offering.. 5,200,527 shares (1)
Use of proceeds from sale of Common Stock by
the Company................................. To retire existing bank debt; to
launch Eddie Bauer Eyewear; and
for working capital and general
corporate purposes. See "Use of
Proceeds."
Nasdaq National Market Symbol................ SEYE
(1) Excludes 600,000 shares of Common Stock available for issuance pursuant to
the Company's Stock Plan. See "Management--Stock Plan."
Except as otherwise noted, all information in this Prospectus assumes no
exercise of the Over-Allotment Option or the warrants (the "Representatives'
Warrants") granted to the Representatives to purchase up to 180,000 shares of
Common Stock at 120% of the initial public offering price, no grant of awards
under the Company's 1997 Stock Plan (the "Stock Plan"), the adjustment in 1997
of the outstanding shares of Common Stock to give effect to a 3.175-for-1 stock
split (the "Stock Split"), and the change of the status of the Company from an
S corporation to a C corporation for income tax purposes. See "Underwriting,"
"Management--Stock Plan" and "Termination of S Corporation Status."
5
<PAGE>
SUMMARY FINANCIAL DATA
Set forth below are summary data from the Company's statements of income and
balance sheets. The following data should be read in conjunction with the
Financial Statements and related notes and with "Management's Discussion and
Analysis of Results of Operations and Financial Condition" appearing elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED OCTOBER 31, APRIL 30,
----------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
------ ------- ------- ------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
DATA:
Net sales............... $9,185 $13,858 $20,051 $23,571 $28,280 $13,052 $16,038
Gross profit............ 3,383 6,929 10,385 12,582 16,349 7,427 9,406
Total operating
expenses............... 3,443 6,562 9,079 10,780 14,027(1) 6,033 7,508
Income (loss) from
operations............. (60) 367 1,306 1,802 2,322 1,394 1,898
Net income (loss)....... (131) 137 1,107 1,635 2,012 1,233 1,706
Pro forma net income
(2).................... 690 1,030 1,265 761 1,030
Pro forma net income per
share (2).............. 0.36 0.22 0.29
Pro forma common shares
outstanding............ 3,546,519 3,492,511 3,600,527
</TABLE>
<TABLE>
<CAPTION>
AT OCTOBER 31, AT APRIL 30, 1997
---------------------------------- ----------------------
1992 1993 1994 1995 1996 ACTUAL AS ADJUSTED(3)
------ ------ ------ ------ ------ ------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets....... $3,261 $4,726 $4,676 $6,462 $8,989 $10,581 $18,997
Total assets......... 3,959 5,247 5,211 7,260 10,293 11,977 20,393
Current liabilities.. 3,151 3,792 3,490 4,602 7,207 9,280 4,105
Total liabilities.... 3,635 4,686 4,350 5,314 7,364 9,342 4,113
Stockholders'
equity.............. 324 561 861 1,946 2,929 2,635 16,280
</TABLE>
- --------
(1) Includes $300,000 in compensation expense recognized by the Company in
connection with the issuance of 108,016 shares of Common Stock to an
executive officer.
(2) The pro forma presentation reflects a provision for income taxes as if the
Company had always been a C corporation.
(3) As adjusted to reflect (i) the conversion of the Company from an S
corporation to a C corporation, (ii) the sale of 1,600,000 shares of Common
Stock offered by the Company by this Prospectus at an initial public
offering price of $10.00 per share and the application of the net proceeds
from the sale and (iii) payment of a $635,000 dividend before the closing
of the Offering (the Company intends to pay additional dividends before the
closing of the Offering in an amount equal to the net income of the Company
from May 1, 1997 through the closing of the Offering). See "Termination of
S Corporation Status."
6
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, prospective
investors should carefully consider the following risk factors before
purchasing shares of Common Stock offered by this Prospectus.
SUBSTANTIAL DEPENDENCE UPON LAURA ASHLEY LICENSE
Net sales of Laura Ashley Eyewear accounted for 77.8%, 74.6% and 73.4% of
the Company's net sales in fiscal 1995, fiscal 1996 and for the six months
ended April 30, 1997, respectively. The Company manufactures Laura Ashley
Eyewear through an exclusive license with Laura Ashley entered into in 1991.
The Laura Ashley license terminates in 2001, but may be renewed by the Company
at least through January 2006 so long as the Company is not in breach of the
license agreement and meets certain minimum net sales requirements. Laura
Ashley may terminate the license before its term expires if (i) the Company
commits a material breach of the license agreement and fails to cure that
breach within 30 days after notice is given, (ii) the management or control of
the Company passes from Bernard Weiss and Julie Heldman to other parties whom
Laura Ashley may reasonably regard as unsuitable, (iii) the Company fails to
propose a selection of styles of eyewear which Laura Ashley in exercising good
faith is willing to approve for manufacture and distribution, (iv) the Company
fails to have net sales of Laura Ashley Eyewear sufficient to generate minimum
royalties in each of any two years, (v) the Company is unable to pay its debts
in the ordinary course of business or enters into liquidation, becomes
bankrupt or insolvent, or is placed in the control of a receiver or trustee,
or (vi) the Company in any year fails to spend a specified percentage of net
sales of Laura Ashley Eyewear on advertising and promotion. For purposes of
renewal and early termination of the license agreement, the Company must
generate total Laura Ashley Eyewear minimum net sales of $9,000,000,
$10,000,000 and $11,000,000 for the contract years ending January 31, 1998,
1999 and 2000, respectively. The Company has substantially exceeded its
minimum net sales requirements each year under the license agreement. The
termination of the Laura Ashley Eyewear license would have a material adverse
effect on the Company's business, operating results and financial condition.
See "Business--Products--Laura Ashley Eyewear."
APPROVAL REQUIREMENTS OF BRAND-NAME LICENSORS
The Company's business is predominantly based on its brand-name licensing
relationships. In addition to its licensing relationship with Laura Ashley,
the Company licenses the right to use proprietary marks from Hart Schaffner &
Marx, Revlon for its Jean Nate brand name, and Eddie Bauer. See "Business--
Products." Each of the Laura Ashley, Hart Schaffner & Marx, Jean Nate and
Eddie Bauer licenses requires mutual agreement of the parties for significant
matters. Each of these licensors has final approval over all eyeglass frames
and other products bearing the licensor's proprietary marks, and the frames
must meet the licensor's general design specifications and quality standards.
Consequently, each licensor may, in the exercise of its approval rights, delay
the distribution of eyeglass frames bearing its proprietary marks. The Company
expects that each future license it obtains will contain similar approval
provisions. Accordingly, there can be no assurance that the Company will be
able to continue to maintain good relationships with each licensor, or that
the Company will not be subject to delays resulting from disagreements with,
or an inability to obtain approvals from, its licensors. These delays could
materially and adversely affect the Company's business, operating results and
financial condition.
LIMITATIONS ON ABILITY TO DISTRIBUTE OTHER BRAND-NAME EYEGLASS FRAMES
Each of the Company's licenses limits the Company's right to market and sell
products with competing brand names. The Laura Ashley license prohibits the
Company from selling any range of designer eyewear that is similar to Laura
Ashley Eyewear in price and any of style, market position and market segment.
The Hart Schaffner & Marx license prohibits the Company from marketing and
selling another men's brand of eyeglass frames under a well-known fashion name
with a wholesale price in excess of $40. The Jean Nate license prohibits the
Company from manufacturing and selling eyeglass frames under any brand name
primarily known as a cosmetic, toiletry, fragrance or haircare trademark or
brand name. The Eddie Bauer license prohibits the Company from entering into
license agreements with companies which Eddie Bauer believes are its direct
competitors. The Company expects that each future license it obtains will
contain some limitations on competition within market segments. The Company's
growth, therefore, will be limited to capitalizing on its
7
<PAGE>
existing licenses in the prescription eyeglass market, introducing eyeglass
frames in other segments of the prescription eyeglass market, and
manufacturing and distributing products other than prescription eyeglass
frames such as sunglasses. In addition, there can be no assurance that
disagreements will not arise between the Company and its licensors regarding
whether certain brand-name lines would be prohibited by their respective
license agreements. Disagreements with licensors may adversely affect sales of
the Company's existing eyeglass frames or prevent the Company from introducing
new eyewear products in market segments the Company believes are not being
served by its existing products.
DEPENDENCE UPON CONTRACT MANUFACTURERS; FOREIGN TRADE REGULATION
The Company's frames are manufactured to its specifications by a number of
contract manufacturers located outside the United States, principally in
Japan, Hong Kong/China, France and Italy. The manufacture of high quality
metal frames is a labor-intensive process which can require over 200
production steps (including a large number of quality-control procedures) and
from 90 to 180 days of production time. These long lead times increase the
risk of overstocking, if the Company overestimates the demand for a new style,
or understocking, which can result in lost sales if the Company underestimates
demand for a new style. While a number of contract manufacturers exist
throughout the world, there can be no assurance that an interruption in the
manufacture of the Company's eyeglass frames will not occur. An interruption
occurring at one manufacturing site that requires the Company to change to a
different manufacturer could cause significant delays in the distribution of
the styles affected. This could cause the Company to miss delivery schedules
for these styles, which could materially and adversely affect the Company's
business, operating results and financial condition. See "Business--
Manufacturing."
In addition, the purchase of goods manufactured in foreign countries is
subject to a number of risks, including foreign exchange rate fluctuations,
economic disruptions, transportation delays and interruptions, increases in
tariffs and duties, changes in import and export controls and other changes in
governmental policies. For frames purchased other than from Hong Kong/China
manufacturers, the Company pays for its frames in the currency of the country
in which the manufacturer is located and thus the costs (in United States
dollars) of the frames vary based upon currency fluctuations. Increases and
decreases in costs (in United States dollars) resulting from currency
fluctuations generally do not affect the price at which the Company sells its
frames, and thus currency fluctuations can impact the Company's gross margin
and results of operations.
In fiscal 1996, approximately 40% of the Company's eyeglass frames were
manufactured by companies headquartered in Hong Kong that have manufacturing
facilities in China. Effective July 1, 1997, the exercise of sovereignty over
the British Crown Colony of Hong Kong was transferred from the United Kingdom
to China pursuant to a treaty between the two countries, and Hong Kong became
a part of China. Any political or economic disruptions in Hong Kong or China
may force the Company to manufacture its eyeglass frames in other countries
which could increase frame costs. The Company is uncertain as to the impact
that the change in government will have on its business operations in Hong
Kong. Further, China currently enjoys Most Favored Nation trading status with
the United States. Under the Trade Act of 1974, the President of the United
States is authorized, upon making specific findings, to waive certain
restrictions that would render China ineligible for Most Favored Nation
treatment. The President has waived these provisions every year since 1979.
China's Most Favored Nation status presently extends until July 1998. No
assurance can be given that China will continue to enjoy Most Favored Nation
status in the future. Any legislation or administrative action by the United
States government that revokes or places further conditions on China's Most
Favored Nation status, or otherwise limits imports of Chinese eyeglass frames
into the United States, could, if enacted, have a material adverse effect on
the Company's business, operating results and financial condition.
MANAGEMENT'S DISCRETION AS TO USE OF PROCEEDS
The Company's management will have broad discretion as to the application of
the net proceeds to the Company from the sale of Common Stock offered by the
Company by this Prospectus. The net proceeds to the Company are estimated to
be approximately $14.3 million. The Company expects to use approximately $7.1
million of the net proceeds to repay all bank debt existing at the closing of
the Offering, approximately $2.5 million to launch the Eddie Bauer Eyewear
line, and the balance for working capital and general corporate
8
<PAGE>
purposes. The Company may change the allocation of these proceeds in response
to developments in the manufacturing and retail industries and changes in the
Company. See "Use of Proceeds."
SUCCESSFUL LAUNCH OF EDDIE BAUER EYEWEAR
The Company intends to use approximately $2.5 million of the net proceeds
from the Offering to develop and introduce the Company's Eddie Bauer Eyewear
line. It is expected that certain members of the Company's management and of
its design and marketing teams will devote considerable time towards
introducing this new line. There can be no assurance that the Company will be
able to introduce Eddie Bauer Eyewear at the budgeted price or through the
Company's existing distribution channels, or that the introduction of Eddie
Bauer Eyewear will occur when planned. Furthermore, once Eddie Bauer Eyewear
is released, there can be no assurance of its acceptance by the market.
RELATIONSHIPS WITH DOMESTIC DISTRIBUTORS
The Company distributes its eyeglass frames to independent optical retailers
in the United States (other than California) largely through distributors who
sell competing lines of eyeglass frames. Although the Company believes that
its distributors currently devote a great deal of time and resources to
promoting the Company's products, there can be no assurance that these
distributors will continue to do so. The Company does not have written
agreements with its domestic distributors except for written understandings
not to resell or divert Laura Ashley Eyewear through unauthorized channels of
distribution, and not to expand the territories in which they sell the
Company's products without the Company's prior consent. Accordingly, the
Company's domestic distributors may spend an increased amount of effort and
resources marketing competing products, and may terminate their relationships
with the Company at any time without penalty. There can be no assurance that
the informal nature of the Company's relationships with its domestic
distributors will not lead to disagreements between the Company and its
distributors or between the distributors themselves, which could have a
material adverse impact on the Company's business, operating results and
financial condition. See "Business--Distribution."
INTERNATIONAL SALES
International sales accounted for approximately 9.0%, 8.8% and 9.5% of the
Company's net sales in fiscal 1995, fiscal 1996, and the six months ended
April 30, 1997, respectively. These sales were primarily in England, Canada,
Australia, New Zealand, France and the Netherlands. The Company's
international business is subject to numerous risks, including the need to
comply with export and import laws, changes in export or import controls,
tariffs and other regulatory requirements, the imposition of governmental
controls, political and economic instability, trade restrictions, the greater
difficulty of administering business overseas and general economic conditions.
Although the Company's international sales are principally in United States
dollars, sales to international customers may also be affected by changes in
demand resulting from fluctuations in interest and currency exchange rates.
There can be no assurance that these factors will not have a material adverse
effect on the Company's business, operating results and financial condition.
QUARTERLY AND SEASONAL FLUCTUATIONS
The Company's results of operations have fluctuated from quarter to quarter
and the Company expects these fluctuations to continue in the future.
Historically, the Company's net sales in the quarter ending January 31 (its
first quarter) have been lower than net sales in other fiscal quarters. The
Company attributes lower net sales in the first fiscal quarter in part to low
consumer demand for prescription eyeglasses during the holiday season and
year-end inventory adjustments by distributors and independent optical
retailers. A factor which may significantly influence results of operations in
a particular quarter is the introduction of a brand-name collection, which
results in disproportionate levels of selling expenses due to additional
advertising, promotions, catalogs and in-store displays. Introduction of a new
brand may also generate a temporary increase in sales due to initial stocking
by retailers. Other factors which can influence the Company's results of
operations include customer demand, the mix of distribution channels through
which the eyeglass frames are sold, the mix of eyeglass frames sold, product
returns, delays in shipment and general economic conditions. See "Management's
Discussion and Analysis of Results of Operations and Financial Condition--
Quarterly and Seasonal Fluctuations."
9
<PAGE>
PRODUCT RETURNS
The Company has a product return policy which it believes is standard in the
optical industry. Under that policy, the Company generally accepts returns of
non-discontinued product for credit, upon presentment and without charge.
According to the 1996 U.S. Optical Industry Handbook, the existence of this
policy in the optical business has led to some companies having return rates
as high as 20%. While the Company's product returns for fiscal 1995 and fiscal
1996 amounted to 11.6% and 12.1% of gross sales (sales before returns),
respectively, and while the Company maintains reserves for product returns
which it considers adequate, the possibility exists that the Company could
experience returns at a rate significantly exceeding its historical levels,
which could have a material adverse impact on the Company's business,
operating results and financial condition.
AVAILABILITY OF VISION CORRECTION ALTERNATIVES
The Company's future success could depend to a significant extent on the
availability and acceptance by the market of vision correction alternatives to
prescription eyeglasses, such as contact lenses and refractive (optical)
surgery. While the Company does not believe that contact lenses, refractive
surgery or other vision correction alternatives materially and adversely
impact its business at present, there can be no assurance that technological
advances in, or reductions in the cost of, vision correction alternatives will
not occur in the future, resulting in their more widespread use. Increased use
of vision correction alternatives could result in decreased use of the
Company's eyewear products, which would have a material adverse impact on the
Company's business, operating results and financial condition.
ACCEPTANCE OF EYEGLASS FRAMES; UNPREDICTABILITY OF DISCRETIONARY CONSUMER
SPENDING
The Company's success will depend to a significant extent on the market's
acceptance of the Company's brand-name eyeglass frames. If the Company is
unable to develop new, commercially successful styles to replace revenues from
older styles in the later stages of their life cycles, the Company's business,
operating results and financial condition could be materially and adversely
affected. The Company's future growth will depend in part upon the
effectiveness of the Company's marketing and sales efforts as well as the
availability and acceptance of other competing eyeglass frames released into
the market place at or near the same time, the availability of vision
correction alternatives, general economic conditions and other tangible and
intangible factors, all of which can change and cannot be predicted.
The Company's success also will depend to a significant extent upon a number
of factors relating to discretionary consumer spending, including the trend in
managed health care to allocate fewer dollars to the purchase of eyeglass
frames, and general economic conditions affecting disposable consumer income,
such as employment business conditions, interest rates and taxation. Any
significant adverse change in general economic conditions or uncertainties
regarding future economic prospects that adversely affect discretionary
consumer spending generally, and purchasers of prescription eyeglass frames
specifically, could have a material adverse effect on the Company's business,
operating results and financial condition.
COMPETITION
The markets for prescription eyewear are intensely competitive. There are
thousands of styles, including hundreds with brand names. At retail, the
Company's eyewear styles compete with styles that do and do not have brand
names, styles in the same price range, and styles with similar design
concepts. To obtain board space at an optical retailer, the Company competes
against many companies, both foreign and domestic, including Luxottica Group
S.p.A. (operating in the United States through a number of its subsidiaries),
Safilo Group S.p.A. (operating in the United States through a number of its
subsidiaries) and Marchon Eyewear, Inc. Signature's largest competitors have
significantly greater financial, technical, sales, manufacturing and other
resources than the Company. They also employ direct sales forces that are
significantly larger than the Company's, and are thus able to realize a higher
gross profit margin. At the distributor level, sales representatives often
carry many lines of eyewear, and the Company must vie for their attention. At
the major retail chains, the Company competes not only against other eyewear
suppliers, but also against the chains themselves, which license some of their
own
10
<PAGE>
brand names for design, manufacture and sale in their own stores. Luxottica,
one of the largest eyewear companies in the world, is vertically integrated in
that it manufactures frames, distributes them through direct sales forces in
the United States and throughout the world, and owns LensCrafters, one of the
largest United States retail optical chains.
The Company competes in its target markets through the quality of the brand
names it licenses, its marketing, merchandising and sales promotion programs,
the popularity of its frame designs, the reputation of its styles for quality,
and its pricing policies. There can be no assurance that the Company will be
able to compete successfully against current or future competitors or that
competitive pressures faced by the Company will not materially and adversely
affect its business, operating results and financial condition. See
"Business--Competition."
DEPENDENCE ON KEY PERSONNEL
The Company's success has and will continue to depend to a significant
extent upon its executive officers, including Bernard Weiss (Chief Executive
Officer), Julie Heldman (President), Michael Prince (Chief Financial Officer),
Robert Fried (Senior Vice President of Marketing) and Robert Zeichick (Vice
President of Advertising and Sales Promotion). The loss of the services of one
or more of these key employees could have a material adverse effect on the
Company. The Company has entered into employment agreements with each of Ms.
Heldman and Messrs. Weiss, Prince, Fried and Zeichick, all effective as of the
closing of the Offering, pursuant to which they have agreed to render services
to the Company until October 31, 2000. See "Management--Employment
Agreements." The Company maintains and is the sole beneficiary of "key person"
life insurance on Ms. Heldman and Messrs. Weiss, Prince, Fried and Zeichick in
the amount of $1,500,000 each. In the event of the death of an executive
officer, a portion of the proceeds of the applicable policy would be used to
pay the Company's obligation under the officer's employment agreement (see
"Management--Employment Agreements with Executive Officers"). There can be no
assurance that the remaining proceeds of these policies will be sufficient to
offset the loss to the Company due to the death of that executive officer. In
addition, the Company's future success will depend in large part upon its
ability to attract, retain and motivate personnel with a variety of creative,
technical and managerial skills. There can be no assurance that the Company
will be able to retain and motivate its personnel or attract additional
qualified members to its management staff. The inability to attract and retain
the necessary managerial personnel could have a material adverse effect on the
Company's business, operating results and financial condition. See
"Management."
MANAGEMENT OF GROWTH
The Company has grown rapidly in recent years, with net sales increasing
from $9.2 million in fiscal 1992 to $28.3 million in fiscal 1996, and the
number of employees increasing from 41 at November 1, 1992 to 101 at April 30,
1997. The Company's growth has placed substantial burdens on its management
resources, and as a result of its growth, the Company has made additions to
its management team. Additionally, the Company plans to expand its operations
by introducing Eddie Bauer Eyewear in the Spring of 1998. The Company's
ability to manage its growth effectively will require it to continue to
improve its operational, financial and management information systems and
controls and to train, motivate and manage a larger number of employees. There
can be no assurance that the Company will be able to sustain its historic rate
of revenue growth, continue its profitable operations or manage future growth
successfully. See "Management's Discussion and Analysis of Results of
Operations and Financial Condition."
CONTROL BY DIRECTORS AND EXECUTIVE OFFICERS
Immediately following the Offering, the directors and executive officers of
the Company will own approximately 59.0% of the Company's outstanding shares
(approximately 54.8% assuming the full exercise of the Over-Allotment Option).
As a result, the directors and executive officers will be able to control the
Company and its operations, including the approval of significant corporate
transactions and the election of at least a majority of the Company's Board of
Directors and thus the policies of the Company. The voting power of the
11
<PAGE>
directors and executive officers could also serve to discourage potential
acquirors from seeking to acquire control of the Company through the purchase
of the Common Stock, which might depress the price of the Common Stock. See
"Management," "Principal and Selling Shareholders" and "Description of Capital
Stock."
NO DIVIDENDS ANTICIPATED
After the consummation of the Offering, the Company does not currently
intend to declare or pay any cash dividends and intends to retain earnings, if
any, for the future operation and expansion of the Company's business. See
"Dividend Policy."
IMMEDIATE AND SUBSTANTIAL DILUTION
The initial public offering price is substantially higher than the book
value per outstanding share of Common Stock. Specifically, investors will
sustain immediate dilution of $6.87 per share based on the net tangible book
value of the Company at April 30, 1997 of $0.73 per share. Investors in the
Offering therefore will bear a disproportionate part of the financial risk
associated with the Company's business while effective control will remain
with the Company's directors and executive officers. See "Dilution" and
"Principal and Selling Shareholders."
ABSENCE OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE; ARBITRARY
DETERMINATION OF OFFERING PRICE
Prior to the Offering, there has been no public market for the Common Stock.
Although the Common Stock has been approved for quotation on the Nasdaq
National Market, there can be no assurance that an active trading market for
the Common Stock will develop as a result of the Offering or, if a trading
market does develop, that it will continue. In the absence of such a market,
investors may be unable readily to liquidate their investment in the Common
Stock. The trading price of the Common Stock could be subject to wide
fluctuations in response to quarter to quarter variations in operating
results, news announcements relating to the Company's business (including new
product introductions by the Company or its competitors), changes in financial
estimates by securities analysts, the operating and stock price performance of
other companies that investors may deem comparable to the Company as well as
other developments affecting the Company or its competitors. In addition, the
market for equity securities in general has been volatile and the trading
price of the Common Stock could be subject to wide fluctuations in response to
general market trends, changes in general conditions in the economy, the
financial markets or the manufacturing or retail industries and other factors
which may be unrelated to the Company's performance. The public offering price
of the shares of Common Stock has been determined by negotiations between the
Company and the Representatives and does not necessarily bear any relationship
to the Company's book value, assets, past operating results, financial
condition or any other established criteria of value. There can be no
assurance that the shares offered by this Prospectus will trade at market
prices in excess of the initial public offering price. See "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of Common Stock by existing shareholders could adversely affect
the prevailing market price of the Common Stock and the Company's ability to
raise capital. Upon completion of the Offering, the Company will have
5,200,527 shares of Common Stock outstanding. Of those shares, the 1,800,000
shares of Common Stock offered by this Prospectus will be freely tradeable
without restriction or further registration under the Securities Act, unless
purchased by "affiliates" of the Company as that term is defined in Rule 144
("Rule 144") under the Securities Act of 1933, as amended (the "Securities
Act"). The remaining 3,400,527 shares of Common Stock outstanding are
"restricted securities," as that term is defined by Rule 144. Under lock-up
agreements with Fechtor, Detwiler & Co., Inc. ("Fechtor Detwiler"), each
existing shareholder has agreed that he or it will not, directly or
indirectly, sell, assign or otherwise transfer any shares of Common Stock
owned by him or it for a period of 360 days after the date of this Prospectus,
except with Fechtor Detwiler's prior written consent and except that each
shareholder may transfer up to 104,000 shares in the aggregate after 180 days
following the date of this Prospectus. Once the lock-up agreements expire, all
of the 3,400,527 shares of Common Stock will become eligible for immediate
sale, subject to compliance with the volume limitations of Rule 144 by holders
of 3,070,677 of these shares. See "Shares Eligible for Future Sale" and
"Underwriting."
12
<PAGE>
The Company intends to file a registration statement under the Securities
Act to register the 600,000 shares of Common Stock authorized for issuance
pursuant to the Stock Plan. See "Management--Stock Plan." This registration
statement will become effective immediately upon filing.
The availability for sale, as well as actual sales, of currently outstanding
shares of Common Stock, and shares of Common Stock issuable pursuant to the
Stock Plan, may depress the prevailing market price for the Common Stock and
could adversely affect the terms upon which the Company would be able to
obtain additional equity financing.
POSSIBLE ANTI-TAKEOVER EFFECTS
The Company's Board of Directors has the authority to issue up to 5,000,000
shares of Preferred Stock and to determine the price, rights, preferences,
privileges and restrictions, including voting rights, of those shares without
any further vote or action by the shareholders. The Preferred Stock could be
issued with voting, liquidation, dividend and other rights superior to those
of the Common Stock. Following the Offering, no shares of Preferred Stock of
the Company will be outstanding, and the Company has no present intention to
issue any shares of Preferred Stock. However, the rights of the holders of
Common Stock will be subject to, and may be adversely affected by, the rights
of the holders of any Preferred Stock that may be issued in the future. The
issuance of Preferred Stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of making it more difficult for a third party to acquire a majority
of the outstanding voting stock of the Company, which may depress the market
value of the Common Stock. See "Description of Capital Stock--Preferred
Stock." In addition, each of the Laura Ashley, Hart Schaffner & Marx, Jean
Nate and Eddie Bauer licenses allows the licensor to terminate its license
upon certain events which under the license are deemed to result in a change
in control of the Company. See "--Substantial Dependence Upon Laura Ashley
License," and "Business--Products." The licensors' rights to terminate their
licenses upon a change in control of the Company could have the effect of
discouraging a third party from acquiring or attempting to acquire a
controlling portion of the outstanding voting stock of the Company and could
thereby depress the market value of the Common Stock.
ELIMINATION OF CUMULATIVE VOTING
The Articles of Incorporation of the Company provide that at such time as
the Company has 800 or more holders of its Common Stock as of the record date
of the Company's most recent annual meeting of shareholders, the cumulative
voting rights of shareholders will cease. This will have the effect of making
it more difficult for minority shareholders to obtain representation on the
Board of Directors.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus includes "forward-looking statements." All statements other
than statements of historical fact included in this Prospectus, including,
without limitation, the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" and "Business," regarding the Company's strategies, plans,
objectives and expectations; the Company's ability to design, develop, import
and market eyewear products; the ability of the Company's eyewear products to
maintain commercial acceptance; the Company's ability to successfully
introduce new brands or products; the anticipated growth of its target
markets; its future operating results; and other matters are all forward-
looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable at this time, it
can give no assurance that those expectations will prove to be correct.
Important factors that could cause actual results to differ materially from
the Company's expectations are set forth in these "Risk Factors," as well as
elsewhere in this Prospectus. All subsequent written and oral forward-looking
statements attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by these "Risk Factors."
13
<PAGE>
THE COMPANY
The Company was incorporated in California in 1983 as USA Optical
Distributors, Inc. ("USA Optical"). USA Optical began as a distributor of
high-quality selections of brand-name eyeglass frames. Those frames were
designed and imported by other eyeglass frame manufacturers and suppliers,
purchased by USA Optical and sold directly to optical retailers. In 1986, USA
Optical began designing its own eyeglass frames and contracting with overseas
manufacturers for the manufacture of the frames.
In 1988, Bernard Weiss and Julie Heldman, principal shareholders and
directors of Signature and the Chief Executive Officer and President,
respectively, formed Optical Surplus, Inc. ("Optical Surplus"). Optical
Surplus acquires eyeglass frame close-outs and sells them at a discount
directly to optical retailers throughout the United States. Optical Surplus
was merged into USA Optical in 1991, and the Company's name was changed to
Signature Eyewear, Inc. shortly thereafter. USA Optical and Optical Surplus
are now divisions of Signature and complement the Company's primary business
of designing, marketing and distributing brand-name eyeglass frames.
The Company's executive offices are located at 498 North Oak Street,
Inglewood, California 90302, and its telephone number is (310) 330-2700.
TERMINATION OF S CORPORATION STATUS
The Company has been treated as an S Corporation since 1990. As a result,
through the date immediately preceding the termination of its S Corporation
status (the "Termination Date"), its earnings have been and will be taxed for
federal income tax purposes directly to the holders of the Common Stock,
rather than to the Company. Other than a tax imposed on S Corporations by the
State of California (currently 1.5% of taxable income), state income taxes on
earnings also have been the responsibility of the Company's shareholders. The
Termination Date will occur immediately before the closing of the Offering. On
the Termination Date, the Company will become subject to federal and state
corporate income taxes. See Note 1 of Notes to Financial Statements.
The Company paid an aggregate of $4,685,000 in dividends to its shareholders
from November 1, 1993 through April 30, 1997. These dividends were paid to the
shareholders to pay their income taxes and as a return of their investment.
Before the closing of the Offering, the Company intends to pay dividends to
the shareholders equal to $635,000 plus an amount equal to the Company's net
income from May 1, 1997 through the Termination Date.
Before the Offering, the Company and the shareholders at the time of the
Offering (the "Existing Shareholders") will enter into a tax indemnification
agreement (the "Tax Agreement"). The Tax Agreement is intended to assure that
taxes are borne by the Company on the one hand and the Existing Shareholders
on the other only to the extent that the parties received the related income.
The Tax Agreement generally provides that, if an adjustment is made to the
taxable income of the Company for a year in which it was treated as an S
Corporation, the Company will indemnify the Existing Shareholders and the
Existing Shareholders will indemnify the Company against any increase in the
indemnified party's income tax liability (including interest and penalties and
related costs and expenses) for any tax year to the extent the increase
results in a related decrease in the income tax liability of the indemnifying
party for that year. The Company will also indemnify the Existing Shareholders
for all taxes imposed upon them as the result of their receipt of an
indemnification payment under the Tax Agreement. Any payment made by the
Company to the Existing Shareholders under the Tax Agreement may be considered
by the Internal Revenue Service or state taxing authorities to be non-
deductible by the Company for income tax purposes.
14
<PAGE>
CAPITALIZATION
The following table sets forth the short term debt and the capitalization of
the Company at April 30, 1997 and as adjusted after giving effect to (i) the
sale of the 1,600,000 shares of Common Stock offered by the Company by this
Prospectus (at an initial public offering price of $10.00 per share) and
application of the net proceeds from the sale (see "Use of Proceeds") and (ii)
the payment of a dividend equal to $635,000 before the closing of the
Offering. This does not include additional dividends to be paid by the Company
before the closing of the Offering in an amount equal to the net income of the
Company from May 1, 1997 through the Termination Date. See "Termination of S
Corporation Status."
<TABLE>
<CAPTION>
AT APRIL 30, 1997
------------------
ACTUAL AS ADJUSTED
------ -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt............................................. $5,167 $ 0
====== =======
Long-term debt, less current portion........................ 62 0
------ -------
Stockholders' equity:
Preferred Stock, $0.001 par value; 5,000,000 shares
authorized; no shares outstanding........................ 0 0
Common Stock, $0.001 par value; 30,000,000 shares
authorized; 3,600,527 shares outstanding; 5,200,527
shares outstanding as adjusted........................... 8 10
Paid-in capital........................................... 413 14,691
Retained earnings......................................... 2,214 1,579
------ -------
Total stockholders' equity.............................. 2,635 16,280
------ -------
Total capitalization.................................. $2,697 $16,280
====== =======
</TABLE>
USE OF PROCEEDS
The net proceeds to the Company from its sale of the 1,600,000 shares of
Common Stock offered by this Prospectus (at an initial public offering price
of $10.00 per share), after deducting the estimated underwriting discounts and
offering expenses, are estimated to be approximately $14.3 million ($14.9
million if the Over-Allotment Option is exercised in full).
The Company expects to use approximately $7.1 million of the net proceeds to
repay all bank debt existing at the closing of the Offering. At April 30,
1997, the bank debt consisted of (i) $4,625,000 in loans under the Company's
revolving line of credit with interest rates ranging from 8.375% to 9.25%, and
(ii) three installment loans totaling $604,000, maturing at various times in
1997 and 1998 and bearing interest at a weighted average rate of 9.11% per
annum. Subsequent to April 30, 1997 and before the closing of the Offering,
the Company will borrow an additional amount equal to approximately $1,850,000
for working capital purposes and shareholder distributions. The Company
intends to use approximately $2.5 million of the net proceeds to launch the
Eddie Bauer Eyewear collection which the Company expects to release in the
Spring of 1998. The balance of the net proceeds will be used for working
capital and general corporate purposes.
The Company intends to maintain flexibility in the use of the proceeds of
the Offering (other than amounts to retire existing bank debt). The amounts
actually expended for each use of the proceeds, if any, are at the discretion
of the Company and may vary significantly depending upon a number of factors,
including requirements for launching new product lines, marketing, advertising
and working capital to support growth. Accordingly, management reserves the
right to reallocate the proceeds of the Offering as it deems appropriate. The
Company may also use a portion of the net proceeds to acquire businesses,
products or proprietary rights; however, the Company currently has no
commitments or agreements relating to any of these types of transactions other
than those disclosed in this Prospectus. Until the net proceeds of the
Offering are used, the Company intends to invest them in United States
government securities, short-term certificates of deposit, money market funds
or other short-term interest bearing investments.
15
<PAGE>
DILUTION
The net tangible book value of the Common Stock as of April 30, 1997 was
$2,635,000 or $0.73 per share. Net tangible book value per share is equal to
the total tangible assets of the Company, less total liabilities, divided by
the number of shares of Common Stock outstanding. After giving effect to the
sale of 1,600,000 shares of Common Stock offered by the Company by this
Prospectus and the application of the net proceeds from the sale (at an
initial public offering price of $10.00 per share, after deducting (i) the
underwriting discount, and (ii) estimated offering expenses of $600,000), the
net tangible book value of the Company as of April 30, 1997 would have been
approximately $16,280,000 or $3.13 per share. This represents an immediate
increase in net tangible book value of $2.58 per share to the Existing
Shareholders and an immediate dilution of $6.87 per share to new shareholders
purchasing shares in the Offering. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price............................... $10.00
Net tangible book value per share as of April 30, 1997.... $ 0.73
Decrease attributable to dividends (1).................... (0.18)
Increase per share attributable to new shareholders....... 2.58
------
Pro forma net tangible book value per share as of April 30,
1997 after the Offering.................................... 3.13
------
Dilution per share to new shareholders...................... $ 6.87
======
</TABLE>
- --------
(1) Based on a $635,000 dividend which will be paid before the closing of the
Offering. Does not include additional dividends which will be paid before
the closing of the Offering in an amount equal to the net income of the
Company from May 1, 1997 through the Termination Date. See "Termination of
S Corporation Status."
The following table summarizes, for Existing Shareholders and new investors,
a comparison of the number of shares of Common Stock acquired from the
Company, the percentage ownership of those shares, the total consideration,
the percentage of total consideration and the average price per share.
<TABLE>
<CAPTION>
SHARES OF COMMON
STOCK ACQUIRED TOTAL CONSIDERATION AVERAGE
----------------- ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing Shareholders........... 3,600,527 69.2% $ 401,000 2.4% $ 0.11
New investors................... 1,600,000 30.8 16,000,000 97.6 $10.00
--------- ------ ----------- ------
5,200,527 100.0% $16,401,000 100.0%
========= ====== =========== ======
</TABLE>
The foregoing tables and calculations assume no exercise of the Over-
Allotment Option.
DIVIDEND POLICY
The Company does not currently intend to pay dividends on its Common Stock
following the Offering and plans to follow a policy of retaining earnings to
finance the growth of its business. Any future determination to pay dividends
will be at the discretion of the Company's Board of Directors and will depend
on the Company's results of operations, financial condition, contractual and
legal restrictions and other factors deemed relevant by the Board of Directors
at that time.
16
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the Company for
the periods and as of the dates indicated. The statement of income data for
each of the three years ended October 31, 1994, 1995 and 1996, and the balance
sheet data as of October 31, 1995 and 1996 are derived from the financial
statements and related notes audited by Altschuler, Melvoin and Glasser LLP,
independent public accountants, as set forth in their report included
elsewhere in this Prospectus. The statement of income data for the six-month
periods ended April 30, 1996 and 1997, and the balance sheet data as of April
30, 1997, are derived from unaudited financial statements of the Company
prepared on the same basis as the audited financial statements and, in the
opinion of management, include all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the Company's financial
position and results of operations. The results of operations for an interim
period are not necessarily indicative of results to be expected for a full
year. The following data should be read in conjunction with the Financial
Statements and related notes and with "Management's Discussion and Analysis of
Results of Operations and Financial Condition" appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, SIX MONTHS ENDED APRIL 30,
--------------------------- --------------------------
1994 1995 1996 1996 1997
------- ------- --------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
DATA:
Net sales............... $20,051 $23,571 $28,280 $13,052 $16,038
Cost of sales........... 9,666 10,989 11,931 5,625 6,632
------- ------- --------- ------------- -------------
Gross profit............ 10,385 12,582 16,349 7,427 9,406
------- ------- --------- ------------- -------------
Operating expenses:
Selling............... 5,855 6,510 8,328 3,682 4,701
General and
administrative....... 3,224 4,035 5,612(1) 2,302 2,807
Relocation expense.... 0 235 87 49 0
------- ------- --------- ------------- -------------
Total operating
expenses........... 9,079 10,780 14,027 6,033 7,508
------- ------- --------- ------------- -------------
Income from operations.. 1,306 1,802 2,322 1,394 1,898
Other expense, net...... (198) (166) (309) (160) (191)
------- ------- --------- ------------- -------------
Income before pro forma
provision for income
taxes.................. 1,108 1,636 2,013 1,234 1,707
Pro forma provision for
income taxes(2)........ 418 606 748 473 677
------- ------- --------- ------------- -------------
Pro forma net
income(2).............. $690 $1,030 $1,265 $761 $1,030
======= ======= ========= ============= =============
Pro forma net income per
share(2)............... $0.36 $0.22 $0.29
========= ============= =============
Pro forma common shares
outstanding............ 3,546,519 3,492,511 3,600,527
========= ============= =============
Supplementary pro forma
net income per
share(3)............... $0.37 $0.28
========= =============
Supplementary pro forma
common shares
outstanding(3)......... 3,892,847 4,126,448
========= =============
</TABLE>
<TABLE>
<CAPTION>
AT OCTOBER 31,
----------------- AT APRIL 30,
1995 1996 1997
-------- -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Current assets................................... $6,462 $8,989 $10,581
Total assets..................................... 7,260 10,293 11,977
Current liabilities.............................. 4,602 7,207 9,280
Total liabilities................................ 5,314 7,364 9,342
Stockholders' equity............................. 1,946 2,929 2,635
</TABLE>
- -------
(1) Includes $300,000 in compensation expense recognized by the Company in
connection with the issuance of 108,016 shares of Common Stock to an
executive officer.
(2) The pro forma presentation reflects a provision for income taxes as if the
Company had always been a C corporation.
(3) Supplementary per share amounts are adjusted to reflect the repayment of
debt and related reduction of interest expense as if the debt was repaid
on November 1, 1995 and 1996. The number of shares required to be issued,
at a $10.00 price per share, have been added to the number of common
shares outstanding for the period.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following discussion and analysis should be read in connection with the
Company's Financial Statements and the notes thereto and other financial
information included elsewhere in this Prospectus.
OVERVIEW
The Company derives revenues primarily through the sale of brand-name
eyeglass frames, including Laura Ashley Eyewear, Hart Schaffner & Marx Eyewear
and Jean Nate Eyewear. The Company also has a division which distributes
prescription eyeglass frames under the Company's own Camelot brand and a
division which sells brand-name close-outs at discounted prices. In June 1997,
the Company acquired an exclusive license from Eddie Bauer to market a
collection of men's and women's prescription eyewear under the Eddie Bauer
brand name. The Company anticipates spending approximately $2.5 million to
launch the Eddie Bauer Eyewear collection in the Spring of 1998.
The Company's revenues have grown from $9.2 million in fiscal 1992 to $28.3
million in fiscal 1996. Since 1993, the Laura Ashley Eyewear collection has
been the leading source of revenue for the Company. Net sales of Laura Ashley
Eyewear accounted for 77.8%, 74.6%, and 73.4% of the Company's net sales
during fiscal 1995, fiscal 1996, and the six months ended April 30, 1997,
respectively. While the Company continues to reduce its dependence on the
Laura Ashley Eyewear line through the development of other brand names and
additional product offerings, the Company expects this line to continue to be
the Company's leading source of revenue for the foreseeable future. See "Risk
Factors--Substantial Dependence Upon Laura Ashley License."
The Company's cost of sales consists primarily of payments to foreign
contract manufacturers who produce frames to the Company's specifications. The
complete development cycle for a new frame design typically takes
approximately twelve months from the initial design concept to the release.
Generally, at least six months are required to complete the initial
manufacturing process. For frames purchased other than from Hong Kong/China
manufacturers, the Company pays for its frames in the currency of the country
in which the manufacturer is located and thus the costs (in United States
dollars) of the frames vary based upon currency fluctuations. Increases and
decreases in costs (in United States dollars) resulting from currency
fluctuations generally do not affect the price at which the Company sells its
frames, and thus currency fluctuation can impact the Company's gross margin.
In 1994, the Company recognized that it was dependent on frame manufacturers
located in Japan. Starting in 1995, the Company implemented a program to
reduce that dependence by purchasing an increasing percentage of its frames
from manufacturers located in other countries, particularly in Hong Kong/China
and to a lesser extent in France and Italy. The use of Hong Kong/China
manufacturers has also reduced the Company's average frame cost, which has
increased the Company's gross margin.
EFFECT OF CHANGE IN FORM FROM AN S CORPORATION TO A C CORPORATION
As a result of the Offering, the Company will be required to change in form
from an S Corporation to a C Corporation, which will affect its operations and
financial condition by increasing the level of federal and state income taxes.
As such, the change in form will affect the net income and the cash flows of
the Company.
As an S Corporation, the Company's income, whether or not distributed, was
taxed at the shareholder level for federal and state income tax purposes. In
addition, for California franchise tax purposes, S Corporations were taxed at
2.5% of taxable income through 1993 and 1.5% of taxable income in 1994, 1995
and 1996, net of income tax credits under the Los Angeles Revitalization Zone
Act. Currently, the highest federal tax rate for C Corporations is 38%
(although the majority of the taxable income is taxed at 35%) and the
corporate tax rate in California is 9.3%. The pro forma provision for income
taxes in the statement of income data included elsewhere in this Prospectus
shows results as if the Company had always been a C Corporation and had
adopted Statement of Financial Accounting Standards No. 109 "Accounting for
Income Taxes".
18
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated selected statements
of income data shown as a percentage of net sales. Pro forma operating results
reflect adjustments to the historical operating results for federal and state
income taxes as if the Company had been taxed as a C Corporation rather than
an S Corporation.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED OCTOBER 31, ENDED APRIL 30,
------------------------- ----------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net sales........................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.................... 48.2 46.6 42.2 43.1 41.3
------- ------- ------- ------- -------
Gross profit..................... 51.8 53.4 57.8 56.9 58.7
------- ------- ------- ------- -------
Operating expenses:
Selling........................ 29.2 27.6 29.4 28.2 29.3
General and administrative..... 16.1 17.1 19.9 17.6 17.5
Relocation expense............. 0 1.0 0.3 0.4 0
------- ------- ------- ------- -------
Total operating expenses..... 45.3 45.7 49.6 46.2 46.8
------- ------- ------- ------- -------
Income from operations........... 6.5 7.7 8.2 10.7 11.9
------- ------- ------- ------- -------
Other expense, net............... (1.0) (0.7) (1.1) (1.2) (1.2)
------- ------- ------- ------- -------
Income before pro forma provision
for income taxes................ 5.5 7.0 7.1 9.5 10.7
Pro forma provision for income
taxes........................... 2.1 2.6 2.6 3.6 4.2
------- ------- ------- ------- -------
Pro forma net income............. 3.4% 4.4% 4.5% 5.9% 6.5%
======= ======= ======= ======= =======
</TABLE>
Comparison of Six Months Ended April 30, 1997 to Six Months Ended April 30,
1996
Net Sales. Net sales increased by 23% from $13,052,000 in the six months
ended April 30, 1996 (the "1996 period") to $16,038,000 in the six months
ended April 30, 1997 (the "1997 period"). This increase in net sales was due
principally to an increase of $1,801,000 in net sales of Laura Ashley Eyewear
and net sales of $938,000 of Hart Schaffner & Marx Eyewear (which was
introduced in the fourth quarter of fiscal 1996). The increase in Laura Ashley
net sales was due principally to an increase in unit sales. Net sales also
increased as a result of the Company's decision in March 1996 to sell directly
to independent optical retailers in California through its own sales
representatives, rather than through a distributor, which resulted in a higher
sales price per frame.
Gross Profit. Gross profit increased from $7,427,000 in the 1996 period to
$9,406,000 in the 1997 period. This increase was due to an increase in net
sales and to an increase in the gross margin from 56.9% in the 1996 period to
58.7% in the 1997 period. This increase was due principally to lower average
frame costs resulting from the Company's continued shift to lower cost frame
manufacturers and to favorable currency fluctuations.
Operating Expenses. Operating expenses increased 24% from $6,033,000 in the
1996 period to $7,508,000 in the 1997 period, which included an increase of
$1,019,000 or 28% in selling expenses and an increase of $505,000 or 22% in
general and administrative expenses. The increase in selling expenses resulted
principally from a $226,000 increase in convention and trade show expenses, a
$214,000 increase in advertising expense and a $206,000 increase in royalty
expense. General and administrative expenses increased principally as a result
of a $372,000 increase in compensation expense, primarily due to an increase
in the number of employees (including a number of mid-level manager
employees).
Other Expense, Net. The $31,000 increase in other expenses in the 1997
period was due primarily to increased interest expense.
19
<PAGE>
Pro Forma Provision for Income Taxes. While an S Corporation, the Company's
income taxes primarily consisted of California state franchise taxes. On a pro
forma basis, income taxes would have been $473,000 and $677,000 in the 1996
period and the 1997 period, respectively.
Pro Forma Net Income. Pro forma net income increased from $761,000 in the
1996 period to $1,030,000 in the 1997 period due to the factors set forth
above.
Comparison of Fiscal Years 1994, 1995 and 1996
Net Sales. Net sales increased by 18% from $20,051,000 for fiscal 1994 to
$23,571,000 in fiscal 1995 and by 20% to $28,280,000 for fiscal 1996. The
increase in net sales from fiscal 1994 to fiscal 1995 was due to a 22%
increase in net sales of Laura Ashley Eyewear from $15,008,000 to $18,348,000.
The increase in net sales from fiscal 1995 to fiscal 1996 resulted primarily
from a 15% increase in net sales of Laura Ashley Eyewear to $21,109,000 and
net sales of $1,889,000 of Jean Nate Eyewear and Hart Schaffner & Marx
Eyewear, which were introduced by the Company in the second and fourth
quarters, respectively, of fiscal 1996. The increase in Laura Ashley Eyewear
net sales in both fiscal years was due principally to an increase in unit
sales and to a lesser extent to an increase in prices for selected frames.
Gross Profit. Gross profit was $10,385,000 in fiscal 1994, $12,582,000 in
fiscal 1995 and $16,349,000 in fiscal 1996. These increases in gross profit
were attributable to increases in net sales as well as improvements in the
gross margin, which increased from 51.8% in fiscal 1994, to 53.4% in fiscal
1995 and to 57.8% in fiscal 1996. During these years, the Company utilized
lower cost frame manufacturers for an increasing percentage of its frames,
which has resulted in lower average frame costs. This positive impact on gross
margin was offset in part in fiscal 1995 due to adverse currency fluctuations,
and was augmented in fiscal 1996 due to beneficial currency fluctuations.
Gross margin was also positively impacted in fiscal 1995 and fiscal 1996 by
increases in the average selling price of frames and by reductions in import
duties and tariffs.
Operating Expenses. Operating expenses were $9,079,000 in fiscal 1994,
$10,780,000 in fiscal 1995 and $14,027,000 in fiscal 1996. These increases
resulted primarily from higher selling and general and administrative expenses
commensurate with the Company's growth.
Selling expenses were $5,855,000 in fiscal 1994, $6,510,000 in fiscal 1995
and $8,328,000 in fiscal 1996, representing 29%, 28% and 29%, respectively, of
net sales for such periods. The 11% increase from fiscal 1994 to fiscal 1995
resulted principally from a $280,000 increase in expenses associated with
sales incentive programs, a $209,000 increase in royalty expense, a $182,000
increase in sales compensation expense and a $123,000 increase in in-store
display expenditures. These increases were offset in part by a decrease of
$446,000 in advertising expenses; the higher advertising expenses in 1994 were
due to a special consumer advertising campaign implemented in connection with
the Company's initial Laura Ashley Loyal Partners program. The 28% increase
from fiscal 1995 to fiscal 1996 was due primarily to a $494,000 increase in
advertising expenses and a $406,000 increase in in-store display expenditures,
due primarily to the introduction of the Jean Nate and Hart Schaffner & Marx
Eyewear lines in fiscal 1996. In addition, in fiscal 1996, royalty expenses
increased by $288,000, expenses associated with sales incentive programs
increased by $223,000 and convention and trade show expenses increased by
$155,000.
General and administrative expenses were $3,224,000 in fiscal 1994,
$4,035,000 in fiscal 1995 and $5,612,000 in fiscal 1996, representing 16%, 17%
and 20%, respectively, of net sales in these periods. The 25% increase from
fiscal 1994 to fiscal 1995 resulted principally from a $505,000 increase in
compensation expense. The 39% increase from fiscal 1995 to fiscal 1996
resulted principally from a $567,000 increase in salaries, a $385,000 increase
in employee bonuses, and compensation expense of $300,000 in connection with
the issuance of 108,016 shares of Common Stock to an executive officer.
The Company incurred expenses of $235,000 and $87,000 in fiscal 1995 and
fiscal 1996, respectively, in connection with the relocation of the Company's
corporate offices and warehouse.
20
<PAGE>
Other Expense, Net. Other expense, net, consisted principally of interest
expense. Interest expense was $201,000 in fiscal 1994, $201,000 in fiscal 1995
and $338,000 in fiscal 1996. The increase in fiscal 1996 was due, in part, to
the increase in borrowings of the bank's credit line as a result of (i) an
increase in accounts receivable resulting from higher sales, (ii) a higher
level of inventories that the Company maintained to support higher sales
levels and better customer service, (iii) capital expenditures relating to
improvements of the Company's facilities and the modernization of its computer
equipment; and (iv) larger S corporation distributions.
Pro Forma Provisions for Income Taxes (unaudited). On a pro forma basis,
income taxes would have been $418,000 in fiscal 1994, $606,000 in fiscal 1995
and $748,000 in fiscal 1996.
Pro Forma Net Income (unaudited). Pro forma net income was $690,000 in
fiscal 1994, $1,030,000 in fiscal 1995 and $1,265,000 in fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has relied primarily on internally generated
funds, credit from suppliers and bank lines of credit to meet its liquidity
needs.
The Company has a credit agreement (the "Credit Agreement") with a
commercial bank which provides for the use of letters of credit, banker's
acceptances and loans in the aggregate amount of $7,935,417. The commitment
formula limits the amount available to the sum of 75% of eligible accounts
receivable and 40% of eligible inventory, with the inventory portion limited
to the lesser of $3,000,000 or the accounts receivable borrowing base. At the
Company's option, interest may be based on the London Interbank Offered Rate
("LIBOR") plus 2.25% or at the bank's prime rate plus .25%. At April 30, 1997,
interest rates ranged from 8.375% to 8.437% on a loan balance of $4,000,000
under the LIBOR option and 9.25% on the remaining balance of $625,000 under
the prime rate option. The Credit Agreement also governs three term loans,
which are due at various times in 1997 and 1998, bear interest at a weighted
average rate of 9.11% per annum, and had an aggregate outstanding principal
balance of $604,000 at April 30, 1997. The Credit Agreement (which expires in
May 1998) is secured by substantially all of the assets of the Company. The
Credit Agreement provides for certain limitations on capital expenditures and
requires the Company to satisfy certain financial tests, including the
maintenance of minimum tangible net worth.
The Company intends to repay the outstanding balance under the Credit
Agreement (estimated to be approximately $7.1 million at the closing of the
Offering) with a portion of the proceeds of the Offering. The increase in
borrowings since April 30, 1997 will be due to borrowings for working capital
and shareholder distributions.
As a result of the Company's treatment as an S Corporation for federal and
state income tax purposes, the Company historically has provided its
shareholders, through dividends, with funds for the payment of income taxes on
the earnings of the Company which have been included in the taxable income of
the shareholders. In addition, the Company has paid dividends to shareholders
to provide them with a return on their investment. The Company paid dividends
of $807,000, $550,000 and $1,328,000 for fiscal 1994, fiscal 1995 and fiscal
1996, respectively, and $2,000,000 in the first six months of fiscal 1997. The
Company also intends to pay the Existing Shareholders dividends equal to
$635,000 plus the amount of the Company's net income from May 1, 1997 through
the Termination Date. These dividends will be paid before the closing of the
Offering. The Company does not currently intend to pay dividends on its Common
Stock following the Offering and plans to follow a policy of retaining
earnings to finance the growth of its business.
Of the Company's accounts payable at October 31, 1996 and April 30, 1997,
$865,069 and $1,086,638, respectively, were payable in foreign currency. To
monitor risks associated with currency fluctuations, the Company on a weekly
basis assesses the volatility of certain foreign currencies and reviews the
amounts and expected payment dates of its purchase orders and accounts payable
in those currencies. Based on those factors,
21
<PAGE>
the Company may from time to time mitigate some portion of that risk by
purchasing forward commitments to deliver foreign currency to the Company. The
Company held forward commitments for foreign currencies in the amount of
$1,459,457 at October 31, 1996, and held no forward commitments at April 30,
1997. See Note 1 of Notes to the Financial Statements.
The Company's bad debt write-offs were less than 0.2% of net sales for the
year ended October 31, 1996 and for the six months ended April 30, 1997. As
part of the Company's management of its working capital, the Company performs
most customer credit functions internally, including extensions of credit and
collections.
The Company believes that cash generated from operations, the net proceeds
received by the Company from this Offering, borrowings under its credit
facility, and credit from its suppliers will be sufficient to fund its working
capital requirements at least through fiscal 1998.
QUARTERLY AND SEASONAL FLUCTUATIONS
The Company's results of operations have fluctuated from quarter to quarter
and the Company expects these fluctuations to continue in the future.
Historically, the Company's net sales in its first fiscal quarter (the quarter
ending January 31) have been lower than net sales in other fiscal quarters.
The Company attributes lower net sales in the first fiscal quarter in part to
low consumer demand for prescription eyeglasses during the holiday season and
year-end inventory adjustments by distributors and independent optical
retailers. A factor which may significantly influence results of operations in
a particular quarter is the introduction of a new brand-name collection, which
results in disproportionate levels of selling expenses due to additional
advertising, promotions, catalogs and in-store displays. Introduction of a new
brand may also generate a temporary increase in sales due to initial stocking
by retailers. Other factors which can influence the Company's results of
operations include customer demand, the mix of distribution channels through
which the eyeglass frames are sold, the mix of eyeglass frames sold, product
returns, delays in shipment and general economic conditions. See "Risk
Factors--Quarterly and Seasonal Fluctuations."
The following table sets forth certain unaudited results of operations for
the ten fiscal quarters ended April 30, 1997. The unaudited information has
been prepared on the same basis as the audited financial statements appearing
elsewhere in this Prospectus 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.
<TABLE>
<CAPTION>
1995 1996 1997
---------------------------------- ---------------------------------- -----------------
JAN. 31 APRIL 30 JULY 31 OCT. 31 JAN. 31 APRIL 30 JULY 31 OCT. 31 JAN. 31 APRIL 30
------- -------- ------- ------- ------- -------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.................... $4,481 $6,309 $6,469 $6,312 $5,308 $7,744 $7,050 $8,178 $6,802 $9,236
Cost of sales................ 2,128 3,041 3,056 2,764 2,449 3,177 2,895 3,410 2,882 3,750
Gross profit................. 2,353 3,268 3,413 3,548 2,859 4,567 4,155 4,768 3,920 5,486
Operating expenses:
Selling..................... 1,056 1,682 1,853 1,919 1,472 2,209 2,055 2,592 2,021 2,680
General and administrative.. 782 970 1,057 1,226 969 1,334 1,554 1,755 1,364 1,443
Relocation expense.......... 0 34 65 136 30 19 17 21 0 0
Total operating expenses..... 1,838 2,686 2,975 3,281 2,471 3,562 3,626 4,368 3,385 4,123
Income from operations....... 515 582 438 267 388 1,005 529 400 535 1,363
Other expense, net........... (38) (44) (29) (55) (67) (92) (84) (66) (85) (106)
Income before pro forma
provision for income taxes.. 477 538 409 212 321 913 445 334 450 1,257
</TABLE>
INFLATION
The Company does not believe its business and operations have been
materially affected by inflation.
22
<PAGE>
BUSINESS
GENERAL
Signature designs, markets and distributes prescription eyeglass frames
primarily under exclusive licenses for Laura Ashley Eyewear, Hart Schaffner &
Marx Eyewear and Jean Nate Eyewear, as well as its own "Camelot" label. The
Laura Ashley Eyewear collection is one of the leading women's brand-name
collections in the United States. The Company attributes its success to its
brand-name development process and high quality, creative frame designs. The
Company's brand-name development process includes identifying a market niche,
obtaining the rights to a carefully selected brand name, producing a
comprehensive marketing plan, developing unique in-store displays and creating
innovative sales and merchandising programs for independent optical retailers
and retail chains. Signature's in-house designers work with many respected
frame manufacturers throughout the world to develop high-quality, creative
designs which are consistent with each brand-name image.
In June 1997, Signature acquired the exclusive license to design and market
an Eddie Bauer Eyewear collection, which the Company plans to launch in the
Spring of 1998. The Company pursued the Eddie Bauer brand name, which had not
previously been licensed for prescription eyewear, for its widespread
recognition, outdoor heritage, casual styling, and reputation for value and
quality. The Eddie Bauer Eyewear collection will offer men's and women's
styles and will be positioned in the medium-price segment of the brand-name
prescription market.
Signature produces "turnkey" marketing, merchandising and sales promotion
programs to promote sales at each level in the distribution chain. For optical
retailers, the Company develops unique in-store displays, such as its Laura
Ashley Eyewear "store within a store" environments. For the sales
representatives who call on retail accounts, whether they are employed by
distributors or by Signature, the Company creates presentation materials,
marketing bulletins, motivational audio and video tapes and other sales tools
to facilitate professional presentations, and the Company offers attractive
incentive awards for reaching targeted sales levels. For its distributors who
sell to independent optical retailers, Signature provides its innovative
loyalty programs.
Under the loyalty programs, which generally last from six to ten months,
each participating retailer agrees to purchase a specified quantity of frames
of new styles released during the program period. Although a participating
retailer may cancel at any time, historically most have completed the program
and renewed their participation in ensuing years. These "automatic" sales
programs have facilitated the widespread placement of new styles in optical
retail stores, have increased the Company's leverage with its manufacturers
due to the large size of the Company's orders, and have assisted its inventory
planning. The Company's largest loyalty program is its Laura Ashley Loyal
Partners program, which at April 30, 1997 had over 4,750 participating
retailers in the United States (approximately 16% of all independent optical
retailers in the United States) as well as over 800 international
participants.
The Company contracts with overseas factories to manufacture the frames it
designs. Signature distributes its frames through distributors in the United
States and through exclusive distributors in foreign countries. In addition,
the Company sells directly through its own sales representatives to major
retail chains, including LensCrafters, Pearle Vision and Eyecare Centers of
America, and to independent optical retailers in California.
The Company's principal product line is Laura Ashley Eyewear, which was
launched in 1992. Signature designs frames and in-store displays which seek to
capture the distinctive, feminine image associated with Laura Ashley clothing
and home furnishings. Laura Ashley Eyewear styles are feminine and classic,
and are positioned in the medium to mid-high price range to reach a broad
segment of the women's eyewear market. The Company's net sales of Laura Ashley
Eyewear have increased from $2.2 million in fiscal 1992 to $21.1 million in
fiscal 1996.
Capitalizing on Signature's customer relationships and the success of Laura
Ashley Eyewear, the Company launched Jean Nate Eyewear in March 1996 and Hart
Schaffner & Marx Eyewear in September 1996. Jean Nate Eyewear is targeted at
women seeking to pay an affordable price for high-quality frames which offer
unique designs, attention to detail and brand-name identification. Hart
Schaffner & Marx Eyewear is a mid-high priced line targeted at men requiring
quality, comfort and craftsmanship.
23
<PAGE>
INDUSTRY OVERVIEW(/1/)
Eyewear Consumers. Optical retail sales in the United States have increased
during the 1990s. Retail sales of all eyewear products increased from $11.4
billion in 1990 to $14.6 billion in 1996. Correspondingly, retail sales of
eyeglass frames increased from $3.87 billion in 1990 to $4.6 billion in 1996.
In 1996, approximately 159 million Americans, just over 60% of the nation's
population, needed some form of vision correction (either eyeglass frames with
corrective lenses or contact lenses). More than 90% of people over the age of
45 need corrective eyewear, many due to presbyopia, a condition which makes it
difficult to focus on nearby objects, such as small newspaper print. The table
below demonstrates how the number of people needing vision correction
increases with age.
AGE BREAKDOWN OF U.S. POPULATION NEEDING VISION CORRECTION
<TABLE>
<CAPTION>
AGE GROUP OF
1996 PURCHASERS AS % OF % OF AGE GROUP
POPULATION TOTAL PURCHASERS OF NEEDING VISION
AGE (IN MILLIONS) VISION CORRECTION CORRECTION
--- ------------- -------------------- ---------------
<S> <C> <C> <C>
0-14................... 58.0 5.7% 15.5%
15-24................... 35.9 11.5 51.0%
25-44................... 83.7 33.0 62.8%
45-64................... 53.7 32.0 95.0%
65 and up............... 33.9 19.8 93.1%
----- -----
Total................. 265.2 100.0%
===== =====
</TABLE>
The average age of the United States population is expected to increase over
the next 25 years, due to the aging of the "baby-boomers" who were born
between 1946 and 1964. As more of the baby-boomers exceed age 45, the Company
believes sales of corrective eyewear should increase.
Sales of eyewear are also increasing due to the evolution of eyewear into a
fashion accessory. Until the mid-1970s, eyeglass frames were viewed as medical
implements which were "dispensed" but never "sold." Because styling was not
emphasized, successful frames often remained popular for years, and sometimes
for decades. In the mid-1970s, experts from other industries introduced
designer names and consumer advertising to the optical industry, as well as
sweeping design changes. These changes resulted in increased consumer demand
for the new products. Although eyeglass frames are a fashion accessory for
many people, the styles are not subject to seasonal changes, and they change
less rapidly than styles in the apparel industry.
Competitive Vision Correction Methods. Currently, there are two methods of
correcting vision impairment which compete with prescription eyeglasses:
contact lenses and surgery. Although retail sales of contact lens remained
flat from 1995 through 1996 at $1.9 billion, their sales as a percentage of
total retail sales decreased from 13.5% in 1995 to 13.0% in 1996. The Company
believes that sales of contact lenses do not currently materially threaten
eyeglass frame sales because many people who wear contact lenses need a pair
of eyeglasses for night time and for the days when they decide not to wear
their lenses.
A number of surgical techniques have been developed to correct vision
problems such as myopia (nearsightedness), hyperopia (farsightedness) and
astigmatism. The Company does not believe that these techniques will
materially and adversely affect sales of prescription eyewear in the near
future. The Company believes that a number of people who have had successful
eye surgery may still need some form of corrective eyeglasses, and others may
need eyeglasses at a later date due to the onset of presbyopia.
- --------
(1) Unless otherwise noted, all the data in this Industry Overview section
relates to the eyewear market in the United States. The source for this
data is the 1997 U.S. Optical Industry Handbook published by Jobson
Publishing Corporation in May 1997.
24
<PAGE>
Optical Retail Outlets. Optical retailers consist of optometrists, opticians
and ophthalmologists. There are two main types of optical retailers:
independents (with one or two stores) and chains. Chains include national
optical retailers such as LensCrafters, Cole Vision Corp. and its subsidiary
Pearle Vision, and Eyecare Centers of America, and mass merchandisers such as
Wal-Mart and Price Club. In 1996, independent optical retailers had a 63.0%
market share, chains had a 35.5% market share, and others had a 1.5% market
share.
GROWTH STRATEGY
The Company intends to capitalize on the success of the Laura Ashley Eyewear
line by further diversifying into new lines, adding new products and expanding
its distribution. Specific elements of the Company's growth strategy include:
. Existing Brands. The Company intends to continue to create innovative
marketing, merchandising and sales promotion programs to increase the
market penetration of its existing lines of brand-name eyewear.
. Eddie Bauer Eyewear. The Company plans to launch Eddie Bauer Eyewear in
the Spring of 1998.
. Additional Brands. The Company will continue its efforts to acquire
exclusive brand-name licenses to market prescription eyeglass frames in
market niches in which the Company does not currently compete.
. New Product Lines. The Company intends to expand the marketing of its
own Camelot collection of frames and may develop one or more additional
brand-name lines of its own.
. Sunwear. The Company intends to expand the market penetration of its
existing Laura Ashley Sunwear line and may acquire additional exclusive
brand-name licenses for sunglass frames.
. International Sales. The Company plans to expand the international
markets into which it distributes its eyewear lines.
BRAND DEVELOPMENT
The Company attributes its success to its brand-name development process and
frame designs. The Company's brand-name development process includes
identifying a market niche, obtaining the rights to a carefully selected brand
name, producing a comprehensive marketing plan, designing frames consistent
with each brand image, developing unique in-store displays, and creating
innovative sales and merchandising programs for independent optical retailers
and retail chains.
Identifying a Market Niche and Obtaining the Rights to a Brand
Name. Signature's brand-name development process begins with identifying an
eyewear market niche. The Company characterizes a market niche by referring to
the target customer's gender and age (e.g., adult, child, teenage), the
niche's general image and styling (e.g., feminine, masculine, casual), its
price range, and the applicable channels of distribution. Once the Company
chooses a market niche, a brand name is identified which the Company believes
will appeal to the target customer in that niche. The Company believes that
for a brand name to have the potential for widespread sales in the optical
industry, the name must have strong, positive consumer awareness, a
distinctive personality and an image of enduring quality. Brands that are
aimed at narrower niches can also have optical industry impact (albeit
smaller), so long as consumer awareness exists within the targeted niche.
After the Company has determined that a targeted brand name is available,
the Company develops a preliminary marketing plan to present to the potential
licensor. The development process is a team effort which includes determining
the market position of the brand name outside the optical industry and the
availability of cross-marketing opportunities. The preliminary marketing plan
demonstrates the Company's (i) in-depth understanding of the potential
licensor's market position, (ii) innovative strategies for extending the
brand's image to the eyewear market, (iii) preliminary plans for
merchandising, advertising and sales promotion, and (iv) broad concepts for
frame design.
The Company then formally presents the preliminary marketing plan to the
potential licensor. The final steps in acquiring an exclusive eyewear license
for a brand name are receiving the licensor's approval and entering into a
license agreement.
25
<PAGE>
The Company's existing license agreements contain terms limiting the ability
of the Company to market competing brand names. See "Risk Factors--Limitations
on Ability to Distribute Other Brand-Name Eyeglass Frames."
Final Marketing Plan. Once the Company has acquired an exclusive eyewear
license for a brand name, it creates a final marketing plan. The final
marketing plan contains detailed concepts for frame designs, establishes the
brand's identity within the optical industry, and sets forth the first year's
merchandising, advertising and sales promotion plans. The Company's ongoing
focus on its marketing plans, including annual updates, provides a framework
for keeping the Company's marketing and sales strategies current with changes
in the eyewear industry and the licensor's marketing.
Frame Design and Quality. The Company's frames are designed by its in-house
design team, which consists of two designers and a management frame committee
which reviews each style. The designers work with many respected frame
manufacturers throughout the world to develop unique designs, and continue to
work closely at each stage of a style's development to assure quality. The
Company's frames generally require over 200 production steps to manufacture,
including hand soldering of bridges, fronts and endpieces. Some frames require
labor-intensive decorative features such as cloisonne color treatments, which
involve painting each frame by hand under a magnifying glass, using tiny
bristle brushes.
Quality Control. The Company uses only manufacturers capable of meeting
Signature's criteria for quality, delivery and attention to design detail.
Signature specifies the materials to be used in the frames, and examines
prototypes before committing to production. The Company places its initial
orders for each style at least six months before the style is released, and
requires the factory to deliver several advance shipments of samples. The
Company's quality committee examines every frame in the sample shipments. The
Company believes this process permits sufficient time to resolve problems with
a style's quality before its release date. The Company's quality committee
selectively examines frames in subsequent shipments to ensure ongoing quality
standards.
Limited Quantity of Style Releases. The Company has historically launched
each brand-name collection with only three styles. Further, although for each
brand the Company has many designs in different stages of development, it has
released no more than three styles per brand per month (each style generally
comes in two or three colors and one or two sizes). This strategy has
contrasted with many of the Company's competitors, who release many more
styles than Signature. The Company believes that its limited release strategy
helps to ensure focus on each new style. Further, the Company believes that
this strategy has resulted in larger orders per style, which has increased its
leverage with the contract manufacturers of its frames.
Marketing, Merchandising and Sales Programs. Signature produces "turnkey"
marketing, merchandising and sales promotion programs to promote sales at each
level in the distribution chain. For optical retailers, the Company develops
unique in-store displays, such as its Laura Ashley Eyewear "store within a
store" environments. For the sales representatives who call on retail
accounts, whether they are employed by distributors or by Signature, the
Company creates presentation materials, marketing bulletins, motivational
audio and video tapes and other sales tools to facilitate professional
presentations, and the Company offers attractive incentive awards for reaching
targeted sales levels. For its distributors who sell to independent optical
retailers, Signature provides its innovative loyalty programs.
Loyalty Programs. The Company attributes a significant portion of its
success with independent optical retailers in the United States to its loyalty
programs. Under these programs, which generally last from six to ten months,
each participating retailer agrees to purchase a specified quantity of frames
(generally three to six frames per month) of new styles released for that
brand during the program period. The Company's loyalty programs benefit the
Company, its distributors and participating retailers. The Company and its
distributors benefit from the automatic sales and the reorders they generate.
The distributors also benefit from the retailers' agreement not to change
distributors for that specific program. Retailers benefit from sales of new
styles, program-ending gifts, and from the special in-store merchandising
(often available first--or only--to participating retailers).
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<PAGE>
Although a retailer may drop out of a loyalty program at any time without
penalty, historically most participating retailers have completed the program
and renewed their participation in ensuing years. The Company believes this is
principally because the frames have sold well and retailers have wanted to
earn the attractive incentive awards provided by the Company and its
distributors at the end of the program.
Signature's first loyalty program was the 1994 Laura Ashley Eyewear Loyal
Partners Program which had 2,494 participants. The 1997 Laura Ashley Loyal
Partners Program had approximately 4,750 United States participants and 800
international participants at April 30, 1997. Each United States participant
in the 1997 program has agreed to purchase a total of 39 Laura Ashley frames
in accordance with its distributor's release schedule. Approximately 16% of
the independent optical retailers in the United States are participating in
the 1997 Laura Ashley Loyal Partners Program.
The Company introduced its Hart Schaffner & Marx Eyewear collection in
September 1996 with a loyalty program. Over 1,200 independent optical
retailers participated in the program, each agreeing to purchase a total of 18
frames from the collection's first six styles.
PRODUCTS
The Company's principal products are eyeglass frames sold under the brand
names Laura Ashley Eyewear, Hart Schaffner & Marx Eyewear and Jean Nate
Eyewear. In June 1997, the Company acquired an exclusive license to design,
market and distribute eyeglass frames under the name Eddie Bauer Eyewear, and
the Company plans to release this line in the Spring of 1998. The Company also
has a division which distributes eyeglass frames under the Company's own
Camelot brand and a division which sells brand-name close-outs at discounted
prices.
The following table provides certain information about the market segments,
introduction dates and approximate retail prices of the Company's products.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
CUSTOMER INTRODUCTION APPROXIMATE
BRAND NAME / SEGMENT GENDER/AGE DATE RETAIL PRICES(1)
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Laura Ashley
Prescription Women March 1992 $125 - 180
Sunwear Women March 1993 $ 80 - 100
Children Girls June 1993 $ 80 - 100
-------------------------------------------------------------------------------
Jean Nate Women April 1996 $ 70 - 90
-------------------------------------------------------------------------------
Hart Schaffner & Marx Men September 1996 $140 - 170
-------------------------------------------------------------------------------
Eddie Bauer Men/Women Spring 1998(2) $100 - 135
-------------------------------------------------------------------------------
Signature's Camelot Men/Women 1986 $ 70 - 130
Line Unisex 1987 $ 70 - 130
Boys/Girls 1987 $ 60 - 90
- --------------------------------------------------------------------------------
</TABLE>
(1) Retail prices are established by retailers, not the Company.
(2) Scheduled launch date.
Laura Ashley Eyewear
Signature's sales growth since 1992 has been primarily attributable to the
success of its Laura Ashley Eyewear collection. The Company's net sales of
Laura Ashley Eyewear have increased from $2.2 million in fiscal 1992 to $21.1
million in fiscal 1996.
Signature pursued Laura Ashley for its strong female following; its feminine
styling and image which are renowned worldwide; its significant worldwide
retail presence; its distinctive, high quality fabrics, home furnishings and
clothing; and its reputation for producing products of enduring quality. At
the time Signature obtained the license in 1991, Laura Ashley had never
previously licensed its name outside the home furnishings industry.
27
<PAGE>
Like Laura Ashley clothing and home furnishings, Laura Ashley Eyewear has
been designed to be feminine and classic, to be fashionable without being
trendy, and to reach a broad segment of the women's eyewear market. Signature
uses the phrase "premier feminine collection" to describe Laura Ashley
Eyewear. The hallmark of Laura Ashley Eyewear is its attention to detail, and
the collection is known for its unique designs on the styles' temples, fronts
and end pieces. The designs are also known for their color treatments; several
styles require cloisonne hand painting. The more recent Laura Ashley Eyewear
styles tend towards smaller shapes and take advantage of modern technical
advances, such as thinner spring hinges (which flex outward and spring back)
and lighter metal alloys, both of which permit the manufacture of frames which
are thinner and lighter while retaining strength.
When Laura Ashley Eyewear was first introduced, most optical sales outlets
had a sterile appearance, using mainly contemporary plastic and glass displays
and fixtures. Signature's in-house team conceptualized and designed unique in-
store "environments" to attract the target customer to the frames. The
original and second-generation Laura Ashley Eyewear environments were covered
with colorful Laura Ashley textured floral-print fabric, which provided the
retailer with an instant new look, and, in effect, a Laura Ashley "store
within a store." The third-generation display environments, released in March
1997, have as their centerpiece a wooden chest modeled after antique English
furniture. The new environments use a subdued Laura Ashley fabric to provide a
subtle feminine accent.
The principal market segment for Laura Ashley Eyewear is women's
prescription eyewear, and each year since 1993 the Company has released
approximately 12 women's prescription eyewear styles. Net sales for those
styles were $16.5 million in fiscal 1995, $19.0 million in fiscal 1996, and
$10.4 million in the six months ended April 30, 1997.
Each Spring since 1993, the Company has released three Laura Ashley Sunwear
styles during its second fiscal quarter. These frames are delivered to optical
retailers with ready-to-wear non-prescription sunglass lenses containing
quality UV 400 protection. These lenses can be replaced with prescription
sunglass lenses if the customer desires. Net sales of Laura Ashley Sunwear
were $0.8 million in fiscal 1995, $0.9 million in fiscal 1996 and $0.8 million
in the six months ended April 30, 1997. In addition to Laura Ashley Sunwear,
almost all of the Company's styles can be fitted with sunglass lenses to make
them into sunwear.
Each Summer since 1993, Signature has released three Laura Ashley for Girls
styles, with their own specialized displays, targeting girls aged 7-13. This
collection is one of the few adult optical brand names to be marketed toward
girls in that age range. Because the frames are designed and produced in small
sizes, they are also purchased from time to time by petite women. Net sales of
Laura Ashley for Girls Eyewear were $1.1 million in fiscal 1995, $1.2 million
in fiscal 1996, and $0.55 million in the six months ended April 30, 1997.
Results for the first six months of fiscal 1997 did not include sales of the
Company's 1997 Laura Ashley for Girls styles, which were released in the third
quarter of fiscal 1997.
The Company has the exclusive right to market and sell Laura Ashley Eyewear
through a license with Laura Ashley entered into in May 1991. The license
covers a specified territory including the United States, Canada, the United
Kingdom, Australia, New Zealand, Colombia, France, Belgium and the
Netherlands. The Company also has a right of first refusal to distribute Laura
Ashley Eyewear in Mexico and all other European countries. The Laura Ashley
license terminates in 2001, but may be renewed by the Company at least through
January 2006 so long as the Company is not in breach of the license agreement
and generates the required amount of minimum net sales. Laura Ashley may
terminate the license before its term expires if (i) the Company commits a
material breach of the license agreement and fails to cure that breach within
30 days after notice is given, (ii) the management or control of the Company
passes from Bernard Weiss and Julie Heldman to other parties whom Laura Ashley
may reasonably regard as unsuitable, (iii) the Company fails to propose a
selection of styles of eyewear which Laura Ashley in exercising good faith is
willing to approve for manufacture and distribution, (iv) the Company fails to
have net sales of Laura Ashley Eyewear sufficient to generate minimum
royalties in each of any two years, (v) the Company is unable to pay its debts
in the ordinary course of business or enters into liquidation, becomes
bankrupt or insolvent, or is placed in the control of a receiver or trustee,
or (vi) the
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Company in any year fails to spend a specified percentage of net sales of
Laura Ashley Eyewear on advertising and promotion. For purposes of renewal and
early termination of the license agreement, the Company must generate total
Laura Ashley Eyewear minimum net sales of $9,000,000, $10,000,000 and
$11,000,000 for the contract years ending January 31, 1998, 1999 and 2000,
respectively. The Company has substantially exceeded its minimum net sales
requirements each year under the license agreement.
Jean Nate Eyewear
In 1995, the Company identified an underdeveloped niche for feminine brand-
name eyeglass frames marketed in the mid-low price range (approximately $70 to
$90 at retail). To capitalize on this opportunity, the Company pursued and
obtained the eyewear license for Jean Nate, a brand name that is widely
recognized within the target niche for its women's fragrance and bath
products, especially its after-bath splash.
The Jean Nate Eyewear collection is targeted at women who are seeking to pay
an affordable price for quality brand-name frames which offer unique designs,
attention to details, features such as spring hinges that flex outwards and
spring back, and brand-name identification. Jean Nate Eyewear advertisements
have had an eyecatching "splash of water" theme, and most of the frames
incorporate sea shells in their design. Sales promotional tools for Jean Nate
Eyewear have included in-store displays and two-for-one specials.
The Company has the exclusive right to market and sell Jean Nate Eyewear in
the United States and Canada through a license with Revlon entered into in
June 1995. "Jean Nate" is a registered trademark of Revlon. The Jean Nate
license terminates in September 1998, but may be renewed by the Company for
two additional terms of three and four years, respectively, so long as the
Company is in compliance in all material respects with all of its terms and
conditions, including the minimum net sales requirements for the two years
preceding the renewal date. Revlon may terminate the license before its term
expires if (i) someone other than Bernard Weiss, Julie Heldman, Robert Fried
or Robert Zeichick acquires in excess of 50% of the Company's outstanding
voting securities; (ii) the Company sells or otherwise transfers substantially
all its assets used in the manufacture, promotion and distribution of eyeglass
frames, (iii) the Company does not generate the minimum net sales required by
the license for two consecutive years, (iv) the Company fails to pay royalties
and any other amounts when due, (v) the Company is unable to pay its debts as
they become due, enters into liquidation, makes an assignment for the benefit
of creditors, enters bankruptcy proceedings or ceases doing business as a
going concern, or (vi) the Company fails to perform its other obligations
under or otherwise breaches the license agreement and fails to cure that
breach within 30 days after notice is given.
Hart Schaffner & Marx Eyewear
Signature expanded its presence to the brand-name men's eyewear market in
fiscal 1996 when it acquired a license from Hart Schaffner & Marx, a
subsidiary of Hartmarx Corporation, a leading manufacturer of tailored
clothing. Hart Schaffner & Marx has an image of enduring quality, and is a
recognized name among men who purchase apparel in the medium to high price
range.
The Hart Schaffner & Marx Eyewear collection is targeted at men who are
somewhat conservative and interested in quality, comfort and craftsmanship.
The Company determined that men are generally concerned about both function
and fashion, so the frames contain features which enhance their durability--
the highest quality screws, nosepads and spring hinges--and come with a two-
year "no fault, worry-free" warranty. The collection is designed to fit a
broad spectrum of men, and selected styles have longer temples and larger
sizes than those generally available. Further, many of the styles integrate
Hart Schaffner & Marx fabric patterns into the frame designs.
The Company has the exclusive right to market and sell Hart Schaffner & Marx
Eyewear in the United States through a license with Hart Schaffner & Marx
entered into in January 1996. The license agreement provides that Hart
Schaffner & Marx may not grant to any third person the right to distribute
eyeglass and sunglass frames, lenses and other eyewear products under the Hart
Schaffner & Marx brand name in any country in the world without first offering
the Company the exclusive right to do so. As of the date of this Prospectus,
no Hart Schaffner & Marx Eyewear is sold anywhere outside of the United
States. The Hart Schaffner & Marx
29
<PAGE>
license terminates in June 1999, but may be renewed for three-year terms by
the Company in perpetuity provided the Company is not in default under the
license agreement. Hart Schaffner & Marx may terminate its license with the
Company before the expiration of its term if (i) someone other than Bernard
Weiss, Julie Heldman, Robert Fried or Robert Zeichick acquires more than 50%
of the Company's outstanding voting securities, (ii) all of Ms. Heldman and
Messrs. Weiss, Zeichick and Fried cease to be involved in a significant manner
in the exploitation of Hart Schaffner & Marx Eyewear before June 30, 1999 and
after the last of such four persons ceases to be involved the Company fails
within 90 days to submit a marketing plan for Hart Schaffner & Marx Eyewear
that is acceptable to Hart Schaffner & Marx, (iii) the Company sells or
otherwise transfers substantially all its assets used in the manufacture,
promotion and distribution of eyeglass frames, (iv) the Company does not
generate the minimum net sales required by the license for two consecutive
years, (v) the Company fails to perform its material obligations under the
license agreement and fails to cure that breach within 30 days after notice is
given, or (vi) after written notice in the event any of the Company's
representations and warranties are not correct in any material respect.
Eddie Bauer Eyewear
In June 1997, the Company acquired the exclusive license from Eddie Bauer to
market Eddie Bauer Eyewear, a collection of men's and women's prescription
eyewear styles. Eddie Bauer, which was founded in 1920, is a subsidiary of
Spiegel, Inc. The Company pursued the Eddie Bauer name, which had not
previously been licensed for prescription eyewear, for its widespread name
recognition, outdoor heritage, casual styling, and reputation for value and
quality. Eddie Bauer currently has over 400 retail stores worldwide, and
annually distributes approximately 100 million Eddie Bauer merchandise
catalogs.
The Eddie Bauer Eyewear collection, which the Company expects to launch in
the Spring of 1998, will be aimed at a different market niche than any of the
Company's other brand names. The Company's marketing plan calls for the
coordination of the collection's frame designs and its marketing,
merchandising and sales promotion programs so that they capture the free
spirit of the Eddie Bauer casual lifestyle and its heritage of the great
outdoors. In keeping with Eddie Bauer's commitment to value, the collection
will consist of medium priced frames, a market-pricing niche which does not
currently have many brand-name competitors. The Company believes that its
purchasing power and its commitment to frame quality will result in the Eddie
Bauer Eyewear collection having higher quality and better features than other
brand-name collections currently targeting the same niche.
The Company has the exclusive worldwide right to market and sell Eddie Bauer
Eyewear through a license agreement with Eddie Bauer entered into in June
1997. Without the prior written consent of Eddie Bauer, however, the Company
may market and sell Eddie Bauer Eyewear only in the United States and in the
other countries specified in the license agreement, most notably Japan, the
United Kingdom, Germany, France, Australia and New Zealand. The license
agreement terminates in December 2002, but the Company may renew it for two
three-year terms provided the Company meets certain minimum net sales and
royalty requirements and is not in material default. Eddie Bauer may terminate
the license before the expiration of its term if (i) a person or entity
acquires more than 30% of the Company's outstanding voting securities, and
thereby becomes the largest shareholder and owns more shares than the Existing
Shareholders, or (ii) the Company commits a material breach of the license
agreement and fails to cure that breach within 30 days after notice is given.
Signature's Camelot Collection
From its inception in 1983 until 1986, the Company, then known as USA
Optical Distributors, Inc., sold only brand-name frames purchased from other
frame suppliers. To take advantage of the increased margins available to
importers, the Company in 1986 began designing its own styles for contract
manufacture overseas. Those styles became the Camelot collection, which
contains a broad range of high-quality men's, women's, unisex, girls' and
boys' styles.
To date, the Company has sold the Camelot collection only through USA
Optical, which is now a division of Signature. The Camelot collection's net
sales were $2,005,000 in fiscal 1995, $2,012,000 in fiscal 1996 and $1,007,000
for the six months ended April 30, 1997. USA Optical continues to sell frames
from other suppliers
30
<PAGE>
as part of its sales mix. USA Optical had total net sales of $3,771,000 in
fiscal 1995, $3,709,000 in fiscal 1996, and $1,775,000 for the six months
ended April 30, 1997.
Brand Name Close-Outs
Another Signature division, Optical Surplus, sells brand-name close-outs
(discontinued styles) at discounts. Optical Surplus has also served as a
useful outlet for selling the Company's overstocks of its own brand-name
products, as well as of its Camelot collection. Using Optical Surplus, the
Company is able to control the distribution of its overstocks without
disturbing the market. Optical Surplus had net sales of $1,075,000 in fiscal
1995, $1,153,000 in fiscal 1996, and $492,000 for the six months ended April
30, 1997.
DISTRIBUTION
The Company distributes its products through its distributors in the United
States and through exclusive distributors in foreign countries; through its
own account managers to major optical retail chains, including LensCrafters,
Pearle Vision and Eyecare Centers of America; through its own direct sales
force, which sells directly to independent optical retailers in California;
and through telemarketing (USA Optical and Optical Surplus).
The following table sets forth the Company's net sales by distribution
channel for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
---------------------- SIX MONTHS ENDED
1994 1995 1996 APRIL 30, 1997
------ ------- ------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Domestic distributors............... $9,155 $10,792 $12,965 $6,995
Optical retail chains............... 4,593 5,798 7,120 4,593
Telemarketing(1).................... 4,809 4,846 4,862 2,268
International distributors.......... 1,494 2,135 2,486 1,330
Direct sales (California)(2)........ -- -- 847 852
</TABLE>
- --------
(1) USA Optical and Optical Surplus.
(2) The Company began selling directly to independent optical retailers in
California in March 1996.
Domestic Distributors. The Company believes that, to maximize sales of its
brand-name eyeglass frames, it must selectively limit its distributors to
those who (i) adhere to and implement the Company's marketing strategies, (ii)
distribute eyewear to optical retailers that market products consistent with
each brand's image and pricing strategy, and (iii) provide a high level of
customer service and technical expertise. Moreover, Signature's marketing
plans require a significant commitment of time, effort and money on the part
of the distributors. At April 30, 1997, the Company had 25 domestic
distributors. Signature believes that it has good working relationships with
all of its distributors.
Because its distributors sell frames supplied by more than one company, the
Company attempts to motivate the distributors' sales representatives to show
Signature's frames first. The Company provides them with various sales tools,
which have included automatic sales through its loyalty programs, and other
tools which are created and produced by the Company's in-house team, including
motivational audio tapes and videotapes, marketing bulletins and high impact
sales promotions. The Company also offers incentive awards, such as first-
class trips, for reaching targeted sales levels.
The Company has no written agreements with its domestic distributors except
written understandings not to resell or divert Laura Ashley Eyewear through
unauthorized channels of distribution, and not to expand the territories in
which they sell the Company's products without the Company's prior consent.
Accordingly, the relationships may be terminated by either party at any time,
without penalty (subject, in Signature's case, to any restrictions under
applicable state law).
Optical Retail Chains. Signature sells directly, through its own key account
managers, to optical retail chains whose images are compatible with the images
of the Company's brand-name eyewear, including LensCrafters, Pearle Vision and
Eyecare Centers of America. Pearle Vision and Eyecare Centers of America have
each used in-store displays which were customized by the Company to feature
the Company's products, and Eyecare Centers of America has dedicated prime
floor space to Laura Ashley Eyewear.
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Telemarketing. The Company's USA Optical and Optical Surplus divisions sell
frames through a form of telemarketing to optical retailers, focusing on
establishing long-term, ongoing relationships. USA Optical offers its
customers premium incentives, such as first class vacations, electronic
equipment and household items for purchasing specified numbers of frames. Many
USA Optical customers buy frames from the Company on a monthly basis in order
to earn the premiums they have chosen to pursue. USA Optical's annual
vacations have been among its most successful premiums, and since 1991 over
325 USA Optical customers have attended one or more of its trips.
International Distributors. Since 1993, the Company has sold Laura Ashley
Eyewear internationally through distributors who have exclusive agreements for
defined territories. Before establishing a distributor relationship, Signature
reviews the distributor's financial condition and its ability to work closely
with the Company in marketing and selling its brand-name products.
International distributors must meet specific unit volumes within specified
time periods. Substantially all international sales have been of Laura Ashley
Eyewear in England, Canada and Australia.
Direct Sales (California). In March 1996, in connection with the retirement
of Signature's California distributor, the Company decided to sell directly to
independent optical retailers in California rather than engage another
distributor. Direct sales to independent optical retailers in California for
the first six months of fiscal 1997 were $852,000, an increase of $519,000 (or
256%) over net sales of $333,000 made to the Company's California distributor
in the first five months of fiscal 1996 and through the Company's direct sales
force in April 1996. One reason for the increase in net sales is the higher
unit price the Company receives when it sells directly to the optical
retailer. Another reason was an increase in the number of units sold in
California from 9,571 for the first six months of fiscal 1996 to 22,501 for
the first six months of fiscal 1997. The Company believes the combined
increase in dollar and unit volume in California is attributable to the
Company's ability to work closely with its own direct sales representatives,
who, unlike distributors' sales representatives, are dedicated to selling only
the Company's products, and the Company's increased ability to require its
sales representatives to implement the Company's marketing plans.
CONTRACT MANUFACTURING
The Company's frames are manufactured to its specifications by a number of
contract manufacturers located outside the United States. The manufacture of
high quality metal frames is a labor-intensive process which can require over
200 production steps (including a large number of quality-control procedures)
and from 90 to 180 days of production time. Signature has used manufacturers
principally in Japan, Hong Kong/China, France and Italy.
Historically, most of the Company's frames have been manufactured in Japan,
which accounted for approximately 41.8%, 56.7%, 39.9% and 41.2% (in cost) of
the frames purchased by the Company in fiscal 1994, fiscal 1995, fiscal 1996
and in the six months ended April 30, 1997, respectively. During the past
several years, the Company has expanded the number and geographic locations of
its contract manufacturers. The Company believes that throughout the world
there are a sufficient number of manufacturers of high-quality frames so that
the loss of any particular frame manufacturer, or the inability to import
frames from a particular country, would not materially and adversely affect
the Company's business in the long-term. However, because lead times to
manufacture the Company's eyeglass frames generally range from 90 to 180 days,
an interruption occurring at one manufacturing site that requires the Company
to change to a different manufacturer could cause significant delays in the
distribution of the styles affected. This could cause the Company not to meet
delivery schedules for these styles, which could materially and adversely
affect the Company's business, operating results and financial condition.
In determining which manufacturer to use for a particular style, the Company
considers manufacturers' expertise (based on type of material and style of
frame), their ability to translate design concepts into prototypes, their
price per frame, their manufacturing capacity, their ability to deliver on
schedule, and their ability to adhere to the Company's quality control and
quality assurance requirements.
Because of the long lead times required for the Company's frames, the
Company has developed a computer model which helps project the Company's needs
for each frame style. This model takes into account the inventory on hand by
style, its three-month and six-month sales rate, the quantity and scheduled
delivery date of any future purchase orders, and other adjustments which the
Company's purchasing department may need to make to model future proposed
changes.
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<PAGE>
The Company is not required to pay for any of its frames prior to shipment.
Payment terms for the Company's products currently range from cash upon
shipment (with a 2% discount) to terms ranging from 60 to 90 days. For frames
purchased other than from Hong Kong manufacturers, the Company is obligated to
pay in the currency of the country in which the manufacturer is located. In
the case of frames purchased from manufacturers located in Hong Kong/China,
the currency is United States dollars. For almost all of the Company's other
frame purchases, its costs vary based on currency fluctuations, and it
generally cannot recover increased frame costs (in United States dollars) in
the selling price of the frames.
The purchase of goods manufactured in foreign countries is subject to a
number of risks. See "Risk Factors--Dependence Upon Contract Manufacturers;
Foreign Trade Regulation."
COMPETITION
The markets for prescription eyewear are intensely competitive. There are
thousands of frame styles, including hundreds with brand names. At retail, the
Company's eyewear styles compete with styles that do and do not have brand
names, styles in the same price range, and styles with similar design
concepts. To obtain board space at an optical retailer, the Company competes
against many companies, both foreign and domestic, including Luxottica Group
S.p.A. (operating in the United States through a number of its subsidiaries);
Safilo Group S.p.A. (operating in the United States through a number of its
subsidiaries); and Marchon Eyewear, Inc. Signature's largest competitors have
significantly greater financial, technical, sales, manufacturing and other
resources than the Company. They also employ direct sales forces that are
significantly larger than the Company's, and are thus able to realize a higher
gross profit margin. At the distributor level, sales representatives often
carry many lines of eyewear, and the Company must vie for their attention. At
the major retail chains, the Company competes not only against other eyewear
suppliers, but also against the chains themselves, which license some of their
own brand names for design, manufacture and sale in their own stores.
Luxottica, one of the largest eyewear companies in the world, is vertically
integrated, in that it manufactures frames, distributes them through direct
sales forces in the United States and throughout the world, and owns
LensCrafters, one of the largest United States retail optical chains.
The Company competes in its target markets through the quality of the brand
names it licenses, its marketing and merchandising, the popularity of its
frame designs, the reputation of its styles for quality, and its pricing
policies. See "Brand Development" and "Products".
BACKLOG
The Company generally ships eyeglass frames upon receipt of orders, and does
not operate with a material backlog.
EMPLOYEES
At April 30, 1997, the Company had 101 full-time employees, including 31 in
sales and marketing, 24 in customer service and support, 25 in warehouse
operations and shipping and 21 in general administration and finance. None of
the employees of the Company is covered by a collective bargaining agreement.
The Company considers its relationship with its employees to be good.
PROPERTIES
The Company leases a building of approximately 44,000 square feet in
Inglewood, California. The building is used as the Company's principal
executive offices and as a warehouse. The lease for this facility expires in
2005. The Company believes that its existing facility is well maintained and
in good operating condition and is adequate for the Company's level of
operations through October 31, 2000.
LEGAL PROCEEDINGS
The Company is not involved in any pending, nor is the Company aware of any
threatened, legal proceedings which the Company believes could reasonably be
expected to have a material adverse effect on the Company's business,
operating results or financial condition.
33
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information about the directors and
executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Bernard Weiss (1)..... 59 Co-Chairman of the Board and Chief Executive Officer
Julie Heldman (1)..... 51 Co-Chairman of the Board and President
Michael Prince........ 48 Chief Financial Officer and Director
Robert Fried.......... 52 Senior Vice President, Marketing
Robert Zeichick....... 46 Vice President, Advertising and Sales Promotion
Daniel Warren......... 40 Director
</TABLE>
- --------
(1) Mr. Weiss and Ms. Heldman are married to each other.
Directors are elected at each annual meeting of shareholders and hold office
until the following annual meeting and their successors are duly elected and
qualified. The Bylaws of the Company presently provide that the number of
directors shall not be less than 4 nor more than 7, with the exact number to
be fixed from time to time by resolution of the Board of Directors. The
current number of directors is 4. Any vacancy on the Board of Directors,
including a vacancy resulting from an increase in the size of the Board of
Directors, may be filled by the remaining directors. In no case may the Board
of Directors decrease the number of directors or shorten the term of any
incumbent director.
Pursuant to the Underwriting Agreement, for a period of three years from the
consummation of the Offering, Fechtor Detwiler may designate one
representative to sit on the Company's Board of Directors. See "Underwriting."
Executive officers are appointed and serve at the discretion of the Board of
Directors, subject to applicable employment contracts.
BERNARD WEISS has served as Chief Executive Officer of the Company since
1983. Mr. Weiss served as Chairman of the Board from 1983 to 1988, and has
served as Co-Chairman of the Board since 1989. Mr. Weiss started in the
optical industry in 1975 as Vice President of Sales and Marketing for Optique
du Monde. From 1977 until he founded the Company in 1983, Mr. Weiss worked in
a variety of executive positions at companies in the optical industry. Mr.
Weiss has a degree in business administration from the University of
Pittsburgh.
JULIE HELDMAN has served as Co-Chairman of the Board since 1989 and
President of the Company since 1995. Ms. Heldman joined the Company in 1985
and since that time has served in various executive positions including Chief
Financial Officer and Executive Vice President of Operations. She held the
position of Chief Operating Officer from 1992 until she was appointed
President of the Company in 1995. Ms. Heldman graduated from Stanford
University in 1966 and has a law degree from UCLA Law School which she
obtained in 1981. Ms. Heldman worked as an attorney from 1981 until she joined
the Company in 1985.
MICHAEL PRINCE joined the Company in 1993 and has served as the Chief
Financial Officer and as a Director of the Company since March 1994. For more
than 14 years before joining the Company, Mr. Prince's principal occupation
was as a consultant with Prince & Co., a business consulting firm which he
owned. Mr. Prince has a degree in business administration from Babson College.
ROBERT FRIED has served as the Company's chief marketing executive since
joining the Company in 1990. In 1995, he was appointed Senior Vice President,
Marketing of the Company. Prior to joining the Company in 1990, Mr. Fried
served in various executive marketing positions at Motorola, Quasar
Electronics, Rockwell International, Starcraft Leisure Products, Marantz
Stereo Company, Nautilus Fitness, Inc. and Hansen Foods.
34
<PAGE>
Mr. Fried has a bachelors degree from Providence College and a masters degree
in marketing from Boston University.
ROBERT ZEICHICK has served as the Company's chief advertising and promotion
executive since joining the Company in November 1990. In 1995, he was
appointed Vice President, Advertising and Sales Promotion of the Company. From
1988 until joining the Company in 1990, Mr. Zeichick served as Vice President
of Advertising and Sales Promotion at Nautilus Fitness, Inc. and Hansen Foods.
Mr. Zeichick worked as an independent advertising consultant from 1984 until
1988 and worked on such brand names as Applause, Walt Disney Home Video and
Marantz. Mr. Zeichick has degrees in journalism and mass communications from
California State University.
DANIEL WARREN has served as a director of the Company since 1993. From
January 1996 until the present, Mr. Warren has been self-employed as a
consultant. From March 1992 until January 1996, Mr. Warren was Vice President
of Planning and Accounting of National Vision Associates, Ltd.
BOARD COMMITTEES
The Board of Directors intends to establish an Audit Committee and a
Compensation Committee following the closing of the Offering. The Audit
Committee's functions include recommending to the Board of Directors the
engagement of the Company's independent certified public accountants,
reviewing with those accountants the results of their audit of the financial
statements and determining the independence of the accountants. The
Compensation Committee reviews and makes recommendations about compensation
payable to the Company's executive officers and key employees and about the
Company's employee benefit plans. A majority of the members of the Audit and
Compensation Committees will consist of independent directors.
DIRECTOR COMPENSATION
Before the Offering, the Company has not paid fees to its directors.
Following the Offering, the Company intends to pay non-employee directors a
fee of $8,000 per year.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company does not currently have a compensation committee. For the fiscal
year ended October 31, 1996, all decisions regarding executive compensation
were made by the Company's Board of Directors. No interlocking relationship
exists between any member of the Company's Compensation Committee and any
member of any other company's board of directors or compensation committee.
EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation for
fiscal 1996 to the Chief Executive Officer and each of the four most highly
compensated executive officers of the Company (the "Named Executive Officers")
in that fiscal year:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------- ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION
--------------------------- -------------------- ------------
<S> <C> <C> <C>
Bernard Weiss, Chief Executive Officer..... $ 145,414 $ 0 $ 1,335(1)
Julie Heldman, President................... $ 161,700 $ 0 $ 5,542(1)
Michael Prince, Chief Financial Officer.... $ 157,345 $ 300,000 $ 300,000(2)
Robert Fried, Senior Vice President,
Marketing................................. $ 138,692 $ 50,000 $ 0
Robert Zeichick, Vice President,
Advertising and Sales Promotion........... $ 138,692 $ 50,000 $ 0
</TABLE>
- --------
(1) Consists of auto allowances.
(2) Represents the value in May 1996 (as determined by the Board of Directors)
of 108,016 shares of Common Stock issued to Mr. Prince in consideration of
services rendered to the Company.
35
<PAGE>
EMPLOYMENT AGREEMENTS WITH EXECUTIVE OFFICERS
Bernard Weiss, Julie Heldman, Michael Prince, Robert Fried and Robert
Zeichick have each entered into an employment agreement with the Company to
take effect as of the closing of the Offering. Pursuant to those agreements,
these executive officers have agreed to render services until October 31,
2000, and will be entitled to salary at the following annual rates during the
term of their contracts (subject to increases from time to time approved by
the Board of Directors or Compensation Committee): Mr. Weiss--$190,000; Ms.
Heldman--$190,000; Mr. Prince--$175,000; Mr. Fried--$175,000; and Mr.
Zeichick--$160,000. Upon termination of employment by the Company without
cause or by an executive officer upon an adverse event, an executive officer
will continue to receive salary and benefits until the later to occur of
October 31, 2000 or one year following termination. The employment agreements
define an "adverse event" to include the occurrence of any of the following,
without the prior written consent of the executive officer: (i) the
executive's demotion as evidenced by the loss of the executive officer's
title, (ii) a significant diminution of the executive's on-going duties and
responsibilities, (iii) the relocation of the Company's principal executive
offices outside the Los Angeles Metropolitan area, or (iv) the Company
requiring executive to relocate to an office outside the Los Angeles
Metropolitan area for a period exceeding three months in any calendar year. If
employment terminates as a result of death, the executive officer's estate
will receive a payment equal to the aggregate amount of unpaid salary through
October 31, 2000. The payment will be made, if insured, upon receipt of the
proceeds of the key person life insurance maintained by the Company. Otherwise
the payment will be made over the term of the executive's employment
agreement. If employment terminates as a result of disability, the executive
officer will continue to receive salary and benefits through October 31, 2000,
offset by any government benefits and any benefits the employee receives under
disability insurance provided by the Company.
STOCK PLAN
The Company adopted a Stock Plan (the "Stock Plan") in May 1997. Each
executive officer, other employee, non-employee director or consultant of the
Company or any of its future subsidiaries is eligible to be considered for the
grant of awards under the Stock Plan. A maximum of 600,000 shares of Common
Stock may be issued pursuant to awards granted under the Stock Plan, subject
to certain adjustments to prevent dilution. Any shares of Common Stock subject
to an award which for any reason expires or terminates unexercised are again
available for issuance under the Stock Plan. The Plan terminates in 2007.
The Stock Plan will be administered by the Company's Board of Directors or
by a committee of two or more directors appointed by the Board of Directors
(the "Administrator"). Subject to the provisions of the Stock Plan, the
Administrator will have full and final authority to select the executives and
other employees to whom awards will be granted thereunder, to grant the awards
and to determine the terms and conditions of the awards and the number of
shares to be issued pursuant thereto.
The Stock Plan authorizes the Administrator to enter into any type of
arrangement with an eligible employee that, by its terms, involves or might
involve the issuance of (i) shares of Common Stock, (ii) an option, warrant,
convertible security, stock appreciation right or similar right with an
exercise or conversion privilege at a price related to the Common Stock, or
(iii) any other security or benefit with a value derived from the value of the
Common Stock. No person may receive awards representing more than 25% of the
number of shares of Common Stock covered by the Stock Plan (150,000 shares).
Awards under the Stock Plan are not restricted to any specified form or
structure and may include arrangements such as sales, bonuses and other
transfers of stock, restricted stock, stock options, reload stock options,
stock purchase warrants, other rights to acquire stock or securities
convertible into or redeemable for stock, stock appreciation rights, phantom
stock, dividend equivalents, performance units or performance shares. An award
may consist of one such arrangement or two or more such arrangements in tandem
or in the alternative. An award may provide for the issuance of Common Stock
for any lawful consideration, including services rendered or, to the extent
permitted by applicable state law, to be rendered.
36
<PAGE>
An award under the Stock Plan may permit the recipient to pay all or part of
the purchase price of the shares or other property issuable pursuant to the
award, and/or to pay all or part of the recipient's tax withholding
obligations for that issuance, by delivering previously owned shares of
capital stock of the Company or other property, or by reducing the amount of
shares or other property otherwise issuable pursuant to the award. If an
option granted under the Stock Plan permits the recipient to pay for the
shares underlying the option with previously owned shares, the option may
grant the recipient the right to "pyramid" his or her previously owned shares,
i.e., to exercise the option in successive transactions, starting with a
relatively small number of shares and, by a series of exercises using shares
acquired from each transaction to pay the purchase price of the shares
acquired in the following transaction, to exercise the option for a larger
number of shares with no more investment than the original share or shares
delivered.
The Administrator may amend or terminate the Stock Plan at any time and in
any manner, subject to the following: (i) no recipient of any award may,
without his or her consent, be deprived of the award or of any of his or her
rights under or relating to the award as a result of the amendment or
termination; and (ii) if any rule or regulation promulgated by the Securities
and Exchange Commission (the "Commission"), the Internal Revenue Service or
any national securities exchange or quotation system upon which any of the
Company's securities are listed requires that the amendment be approved by the
Company's stockholders, then the amendment will not be effective until it has
been approved by the Company's shareholders.
Effective as of the date of this Prospectus, the Company has issued options
to purchase an aggregate of 452,250 shares of Common Stock at an exercise
price of $10.00 per share, including options issued to the following executive
officers: Bernard Weiss--20,000 shares; Julie Heldman--20,000 shares; Michael
Prince--35,000 shares; Robert Fried--35,000 shares; and Robert Zeichick--
35,000 shares. None of these options can be exercised before April 1, 1998.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Articles of Incorporation include a provision that eliminates
the personal liability of its directors to the Company and its shareholders
for monetary damages for breach of the directors' fiduciary duties in certain
circumstances. This limitation has no effect on a director's liability (i) for
acts or omissions that involve intentional misconduct or a knowing and
culpable violation of law, (ii) for acts or omissions that a director believes
to be contrary to the best interests of the Company or its shareholders or
that involve the absence of good faith on the part of the director, (iii) for
any transaction from which a director derived an improper personal benefit,
(iv) for acts or omissions that show a reckless disregard for the director's
duty to the Company or its shareholders in circumstances in which the director
was aware, or should have been aware, in the ordinary course of performing a
director's duties, of a risk of a serious injury to the Company or its
shareholders, (v) for acts or omissions that constitute an unexcused pattern
of inattention that amounts to an abdication of the director's duty to the
Company or its shareholders, (vi) under Section 310 of the California
Corporations Code (the "California Code") (concerning contracts or
transactions between the Company and a director) or (vii) under Section 316 of
the California Code (concerning directors' liability for improper dividends,
loans and guarantees). The provision does not extend to acts or omissions of a
director in his capacity as an officer. Further, the provision will not affect
the availability of injunctions and other equitable remedies available to the
Company's shareholders for any violation of a director's fiduciary duty to the
Company or its shareholders.
The Company's Articles of Incorporation also include an authorization for
the Company to indemnify its agents (as defined in Section 317 of the
California Code), through bylaw provisions, by agreement or otherwise, to the
fullest extent permitted by law. Pursuant to this provision, the Company's
Bylaws provide for indemnification of the Company's directors, officers and
employees. In addition, the Company, at its discretion, may indemnify persons
whom the Company is not obligated to indemnify. The Bylaws also allow the
Company to enter into indemnity agreements with individual directors,
officers, employees and other agents. The Company has entered into
indemnification agreements designed to provide the maximum indemnification
permitted by law with all the directors and executive officers of the Company.
These agreements, together with the Company's Bylaws and Articles of
Incorporation, may require the Company, among other things, to indemnify these
37
<PAGE>
directors and executive officers against certain liabilities that may arise by
reason of their status or service as directors or executive officers (other
than liabilities resulting from willful misconduct of a culpable nature), to
advance expenses to them as they are incurred, provided that they undertake to
repay the amount advanced if it is ultimately determined by a court that they
are not entitled to indemnification, and to obtain directors' and officers'
insurance if available on reasonable terms. The Company maintains directors'
and officers' liability insurance.
Section 317 of the California Code, the Company's Bylaws and the Company's
indemnification agreements with its directors and executive officers make
provision for the indemnification of officers, directors and other corporate
agents in terms sufficiently broad to indemnify those persons, under certain
circumstances, for liabilities (including reimbursement of expenses incurred)
arising under the Securities Act. Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to directors, officers, and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
38
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has been treated as an S Corporation since 1990. The Company
paid an aggregate of $4,685,000 in dividends to the Existing Shareholders from
November 1, 1993 through April 30, 1997. These dividends were paid to the
Existing Shareholders to pay their income taxes, and as a return on their
investment. The Company intends to pay to the Existing Shareholders dividends
equal to $635,000 plus the amount of the Company's net income from May 1, 1997
through the Termination Date. These dividends will be paid to the Existing
Shareholders before the closing of the Offering.
The Company and the Existing Shareholders have entered into a tax
indemnification agreement relating to their respective income tax liabilities.
See "Termination of S Corporation Status."
Until April 1997, Mr. Weiss and Ms. Heldman personally guaranteed the
Company's obligation under the loan from its commercial bank. Mr. Weiss and
Ms. Heldman have personally guaranteed the Company's performance under the
lease for its corporate offices and warehouse (the "Lease Guarantee"). The
Lease Guarantee has been suspended and shall remain suspended so long as the
Company's net worth equals or exceeds $1,500,000, and will terminate upon the
closing of the Offering.
Robert Fried and Robert Zeichick, executive officers of the Company, are
officers, directors and significant shareholders of Brandmark, Inc., a
corporation which has a license from Laura Ashley to produce timepieces
bearing the Laura Ashley trademark. In fiscal 1996, the Company purchased from
Brandmark, Inc. an aggregate of $362,000 of timepieces bearing the Laura
Ashley trademark. The Company, with the financial participation of its
distributors, gave these timepieces to its 1996 Laura Ashley Loyal Partners as
a promotional incentive. The Company did not make any purchases from
Brandmark, Inc. during the six months ended April 30, 1997; however, by the
end of fiscal 1997, the Company plans to purchase from Brandmark, Inc.
approximately $450,000 of Laura Ashley timepieces for its 1997 Laura Ashley
Loyal Partners. The activities of Mr. Fried and Mr. Zeichick with Brandmark,
Inc. have not interfered with their responsibilities as executive officers of
the Company.
In January 1995, the Company purchased from The Weiss Family Trust a limited
partnership interest in International Business Center, a California limited
partnership ("IBC"), which owns the premises formerly used by the Company as
its principal executive offices. Bernard Weiss and Julie Heldman, the Chief
Executive Officer and President, respectively, and Co-Chairmen of the Board of
the Company, are trustees of The Weiss Family Trust. The Company paid $75,000
for the limited partnership interest, an amount equal to the purchase price
originally paid by The Weiss Family Trust. The Company paid for the limited
partnership interest with a non-interest bearing promissory note which was
paid in full in January 1996.
In March 1993, the Company issued two subordinated notes (the "Subordinated
Notes"), each in the principal amount of $200,000, to Edward Weiner and Daniel
Warren in consideration of the cancellation of demand loans made by Messrs.
Weiner and Warren to the Company. Mr. Warren is a director of the Company and
Messrs. Weiner and Warren are significant shareholders of the Company. The
Subordinated Notes, which provided for an annual interest rate of 5.5%,
payable annually, were due on March 1, 1998. One of the Subordinated Notes was
repaid in April 1995 and the other was repaid in October 1996.
In June 1992, Mr. Weiss and Ms. Heldman loaned the Company $400,000. The
promissory note evidencing the loan provided for an annual interest rate equal
to one and one-half percent over the prime rate of Wells Fargo Bank, adjusted
annually, and was due on May 31, 1997. The loan was repaid in October 1996.
The Company believes that the transactions described above were on terms no
less favorable to the Company than could have been obtained in arm's length
transactions from unaffiliated third parties.
39
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of April 30, 1997, and as adjusted to reflect
the sale of 1,600,000 shares of Common Stock by the Company and the sale of
200,000 shares of Common Stock by the Selling Shareholders offered by this
Prospectus, for (i) each person who is known to the Company to be the
beneficial owner of more than 5% of the outstanding Common Stock, (ii) each of
the Company's directors, (iii) each of the Named Executive Officers, and (iv)
all directors and executive officers of the Company as a group. The address of
each person listed is in care of the Company, 498 North Oak Street, Inglewood,
California 90302, unless otherwise set forth below such person's name.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO OFFERING(1) AFTER THE OFFERING(1)(2)
---------------------------- ----------------------------
NUMBER OF
NUMBER OF PERCENT SHARES NUMBER OF PERCENT
NAME AND ADDRESS SHARES OF CLASS OFFERED(2) SHARES OF CLASS
---------------- --------------- ------------ ---------- --------------- ------------
<S> <C> <C> <C> <C> <C>
The Weiss Family Trust
(3).................... 2,393,543 66.5% 132,954 2,260,589 43.5%
Bernard Weiss (3)....... 2,393,543 66.5 132,954 2,260,589 43.5
Julie Heldman (3)....... 2,393,543 66.5 132,954 2,260,589 43.5
Edward Weiner (4)....... 349,250 9.7 19,400 329,850 6.3
600 Golden Harbor Drive
Boca Raton, Florida
33431
Daniel Warren........... 349,250 9.7 19,400 329,850 6.3
85 Old Stratton Chase
Atlanta, GA 30328
Robert Fried............ 200,234 5.6 11,123 189,111 3.6
Robert Zeichick......... 200,234 5.6 11,123 189,111 3.6
Michael Prince.......... 108,016 3.0 6,000 102,016 2.0
All of the directors and
executive officers as a
group (6 Persons)...... 3,251,277 90.3 180,600 3,070,677 59.0
</TABLE>
- --------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission that deem shares to be beneficially
owned by any person who has or shares voting or investment power for those
shares. Unless otherwise indicated, the persons named in this table have
sole voting and sole investment power for all shares shown as beneficially
owned, subject to community property laws where applicable.
(2) Assumes no exercise of the Over-Allotment Option. If the Over-Allotment
Option is exercised in full, the Company will sell an additional 67,500
shares of Common Stock and the Selling Shareholders will sell an
additional 202,500 shares of Common Stock. In such event, upon the closing
of the Offering (i) The Weiss Family Trust will sell an aggregate of
267,571 shares and beneficially own 2,125,972 shares, or 40.4% of the
Company's outstanding Common Stock, (ii) Bernard Weiss will beneficially
own 2,125,972 shares, or 40.4% of the Company's outstanding Common Stock,
(iii) Julie Heldman will beneficially own 2,125,972 shares, or 40.4% of
the Company's outstanding Common Stock, (iv) Edward Weiner will sell an
aggregate of 39,042 shares and beneficially own 310,208 shares, or 5.9% of
the Company's outstanding Common Stock, (v) Daniel Warren will sell an
aggregate of 39,042 shares and beneficially own 310,208 shares, or 5.9% of
the Company's outstanding Common Stock, (vi) Robert Fried will sell an
aggregate of 22,385 shares and beneficially own 177,849 shares, or 3.4% of
the Company's outstanding Common Stock, (vii) Robert Zeichick will sell an
aggregate of 22,385 shares and beneficially own 177,849 shares, or 3.4% of
the Company's outstanding Common Stock, (viii) Michael Prince will sell an
aggregate of 12,075 shares and beneficially own 95,941 shares, or 1.8% of
the Company's outstanding Common Stock, and (ix) all directors and
executive officers as a group will beneficially own 2,887,819 shares, or
54.8% of the Company's outstanding Common Stock.
(3) Bernard Weiss and Julie Heldman are married. Mr. Weiss and Ms. Heldman are
co-trustees of The Weiss Family Trust, and have voting and investment
power for shares held by The Weiss Family Trust.
(4) Edward Weiner served as a director of the Company from March 1993 until
June 2, 1997.
40
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company is authorized to issue 30,000,000 shares of Common Stock, par
value $0.001 per share, and 5,000,000 shares of Preferred Stock, par value
$0.001 per share. At April 30, 1997, the Company had six holders of record of
the Common Stock. The following statements are brief summaries of certain
provisions relating to the Company's capital stock.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters on which the holders of Common Stock are entitled to
vote and have cumulative voting rights for the election of directors. The
right to cumulate votes will automatically cease as of the first record date
of the Company's annual meeting of shareholders where the Company has at least
800 holders of its equity securities (as determined under the California
General Corporation Law). The holders of Common Stock are entitled to receive
dividends ratably when, as and if declared by the Board of Directors out of
funds legally available therefor. In the event of liquidation, dissolution or
winding up of the Company, the holders of Common Stock are entitled, subject
to the rights of holders of Preferred Stock issued by the Company, if any, to
share ratably in all assets remaining available for distribution to them after
payment of liabilities and after provision is made for each class of stock, if
any, having preference over the Common Stock.
The holders of Common Stock have no preemptive or conversion rights and they
are not subject to further calls or assessments by the Company. There are no
redemption or sinking fund provisions applicable to the Common Stock. The
outstanding shares of Common Stock are, and the shares of Common Stock
issuable pursuant to this Prospectus will be, when issued, fully paid and
nonassessable.
PREFERRED STOCK
The Board of Directors has the authority to issue the authorized and
unissued 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. Accordingly, the Board of Directors is empowered, without
shareholder approval, to issue Preferred Stock with dividend, liquidation,
conversion, voting or other rights which adversely affect the voting power or
other rights of the holders of the Company's Common Stock. In the event of
issuance, the Preferred Stock could be utilized, under certain circumstances,
as a way of discouraging, delaying or preventing an acquisition or change in
control of the Company. The Company does not currently intend to issue any
shares of its Preferred Stock.
REGISTRATION RIGHTS
Pursuant to an agreement between the Company and the Existing Shareholders,
the Existing Shareholders have the right to include all shares of Common Stock
from time to time held by them in any registered public offering by the
Company for cash (subject to customary provisions regarding underwriter
cutbacks). The Board of Directors of the Company has the right to terminate
this agreement in its sole and absolute discretion in the event of any merger
or consolidation between the Company and another entity in which the Company
is not the surviving corporation.
TRANSFER AGENT
The Company's transfer agent and registrar for its Common Stock is American
Stock Transfer and Trust Company, 40 Wall Street, New York, New York 10005.
41
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Before the Offering, there has been no public market for the Company's
Common Stock. Sales of substantial amounts of Common Stock in the public
market could adversely affect the market price of the Common Stock.
Upon completion of the Offering, the Company will have outstanding an
aggregate of 5,200,527 shares of Common Stock, assuming no exercise of the
Over-Allotment Option. Of these shares, the 1,800,000 shares sold in the
Offering will be freely tradeable without restriction or further registration
under the Securities Act, unless held by "affiliates" of the Company, as that
term is defined in Rule 144 under the Securities Act. The remaining 3,400,527
shares of Common Stock held by the Existing Shareholders are "restricted"
securities within the meaning of Rule 144 under the Securities Act. Restricted
securities may be sold in the public market only if registered or if they
qualify for an exemption from registration under Rule 144 promulgated under
the Securities Act, as summarized below.
Each Existing Shareholder has agreed not to sell, transfer, assign, or
otherwise dispose of, any beneficial interest in the Common Stock held by him
or her (except for transfers to and/or among their respective family members)
for a period of 360 days following the date of this Prospectus, except with
Fechtor Detwiler's prior written consent and except that each shareholder may
transfer up to 104,000 shares in the aggregate after 180 days following the
date of this Prospectus. As a result of these contractual restrictions, no
shares will be eligible for immediate sale on the effective date of the
Offering. All of the 3,400,527 shares will become eligible for sale upon
expiration of or earlier release from the lock-up provisions, subject to
compliance with the volume limitations of Rule 144 (summarized below) by
holders of 3,070,677 of these shares.
In general, under Rule 144 as currently in effect, an affiliate of the
Company, or person (or persons whose shares are aggregated) who has
beneficially owned restricted shares for at least one year but less than two
years, will be entitled to sell in any three-month period a number of shares
that does not exceed the greater of (i) 1% of the then outstanding shares of
Common Stock (approximately 52,000 shares immediately after the Offering) or
(ii) the average weekly trading volume during the four calendar weeks
immediately preceding the date on which notice of the sale is filed with the
Securities and Exchange Commission. Sales pursuant to Rule 144 are subject to
certain requirements relating to manner of sale, notice and availability of
current public information about the Company. A person (or person whose shares
are aggregated) who is not deemed to have been an affiliate of the Company at
any time during the 90 days immediately preceding the sale and who has
beneficially owned his or her shares for at least two years is entitled to
sell these shares pursuant to Rule 144(k) without regard to the limitations
described above.
The Company has reserved an aggregate of 600,000 shares of Common Stock for
issuance pursuant to the Stock Plan. The Company intends to file a
registration statement under the Securities Act to register the 600,000 shares
of Common Stock reserved for issuance under the Stock Plan. The registration
statement is expected to be filed following the date of this Prospectus and
will become effective immediately upon filing with the Securities and Exchange
Commission. Shares issued under the Stock Plan after the effective date of
such registration statement generally will be available for sale to the public
without restriction, except for shares issued to affiliates of the Company,
which will remain subject to the volume and manner of sale limitations of Rule
144 and the 360 day lock-up provisions. See "Underwriting."
42
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters"), represented by Fechtor,
Detwiler & Co., Inc. and Van Kasper & Company (the "Representatives"), have
severally agreed, subject to the terms and conditions of the Underwriting
Agreement (the "Underwriting Agreement"), to purchase from the Company and the
Selling Shareholders, and the Company and the Selling Shareholders have agreed
to sell to the Underwriters, the number of shares of Common Stock set forth
opposite the Underwriter's name below:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
- ------------ ----------------
<S> <C>
Fechtor, Detwiler & Co., Inc. ................................. 505,000
Van Kasper & Company........................................... 505,000
A.G. Edwards & Sons Inc. ...................................... 45,000
BT Alex. Brown Incorporated.................................... 45,000
Goldman, Sachs & Co. .......................................... 45,000
Hambrecht & Quist LLC.......................................... 45,000
NatWest Securities Limited..................................... 45,000
Oppenheimer & Co. Inc. ........................................ 45,000
PaineWebber Incorporated....................................... 45,000
Advest Inc. ................................................... 25,000
Crowell, Weedon & Co. ......................................... 25,000
Cruttenden Roth Incorporated................................... 25,000
EVEREN Securities, Inc. ....................................... 25,000
Fahnestock & Co. Inc. ......................................... 25,000
First Albany Corporation....................................... 25,000
Gerard Klauer Mattison & Co., LLC.............................. 25,000
Gruntal & Co. Inc. ............................................ 25,000
Janney Montgomery Scott Inc. .................................. 25,000
Ladenburg, Thalmann & Co. Inc. ................................ 25,000
McDonald & Co. Securities Inc. ................................ 25,000
NatCity Investments, Inc. ..................................... 25,000
Needham & Co. Inc. ............................................ 25,000
Ohio Co. ...................................................... 25,000
Pacific Crest Securities....................................... 25,000
Pennsylvania Merchant Group Ltd. .............................. 25,000
Sanders Morris Mundy........................................... 25,000
Southwest Securities Inc. ..................................... 25,000
Wessels, Arnold & Henderson, L.L.C. ........................... 25,000
---------
Total........................................................ 1,800,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company and the Selling
Shareholders and their counsel and independent auditors. The nature of the
underwriting commitment is such that the Company is obligated to sell and the
Underwriters are obligated to purchase all, if any, of the shares of Common
Stock offered by this Prospectus.
The Company has been advised by the Underwriters that they propose initially
to offer the Common Stock to the public at the public offering price set forth
on the cover page of this Prospectus and to allow to certain dealers
concessions not in excess of $0.40 per share of Common Stock. Such dealers may
re-allow a concession not in excess of $0.10 per share of Common Stock to
other dealers. After the commencement of the Offering, the public offering
price, concession and reallowance may be changed by the Underwriters. The
Underwriters have advised the Company that they do not anticipate sales to
discretionary accounts by the Underwriters to exceed five percent of the total
number of shares of Common Stock offered by this Prospectus.
43
<PAGE>
At the request of the Company, up to 150,000 shares of Common Stock offered
in the Offering will be reserved for sale to employees and others having a
business relationship with the Company. The price of these shares to these
persons will be the public offering price set forth on the cover page of this
Prospectus.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, the Exchange Act
and any other statute or at common law or otherwise under the laws of foreign
countries, arising out of or based upon any untrue statement of or failure to
state a material fact in any preliminary Prospectus, final Prospectus, the
Registration Statement of which this Prospectus is a part or in certain other
documents and to contribute to certain payments that the Underwriters may be
required to make. The Company has also agreed to reimburse the Underwriters
for their actual out-of-pocket expenses not to exceed $135,000 in the
aggregate, of which none has been paid to date.
The Company and the Selling Shareholders have granted to the Underwriters
the Over-Allotment Option, exercisable within 30 days after the date of this
Prospectus, to purchase up to an aggregate of 67,500 additional shares from
the Company and 202,500 additional shares from the Selling Shareholders at the
initial public offering price per share of Common Stock offered by this
Prospectus, less underwriting discounts. The option may be exercised only for
the purpose of covering over-allotments, if any, incurred in the sale of the
Common Stock offered by this Prospectus.
Pursuant to the Underwriting Agreement, the Company has granted Fechtor
Detwiler a right of first refusal to represent the Company in any subsequent
financing or other transaction for which the Company requires the services of
an investment banker or broker/dealer for a three-year period commencing upon
the consummation of the Offering.
In connection with the Offering, the Company has agreed to sell to the
Representatives, for nominal consideration, the Representatives' Warrants to
purchase from the Company 180,000 shares of Common Stock which have been
registered in the Registration Statement of which this Prospectus is a part.
The Representatives' Warrants are initially exercisable at a price equal to
120% of the initial public offering price for a period of four years
commencing one year from the effective date of the Registration Statement. The
Representatives' Warrants contain anti-dilution provisions for, among others,
stock dividends, stock splits, mergers, sale of substantially all of the
Company's assets (but not the sale or issuance of Common Stock at a price
below the then current exercise price of the Representatives' Warrants).
Pursuant to the Underwriting Agreement, for a period of three years from the
consummation of the Offering, Fechtor Detwiler may designate one
representative to sit on the Board of Directors of the Company.
Before the Offering, there has been no public market for the Common Stock.
Consequently, the initial public offering price for the Common Stock has been
determined by negotiations between the Company and the Representatives and is
not necessarily related to the Company's asset value, net worth or other
established criteria of value. The factors considered in such negotiations, in
addition to prevailing market conditions, included the history of, and
prospects for, the industry in which the Company competes, an assessment of
the Company's management, the prospects of the Company, its capital structure
and certain other factors which were deemed relevant.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to a
copy of each such agreement which is filed as an exhibit to the Registration
Statement of which this Prospectus forms a part. See "Additional Information."
44
<PAGE>
LEGAL MATTERS
Counsel for the Company, Troop Meisinger Steuber & Pasich, LLP, Los Angeles,
California, will render an opinion to the effect that the Common Stock offered
by the Selling Shareholders is, and the Common Stock offered by the Company
upon sale will be, duly and validly issued, fully paid and non-assessable.
Proskauer Rose LLP, Boca Raton, Florida, has acted as counsel to the
Underwriters in connection with certain legal matters relating to the
Offering.
EXPERTS
The financial statements of Signature Eyewear, Inc. at October 31, 1996 and
October 31, 1995, and for each of the three years in the period ended October
31, 1996 have been audited by Altschuler, Melvoin and Glasser LLP, independent
auditor, as set forth in their reports appearing elsewhere in this Prospectus
and Registration Statement, and are included in reliance upon such reports
given upon the authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission in
Washington, D.C., a Registration Statement under the Securities Act for the
shares offered by this Prospectus. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits included
with the Registration Statement. Statements contained in this Prospectus as to
the contents of any contract or any other document referred to are not
necessarily complete, and with respect to any contract or other document filed
as an exhibit to the Registration Statement, reference is made to the exhibit
for a more complete description of the matter involved, and each such
statement is qualified in its entirety by this reference. For further
information about the Company and the shares offered by this Prospectus,
reference is hereby made to the Registration Statement and exhibits included
with the Registration Statement. A copy of the Registration Statement,
including exhibits, may be inspected without charge at the Securities and
Exchange Commission's principal office in Washington, D.C., and copies of all
or any part thereof may be obtained from the Public Reference Section of the
Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, upon payment of certain prescribed rates.
Upon consummation of the Offering, the Company will become subject to the
information requirements of the Exchange Act and, in accordance therewith,
will file reports and other information with the Securities and Exchange
Commission in accordance with its rules. These reports and other information
concerning the Company may be inspected and copied at the public reference
facilities referred to above as well as certain regional offices of the
Securities and Exchange Commission.
The Securities and Exchange Commission maintains a Web Site which contains
reports, proxy and information statements and other information regarding
issuers that file electronically with the Securities and Exchange Commission
(such as the Company) at http://www.sec.gov.
45
<PAGE>
SIGNATURE EYEWEAR, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.............................................. F-2
Balance Sheets at October 31, 1995 and 1996 and (Unaudited) April 30,
1997..................................................................... F-3
Statement of Income for the years ended October 31, 1994, 1995 and 1996
and (Unaudited) for the Six Months Ended April 30, 1996 and 1997......... F-4
Statement of Changes in Stockholders' Equity for the years ended
October 31, 1994, 1995 and 1996 and (Unaudited) for the Six Months Ended
April 30, 1997............................................................ F-5
Statement of Cash Flows for the years ended October 31, 1994, 1995 and
1996 and (Unaudited) for the Six Months Ended April 30, 1996 and 1997.... F-6
Notes to the Financial Statements......................................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Signature Eyewear, Inc.
We have audited the accompanying balance sheets of SIGNATURE EYEWEAR, INC.
(an S corporation) as of October 31, 1995 and 1996, and the related statements
of income, changes in stockholders' equity and cash flows for each of the
three years in the period ended October 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Signature Eyewear, Inc. at
October 31, 1995 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended October 31, 1996, in
conformity with generally accepted accounting principles.
ALTSCHULER, MELVOIN AND GLASSER LLP
Los Angeles, California
January 15, 1997
F-2
<PAGE>
SIGNATURE EYEWEAR, INC.
BALANCE SHEETS
OCTOBER 31, 1995 AND 1996 AND UNAUDITED APRIL 30, 1997
<TABLE>
<CAPTION>
APRIL 30, 1997
-----------------------
PRO FORMA
1995 1996 ACTUAL (NOTE 1)
---------- ----------- ----------- -----------
UNAUDITED
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash.......................... $ 28,724 $ 214,399 $ 59,673 $ 59,673
Accounts receivable, trade
(net of allowance for
doubtful accounts of $24,028
in 1995, $45,000 in 1996 and
$65,000 in 1997)............. 2,745,291 3,849,750 4,724,307 4,724,307
Inventories................... 3,627,951 4,635,928 5,338,000 5,338,000
Prepaid expenses and other
current assets............... 60,182 288,859 458,793 458,793
---------- ----------- ----------- -----------
6,462,148 8,988,936 10,580,773 10,580,773
---------- ----------- ----------- -----------
Property and Equipment (net of
accumulated depreciation and
amortization--Note 2).......... 599,461 1,040,374 1,132,822 1,132,822
---------- ----------- ----------- -----------
Other Assets:
Deferred charges (net of
amortization of $194,743 in
1995, $210,972 in 1996 and
$210,972 in 1997--Note 1).... 16,229 0 0 0
Deposits and other............ 181,985 263,747 263,747 263,747
---------- ----------- ----------- -----------
198,214 263,747 263,747 263,747
---------- ----------- ----------- -----------
$7,259,823 $10,293,057 $11,977,342 $11,977,342
========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current Liabilities:
Accounts payable, trade....... $1,566,019 $ 2,571,945 $ 2,941,903 $ 2,941,903
Note payable, bank (Note 3)... 1,755,000 3,100,000 4,625,000 4,625,000
Current portion of long-term
debt (Note 4)................ 202,826 206,394 571,790 571,790
Accrued expenses and other
current liabilities.......... 1,078,767 1,328,698 1,140,992 1,140,992
Dividends payable............. 0 0 0 635,000
---------- ----------- ----------- -----------
4,602,612 7,207,037 9,279,685 9,914,685
---------- ----------- ----------- -----------
Long-term Debt (Note 4)......... 349,199 156,883 62,415 62,415
Notes Payable, Stockholders
(Note 7)....................... 362,500 0 0 0
---------- ----------- ----------- -----------
711,699 156,883 62,415 62,415
---------- ----------- ----------- -----------
Commitments (Note 5)
Stockholders' Equity (Note 6):
Preferred stock............... 0 0 0 0
Common stock (3,492,511 shares
issued and outstanding at
October 31, 1995 and
3,600,527 shares issued and
outstanding at October 31,
1996 and April 30, 1997)..... 7,500 7,732 7,732 7,732
Paid-in capital............... 113,261 413,029 413,029 1,912,341
Retained earnings............. 1,824,751 2,508,376 2,214,481 80,169
---------- ----------- ----------- -----------
1,945,512 2,929,137 2,635,242 2,000,242
---------- ----------- ----------- -----------
$7,259,823 $10,293,057 $11,977,342 $11,977,342
========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-3
<PAGE>
SIGNATURE EYEWEAR, INC.
STATEMENT OF INCOME
YEARS ENDED OCTOBER 31, 1994, 1995 AND 1996 AND
UNAUDITED FOR THE SIX MONTHS ENDED APRIL 30, 1996 AND 1997
<TABLE>
<CAPTION>
SIX MONTHS ENDED
APRIL 30,
------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
UNAUDITED
<S> <C> <C> <C> <C> <C>
Net Sales............... $20,050,685 $23,570,513 $28,280,086 $13,052,354 $16,038,054
Cost of Sales........... 9,666,062 10,988,106 11,931,299 5,625,371 6,632,110
----------- ----------- ----------- ----------- -----------
Gross Profit............ 10,384,623 12,582,407 16,348,787 7,426,983 9,405,944
----------- ----------- ----------- ----------- -----------
Operating Expenses:
Selling............... 5,854,838 6,509,752 8,328,296 3,681,742 4,700,464
General and
administrative....... 3,223,909 4,035,432 5,611,874 2,302,726 2,807,433
Relocation expense ... 0 235,419 86,871 48,942 0
----------- ----------- ----------- ----------- -----------
9,078,747 10,780,603 14,027,041 6,033,410 7,507,897
----------- ----------- ----------- ----------- -----------
Income from Operations.. 1,305,876 1,801,804 2,321,746 1,393,573 1,898,047
----------- ----------- ----------- ----------- -----------
Other Income (Expense):
Interest expense...... (200,814) (201,196) (338,373) (166,612) (188,654)
Sundry income
(expense)............ 3,124 35,448 29,196 6,879 (2,488)
----------- ----------- ----------- ----------- -----------
(197,690) (165,748) (309,177) (159,733) (191,142)
----------- ----------- ----------- ----------- -----------
Income before State
Income Taxes........... 1,108,186 1,636,056 2,012,569 1,233,840 1,706,905
Provision for State
Income Taxes (Note 1).. 1,072 1,352 800 800 800
----------- ----------- ----------- ----------- -----------
Net Income.............. $ 1,107,114 $ 1,634,704 $ 2,011,769 $ 1,233,040 $ 1,706,105
=========== =========== =========== =========== ===========
Pro Forma Data
(unaudited):
Income before
provision for state
income taxes (from
above)............... $ 1,108,186 $ 1,636,056 $ 2,012,569 $ 1,233,840 $ 1,706,905
Income tax provision.. 418,000 606,000 748,000 473,000 677,000
----------- ----------- ----------- ----------- -----------
Net income............ $ 690,186 $ 1,030,056 $ 1,264,569 $ 760,840 $ 1,029,905
=========== =========== =========== =========== ===========
Net income per common
share................ $ 0.36 $ 0.22 $ 0.29
=========== =========== ===========
Common shares
outstanding ......... 3,546,519 3,492,511 3,600,527
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-4
<PAGE>
SIGNATURE EYEWEAR, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED OCTOBER 31, 1994, 1995 AND 1996 AND
UNAUDITED FOR THE SIX MONTHS ENDED APRIL 30, 1997
<TABLE>
<CAPTION>
COMMON STOCK
----------------
NO. OF
SHARES PAID-IN RETAINED
ISSUED AMOUNT CAPITAL EARNINGS TOTAL
--------- ------ -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, November 1, 1993
(Note 6)................. 3,492,511 $7,500 $113,261 $ 440,183 $ 560,944
Net Income................ 0 0 0 1,107,114 1,107,114
Dividends Paid............ 0 0 0 (807,250) (807,250)
--------- ------ -------- ----------- -----------
Balance, October 31,
1994..................... 3,492,511 7,500 113,261 740,047 860,808
Net Income................ 0 0 0 1,634,704 1,634,704
Dividends Paid............ 0 0 0 (550,000) (550,000)
--------- ------ -------- ----------- -----------
Balance, October 31,
1995..................... 3,492,511 7,500 113,261 1,824,751 1,945,512
Net Income................ 0 0 0 2,011,769 2,011,769
Issuance of Common Stock.. 108,016 232 299,768 0 300,000
Dividends Paid............ 0 0 0 (1,328,144) (1,328,144)
--------- ------ -------- ----------- -----------
Balance, October 31,
1996..................... 3,600,527 7,732 413,029 2,508,376 2,929,137
Net Income (unaudited).... 0 0 0 1,706,105 1,706,105
Dividends Paid
(unaudited).............. 0 0 0 (2,000,000) (2,000,000)
--------- ------ -------- ----------- -----------
Balance, April 30, 1997
(unaudited).............. 3,600,527 $7,732 $413,029 $ 2,214,481 $ 2,635,242
========= ====== ======== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE>
SIGNATURE EYEWEAR, INC.
STATEMENT OF CASH FLOWS
YEARS ENDED OCTOBER 31, 1994, 1995 AND 1996 AND
UNAUDITED FOR THE SIX MONTHS ENDED APRIL 30, 1996 AND 1997
<TABLE>
<CAPTION>
SIX MONTHS ENDED
APRIL 30,
------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
UNAUDITED
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net income............. $ 1,107,114 $ 1,634,704 $ 2,011,769 $ 1,233,040 $ 1,706,105
Adjustments to
reconcile net income
to net cash provided
by (used in) operating
activities:
Depreciation and
amortization.......... 124,047 218,956 249,013 117,099 209,560
Provision for bad
debts................. 25,000 (26,952) 20,972 15,972 20,000
Stock compensation..... 0 0 300,000 0 0
Loss on abandonment of
property and
equipment............. 0 92,123 0 0 0
Changes in assets--
(increase) decrease:
Accounts receivable,
trade................ 155,767 (851,423) (1,125,431) (1,004,132) (894,557)
Inventories........... (46,647) (1,134,544) (1,007,977) (1,118,084) (702,072)
Prepaid expenses and
other assets......... 15,009 (142,549) (310,439) (309,197) (169,934)
Changes in
liabilities--increase
(decrease):
Accounts payable,
trade................ 223,076 79,003 1,005,926 (107,490) 369,958
Accrued expenses and
other liabilities.... 262,808 409,828 249,931 (56,989) (187,706)
----------- ----------- ----------- ----------- -----------
Net cash provided by
(used in) operating
activities............ 1,866,174 279,146 1,393,764 (1,229,781) 351,354
----------- ----------- ----------- ----------- -----------
Cash Flows from
Investing Activities:
Purchases of property
and equipment......... (128,478) (464,200) (655,074) (135,289) (302,008)
Net proceeds on sale of
equipment............. 3,583 0 0 0 0
----------- ----------- ----------- ----------- -----------
Net cash used in
investing activities.. (124,895) (464,200) (655,074) (135,289) (302,008)
----------- ----------- ----------- ----------- -----------
Cash Flows from
Financing Activities:
Borrowings on long-term
debt.................. 0 525,000 0 0 0
Borrowings on note
payable, bank......... 7,520,000 9,275,000 9,310,000 5,085,000 4,900,000
Repayments on note
payable, bank......... (8,100,000) (8,820,000) (7,965,000) (2,740,000) (3,375,000)
Principal payments on
long-term debt........ (41,775) (66,936) (207,371) (217,069) (229,072)
Principal payments on
notes payable,
stockholders.......... (200,000) (437,500) (362,500) 0 0
Proceeds from long-term
debt.................. 0 0 0 0 500,000
Dividends paid......... (807,250) (550,000) (1,328,144) (640,000) (2,000,000)
----------- ----------- ----------- ----------- -----------
Net cash provided by
(used in) financing
activities............ (1,629,025) (74,436) (553,015) 1,487,931 (204,072)
----------- ----------- ----------- ----------- -----------
Net Increase (Decrease)
in Cash................ 112,254 (259,490) 185,675 122,861 (154,726)
Cash, Beginning of
Period................. 175,960 288,214 28,724 28,724 214,399
----------- ----------- ----------- ----------- -----------
Cash, End of Period..... $ 288,214 $ 28,724 $ 214,399 $ 151,585 $ 59,673
=========== =========== =========== =========== ===========
Supplemental
Disclosures of Cash
Flow Information:
Cash paid during the
period for:
Interest.............. $ 200,810 $ 193,044 $ 337,575 $ 159,932 $ 179,787
=========== =========== =========== =========== ===========
Income taxes.......... $ 1,072 $ 1,352 $ 800 $ 800 $ 800
=========== =========== =========== =========== ===========
Supplemental Schedule
of Noncash Investing
and Financing
Activities:
Purchase of equipment
financed by capital
lease obligation..... $ 0 $ 0 $ 18,623 $ 18,623 $ 0
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-6
<PAGE>
SIGNATURE EYEWEAR, INC.
NOTES TO THE FINANCIAL STATEMENTS
OCTOBER 31, 1994, 1995 AND 1996 AND UNAUDITED APRIL 30, 1997
NOTE 1--NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES:
Signature Eyewear, Inc. (the "Company") designs, markets and distributes
prescription eyeglass frames throughout the United States and internationally.
Operations are conducted from leased premises in Inglewood, California.
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
A summary of significant accounting policies is as follows:
Inventories--Inventories (consisting of finished goods) are valued at the
lower of cost, determined on a first-in, first-out (FIFO) basis, or market.
Revenue Recognition--Revenue is recognized when merchandise is shipped. An
allowance for estimated product returns is established based upon actual
historical return percentages multiplied by current period sales less actual
returns.
Depreciation and Amortization--Depreciation and amortization of property and
equipment are computed using the straight-line method over the useful economic
life of the assets.
Deferred Charges--Costs of product development incurred in connection with
establishing the Laura Ashley Eyewear line (Note 5) were amortized on the
straight-line basis over 39 months. The deferred charges were fully amortized
as of January 31, 1996. Provision for amortization charged to operations for
the years ended October 31, 1994, 1995 and 1996 amounted to $12,711, $64,914
and $16,229, respectively. Product development costs incurred subsequent to
the Laura Ashley Eyewear line have been charged as expenses when and as
incurred.
Income Taxes--Pursuant to its S corporation status under the Internal
Revenue Code, the Company is not subject to federal income taxes, and its
income is allocated and taxed to the stockholders' individual income tax
returns. Accordingly, no liability or provision for federal income taxes
attributable to S corporation operations is included in the accompanying
financial statements, nor are any deferred taxes provided for temporary
differences between tax and financial reporting. Provision for state income
taxes has been provided based upon the applicable state income tax rate, net
of income tax credits and deductions as provided under the provisions of the
Los Angeles Revitalization Zone.
The impact on the Company's financial position and results of operations had
the change in income tax status to a C corporation been effected as of April
30, 1997 would be to record a deferred tax asset and a deferred tax benefit in
the amount of approximately $100,000. Management estimates that this amount
will not materially differ at the actual S corporation termination date.
Financial Instruments--The Company's financial instruments, when valued
using market interest rates, would not be materially different from the
amounts presented in the financial statements.
Impairment of Assets--In November 1996, the Company adopted Statement of
Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
The Statement establishes accounting standards for the impairment of long-
lived assets, certain identifiable intangibles, and goodwill related to those
assets. There was no material effect on the financial statements from the
adoption of SFAS 121. Under provisions of the Statement, impairment losses are
F-7
<PAGE>
SIGNATURE EYEWEAR, INC.
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
recognized when expected future cash flows are less than the assets' carrying
value. Accordingly, when indicators of impairment are present, the Company
evaluates the carrying value of property, plant and equipment and intangibles
in relation to the operating performance and future undiscounted cash flows of
the underlying business. The Company adjusts the net book value of the
underlying assets if the sum of expected future cash flows is less than book
value.
Derivatives--The Company has from time to time used derivative financial
instruments to help manage its foreign currency exposure. The purpose is to
hedge commitments for the purchase of inventory which are denominated in a
specific foreign currency. Gains and losses on derivative financial
instruments are deferred and recognized only when the transaction is
completed.
At October 31, 1995 and 1996, the Company had off-balance sheet forward
commitments to purchase Japanese Yen in the amount of $1,459,111 and
$1,459,457 related to the purchase of inventory. Each of the forward
commitments matured in less than three months. As of April 30, 1997, the
Company had no off-balance sheet forward commitments to purchase foreign
currency.
Unaudited Pro Forma Net Income--The unaudited pro forma net income
represents the results of operations adjusted to reflect a provision for
income tax on historical income before provision for income taxes, which gives
effect to the change in the Company's income tax status to a C corporation
subsequent to the public sale of its common stock. The difference between the
pro forma income tax rates utilized and federal statutory rate of 35% relates
primarily to state income taxes (approximately 6%, net of federal tax
benefit).
Unaudited Pro Forma Net Income Per Share--Historical net income per common
share is not presented because it is not indicative of the ongoing entity.
Unaudited pro forma net income per common share has been computed by dividing
unaudited pro forma net income by the weighted average number of shares of
common stock outstanding during the period.
Unaudited Interim Financial Data--The interim financial data as of April 30,
1997 and for the six months ended April 30, 1996 and 1997 have been derived
from unaudited financial statements of the Company. Management believes the
Company's unaudited financial statements have been prepared on the same basis
as the audited financial statements and include all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
financial position and results of operations for such periods. Results for the
six months ended April 30, 1997 have not been audited and are not necessarily
indicative of results to be expected for the full fiscal year.
Unaudited Interim Pro Forma Balance Sheet--The interim unaudited pro forma
balance sheet as of April 30, 1997 has been adjusted to reflect dividends
payable of $635,000 and the reclassification of undistributed S corporation
earnings to paid-in capital upon termination of the S corporation election.
The remaining retained earnings balance of $80,169 represents C corporation
earnings by the Company prior to the Company electing S corporation status in
1990.
F-8
<PAGE>
SIGNATURE EYEWEAR, INC.
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2--PROPERTY AND EQUIPMENT:
Property and equipment (stated at cost) as of October 31, 1995 and 1996 and
April 30, 1997 consisted of the following:
<TABLE>
<CAPTION>
PERIODS OF APRIL 30,
DEPRECIATION 1995 1996 1997
------------- ---------- ---------- ----------
UNAUDITED
<S> <C> <C> <C> <C>
Office furniture and fixtures... 7 years $ 243,190 $ 372,368 $ 417,233
Computer equipment.............. 3 to 7 years 401,077 574,510 633,517
Software........................ 3 years 0 317,536 498,833
Vehicles........................ 7 years 162,744 153,141 153,141
Leasehold improvements.......... term of lease 146,582 164,685 178,880
Machinery and equipment held
under capitalized leases....... 5 years 102,411 137,857 140,438
---------- ---------- ----------
1,056,004 1,720,097 2,022,042
Less accumulated depreciation
and amortization (including
amortization on capitalized
leases of $66,578, $94,693 and
$103,769, respectively)........ 456,543 679,723 889,220
---------- ---------- ----------
Net book value.................. $ 599,461 $1,040,374 $1,132,822
========== ========== ==========
</TABLE>
Provision for depreciation and amortization charged to operations for the
years ended October 31, 1994, 1995 and 1996 and the six months ended April 30,
1996 and 1997 amounted to $111,336, $154,042, $232,784, $100,870 and $209,560,
respectively (including capitalized lease amortization of $20,169, $17,484,
$26,587, $11,898 and $9,075, respectively).
NOTE 3--NOTE PAYABLE, BANK:
At October 31, 1996, the Company had available, pursuant to a revolving
Credit Agreement (the "Credit Agreement") with its commercial bank (the
"Bank"), the use of letters of credit, banker's acceptances and loans in the
aggregate amount of $5,000,000 ($4,025,000 at October 31, 1995). The
commitment formula limited the amount available to the sum of 75% of eligible
accounts receivable (as defined) and 40% of eligible inventory (as defined),
with the inventory portion limited to the lesser of $2,000,000 or the accounts
receivable borrowing base (as defined). At the Company's option, interest
under the agreement was based on the London Interbank Offered Rate ("LIBOR")
plus 2.75% and at the Bank's prime rate plus .75%. At October 31, 1996,
interest rates ranged from 8.125% to 8.378% (8.617% to 8.625% at October 31,
1995) on a loan balance of $2,500,000 ($1,500,000 at October 31, 1995) under
the LIBOR option and 9% (9.5% at October 31, 1995) on the remaining balance of
$600,000 ($255,000 at October 31, 1995) under the prime rate option. The
weighted average interest rate was 8.23% for the year ended October 31, 1996
(9.16% for the year ended October 31, 1995). The Credit Agreement was secured
by substantially all of the assets of the Company and was guaranteed by the
major stockholders of the Company up to $1,750,000. Under the commitment
formula, the Company had available for borrowing approximately $1,077,000 and
$1,011,000 as of October 31, 1996 and 1995, respectively.
The Credit Agreement contains various covenants including requirements for
the maintenance of minimum tangible net worth (as defined) and certain
financial ratios, and provisions restricting the payment of dividends without
the consent of the Bank, except for dividends in 1997 in an amount equal to
the net income of the Company during the period it is an S corporation. The
Company was in compliance with these covenants at October 31, 1996 and 1995.
F-9
<PAGE>
SIGNATURE EYEWEAR, INC.
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
In April 1997, the Company executed an amendment to the Credit Agreement
(the "Amendment"), which expires in May 1998. The Amendment provides for an
increase in the total commitments to $6,760,417. In connection with the
Amendment, the interest rate option decreased to LIBOR plus 2.25% or the
Bank's prime rate plus .25%. The weighted average interest rate was 8.19% for
the six months ended April 30, 1997. Additionally, the Amendment provides that
the major stockholders of the Company no longer guarantee the credit facility.
Under the commitment formula, the Company had available for borrowing
approximately $701,000 as of April 30, 1997.
In June and July 1997, the Company executed two additional amendments to the
Credit Agreement. The amendments provide for an increase in the total
commitments to $7,935,417. The Amendments also provide for an increase in the
inventory portion of the borrowing base to the lesser of $3,000,000 or the
accounts receivable borrowing base (as defined), and the elimination of the
provision restricting the payment of dividends without the consent of the
Bank.
NOTE 4--LONG-TERM DEBT:
Long-term debt at October 31, 1995 and 1996 and April 30, 1997 consisted of
the following:
<TABLE>
<CAPTION>
APRIL 30,
1995 1996 1997
-------- -------- ----------
UNAUDITED
<S> <C> <C> <C>
Note payable, bank (secured by substantially all
the assets of the Company, payable in monthly
installments of $41,667, plus interest at the
Bank's prime rate plus .5% per annum)........... $ 0 $ 0 $375,000
Note payable, bank (secured by substantially all
the assets of the Company, payable in monthly
installments of $11,111, plus interest at 9.75%
per annum)...................................... 366,667 233,333 166,667
Note payable, Bank (secured by certain vehicles,
payable in monthly installments of $3,472, plus
interest at 8.75% per annum).................... 125,000 83,334 62,500
Liability for transportation equipment under a
purchase agreement (interest at 8.9%)........... 19,124 13,306 10,192
Liability for machinery and equipment under
various capitalized lease agreements (interest
rates ranging from approximately 12% to 21%).... 41,234 33,304 19,846
-------- -------- --------
552,025 363,277 634,205
Less current portion............................. 202,826 206,394 571,790
-------- -------- --------
Long-term portion................................ $349,199 $156,883 $ 62,415
======== ======== ========
</TABLE>
Future minimum payments as of October 31, 1996, under the aforementioned
long-term debt, are as follows:
<TABLE>
<CAPTION>
NOTES CAPITALIZED
PAYABLE PURCHASE LEASE
OCTOBER 31, BANK AGREEMENTS AGREEMENTS TOTAL
----------- -------- ---------- ------------ --------
<S> <C> <C> <C> <C>
1997............................. $175,000 $ 6,365 $27,883 $209,248
1998............................. 141,667 6,941 7,639 156,247
1999............................. 0 0 1,229 1,229
-------- ------- ------- --------
316,667 13,306 36,751 366,724
Less imputed interest thereon..... 0 0 3,447 3,447
-------- ------- ------- --------
$316,667 $13,306 $33,304 $363,277
======== ======= ======= ========
</TABLE>
F-10
<PAGE>
SIGNATURE EYEWEAR, INC.
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5--COMMITMENTS:
Operating Leases--The Company maintains its offices and warehouse in leased
facilities in Inglewood, California under an operating lease which expires on
May 31, 2005. The lease agreement provides for minimum monthly rental payments
ranging from $23,000 presently and escalating to $29,000 for the last five
years of the lease. The Company is also responsible for the payment of (i)
common area operating expenses (as defined), (ii) utilities, and (iii)
insurance. The security deposit on the lease includes a $70,000 irrevocable
standby letter of credit in favor of the lessor. The lease agreement provides
for an option to extend the term of the lease for five additional years.
Future minimum lease payments (excluding common area operating expenses,
property taxes, utilities and insurance) under the lease at October 31, 1996,
are as follows:
<TABLE>
<CAPTION>
OCTOBER 31, AMOUNT
----------- ----------
<S> <C>
1997.......................................................... $ 269,000
1998.......................................................... 281,000
1999.......................................................... 293,000
2000.......................................................... 320,000
2001.......................................................... 348,000
Thereafter..................................................... 1,247,000
----------
$2,758,000
==========
</TABLE>
Total rent expense for the years ended October 31, 1994, 1995 and 1996 and
the six months ended April 30, 1996 and 1997 amounted to $210,074, $201,333,
$254,091, $116,936 and $143,312, respectively.
License Agreements--The Company has a license agreement with Laura Ashley
Manufacturing, B.V., which grants the Company certain rights to use the "Laura
Ashley" trademark in connection with the distribution, marketing and sale of
Laura Ashley eyewear products. The license period extends through January 31,
2001, with automatic one-year renewals thereafter through at least 2006,
provided that specified minimum sales are achieved.
The Company has a license agreement with Revlon Consumer Products
Corporation, which grants the Company certain rights to use the "Jean Nate"
trademark in connection with the distribution, marketing and sale of Jean Nate
eyewear products. The license period extends through September 30, 1998, with
automatic renewal terms (as defined) thereafter, provided that specified
minimum sales are achieved.
The Company has a license agreement with Hart Schaffner & Marx, which grants
the Company certain rights to use the "Hart Schaffner & Marx" trademark in
connection with the distribution, marketing and sale of Hart Schaffner & Marx
eyewear products. The license period extends through June 30, 1999, with
automatic three year renewal terms (as defined) thereafter, provided that
specified minimum sales are achieved.
Total minimum royalties under all of the Company's license agreements are as
follows:
<TABLE>
<CAPTION>
OCTOBER 31, AMOUNT
----------- ----------
<S> <C>
1997.......................................................... $ 812,500
1998.......................................................... 883,750
1999.......................................................... 898,750
2000.......................................................... 763,750
2001.......................................................... 195,000
----------
$3,553,750
==========
</TABLE>
Total royalty expense charged to operations for the years ended October 31,
1994, 1995 and 1996 and the six months ended April 30, 1996 and 1997 amounted
to $962,205, $1,171,091, $1,459,559, $641,961 and $848,393, respectively.
F-11
<PAGE>
SIGNATURE EYEWEAR, INC.
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6--STOCKHOLDERS' EQUITY:
In July 1995, the Company's Articles of Incorporation were amended to
increase the total number of authorized shares of Common Stock, par value
$.001 per share, to 30,000,000, and to authorize the issuance of up to
5,000,000 shares of Preferred Stock, par value $.001 per share. Additionally,
in July 1995 an 800 to 1 split of the Company's Common Stock was effected. In
June 1997, a 3.175 to 1 split of the Company's Common Stock was effected. All
share and per share amounts included in the accompanying financial statements
and footnotes have been restated to reflect the stock splits.
The Board of Directors has the authority to issue the authorized and
unissued 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. No shares of the Preferred Stock were
issued as of October 31, 1995 and 1996 and April 30, 1997.
NOTE 7--RELATED PARTY TRANSACTIONS:
Notes Payable, Stockholders--As of October 31, 1995, the following amounts
were due to stockholders of the Company:
<TABLE>
<S> <C>
Note payable (unsecured, interest at 5.5% per annum)................. $162,500
Notes payable (unsecured, interest at the Bank's prime rate plus 1.5%
per annum).......................................................... $200,000
--------
$362,500
========
</TABLE>
These amounts were repaid during fiscal 1996. Interest expense paid on the
notes payable to the stockholders amounted to $65,086, $46,579, $21,337,
$13,286 and $0 for the years ended October 31, 1994, 1995 and 1996 and the six
months ended April 30, 1996 and 1997, respectively.
Purchases from Related Party--Two executive officers, who are also
shareholders of the Company, are officers, directors and significant
shareholders of Brandmark, Inc., a corporation which has a license from Laura
Ashley to produce timepieces bearing the Laura Ashley trademark. In fiscal
1996, the Company purchased from Brandmark, Inc. an aggregate of $362,000 of
timepieces bearing the Laura Ashley trademark, which amount is included in
selling expenses for the year ended October 31, 1996.
Limited Partnership Investment--In January 1995, the Company purchased from
The Weiss Family Trust a limited partnership interest in a California limited
partnership which owns the premises formerly used by the Company as its
principal executive offices. Bernard Weiss and Julie Heldman, the Chief
Executive Officer and President, respectively, and Co-Chairmen of the Board of
the Company, are trustees of The Weiss Family Trust. The Company paid $75,000
for the limited partnership interest, an amount equal to the purchase price
originally paid by The Weiss Family Trust. The investment is included in the
deposits and other assets balance at October 31, 1995 and 1996 and April 30,
1997.
F-12
<PAGE>
INSIDE BACK COVER--TWO PAGE COLOR FOLD OUT:
Across the top of the gatefold is the headline "The Signature Marketing of
Signature Eyewear".
Across the gatefold is a collection of photographs of various marketing in-
store displays and trade show booths.
Across the bottom of the gatefold is a full left to right photograph of 18
Signature eyeglass frames.
<PAGE>
[PICTURES]
INSIDE BACK COVER
Jean Nate Eyewear lifestyle photograph of a woman wearing Jean Nate Eyewear
being "splashed" from below, up towards her face. At the bottom of the image
is the Jean Nate Eyewear logo with the phrase "Always make a splash" at the
bottom of the page and the lines "Jean Nate is used under license (C) 1997"
and "Jean Nate Eyewear net sales were 4% of the Company's net sales in the six
months ended April 30, 1997."
<PAGE>
[PICTURES]
OUTSIDE BACK COVER
Hart Schaffner & Marx Eyewear lifestyle photograph of a man wearing Hart
Schaffner & Marx Eyewear in front of a swimming pool. At the bottom of the
image is the Hart Schaffner & Marx logo and trade theme-line "For A Man's
Frame of Mind." At the bottom of the page are the lines "Hart Schaffner & Marx
Eyewear net sales were 6% of the Company's net sales in the six months ended
April 30, 1997" and "Made by Signature Eyewear under license from Hart
Schaffner & Marx."
