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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT
TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1997 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO ________________
COMMISSION FILE NUMBER: 0-23001
SIGNATURE EYEWEAR, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 95-3876317
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
498 NORTH OAK STREET
INGLEWOOD, CALIFORNIA 90302
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 330-2700
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
------- -------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulations S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
On January 20, 1998, the Registrant had 5,268,027 outstanding shares of
Common Stock, $.001 par value. The aggregate market value of the 2,380,208
shares of Common Stock held by non-affiliates of the Registrant as of January
20, 1998 was $21,124,346.
DOCUMENTS INCORPORATED BY REFERENCE
Part III - Portions of Registrant's Proxy Statement for its 1998 Annual Meeting
of Shareholders are incorporated by reference into Part III of this Form 10-K.
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PART I
The discussions in this Form 10-K contain forward-looking statements that
involve risks and uncertainties. Important factors that could cause actual
results to differ materially from the Company's expectations are set forth in
"Factors That May Affect Future Results" in Item 7 of this Form 10-K, as well
as those discussed elsewhere in this Form 10-K. All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by the "Factors That May
Affect Future Results." Those forward-looking statements relate to, among other
things, the Company's plans and strategies, new product lines, and relationships
with licensors, distributors and customers, and the business environment in
which the Company operates.
ITEM 1--BUSINESS
GENERAL
Signature Eyewear, Inc. ("Signature" or the "Company") designs, markets and
distributes prescription eyeglass frames 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 March 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 October 31, 1997 had over 4,500 participating retailers in the United
States (approximately 15% of all independent optical retailers in the United
States) as well as approximately 750 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 Eyecare Centers of America, Pearle Vision, and LensCrafters,
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
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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
$24.0 million in fiscal 1997.
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.
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 5.5% 15.5%
15-24.................................... 35.9 11.3 51.0%
25-44.................................... 83.7 32.4 62.8%
45-64.................................... 53.7 31.4 95.0%
65 and up................................ 33.9 19.4 93.1%
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Total................................... 265.2 100.0%
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</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 contact lenses.
__________
(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.
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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.
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 March 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.
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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.
The Company's existing license agreements contain terms limiting the ability
of the Company to market competing brand names. See "Factors That May Affect
Future Results--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 launched its first three
brand-name collections with only three styles, and plans to launch its Eddie
Bauer Eyewear collection with only five styles in March and April 1998. 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
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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). 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 4,500 United States participants and 750
international participants at October 31, 1997. Each United States participant
in the 1997 program agreed to purchase a total of 39 Laura Ashley frames in
accordance with its distributor's release schedule. Approximately 15% of the
independent optical retailers in the United States participated 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, which the Company
plans to release in March 1998. The Company also has a division that distributes
eyeglass frames under the Company's own Camelot brand and a division that 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 March 1998(2) $100 - 135
Signature's Camelot Line Men/Women 1986 $ 70 - 130
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 $24.0 million
in fiscal 1997.
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
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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.
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 $ 21.6 million in
fiscal 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 fiscal
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 $1.6 million in 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 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.
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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 January 20, 1998, the Company is not aware
of any sales of Hart Schaffner & Marx Eyewear anywhere outside of the United
States. The Hart Schaffner & Marx 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
8
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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
March 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 Bernard L. Weiss,
Julie Heldman, Robert Fried, Robert Zeichick and Daniel Warren (all of whom are
currently directors and/or officers of the Company), 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
$2.0 million in fiscal 1995 and fiscal 1996, and $2,1million in fiscal 1997. USA
Optical continues to sell frames from other suppliers as part of its sales mix.
USA Optical had total net sales of $3.8 million in fiscal 1995, $3.7 million in
fiscal 1996, and $3.9 million in fiscal 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 $1.1 million in fiscal 1995, $1.2 million in
fiscal 1996, and $1.0 million in fiscal 1997.
9
<PAGE>
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 Eyecare Centers of
America, Pearle Vision and LensCrafters; 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,
---------------------------------------------
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
(IN THOUSANDS)
Domestic distributors........................................... $10,792 $12,965 $14,402
Optical retail chains........................................... 5,798 7,120 9,297
Telemarketing(1)................................................ 4,846 4,862 4,871
International distributors...................................... 2,135 2,486 2,540
Direct sales (California)(2).................................... -- 847 2,066
</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 October 31, 1997, the Company had 24 domestic 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 Eyecare Centers of America,
Pearle Vision and LensCrafters. Eyecare Centers of America and Pearle Vision
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.
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
10
<PAGE>
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 in
fiscal 1997 were $2,045,000, an increase of $983,000 (or 93%) over net sales of
$1,062,000 made to the Company's California distributor in the first five months
of fiscal 1996 and through the Company's direct sales force from April through
October 31, 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
27,060 in fiscal 1996 to 49,074 in 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 56.7%, 39.9% and 48.9% (in cost) of the frames
purchased by the Company in fiscal 1995, fiscal 1996 and fiscal 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.
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 1% to 3% 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 "Factors That May Affect Future Results--Dependence Upon Contract
Manufacturers; Foreign Trade Regulation."
COMPETITION
11
<PAGE>
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 October 31, 1997, the Company had 102 full-time employees, including 43 in
sales and marketing, 14 in customer service and support, 26 in warehouse
operations and shipping and 19 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.
ITEM 2--DESCRIPTION OF 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.
ITEM 3--LEGAL PROCEEDINGS
The Company is not involved in any material legal proceedings.
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
None
12
<PAGE>
PART II
ITEM 5--MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK
The Company's Common Stock has been traded on the Nasdaq National Market
System under the symbol "SEYE" since the commencement of the Company's initial
public offering on September 11, 1997. The high and low sales prices for the
Company's Common Stock for the fourth quarter of fiscal 1997 (from September 11,
1997 through October 31, 1997) were $11 7/8 and $8 1/2 per share, respectively,
as reported on the NASDAQ Stock Market.
At January 20, 1998, there were 5,268,027 shares of the Company's Common
Stock outstanding. On that date, the Company had 18 holders of record of its
Common Stock and approximately 1,240 beneficial owners of its Common Stock.
DIVIDENDS
The Company was treated as an S Corporation from 1990 through September 15,
1997, the date immediately preceding the closing of its initial public offering.
During the period the Company was an S Corporation, its income, whether or not
distributed, was taxed for federal and state income tax purposes directly to the
holders of the Common Stock, rather than to the Company. As a result of the
Company's treatment as an S Corporation, the Company historically provided its
shareholders, through dividends, with funds for the payment of income taxes on
the earnings of the Company which were included in their taxable income. In
addition, the Company paid dividends to shareholders to provide them with a
return on their investment. The Company paid dividends of $1,328,000 for fiscal
1996 and $3,982,000 for fiscal 1997.
Since September 16, 1997, the Company has been treated as a C Corporation, and
has become subject to federal and state corporate income taxes. The Company
does not currently intend to pay dividends on its Common Stock and plans to
follow a policy of retaining earnings to finance the growth of its business.
USE OF PROCEEDS
The Company's Registration Statement on Form S-1 (File No. 333-30017) relating
to the public offering (the "Offering") of an aggregate of 2,070,000 shares (the
"Shares") of Common Stock, par value $0.001 per share (the "Common Stock"), of
the Company was declared effective by the Securities and Exchange Commission
(the "Commission") on September 11, 1997. Of the 2,070,000 shares of Common
Stock registered under the Registration Statement, the Company offered 1,667,500
shares and 402,500 shares were offered by certain shareholders of the Company
(the "Selling Shareholders"). All of the Shares were offered and sold for
$10.00 per share, for an aggregate offering price of $16,675,000 for the shares
offered by the Company and $4,025,000 for the shares offered by the Selling
Shareholders. The Company also registered under the Registration Statement (i)
180,000 warrants to purchase up to an aggregate of 180,000 shares of Common
Stock granted to Fechtor, Detwiler & Co., Inc. and Van Kasper & Company, the
managing underwriters of the Offering (the "Managing Underwriters"), and (ii)
180,000 shares of Common Stock underlying the warrants granted to the Managing
Underwriters. The Company also received $0.001 per warrant, for aggregate net
proceeds of $180, in consideration of the warrants granted to the Managing
Underwriters.
The Company's expenses in connection with the Offering included underwriting
discounts of $1,167,000, expense reimbursement to the underwriters of $143,000
and other expenses of $586,000, for the total expenses of $1,896,000, resulting
in net proceeds ("Net Proceeds") to the Company of $14,779,000.
As of October 31, 1997, the Company had applied $5,623,000 of the Net Proceeds
to pay all borrowings previously owed to its commercial bank and $4,318,000 was
used for working capital. The Company invested the remaining $4,838,000 of the
Net Proceeds in commercial paper and money market funds bearing interest at a
weighted average of 5.15% .
The Company will disclose the application of the remaining Net Proceeds as
required by Rule 463 of the Securities Act in the Company's periodic report for
the quarter ending January 31, 1997 and, to the extent necessary, in subsequent
periodic reports filed by the Company pursuant to Section 13(a) or 15(d) of the
Exchange Act.
13
<PAGE>
ITEM 6--SELECTED FINANCIAL DATA
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 Form
10-K.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales........................................... $13,858 $20,051 $23,571 $ 28,280 $ 33,176
Gross profit........................................ 6,929 10,385 12,582 16,349 19,677
Total operating expenses............................ 6,562 9,079 10,780 14,027(1) 15,667
Income (loss) from operations....................... 367 1,306 1,802 2,322 4,010
Net income (loss)................................... 137 1,107 1,635 2,012 3,585
Pro forma net income (2)............................ 690 1,030 1,265 2,340
Pro forma net income per share (2).................. 0.36 .61
Weighted average common shares outstanding.......... 3,546,519(3) 3,829,822
</TABLE>
<TABLE>
<CAPTION>
AT OCTOBER 31,
--------------------------------------------
1993 1994 1995 1996 1997
------ ------ ------ ------- -------
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Current assets...................................... $4,726 $4,676 $6,462 $ 8,989 $19,964
Total assets........................................ 5,247 5,211 7,260 10,293 21,175
Current liabilities................................. 3,792 3,490 4,602 7,207 3,860
Total liabilities................................... 4,686 4,350 5,314 7,364 3,863
Stockholders' equity................................ 561 861 1,946 2,929 17,312
</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) Pro forma.
14
<PAGE>
ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following discussions in this Form 10-K contain forward-looking statements
that involve risks and uncertainties. Important factors that could cause actual
results to differ materially from the Company's expectations are set forth in
"Factors That May Affect Future Results" in Item 7 of this Form 10-K, as well as
those discussed elsewhere in this Form 10-K. All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by the "Factors That May
Affect Future Results." Those forward-looking statements relate to, among other
things, the Company's plans and strategies, new product lines, and relationships
with licensors, distributors and customers, and the business environment in
which the Company operates.
The following discussion and analysis should be read in connection with the
Company's Financial Statements and related notes and other financial information
included elsewhere in this Form 10-K.
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 March 1998.
The Company's revenues have grown from $9.2 million in fiscal 1992 to $33.2
million in fiscal 1997. 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 72.5% of the Company's net sales during fiscal
1995, fiscal 1996, and fiscal 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 "Factors That May Affect Future Results--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.
In fiscal 1996 and fiscal 1997, approximately 39.9% and 45.8%, respectively,
of the Company's eyeglass frames were manufactured by companies in Japan, and
approximately 40.0% and 36.6%, respectively, of the Company's eyeglass frames
were manufactured by companies headquartered in Hong Kong that have
manufacturing facilities in China. Recent economic developments have resulted in
a stronger U.S. dollar and instability in the Asian-Pacific economies and
financial markets. These economic developments have resulted in improved profit
margins for the Company, as its cost of goods has decreased for frames purchased
in foreign currencies. There can be no assurance, however, that the Asian-
Pacific economic
15
<PAGE>
instability will not result in an adverse future impact on the business
operations of some of the Company's contract manufacturers, which could force
the Company to move the manufacture of some styles to other factories. The
resulting disruption to the Company's business could have a material adverse
effect on the Company's business, operating results and financial condition.
EFFECT OF CHANGE IN FORM FROM AN S CORPORATION TO A C CORPORATION
The Company was treated as an S Corporation from 1990 through September 15,
1997. During the period the Company was an S Corporation, its income, whether
or not distributed, was taxed for federal and state income tax purposes directly
to the holders of the Common Stock, rather than to the Company. In addition,
for California franchise tax purposes, S Corporations were taxed at 1.5% of
taxable income in 1995, 1996 and 1997, net of income tax credits under the Los
Angeles Revitalization Zone Act.
The Company paid dividends to its shareholders of $550,000, $1,328,000, and
$3,982,000 in fiscal 1995, fiscal 1996 and fiscal 1997, respectively. These
dividends were paid to the shareholders to pay their income taxes and as a
return of their investment.
Since September 16, 1997, the Company has converted to a C Corporation, and
has become subject to federal and state corporate income taxes. As a result of
this conversion, the Company has adopted Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes." See Note 1 of Notes to
Financial Statements. Currently, the highest federal tax rate for C
Corporations is 38% (although the majority of the taxable income is taxed at
34%) 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 Form
10-K shows results as if the Company had always been a C Corporation.
Financial Accounting Standards No. 109 requires the use of the "liability
method" of accounting for income taxes. Under that method, deferred income tax
assets and liabilities are recognized for the expected future tax consequences
of events that have been included in a company's financial statements or tax
returns. As a result of the Company's conversion to a C Corporation, a deferred
income tax asset of $218,000 was established. The deferred tax asset resulted
primarily from temporary differences arising from costs of $157,000 capitalized
into inventory. See Note 5 of Notes to Financial Statements.
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>
YEAR ENDED OCTOBER 31,
------------------------------------------------
1995 1996 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales...................................................... 46.6 42.2 40.7
----- ----- -----
Gross profit....................................................... 53.4 57.8 59.3
----- ----- -----
Operating expenses:
Selling.......................................................... 27.6 29.4 29.5
General and administrative....................................... 17.1 19.9 17.7
Relocation expense............................................... 1.0 0.3 0.0
Total operating expenses...................................... 45.7 49.6 47.2
----- ----- -----
Income from operations............................................. 7.7 8.2 12.1
----- ----- -----
Other expense, net................................................. (0.7) (1.1) (0.9)
----- ----- -----
Income before pro forma provision for income taxes................. 7.0 7.1 11.2
Pro forma provision for income taxes............................... 2.6 2.6 4.1
----- ----- -----
Pro forma net income............................................... 4.4% 4.5% 7.1%
===== ===== =====
</TABLE>
16
<PAGE>
Comparison of Fiscal Years 1995, 1996 and 1997
Net Sales. Net sales increased by 20% from $23,571,000 in fiscal 1995 to
$28,280,000 for fiscal 1996, to $33,176,000 in fiscal 1997. The increase in net
sales from fiscal 1995 to fiscal 1996 resulted primarily from a 15% increase in
net sales of Laura Ashley Eyewear from $18,348,000 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 net sales from fiscal 1996 to fiscal 1997 resulted
from a 14% increase in net sales of Laura Ashley Eyewear to $24,037,000, a 127%
increase in net sales of Hart Schaffner & Marx Eyewear to $2,277,000, and a 65%
increase in net sales of Jean Nate Eyewear to $1,467,000. The increase in Laura
Ashley Eyewear net sales in all three fiscal years was due principally to an
increase in unit sales and to a lesser extent to an increase in prices for
selected frames. The increase in net sales of Hart Schaffner & Marx Eyewear and
Jean Nate Eyewear from fiscal 1996 to fiscal 1997 was due an increase in unit
sales.
Gross Profit. Gross profit was $12,582,000 in fiscal 1995, $16,349,000 in
fiscal 1996, and $19,677,000 in fiscal 1997. These increases in gross profit
were attributable to increases in net sales as well as improvements in the gross
margin, which increased from 53.4% in fiscal 1995 to 57.8% in fiscal 1996, and
59.3% in fiscal 1997. 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 and fiscal 1997 due to beneficial currency fluctuations. Gross
margin was also positively impacted in all three fiscal years by increases in
the average selling price of frames and by reductions in import duties and
tariffs.
Operating Expenses. Operating expenses were $10,780,000 in fiscal 1995,
$14,027,000 in fiscal 1996 and $15,667,000 in fiscal 1997. The increase from
fiscal 1995 to fiscal 1996 resulted primarily from higher selling and general
and administrative expenses commensurate with the Company's growth. The increase
from fiscal 1996 to fiscal 1997 resulted from predominantly from increased
selling expenses.
Selling expenses were $6,510,000 in fiscal 1995, $8,328,000 in fiscal 1996 and
$9,797,000 in fiscal 1997, representing 28%, 29%, and 30%, respectively, of net
sales for such periods. 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. The 18% increase from fiscal 1996 to fiscal 1997
resulted from a $568,000 increase in in-store display expenditures, due
primarily to the introduction of new Laura Ashley Eyewear store displays. In
addition, in fiscal 1997, convention and trade show expenses increased by
$194,000, royalty expense increased by $273,000 , and sales salaries and
commissions increased by $158,000.
General and administrative expenses were $4,035,000 in fiscal 1995, $5,612,000
in fiscal 1996, and $5,870,000 in fiscal 1997, representing 17%, 20%, and 18%,
respectively, of net sales in these periods. 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 5% increase from fiscal 1996 to fiscal 1997 resulted from a
$682,000 increase in salaries, and a $214,000 increase in depreciation expense,
offset in part by a decrease of $340,000 in employee bonuses, and a $300,000
decrease in stock compensation expenses.
The Company incurred expenses of $235,000, $87,000, and $0 in fiscal 1995,
fiscal 1996, and fiscal 1997, respectively, in connection with the relocation of
the Company's corporate offices and warehouse.
Other Expense, Net. Other expense, net, consisted principally of interest
expense. Interest expense was $201,000 in fiscal 1995, $338,000 in fiscal 1996,
and $360,000 in fiscal 1997. The increases from fiscal 1995 to fiscal 1996 of
$137,000 and from fiscal 1996 to fiscal 1997 of $21,231 were predominantly due
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
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<PAGE>
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 amounted to $606,000 in fiscal 1995, $748,000 in fiscal
1996 and $1,374,000 in fiscal 1997.
Pro Forma Net Income (unaudited). Pro forma net income was $1,030,000 in
fiscal 1995, $1,265,000 in fiscal 1996, and $2,340,000 in fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital increased from $1,782,000 at October 31, 1996 to
$16,104,000 at October 31, 1997 as a result of its initial public offering in
September 1997. The Company had proceeds from its initial public offering, net
of underwriting discounts and other related expenses, amounting to $14,779,000.
At October 31, 1997, the Company had $7,751,000 in cash or cash equivalents, of
which $6,750,000 was invested in commercial paper with interest rates ranging
from 4.9% to 5.3%, and $1,001,000 was invested in money market funds bearing
interest at 4.8%.
Before the Company's initial public offering, the Company relied primarily on
internally generated funds, credit from suppliers and bank lines of credit to
meet its liquidity needs. The Company had a credit agreement with a commercial
bank which provided for the use of letters of credit, banker's acceptances and
loans in the aggregate amount of $7,935,417. Immediately before the Company's
initial public offering, the Company owed the bank an aggregate of $5,623,000
under the credit agreement. As of September 30, 1997, the Company had paid that
amount in full from the proceeds of the offering.
In October 1997, the Company entered into a new credit agreement with its
commercial bank (the "New Credit Agreement"). Under the New Credit Agreement,
the bank has agreed to provide to the Company an unsecured revolving line of
credit up to an aggregate of $5,000,000. At the Company's option, interest may
be based on the London Interbank Offered Rate ("LIBOR") plus 2% or at the
bank's prime rate. At October 31, 1997, no amounts were due to the bank under
the New Credit Agreement.
Of the Company's accounts payable at October 31, 1996 and October 31, 1997,
$865,069 and $851,026, respectively, were payable in foreign currency. To
monitor risks associated with currency fluctuations, the Company on a weekly
basis assesses the volatility of certain foreign currencies and reviews the
amounts and expected payment dates of its purchase orders and accounts payable
in those currencies. Based on those factors, the Company may from time to time
mitigate some portion of that risk by purchasing forward commitments to deliver
foreign currency to the Company. The Company held forward commitments for
foreign currencies in the amount of $1,459,457 at October 31, 1996, and and had
no such commitments at October 31, 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
1996 and 1997 fiscal years. 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, along with the net
proceeds received by the Company from its initial public 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.
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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.
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The following table sets forth certain unaudited results of operations for the
twelve fiscal quarters ended October 31, 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
----------------------------------------- -----------------------------------------
JAN. 31 APRIL 30 JULY 31 OCT. 31 JAN. 31 APRIL 30 JULY 31 OCT. 31
-------- --------- -------- -------- -------- --------- -------- --------
<S> <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
Cost of sales..................... 2,128 3,041 3,056 2,764 2,449 3,177 2,895 3,410
Gross profit...................... 2,353 3,268 3,413 3,548 2,859 4,567 4,155 4,768
Operating expenses:
Selling.......................... 1,056 1,682 1,853 1,919 1,472 2,209 2,055 2,592
General and administrative....... 782 970 1,057 1,226 969 1,334 1,554 1,755
Relocation expense............... 0 34 65 136 30 19 17 21
Total operating expenses.......... 1,838 2,686 2,975 3,281 2,471 3,562 3,626 4,368
Income from operations............ 515 582 438 267 388 1,005 529 400
Other expense, net................ (38) (44) (29) (55) (67) (92) (84) (66)
Income before pro forma
provision for income taxes...... 477 538 409 212 321 913 445 334
<CAPTION>
1997
-----------------------------------------
JAN. 31 APRIL 30 JULY 31 OCT. 31
-------- --------- -------- --------
<S> <C> <C> <C> <C>
Net sales......................... $6,802 $9,236 $8,318 $8,820
Cost of sales..................... 2,882 3,750 3,370 3,496
Gross profit...................... 3,920 5,486 4,948 5,324
Operating expenses:
Selling.......................... 2,021 2,680 2,403 2,694
General and administrative....... 1,364 1,443 1,540 1,523
Relocation expense............... 0 0 0 0
Total operating expenses.......... 3,385 4,123 3,943 4,217
Income from operations............ 535 1,363 1,005 1,107
Other expense, net................ (85) (106) (104) (1)
Income before pro forma
provision for income taxes...... 450 1,257 901 1,106
</TABLE>
INFLATION
The Company does not believe its business and operations have been materially
affected by inflation.
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FACTORS THAT MAY AFFECT FUTURE RESULTS
The following is a discussion of certain factors that may affect the Company's
financial condition and results of operations.
SUBSTANTIAL DEPENDENCE UPON LAURA ASHLEY LICENSE
Net sales of Laura Ashley Eyewear accounted for 77.8%, 74.6% and 72.5% of the
Company's net sales in fiscal 1995, fiscal 1996, fiscal 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.
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. 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 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
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<PAGE>
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.
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 and fiscal 1997, approximately 39.9% and 45.8%, respectively,
of the Company's eyeglass frames were manufactured by companies in Japan, and
approximately 40.0% and 36.6%, respectively, of the Company's eyeglass frames
were manufactured by companies headquartered in Hong Kong that have
manufacturing facilities in China. Recent economic developments have resulted
in a stronger U.S. dollar and instability in the Asian-Pacific economies and
financial markets. These economic developments have resulted in improved profit
margins for the Company, as its cost of goods has decreased for frames purchased
in foreign currencies. There can be no assurance, however, that the Asian-
Pacific economic instability will not result in an adverse future impact on the
business operations of some of the Company's contract manufacturers, which could
force the Company to move the manufacture of some styles to other factories.
The resulting disruption to the Company's business could have a material adverse
effect on the Company's business, operating results and financial condition.
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.
SUCCESSFUL LAUNCH OF EDDIE BAUER EYEWEAR
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<PAGE>
Certain members of the Company's management and of its design and marketing
teams will devote considerable time towards introducing the Eddie Bauer Eyewear
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 7.7% of the
Company's net sales in fiscal 1995, fiscal 1996, and fiscal 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
23
<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, fiscal 1996,
and fiscal 1997 amounted to 11.6%, 12.1%, and 12.5% 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 brand names for design, manufacture and sale in their own stores. Luxottica,
one of the largest eyewear companies in the
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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.
MANAGEMENT OF GROWTH
The Company has grown rapidly in recent years, with net sales increasing from
$9.2 million in fiscal 1992 to $33.2 million in fiscal 1997, and the number of
employees increasing from 41 at November 1, 1992 to 102 at October 31, 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 March 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.
CONTROL BY DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company own approximately 54.8% of
the Company's outstanding shares. As a result, the directors and executive
officers control the Company and its operations, including the approval of
significant corporate transactions and the election of at least a majority of
the Company's Board of Directors and thus the policies of the Company. The
voting power of the directors and executive officers could also serve to
discourage potential acquirors from seeking to acquire control of the Company
through the purchase of the Common Stock, which might depress the price of the
Common Stock.
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NO DIVIDENDS ANTICIPATED
The Company does not currently intend to declare or pay any cash dividends and
intends to retain earnings, if any, for the future operation and expansion of
the Company's business.
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. 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." 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.
26
<PAGE>
ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SIGNATURE EYEWEAR, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
INDEPENDENT AUDITORS' REPORT 28
FINANCIAL STATEMENTS:
Balance Sheets, October 31, 1997 and 1996 (Exhibit A) 29
Statement of Income, Years Ended October 31, 1997, 1996 and
1995 (Exhibit B) 30
Statement of Changes in Stockholders' Equity, Years Ended
October 31, 1997, 1996 and 1995 (Exhibit C) 31
Statement of Cash Flows, Years Ended October 31, 1997, 1996
and 1995 (Exhibit D) 32-33
Notes to the Financial Statements 34-43
</TABLE>
27
<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. as of
October 31, 1997 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, 1997. 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. as of
October 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended October 31, 1997, in conformity
with generally accepted accounting principles.
Altschuler, Melvoin and Glasser LLP
Los Angeles, California
January 14, 1998
28
<PAGE>
Exhibit A
SIGNATURE EYEWEAR, INC.
Balance Sheets
October 31, 1997 and 1996
<TABLE>
<CAPTION>
Assets 1997 1996
----------- -----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 8,133,423 $ 214,399
Accounts receivable, trade (net of allowance for
doubtful accounts of $60,316 in 1997 and $45,000
in 1996) 4,013,518 3,849,750
Inventories 6,827,613 4,635,928
Deferred tax asset (Note 5) 221,000 0
Prepaid expenses and other current assets 768,368 288,859
----------- -----------
19,963,922 8,988,936
Property and Equipment (net of accumulated depreciation
and amortization--Note 2) 1,079,536 1,040,374
Deposits and Other Assets 131,857 263,747
----------- -----------
$21,175,315 $10,293,057
=========== ===========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable, trade $ 2,217,923 $ 2,571,945
Note payable, bank (Note 3) 0 3,100,000
Current portion of long-term debt (Note 4) 13,743 206,394
Income taxes payable (Note 5) 346,000 0
Accrued expenses and other current liabilities 1,281,844 1,328,698
----------- -----------
3,859,510 7,207,037
----------- -----------
Long-term Debt (Note 4) 1,211 156,883
Deferred Tax Liability (Note 5) 3,000 0
----------- -----------
4,211 156,883
----------- -----------
Commitments and Contingencies (Note 6)
Stockholders' Equity (Note 8):
Preferred stock 0 0
Common stock (5,268,027 shares issued and
outstanding at October 31, 1997 and 3,600,527
shares issued and outstanding at October 31, 1996) 9,400 7,732
Paid-in capital 15,190,389 413,029
Retained earnings 2,111,805 2,508,376
----------- -----------
17,311,594 2,929,137
----------- -----------
$21,175,315 $10,293,057
=========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
29
<PAGE>
Exhibit B
SIGNATURE EYEWEAR, INC.
Statement of Income
Years Ended October 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------- ----------- ------------ ------------
<S> <C> <C> <C>
Net Sales $33,175,733 $28,280,086 $23,570,513
Cost of Sales 13,498,250 11,931,299 10,988,106
----------- ----------- -----------
Gross Profit 19,677,483 16,348,787 12,582,407
----------- ----------- -----------
Operating Expenses:
Selling 9,796,768 8,328,296 6,509,752
General and administrative 5,870,460 5,611,874 4,035,432
Relocation expense 0 86,871 235,419
----------- ----------- -----------
15,667,228 14,027,041 10,780,603
----------- ----------- -----------
Income from Operations 4,010,255 2,321,746 1,801,804
----------- ----------- -----------
Other Income (Expense):
Interest expense (359,604) (338,373) (201,196)
Sundry income 63,152 29,196 35,448
----------- ----------- -----------
(296,452) (309,177) (165,748)
----------- ----------- -----------
Income before Income Taxes 3,713,803 2,012,569 1,636,056
Provision for Income Taxes (Note 5) 128,800 800 1,352
----------- ----------- -----------
Net Income $ 3,585,003 $ 2,011,769 $ 1,634,704
=========== =========== ===========
Pro Forma Income Per Share:
Income before provision for income taxes $ 3,713,803
Income tax provision 1,374,000
-----------
Net Income $ 2,339,803
===========
Net Income Per Common Share $ 0.61
===========
Common Shares Outstanding 3,829,822
===========
</TABLE>
The accompanying notes are an integral part of this statement.
30
<PAGE>
Exhibit C
SIGNATURE EYEWEAR, INC.
Statement of Changes in Stockholders' Equity
Years Ended October 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Common Stock
Number
of Shares Stated Paid-in Retained
Issued Value Capital Earnings Total
--------- ------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, November 1, 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 (Note 8) 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 0 0 0 3,585,003 3,585,003
Issuance of Common Stock 1,667,500 1,668 14,777,360 0 14,779,028
Dividends Paid 0 0 0 (3,981,574) (3,981,574)
--------- ------ ----------- ----------- -----------
Balance, October 31, 1997 5,268,027 $9,400 $15,190,389 $ 2,111,805 $17,311,594
========= ====== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
31
<PAGE>
Exhibit D
SIGNATURE EYEWEAR, INC.
Statement of Cash Flows
Years Ended October 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 3,585,003 $ 2,011,769 $ 1,634,704
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 446,395 249,013 218,956
Provision for bad debts 15,316 20,972 (26,952)
Stock compensation 0 300,000 0
Loss on abandonment of property and equipment 0 0 92,123
Deferred income taxes (218,000) 0 0
Changes in assets--(increase) decrease:
Accounts receivable, trade (179,084) (1,125,431) (851,423)
Inventories (2,191,685) (1,007,977) (1,134,544)
Prepaid expenses and other assets (347,619) (310,439) (142,549)
Changes in liabilities--increase (decrease):
Accounts payable, trade (354,022) 1,005,926 79,003
Income taxes payable 346,000 0 0
Accrued expenses and other current liabilities (46,854) 249,931 409,828
----------- ----------- -----------
Net cash provided by operating activities 1,055,450 1,393,764 279,146
----------- ----------- -----------
Cash Flows Used in Investing Activities:
Purchases of property and equipment (485,557) (655,074) (464,200)
----------- ----------- -----------
Cash Flows from Financing Activities:
Borrowings on note payable, bank 8,850,000 9,310,000 9,275,000
Repayments on note payable, bank (11,950,000) (7,965,000) (8,820,000)
Borrowings on long-term debt 500,000 0 525,000
Principal payments on long-term debt (848,323) (207,371) (66,936)
Principal payments on notes payable, stockholders 0 (362,500) (437,500)
Dividends paid (3,981,574) (1,328,144) (550,000)
Issuance of common stock 14,779,028 0 0
----------- ----------- -----------
Net cash provided by (used in) financing activities 7,349,131 (553,015) (74,436)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents 7,919,024 185,675 (259,490)
Cash and Cash Equivalents, Beginning of Year 214,399 28,724 288,214
----------- ----------- -----------
Cash and Cash Equivalents, End of Year $ 8,133,423 $ 214,399 $ 28,724
=========== =========== ===========
</TABLE>
32
<PAGE>
Exhibit D, Continued
SIGNATURE EYEWEAR, INC.
Statement of Cash Flows
Years Ended October 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Supplementary Disclosures of Cash Flow
Information:
Cash paid during the year for:
Interest $383,221 $337,575 $193,044
======== ======== ========
Income taxes $ 1,220 $ 800 $ 1,352
======== ======== ========
Supplemental Schedule of Noncash
Investing and Financing Activities:
Purchase of equipment financed by
capital lease obligations $ 0 $ 18,623 $ 0
======== ======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
33
<PAGE>
SIGNATURE EYEWEAR, INC.
Notes to the Financial Statements
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 September 1997, the Company issued 1,667,500 shares of its common stock
(including 67,500 shares upon exercise of an over-allotment option), in its
initial public offering (the "IPO"). Proceeds from the offering, net of
underwriting discounts and other related expenses totalling $1,895,972, amounted
to $14,779,028.
A summary of significant accounting policies is as follows:
USE OF ESTIMATES--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 revenue and expenses during
the reporting period. Actual results could differ from those estimates.
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. Depreciation and amortization of property and
equipment for tax reporting purposes are computed using various statutory
methods as provided in the Internal Revenue Code.
INCOME TAXES--Through September 15, 1997, the Company had been treated as an
S corporation under the Internal Revenue Code, whereby income or loss of the
Company was allocated to its stockholders, by inclusion in their respective
individual income tax returns. Accordingly, no liability or provision for
federal income taxes was reflected in the accompanying financial statements,
nor were any deferred taxes provided for temporary differences between tax
and financial reporting. Provision for state income taxes had been provided
based upon the applicable state income tax rates, net of income tax credits
and deductions.
34
<PAGE>
SIGNATURE EYEWEAR, INC.
Notes to the Financial Statements
NOTE 1--NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
- ---------------------------------------------------------------------------
Effective September 16, 1997, the Company's S corporation status was
terminated upon its public offering. As a result of this termination, the
Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes", which requires the use of the "liability
method" of accounting for income taxes. Accordingly, deferred income taxes
are provided for temporary differences between financial statement and tax
bases of certain assets and liabilities. Deferred income tax assets and
liabilities are recognized for the expected future tax consequences of events
that have been included in the financial statements or tax returns. Under
this method, deferred income tax assets and liabilities are determined based
on the financial statement and tax bases of assets and liabilities (Note 5).
CASH EQUIVALENTS--The Company considers all highly liquid debt instruments
with an original maturity of three months or less to be cash equivalents.
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, "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 this Statement. Under provisions of the Statement, impairment
losses are 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--Derivative financial instruments are used by the Company in the
management of foreign currency exposure. Gains and losses on contracts which
hedge specific foreign currency denominated commitments relating to the
purchase of inventory are deferred and recognized in the basis of the
transaction when completed. As of October 31, 1997, the Company had no-off
balance sheet forward commitments to purchase foreign currency related to the
purchase of inventory. As of October 31, 1996, the Company had off-balance
sheet forward commitments to purchase Japanese Yen in the amount of
$1,459,457 related to the purchase of inventory, all of which matured in less
than three months.
35
<PAGE>
SIGNATURE EYEWEAR, INC.
Notes to the Financial Statements
NOTE 1--NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
- ---------------------------------------------------------------------------
PRO FORMA NET INCOME--The 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 IPO.
The difference between the pro forma income tax rates utilized and federal
statutory rate of 34% relates primarily to state income taxes (approximately
6%, net of federal tax benefit).
PRO FORMA NET INCOME PER SHARE--Historical net income per common share is not
presented because it is not indicative of the ongoing entity. Pro forma net
income per common share has been computed by dividing pro forma net income by
the weighted average number of shares of common stock outstanding during the
period.
EARNINGS PER SHARE--Statement of Financial Accounting Standards No. 128 is
effective for financial statements issued for the periods ending after
December 15, 1997. This Statement establishes standards for computing and
presenting earnings per share by replacing the presentation of primary
earnings per share with a presentation of basic earnings per share. It also
requires the dual presentation of basic and diluted earnings per share on the
face of the income statement. The Company intends to adopt Statement 128
during the first quarter of fiscal year 1998. The Company has not determined
the effect of adopting this Statement.
REPORTING COMPREHENSIVE INCOME--Statement of Financial Accounting Standards
No. 130 is effective for fiscal years beginning after December 15, 1997.
This Statement establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. The Company has not determined when it will adopt the
Statement. However, adoption of the Statement is not expected to have a
significant impact because the Company currently does not have any items of
other comprehensive income in its financial statements.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION--
Statement of Financial Accounting Standards No. 131 is effective for
financial statements for periods beginning after December 15, 1997. The
Statement establishes standards for the way that companies report information
about operating segments in interim financial reports issued to shareholders.
The Company has not determined when this Statement will be adopted. Adoption
of Statement No. 131 is not expected to have a significant impact on the
Company because the Company currently operates in only one industry segment.
36
<PAGE>
SIGNATURE EYEWEAR, INC.
Notes to the Financial Statements
NOTE 2--PROPERTY AND EQUIPMENT
- ------------------------------
Property and equipment (stated at cost) as of October 31, 1997 and 1996
consisted of the following:
<TABLE>
<CAPTION>
Periods of
Depreciation 1997 1996
------------- ---------- ----------
<S> <C> <C> <C>
Office furniture and fixtures 7 years $ 430,742 $ 372,368
Computer equipment 3 to 7 years 717,729 574,510
Software 3 years 572,195 317,536
Vehicles 7 years 153,141 153,141
Leasehold improvements Term of lease 191,346 164,685
Machinery and equipment held under
capitalized leases 5 years 140,438 137,857
---------- ----------
2,205,591 1,720,097
Less accumulated depreciation and amortization
(including amortization on capitalized
leases of $112,949 in 1997 and $94,693 in 1996) 1,126,055 679,723
---------- ----------
Net book value $1,079,536 $1,040,374
========== ==========
</TABLE>
Provision for depreciation and amortization charged to operations for the years
ended October 31, 1997, 1996, and 1995 amounted to $446,395, $232,784 and
$154,042, respectively (including capitalized lease amortization of $18,256,
$26,587 and $17,484, respectively).
NOTE 3--NOTE PAYABLE, BANK
- --------------------------
At October 31, 1997, the Company had available, pursuant to a revolving Credit
Agreement (which expires in March 2000) (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. At the Company's option,
interest under the Credit Agreement may be based on the London Interbank Offered
Rate ("LIBOR"), plus 2.0% or at the Bank's prime rate. At October 31, 1997, the
Company had no outstanding borrowings under the Credit Agreement. At October
31, 1996, the Company had outstanding borrowings under a prior credit agreement
with the Bank of $3,100,000, consisting of $2,500,000 under the LIBOR option
(interest rates ranged from 8.125% to 8.378%) and $600,000 under the prime rate
option (interest at 9.00%). The weighted average interest rate was 8.23% for
the year ended October 31, 1996.
The Credit Agreement contains various covenants including requirements for the
maintenance of minimum tangible net worth (as defined) and certain financial
ratios. The Company was in compliance with these covenants at October 31, 1997.
37
<PAGE>
SIGNATURE EYEWEAR, INC.
Notes to the Financial Statements
NOTE 4--LONG-TERM DEBT
- ----------------------
Long-term debt at October 31, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
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 ) $ 0 $233,333
Note payable, bank (secured by certain vehicles,
payable in monthly installments of $3,472, plus
interest at 8.75% per annum) 0 83,334
Liability for transportation equipment under a
purchase agreement (interest at 8.9%) 6,941 13,306
Liability for machinery and equipment under various
capitalized lease agreements (interest rates ranging
from approximately 12% to 21%) 8,013 33,304
-------- --------
14,954 363,277
Less current portion 13,743 206,394
-------- --------
Long-term portion $ 1,211 $156,883
======== ========
</TABLE>
The long-term portion as of October 31, 1997 of the aforementioned long-term
debt is payable in fiscal 1999.
NOTE 5--INCOME TAXES
- --------------------
Through the period ended September 15, 1997 and for the years ended October 31,
1996 and 1995, the Company had been treated as an S corporation under the
Internal Revenue Code and therefore no provisions for income taxes were
reflected for the Company in the financial statements for such periods (see Note
1).
38
<PAGE>
SIGNATURE EYEWEAR, INC.
Notes to the Financial Statements
NOTE 5--INCOME TAXES, CONTINUED
- -------------------------------
Income tax expense (benefit) consisted of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----- ------
<S> <C> <C> <C>
Current:
Federal $ 270,970 $ 0 $ 0
State 75,830 800 1,352
Deferred (48,000) 0 0
Deferred taxes relating to change
in tax status (170,000) 0 0
--------- ----- ------
$ 128,800 $ 800 $1,352
========= ===== ======
</TABLE>
At October 31, 1997, the Company's net deferred tax asset and liability
consisted of the following:
<TABLE>
<S> <C>
Current:
Deferred tax assets:
Allowance for doubtful accounts $ 26,000
Capitalization of inventory costs 157,000
State deferred tax liabilities 38,000
--------
Net current deferred tax asset $221,000
========
Long-term:
Deferred tax liability--excess depreciation
taken for income tax reporting purposes $ 20,000
Deferred tax asset--state deferred tax liabilities 17,000
--------
Net long-term deferred tax liability $ 3,000
========
</TABLE>
A reconciliation of the provision for income taxes and the amount computed by
applying the federal statutory rate to income before income tax expense is as
follows:
<TABLE>
<S> <C>
Computed income tax expense at federal statutory rate $ 1,263,000
Increase (reduction) resulting from:
State income taxes 75,000
Effect of S corporation earnings not taxed (1,022,000)
Deferred taxes relating to change in tax status (170,000)
All other (17,200)
-----------
$ 128,800
===========
</TABLE>
39
<PAGE>
SIGNATURE EYEWEAR, INC.
Notes to the Financial Statements
NOTE 6--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 increasing 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, 1997 are
as follows:
<TABLE>
<CAPTION>
October 31, Amount
------------- ----------
<S> <C>
1998 $ 281,000
1999 293,000
2000 320,000
2001 348,000
2002 348,000
Thereafter 899,000
----------
$2,489,000
==========
</TABLE>
Total rent expense for the years ended October 31, 1997, 1996 and 1995 amounted
to $289,198, $254,091 and $201,333, respectively.
LICENSE AGREEMENTS--The Company has a license agreement with Laura Ashley
Manufacturing, B.V., which grants the Company certain rights to use "Laura
Ashley" trademarks 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 "Jean Nate" trademarks 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 through 2005 (as defined) thereafter, provided that the Company is
in compliance in all material respects with the license agreement and specified
minimum sales are achieved.
The Company has a license agreement with Hart Schaffner & Marx, which grants the
Company certain rights to use "Hart Schaffner & Marx" trademarks 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 and the Company is not in default under the license
agreement.
40
<PAGE>
SIGNATURE EYEWEAR, INC.
Notes to the Financial Statements
NOTE 6--COMMITMENTS, CONTINUED
- ------------------------------
The Company has a license agreement with Eddie Bauer, Inc., which grants the
Company certain rights to use "Eddie Bauer" trademarks in connection with the
distribution, marketing and sale of Eddie Bauer eyewear products. The license
period extends through December 31, 2002, with two automatic three year renewal
terms (as defined) thereafter, provided that specified minimum sales are
achieved and the Company is not in material default under the license agreement.
Total minimum royalties under all of the Company's license agreements are as
follows:
<TABLE>
<CAPTION>
October 31, Amount
------------- ----------
<S> <C>
1998 $1,133,750
1999 1,261,250
2000 1,388,750
2001 870,000
2002 675,000
Thereafter 112,500
----------
$5,441,250
==========
</TABLE>
Total royalty expense charged to operations for the years ended October 31,
1997, 1996 and 1995 amounted to $1,732,873, $1,459,559 and $1,171,091,
respectively.
EMPLOYMENT AGREEMENTS--In connection with the IPO, key executive officers each
entered into an employment agreement with the Company. Pursuant to those
agreements, these officers have agreed to render services until October 31,
2000, and will be entitled to salaries, as specified, during the term of their
contracts, subject to increases from time to time as approved by the Board of
Directors or Compensation Committee. The aggregate commitment for future
salaries at October 31, 1997, excluding bonuses, was approximately $2,670,000.
NOTE 7--STOCK WARRANTS AND OPTIONS
- ----------------------------------
In connection with the IPO, in September 1997 the Company sold to Fechtor,
Detwiler & Co., Inc. and Van Kasper Company, the managing underwriters of the
offering (the "Underwriters"), warrants to purchase 180,000 shares of common
stock for $12 per share. The warrants are exercisable during the period
September 16, 1998 through September 16, 2002.
41
<PAGE>
SIGNATURE EYEWEAR, INC.
Notes to the Financial Statements
NOTE 7--STOCK WARRANTS AND OPTIONS, CONTINUED
- ---------------------------------------------
The Company adopted a Stock Plan (the "Plan") in May 1997. Pursuant to the
Plan, a maximum of 600,000 shares of common stock may be issued from time to
time to directors, officers, employees and consultants pursuant to awards such
as stock options and restricted stock sales. The Plan terminates in 2007. On
September 11, 1997, the Company granted 10-year options under the Plan to
purchase an aggregate of 454,250 shares of common stock for $10 per share. The
options cannot be exercised before April 1, 1998. No compensation expense is
required to be recorded over the respective service periods required of the
optionees, because the exercise price was not less than the fair market value of
the common stock on the date of grant.
The Company has adopted only the disclosure provisions of SFAS 123, "Accounting
for Stock-Based Compensation" and will account for its stock options in
accordance with APB Opinion 25, "Accounting for Stock Issued to Employees".
Because the Company's common stock has been publicly traded only since September
11, 1997, management has no historical experience with respect to the expected
life of stock options or the expected volatility of the Company's common stock
price and, therefore, is unable to determine the fair value of the Company's
stock options using option pricing methods. Accordingly, the Company is unable
to determine the pro forma disclosures required by SFAS 123.
NOTE 8--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, and to effect an 800 to 1 split of
the Company's common stock. 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 stockholder approval. No shares of the preferred stock were issued as
of October 31, 1997.
NOTE 9--RELATED PARTY TRANSACTIONS
- ----------------------------------
PURCHASES FROM RELATED PARTY--Two executive officers of the Company are
officers, directors and significant shareholders of Brandmark, Inc., a
corporation which had a license from Laura Ashley to produce timepieces bearing
the Laura Ashley trademark. In fiscal 1997 and 1996, the Company purchased from
Brandmark, Inc. an aggregate of $516,575 and $362,000, respectively, of
timepieces bearing the Laura Ashley trademark, which amounts are included in
selling expenses for those years. In December 1997, Brandmark, Inc. ceased to
have a license to produce timepieces bearing the Laura Ashley trademark.
42
<PAGE>
SIGNATURE EYEWEAR, INC.
Notes to the Financial Statements
NOTE 9--RELATED PARTY TRANSACTIONS, CONTINUED
- ---------------------------------------------
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, 1997 and 1996.
43
<PAGE>
ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10--DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors and executive officers of the Registrant will
appear in the proxy statement for the 1998 Annual Meeting of Shareholders, and
is incorporated herein by reference.
ITEM 11--EXECUTIVE COMPENSATION
Information regarding executive compensation will appear in the proxy
statement for the 1998 Annual Meeting of Shareholders, and is incorporated
herein by reference.
ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management will appear in the proxy statement for the 1998 Annual Meeting of
Shareholders, and is incorporated herein by reference.
ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions will
appear in the proxy statement for the 1998 Annual Meeting of Shareholders, and
is incorporated herein by reference.
PART IV
ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents Filed As Part of Report:
1. Financial Statements:
Independent Auditor's Report;
Balance Sheets at October 31, 1996 and 1997;
Statement of Income for the years ended October 31, 1995, 1996
and 1997;
Statement of Changes in Stockholders' Equity for the years
ended October 31, 1995, 1996 and 1997; and
Statement of Cash Flows for the years ended October 31, 1995,
1996 and 1997.
44
<PAGE>
2. Financial Statement Schedules:
II - Valuation and Qualifying Accounts
3. Exhibits:
See attached Exhibit List.
(b) Reports on Form 8-K:
Report on Form 8-K dated October 7, 1997 reporting under Item 5
thereof Registrant's press release dated October 7, 1997
disclosing third quarter results of operations.
45
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS FORM 10-K TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF LOS
ANGELES, STATE OF CALIFORNIA, ON JANUARY 23, 1998.
Signature Eyewear, Inc.
By: /s/ Julie Heldman
---------------------------------------
JULIE HELDMAN,
CO-CHAIRMAN OF THE BOARD AND PRESIDENT
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES STATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/S/ BERNARD WEISS Co-Chairman of the Board January 23, 1998
- ---------------------------- and Chief Executive
BERNARD WEISS Officer
/S/ JULIE HELDMAN Co-Chairman of the Board January 23, 1998
- ---------------------------- and President
JULIE HELDMAN
/S/ MICHAEL PRINCE Chief Financial Officer and January 23, 1998
- ---------------------------- Director (Principal
MICHAEL PRINCE Financial and Accounting
Officer)
/S/ DANIEL WARREN Director January 24, 1998
- ----------------------------
DANIEL WARREN
/S/ MAURICE BUCHSBAUM Director January 26, 1998
- ----------------------------
MAURICE BUCHSBAUM
</TABLE>
46
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------ -------------------
<S> <C>
3.1 Restated Articles of Incorporation of Registrant. (1)
3.2 Amended and Restated Bylaws of Registrant. (1)
4.1 Specimen Stock Certificate of Common Stock of Registrant. (1)
10.1 1997 Stock Plan. (1)
10.2 Form of Registrant's Stock Option Agreement (Non-Statutory Stock Option). (1)
10.3 Form of Indemnification Agreement for Directors and Officers. (1)
10.4 Tax Indemnification Agreement among Registrant and the Existing Shareholders. (1)
10.5 License Agreement, dated May 28, 1991, between Laura Ashley Manufacturing B.V. and Registrant,
as amended. (1)+
10.6 Lease Agreement, dated March 23, 1995, between the Registrant and Roxbury Property Management,
and Guaranty of Lease, dated March 23, 1995, between Julie Heldman and Bernard Weiss and
Roxbury Property Management. (1)
10.7 Credit Agreement, dated as of October 27, 1997, between Registrant and City National Bank.
10.8 Employment Agreement between the Registrant and Bernard Weiss. (1)
10.9 Employment Agreement between the Registrant and Julie Heldman. (1)
10.10 Employment Agreement between the Registrant and Michael Prince. (1)
10.11 Employment Agreement between the Registrant and Robert Fried. (1)
10.12 Employment Agreement between the Registrant and Robert Zeichick. (1)
10.13 License Agreement, dated January 12, 1996, between Hart Schaffner & Marx and the Registrant. (1) +
10.14 License Agreement, dated June 2, 1995, between Revlon Consumer Products Corporation and the
Registrant, as amended. (1)+
10.15 License Agreement, dated June 24, 1997, between Eddie Bauer, Inc. and the Registrant. (1) +
10.16 Form of Representatives' Warrant (1)
27.1 Financial Data Schedule.
99.1 Schedule II--Valuation and Qualifying Accounts.
</TABLE>
__________
+ Certain portions of this exhibit have been omitted and filed separately with
the Securities and Exchange Commission pursuant to an order granting
confidential treatment pursuant to Rule 406 of the General Rules and
Regulations under the Securities Act of 1933.
(1) Incorporated by reference to Registrant's Registration Statement on Form S-1
(SEC Registration No. 333-30017), filed with the Commission on June 25,
1997, as amended.
47
<PAGE>
EXHIBIT 10.7
CREDIT AGREEMENT
This Credit Agreement (the "Agreement"), dated as of October 27, 1997 is
between City National Bank("CNB") and SIGNATURE EYEWEAR, INC., a California
Corporation ("Borrower").
1. DEFINITIONS. As used in this Agreement, these terms have the following
meanings:
"ACCOUNT" or "ACCOUNTS" mean any right to payment for goods sold or leased or
for services rendered which is not evidenced by an instrument or chattel paper,
whether or not it has been earned by performance.
"AFFILIATE" means any Person directly or indirectly controlling, controlled
by, or under common control with, Borrower, and includes any employee stock
ownership plan of Borrower or an Affiliate. "Control" means the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of that Person, whether through the ownership of voting
securities, by contract or otherwise.
"BUSINESS DAY" means a day that CNB's Head Office is open and conducts a
substantial portion of its business.
"CASH FLOW FROM OPERATIONS" will be determined on a consolidated basis for
Borrower and the Subsidiaries and means the sum of (a) net income after taxes
and before extraordinary items in accordance with GAAP earned over the twelve
month period ending on the date of determination, plus (b) amortization of
intangible assets, plus (c) interest expense, plus (d) depreciation expenses
during the twelve month period ending on the date of determination.
"CODE" means the California Uniform Commercial Code, except where the Uniform
Commercial Code of another state governs the perfection of a security interest
in Collateral located in that state.
"COLLATERAL" means the property, if any, securing the Obligations.
"CURRENT ASSETS" will be determined on a consolidated basis for Borrower and the
Subsidiaries in accordance with GAAP excluding, however, loans to stockholders,
management or employees, amounts due from Subsidiaries or Affiliates, deferred
costs, and other intangible assets.
"CURRENT LIABILITIES" will be determined on a consolidated basis for Borrower
and the Subsidiaries in accordance with GAAP and will include without limitation
(a) all payments on Subordinated Debt required to be made within one (1) year
after the date on which the determination is made; and (b) all indebtedness
payable to stockholders, Affiliates, Subsidiaries or officers regardless of
maturity, unless such indebtedness has been subordinated, on terms satisfactory
to CNB, to the Obligations.
"DEBT" means, at any date, the aggregate amount of, without duplication, (a) all
obligations of Borrower or any Subsidiary for borrowed money; (b) all
obligations of Borrower or any Subsidiary evidenced by bonds, debentures, notes
or other similar instruments; (c) all obligations of Borrower or any Subsidiary
to pay the deferred purchase price of property or services: (d) all capitalized
lease obligations of Borrower or any Subsidiary: (e) all obligations or
liabilities of others secured by a lien on any asset of Borrower or any
Subsidiary, whether or not such obligation or liability is assumed; (f) all
obligations guaranteed by Borrower or any Subsidiary; (g) all obligations of
Borrower or any Subsidiary, direct or indirect, for letters of credit; and (h)
any other obligations or liabilities which are required by generally accepted
accounting principles to be shown as debt on the balance sheet of Borrower or
any Subsidiary.
"DEBT SERVICE" means (a) the aggregate amount of Current Maturity of Long Term
Debt plus (b) all interest incurred on borrowed money during the twelve month
period ending on the date of determination. "Current Maturity of Long Term Debt"
means that portion of Borrower's consolidated long term liabilities, determined
in accordance with GAAP, which shall, by the terms thereof, become due and
payable within one (1) year following the date of the balance sheet upon which
such calculations are based.
"EUROCURRENCY RESERVE REQUIREMENT" means the aggregate (without duplication) of
the rates (expressed as a decimal) of reserves (including, without limitation,
any basic, marginal, supplemental, or emergency reserves) that are required to
be maintained by banks during the Interest Period under any regulations of the
Board of Governors of the Federal Reserve System, or any other governmental
authority having jurisdiction with respect thereto, applicable to funding based
on so-called "Eurocurrency Liabilities", including Regulation D (12 CFR 204).
1
<PAGE>
"GAAP" means generally accepted accounting principles and practices,
consistently applied.
"INTEREST PERIOD" means the period commencing on the date a LIBOR Loan is made
(including the date a Prime Loan is converted to a LIBOR Loan, or a LIBOR Loan
is renewed as a LIBOR Loan, which, in the latter case, will be the last day of
the expiring Interest Period) and ending one (1), two (2), three (3), or six (6)
months thereafter, as selected by the Borrower; provided, however, (a) any
Interest Period that would end on a day not a Business Day, will extend to the
next Business Day; and (b) no Interest Period may extend beyond the Termination
Date.
"INVENTORY" means goods held for sale or lease in the ordinary course of
business, work in process and any and all raw materials used in connection with
the foregoing.
"LETTERS OF CREDIT" means any Commercial Letters of Credit and Standby Letters
of Credit issued under this Agreement.
"LIBOR BASE RATE" means the British Banker's Association definition of the
London InterBank Offered Rates as made available by Telerate Monitor on Telerate
Screen 3750, or such other information service available to CNB, for the
applicable Interest Period for the LIBOR Loan selected by Borrower and as quoted
by CNB on the Business Day Borrower requests a LIBOR Loan.
"LIBOR INTEREST RATE" means the rate per year (rounded upward to the next
one-sixteenth (1/16th) of one percent (0.0625%), if necessary) determined by CNB
to be the quotient of (a) the LIBOR Base Rate divided by (b) one minus the
Eurocurrency Reserve Requirement for the Interest Period; which is expressed by
the following formula:
LIBOR BASE RATE
----------------------------------
1-Eurocurrency Reserve Requirement
"LIBOR LOAN" means any Loan tied to the LIBOR Interest Rate.
"LOAN" or "LOANS" means one or more of the Loans extended by CNB to Borrower
under Section 2.
"LOAN DOCUMENTS" means, individually and collectively, this Agreement, any Note,
guaranty, security or pledge agreement, financing statement and all other
contracts, instruments, addenda and documents executed in connection with or
related to the extension(s) of credit, and any Collateral therefor, which are
the subject of this Agreement.
"NOTES" means the Notes referenced in Section 2.
"OBLIGATIONS" means all present and future liabilities and obligations of
Borrower to CNB hereunder and all other liabilities and obligations of Borrower
to CNB of every kind, now existing or hereafter owing, matured or unmatured,
direct or indirect, absolute or contingent, joint or several, including any
extensions and renewals thereof and substitutions therefor.
"PERSON" means any individual or entity.
"POTENTIAL EVENT OF DEFAULT" means any condition that with the giving of notice
or passage of time or both would, unless cured or waived, become an Event of
Default.
"PRIME RATE" means the rate most recently announced by CNB at its principal
office in Beverly Hills, California as its "Prime Rate." Any change in the
interest rate resulting from a change in the Prime Rate will be effective on the
day on which each change in the Prime Rate is announced by CNB.
"QUICK ASSETS" means the sum of cash, plus cash equivalents, plus accounts
receivable, plus securities classified as short-term marketable securities
according to GAAP, as such items appear on Borrower's consolidated balance
sheet, determined in accordance with GAAP.
"SUBORDINATED DEBT" means Debt of Borrower or any Subsidiary, the repayment of
which is subordinated to the Obligations on terms satisfactory to CNB.
"SUBSIDIARY" means any corporation, the majority of whose voting shares are at
any time owned, directly or indirectly by Borrower and/or by one or more
Subsidiaries.
2
<PAGE>
"TANGIBLE NET WORTH" means the total of all assets appearing on a balance sheet
prepared in accordance with GAAP for Borrower and the Subsidiaries on a
consolidated basis, minus (a) all intangible assets, including, without
limitation, unamortized debt discount, Affiliate, employee and officer
receivables or advances, goodwill, research and development costs, patents,
trademarks, the excess of purchase price over underlying values of acquired
companies, any covenants not to compete, deferred charges, copyrights,
franchises and appraisal surplus; minus (b) all obligations which are required
by GAAP to be reflected as a liability on the consolidated balance sheet of
Borrower and the Subsidiaries; minus (c) the amount, if any, at which shares of
stock of a non-wholly owned Subsidiary appear on the asset side of Borrower's
consolidated balance sheet, as determined in accordance with GAAP; minus (d)
minority interests; and minus (e) deferred income and reserves not otherwise
reflected as a liability on the consolidated balance sheet of Borrower and the
Subsidiaries.
"TERMINATION DATE" means March 31, 2000 unless the Revolving Credit Commitment
is renewed for an additional term by CNB giving Borrower prior written notice of
such renewal, in which event the Termination Date will mean the renewed
maturity date of the Revolving Credit COmmitment set forth in the notice.
Notwithstanding the foregoing, CNB may, at its option, terminate this Agreement
pursuant to Section 7.3; the date of any such termination will become the
Termination Date as that term is used in this Agreement.
"TOTAL SENIOR LIABILITIES" means, as of any date of determination, the amount of
all obligations that should be reflected as a liability on a consolidated
balance sheet of Borrower and the Subsidiaries prepared in accordance with GAAP,
less Subordinated Debt.
2. LOANS.
2.1 REVOLVING CREDIT LOANS. CNB agrees to make loans ("Revolving Credit Loans")
to Borrower up to, but not including, the Termination Date, at Borrower's
request, up to the amount of Five Million Dollars ($5,000,000.00)(the "Revolving
Credit Commitment"). The Revolving Credit Loans may be repaid and reborrowed at
any time up to the Termination Date; provided, however, that the aggregate
unpaid principal amount of outstanding Revolving Credit Loans will at no time
exceed the Revolving Credit Commitment. All Revolving Credit Loans will be paid
by Borrower to CNB on the Termination Date. The Revolving Credit Loans will be
evidenced by a promissory note ("Revolving Credit Note") in the form attached
hereto as Exhibit "A."
2.1.1 INTEREST ON REVOLVING CREDIT LOANS.
Each Revolving Credit Loan will bear interest from disbursement until due
(whether at stated maturity, by acceleration or otherwise) at a rate equal to,
at Borrower's option, either (a) for a LIBOR Revolving Loan, the LIBOR Interest
Rate plus two percent (2.0%) per annum, or (b) for a Prime Revolving Loan, the
fluctuating Prime Rate per annum. Interest on the Revolving Credit Loans will
accrue daily and be payable (a) if a Prime Revolving Loan, monthly, in arrears,
on the first (1st) day of each month, commencing on the first such date
following disbursement; (b) if a LIBOR Revolving Loan, (i) at the same time as
interest payments are due on Prime Revolving Loans, (ii) on the last day of each
Interest Period, and (iii) upon any prepayment of any LIBOR Revolving Loan (to
the extent accrued on the amount prepaid); (c) on the date a Prime Revolving
Loan is converted to a LIBOR Revolving Loan; and (d) at the Termination Date. A
Revolving Credit Loan tied to the LIBOR Interest Rate is called a "LIBOR"
Revolving Loan", and a Revolving Credit Loan tied to the Prime Rate is called a
"Prime Revolving Loan." A Revolving Credit Loan will be a Prime Revolving Loan
any time it is not a LIBOR Revolving Loan.
2.1.2 PROCEDURE FOR REVOLVING CREDIT LOANS. Each Revolving Credit Loan may
be made by CNB at the oral or written request of anyone who is authorized in
writing by Borrower to request Revolving Credit Loans until written notice of
the revocation of such authority is received by CNB.
2.2 LIBOR LOAN TERMS AND CONDITIONS
2.2.1 PROCEDURE FOR LIBOR LOANS. Borrower may request that a Loan be a
LIBOR Loan, if herein allowed (including conversion of a Prime Loan to a LIBOR
Loan, or continuation of a LIBOR Loan as a LIBOR Loan upon the expiration of the
Interest Period). Borrower's request will be irrevocable, and will be made to
CNB, using the "Notice of Borrowing" form attached hereto as Exhibit "B", no
earlier than two (2) Business Days before and no later than 1:00 p.m. Pacific
Time on the date the LIBOR Loan is to be made, and will specify the Interest
Period, the amount of the LIBOR Loan, and such other information as CNB
requests. If Borrower fails to select a LIBOR Loan in accordance herewith, the
Loan will be a Prime Loan, and any LIBOR Loan will be deemed a Prime Loan upon
expiration of the Interest Period.
3
<PAGE>
2.2.2 AVAILABILITY OF LIBOR LOANS. Notwithstanding anything herein to
the contrary, each LIBOR Loan must be in the minimum amount of $500,000.00 and
increments of $500,000.00 Borrower may have Prime Loans and LIBOR Loans
outstanding simultaneously.
2.2.3 PREPAYMENT OF PRINCIPAL. Borrower may not make a partial principal
prepayment on a LIBOR Loan. Borrower may prepay the full outstanding principal
balance on a LIBOR Loan prior to the end of the Interest Period, provided,
however, that such prepayment is accompanied a fee ("LIBOR Prepayment Fee")
equal to the amount, if any, by which (a) the additional interest which would
have been earned by CNB had the LIBOR Loan not been prepaid exceeds (b) the
interest which would have been recoverable by CNB by placing the amount of the
LIBOR Loan on deposit in the LIBOR market for a period starting on the date on
which it was prepaid and ending on the last day of the applicable Interest
Period. CNB's calculation of the Libor Prepayment Fee will be conclusive absent
manifest error.
2.2.4 SUSPENSION OF LIBOR LOANS. In the event CNB, on any Business Day,
is unable to determine the LIBOR Base Rate applicable for a new, continued, or
converted LIBOR Loan for any reason, or any law, regulation, or governmental
order, rule or determination, makes it unlawful for CNB to make a LIBOR Loan,
Borrower's right to select LIBOR Loans will be suspended until CNB is again able
to determine the LIBOR Base Rate or make LIBOR Loans, as the case may be.
During such suspension, new Loans, outstanding Prime Loans and LIBOR Loans whose
Interest Periods terminate may only be Prime Loans.
2.3 LOANS AND PAYMENTS. All payments will be in United States Dollars and in
immediately available funds. Interest will be computed on the basis of a 360-day
year, actual days elapsed. All payments of principal, interest, fees and other
charges on the Loans will be made by charging, and Borrower hereby authorizes
CNB to charge, Borrower's demand deposit account at CNB for the amount of each
such payment. Borrower must have sufficient collected balances in its demand
deposit account with CNB in order that each such payment will be available when
due. CNB is authorized to note the date, amount and interest rate of each Loan
and each payment of principal and interest on CNB's books and records, which
notations will constitute presumptive evidence of the accuracy of the
information noted. Any Loan will be conclusively presumed to have been made to
or for the benefit of Borrower when CNB, in its sole discretion, believes that
the request therefor has been made by authorized persons (whether in fact that
is the case), or when the Loan is deposited to the credit of Borrower's account
with CNB, regardless of whether any Person other than Borrower may have
authority to draw against such account.
2.4 DEFAULT INTEREST RATE. From and after written notice by CNB to Borrower of
the occurrence of an Event of Default (and without constituting a waiver of such
Event of Default), the Loans (and interest thereon to the extent permitted by
law) will bear additional interest at a fluctuating rate equal to three percent
(3.0%) per annum higher than the interest rate stated in Sections 2.1.1 until
the Event of Default has been cured; provided, however, for purposes of this
Section, a LIBOR Loan will be treated as a Prime Loan upon the termination of
the Interest Period. All interest provided for in this Section will be
compounded monthly and payable on demand.
3. CONDITIONS PRECEDENT.
3.1 EXTENSION OF CREDIT. The obligation of CNB to make any Loan or other
extension of credit hereunder is subject to CNB's receipt of each of the
following, in form and substance satisfactory to CNB, and duly executed as
required by CNB:
3.1.1 All Loan Documents required by CNB, including but not limited to such
documents necessary to perfect CNB's first priority security interest in the
Collateral, and evidence of such perfection;
3.1.2 Where Borrower or any party signing a Loan Document is a business
entity, such authorization documents as CNB may require, in form and substance
satisfactory to CNB.
3.2 CONDITIONS TO EACH EXTENSION OF ALL LOANS. The obligation of CNB to make
any Loan or other extension of credit hereunder will be subject to the
fulfillment of each of the following conditions to CNB's satisfaction:
3.2.1 If a Commerical Letter of Credit is to be issued, CNB will have
received an Irrevocable Letter of Credit Application and Security Agreement,
duly executed and delivered by Borrower, in the form customarily used by CNB;
3.2.2 If a Standby Letter of Credit is to be issued, CNB will have
received an Irrevocable Standby Letter of Credit Application and Letter of
Credit Agreement, duly executed and delivered by Borrower, in the form
customarily used by CNB;
3.2.3 The representations and warranties of Borrower set forth in Section
4 of this Agreement and in all other Loan
4
<PAGE>
Documents will be true and correct on the date of the making of each Loan or
other extension of credit with the same effect as though such representations
and warranties had been made on and as of such date;
3.2.4 There will be no Event of Default or Potential Event of Default
under this Agreement or any of the Loan Documents; and
3.2.5 All other documents and legal matters in connection with the
transactions described in this Agreement will be satisfactory in form and
substance to CNB.
4. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants (and each
request for a Loan or other extension of credit will be deemed a representation
and warranty made on the date of such request) that:
4.1 CORPORATE EXISTENCE, POWER AND AUTHORIZATION. Borrower and each Subsidiary
is duly organized, validly existing and in good standing under the laws of the
state of its organization, and is duly qualified to conduct business in each
jurisdiction in which its business is conducted. The execution, delivery and
performance of all Loan Documents executed by Borrower are within Borrower's
powers and have been duly authorized by the Board of Directors of Borrower and
do not require any consent or approval of the stockholders of Borrower.
4.2 BINDING AGREEMENT. The Loan Documents constitute the valid and legally
binding obligations of Borrower, enforceable against Borrower in accordance
with their terms.
4.3 ANCILLARY DOCUMENTS. To the extent that any security agreement,
subordination agreement or Guaranty is required to be executed by a Subsidiary
or Affiliate, the representations and warranties set forth in Sections 4.1 and
4.2 are also true and correct with respect to any such Subsidiary or Affiliate
and such document.
4.4 OTHER AGREEMENTS. The execution and performance of the Loan Documents will
not violate any provision of law or regulation (including, without limitation,
Regulations X and U of the Federal Reserve Board) or any order of any
governmental authority, court, or arbitration board or the Articles of
Incorporation or By-laws of Borrower, or result in the breach of, constitute a
default under, contravene any provisions of, or result in the creation of any
security interest, lien, charge or encumbrance upon any of the assets of
Borrower pursuant to any indenture or agreement to which Borrower or any of its
properties is bound, except liens and security interests in favor of CNB.
4.5 LITIGATION. There is no litigation, tax claim, investigation or proceeding
pending, threatened against or affecting Borrower, any Subsidiary, any Guarantor
or any of their respective properties which, if adversely determined, would have
a material adverse effect on the business, operations or condition, financial or
otherwise, of Borrower, any Subsidiary or any Guarantor.
4.6 FINANCIAL CONDITION. Borrower's most recent financial statements, copies
of which have been delivered to CNB, have been prepared in accordance with GAAP
and are true, complete and correct and fairly present the financial condition of
Borrower and the Subsidiaries, including operating results, as of the accounting
period referenced therein. There has been no material adverse change in the
financial condition or business of Borrower or any Subsidiary since the date of
such financial statements. Neither Borrower nor any Subsidiary has any material
liabilities for taxes or long-term leases or commitments, except as
disclosed in the financial statements.
4.7 NO VIOLATIONS. Borrower is not, nor is any Subsidiary, in violation of any
law, ordinance, rule or regulation to which it or any of its properties is
subject.
4.8 USE OF PROCEEDS. Borrower will use the proceeds of the Revolving Credit
Loans solely for business purposes.
4.9 ERISA. Borrower is in compliance in all material respects with all
applicable provisions of the Employee Retirement Income Security Act of 1974
("ERISA"). No Reportable Event (as defined in ERISA and the regulations issued
thereunder other than a "Reportable Event" not subject to the provision for
thirty (30) day notice to the Pension Benefit Guaranty Corporation ("PBGC")
under such regulations) has occurred with respect to any benefit plan of
Borrower nor are there any unfunded vested liabilities under any benefit plan of
Borrower. Borrower has met its minimum funding requirements under ERISA with
respect to each of its plans and has not incurred any material liability to the
PBGC in connection with any such plan.
4.10 CONSENTS. No consent, license, permit, or authorization of, exemption by,
notice to, report to, or registration, filing or
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declaration with, any governmental authority or agency is required in connection
with the execution and performance by Borrower of the Loan Documents or the
transactions contemplated hereunder.
4.11 REGULATION U. Borrower is not engaged principally, or as one of its
principal activities, in the business of extending credit for the purpose of
purchasing or carrying margin stock (within the meaning of Regulations U or X of
the Federal Reserve Board). No part of the proceeds of the Loans will be used
by Borrower to purchase or carry any such margin stock or to extend credit to
others for the purpose of purchasing or carrying such margin stock.
4.12 ENVIRONMENTAL MATTERS.
4.12.1 The operations of Borrower and each Subsidiary comply in all
material respects with all applicable federal, state and local environmental,
health and safety statutes, regulations and ordinances, and fully comply with
all terms of all required permits and licenses;
4.12.2 Borrower and each Subsidiary have received no notices of any
threatened or pending governmental or private civil, criminal or administrative
proceeding regarding any environmental or health and safety statute, regulation
or ordinance and have not been subject to any federal, state or local
investigations, inspections or orders regarding any environmental or health and
safety statute, regulation or ordinance;
4.12.3 Neither Borrower nor any Subsidiary knows of any facts or
conditions which may exist which may subject Borrower or any Subsidiary to
liability or contingent liability and neither Borrower nor any Subsidiary is
presently liable or contingently liable for any removal, remedial, response or
other costs or damages in connection with any release into the environment of
toxic or hazardous substances or waste included on any federal, state or local
hazardous chemical or substance lists under any federal, state or local statute,
regulation or ordinance.
4.12.4 Borrower will, at all times, defend and indemnify and hold CNB
(which for purposes of this Section 4.12 and Section 8.8 includes CNB's parent
company and subsidiaries and all of their respective shareholders, directors,
officers, employees, agents, representatives, successors, attorneys and assigns)
harmless from and against any liabilities, claims, demands, causes of action,
losses, damages, expenses (including without limitation reasonable
attorneys' fees, which attorneys may be employees of CNB, or may be outside
counsel) costs, settlements, judgments or recoveries (collectively, "Claims")
directly or indirectly arising out of or attributable to the use, generation,
manufacture, production, storage, release, threatened release, discharge,
disposal, or presence of a hazardous substance on, under or about Borrower's
property or operations or property leased to or used by Borrower. For these
purposes, the term "hazardous substances" means any substance which is or
becomes designated as "hazardous" or "toxic" under any Federal, state, or local
law. Any obligation or liability of Borrower to CNB under this Section will
survive the expiration or termination of this Agreement and the repayment of all
Loans and the payment or performance of all other Obligations of Borrower to
CNB.
5. AFFIRMATIVE COVENANTS. Borrower agrees that until payment in full of all
Obligations, Borrower will comply with the following covenants:
5.1 BOOKS AND RECORDS. Borrower will maintain, in accordance with sound
accounting practices, accurate records and books of account showing, among other
things, all Inventory and Accounts, the proceeds of the sale or other
disposition thereof and the collections therefrom. Borrower will not change the
accounting method used to determine Borrower's Inventory cost without
notification to CNB. CNB may, at any reasonable time, inspect, audit, and make
extracts from, or copies of, all books, records and other data, inspect any of
Borrower's properties and confirm balances due on Accounts by direct inquiry to
Account Debtors (defined as those Persons obligated on the Accounts). Borrower
will furnish CNB with all information regarding the business or finances of
Borrower promptly upon CNB's request.
5.2 FINANCIAL STATEMENTS. Borrower will furnish to CNB on a continuing basis:
5.2.1 Within forty-five (45) days after the end of each quarterly
accounting period of each fiscal year excluding the fiscal quarter ending
October 31st, a financial statement for Borrower and the Subsidiaries consisting
of not less than a balance sheet, and income statement, with notes thereto,
prepared in accordance with GAAP, which financial statement may be internally
prepared;
5.2.2 Within one hundred twenty (120) days after the end of each fiscal
year, a copy of the annual financial statements for such year for Borrower and
the Subsidiaries including therein a balance sheet, income statement,
reconciliation of net worth
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and statement of cash flows, with notes thereto, audited by an independent
certified public accountant acceptable to CNB, and certified by such accountant
to have been prepared in accordance with GAAP:
5.2.3 Such additional information, reports and/or statements as CNB may,
from time to time, reasonably request.
5.3 TAXES AND PREMIUMS. Borrower will, and will cause each Subsidiary to, pay
and discharge all taxes, assessments, governmental charges and real and personal
property taxes, including, but not limited to, federal and state income taxes,
employee withholding taxes and payroll taxes, and all premiums for insurance
required under this Agreement, prior to the date upon which penalties are
attached thereto.
5.4 INSURANCE
5.4.1 Borrower will, and will cause each Subsidiary to, provide and maintain
the insurance required under the Loan Documents;
5.4.2 In addition to the insurance required above, Borrower will, and will
cause each Subsidiary to, maintain insurance of the types and in amounts
customarily carried in its lines of business, including, but not limited to,
fire, public liability, property damage, business interruption and extra expense
and worker's compensation, such insurance to be carried with companies and in
amounts satisfactory to CNB, and will deliver to CNB from time to time, upon
CNB's request, schedules setting forth all insurance then in effect; and
5.4.3 If Borrower fails to provide, maintain, or furnish to CNB the policies
required by this Section, CNB may immediately procure such insurance or other
insurance necessary to protect CNB's interest, and Borrower will pay all
premiums thereon promptly upon demand by CNB, together with interest, at the
highest rate provided for any of the Loans exclusive of LIBOR Loans extended
under Section 2 above, from the date of expenditure, and if not paid within ten
(10) days of CNB's demand therefor (and without constituting a waiver of an
Event of Default), at a rate five percent (5%) per year higher than such
interest rate until such amount (and interest thereon, to the extent permitted
by law), is paid in full.
5.5 NOTICE. Borrower will promptly advise CNB in writing of (a) the opening of
any new, or the closing of any existing, places of business, each location at
which Inventory or Equipment is or will be kept, and any change to Borrower's
name, trade name or other name under which it does business or of any such new
or additional name; (b) the occurrence of any Event of Default or Potential
Event of Default; (c) any litigation pending or threatened against Borrower, any
Subsidiary or any Guarantor where the amount or amounts in controversy exceed
$1,000,000.00; (d) any unpaid taxes of Borrower, any Subsidiary or any
Guarantor, which are more than fifteen (15) days delinquent; and (e) any other
matter that might materially or adversely affect Borrower's, any Subsidiary's or
any Guarantor's financial condition, property or business.
5.6 FAIR LABOR STANDARDS ACT. Borrower will, and will cause each subsidiary to,
comply with the requirements of, and all regulations promulgated under, the Fair
Labor Standards Act of 1938 (29 U.S.C. Code (S) 01 et seq.).
5.7 CORPORATE EXISTENCE. Borrower will, and will cause each Subsidiary to,
maintain its corporate existence and all of its rights, privileges and
franchises necessary or desirable in the normal course of its business.
5.8 COMPLIANCE WITH LAW. Borrower will, and will cause each subsidiary to,
comply with the requirements of all applicable laws, rules, regulations, orders
of any governmental agency and all material agreements to which they are a
party,
5.9 FINANCIAL TESTS. Borrower will maintain:
5.9.1 Tangible Net Worth plus Subordinated Debt of not less than
$15,500,000.00 as of October 31, 1997 and $16,500,000.00 as of October 31, 1998
and at all times thereafter.
5.9.2 A ratio of Total Senior Liabilities to Tangible Net Worth plus
Subordinated Debt of not more than 0.75 to 1 at all times;
5.9.3 A ratio of Quick Assets to Current Liabilities of not less than 3.0
to 1 at all times; and
5.9.4 Net income after taxes per fiscal year of greater than zero at all
times.
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6. NEGATIVE CONVENANTS. Borrower agrees that until payment in full of all
Obligations, Borrower will not, nor will it permit any Subsidiary to, do any of
the following, without CNB's prior written consent:
6.1 BORROWING. Create, incur, assume or permit to exist any Debt, except Debt
to CNB, the Subordinated Debt, purchase money and trade Debt incurred in the
ordinary course of business.
6.2 SALE OF ASSETS. Sell, lease or otherwise dispose of any of Borrower's or
any Subsidiary's assets, other than in the ordinary course of business.
6.3 LOANS. Make loans or advances to any Person without prior approval from
CNB except credit extended to employees or to customers in the ordinary course
of its business.
6.4 CONTINGENT LIABILITIES. Assume, guarantee, endorse, contingently agree to
purchase or otherwise become liable for the obligation of any Person including
Borrower, a Subsidiary, or Affiliate, except (a) by the endorsement of
negotiable instruments for deposit or collection or similar transactions in the
ordinary course of business, and (b) contingent liabilities in favor of CNB.
6.5 INVESTMENTS. Purchase or acquire the obligations or stock of, or any other
interest in, any partnership, joint venture or corporation, except (a) direct
obligations of the United States of America and its Agencies (b) investments in
certificates of deposit issued by, and other deposits with, commercial banks
organized under the United States or a State thereof having capital of at least
One Hundred Million Dollars ($100,000,000.00) (c) direct obligations of
corporations whose obligations are rated by Standard & Poor's as A or better or
by Moody's Investor Services as A2P2 or better; and (d) direct obligations of
municipalities rated by Standard & Poor's as BBB or better.
6.6 MORTGAGES, LIENS, ETC. Mortgage, pledge, hypothecate, grant or contract to
grant any security interest of any kind in any property or assets, to anyone
except CNB.
6.7 INVOLUNTARY LIENS. Permit any involuntary liens to arise with respect to
any property or assets including but not limited to those arising from the levy
of a writ of attachment or execution, or the levy of any state or federal tax
lien which lien will not be removed within a period of thirty (30) days.
6.8 SALE AND LEASEBACK. Enter into any sale-leaseback transaction.
6.9 MERGERS AND ACQUISITIONS. Enter into any merger or consolidation, or
acquire all or substantially all the assets of any Person, except a Subsidiary
may be merged into or consolidated with another Subsidiary or with Borrower.
6.10 EVENT OF DEFAULT. Permit a default to occur under any document or
instrument evidencing Debt incurred under any indenture, agreement or other
instrument under which such Debt may be issued, or any event to occur under any
of the foregoing which would permit any holder of the Debt outstanding
thereunder to declare the same due and payable before its stated maturity,
whether or not such acceleration occurs or such default be waived.
7. EVENTS OF DEFAULT.
7.1 EVENTS OF DEFAULT. The occurrence of any of the following will constitute
an Event of Default:
7.1.1 Borrower fails to pay when due any installment of principal or
interest or any other amount payable under the Loan Documents;
7.1.2 Any Person, or any Subsidiary of any Person, which is a party to
any Loan Document fails to perform or observe any of the terms, provisions,
covenants, conditions, agreements or obligations contained in the Loan
Documents;
7.1.3 The entry of an order for relief or the filing of an involuntary
petition with respect to Borrower, any Subsidiary or any Guarantor under the
UNITED STATES BANKRUPTCY CODE, the appointment of a receiver, trustee, custodian
or liquidator of or for any part of the assets or property of Borrower, any
Subsidiary or any Guarantor, or Borrower, any Subsidiary or any Guarantor makes
a general assignment for the benefit of creditors;
7.1.4 Any financial statement, representation or warranty made or
furnished by Borrower, any Subsidiary or any Guarantor in connection with the
Loan Documents provides to be in any material respect incorrect:
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7.1.5 CNB's security interest in or lien on any portion of any Collateral
becomes impaired or otherwise unenforceable;
7.1.6 Any Person obtains an order or decree in any court of competent
jurisdiction enjoining or prohibiting Borrower or CNB or either of them from
performing this Agreement, and such proceedings are not dismissed or such decree
is not vacated within ten (10) days after the granting thereof;
7.1.7 Borrower or any Subsidiary neglects, fails or refuses to keep in
full force and effect any governmental permit or approval which is necessary to
the operation of its business;
7.1.8 All or substantially all of the property of Borrower, any Guarantor
or any Subsidiary is condemned, seized or otherwise appropriated;
7.1.9 The occurrence of (a) a Reportable Event as defined in ERISA which
CNB determines in good faith constitutes grounds for the institution of
proceedings to terminate any pension plan by the PBGC, (b) an appointment of a
trustee to administer any pension plan of Borrower, or (c) any other event or
condition which might constitute grounds under ERISA for the involuntary
termination of any pension plan of Borrower, where such event set forth in (a),
(b) or (c) results in a significant monetary liability to Borrower;
7.1.10 The Termination Date is not extended.
7.2 NOTICE OF DEFAULT AND CURE OF POTENTIAL EVENTS OF DEFAULT. Except with
respect to the Events of Default specified in Sections 7.1.1, 7.1.3, or 7.1.5
above, and subject to the provisions of Section 7.4, CNB will give Borrower at
least ten (10) days' written notice of any event which constitutes or, with the
lapse of time would become an Event of Default, during which time Borrower will
be entitled to cure same.
7.3 CNB'S REMEDIES. Upon the occurrence of an Event of Default, at the sole
and exclusive option of CNB, and upon written notice to Borrower, CNB may (a)
declare the principal of and accrued interest on the Loans, and all other
Obligations immediately due and payable in full, whereupon the same will
immediately become due and payable; (b) terminate this Agreement as to any
future liability or obligation of CNB, but without affecting CNB's rights and
security interest in the Collateral and without affecting the Obligations owing
by Borrower to CNB; and/or (c) exercise its rights and remedies under the Loan
Documents and all rights and remedies of a secured party under the Code and
other applicable laws with respect to all of the Collateral.
7.4 ADDITIONAL REMEDIES. Nothwithstanding any other provision of this
Agreement, upon the occurrence of any event, action or inaction by Borrower, or
if any action or inaction is threatened which CNB reasonably believes will
materially affect the value of the Collateral, CNB may take such legal actions
as it deems necessary to protect the Collateral, including but not limited to,
seeking injunctive relief and the appointment of a receiver, whether or not an
Event of Default or Potential Event of Default has occurred under this
Agreement.
8. MISCELLANEOUS.
8.1 REIMBURSEMENT OF COSTS AND EXPENSES. Borrower will reimburse CNB for
all costs and expenses relating to this Agreement including, but not limited to,
filing, recording or search fees, audit or verification fees, appraisals of the
Collateral and other out-of-pocket expenses, and reasonable attorneys' fees and
expenses expended or incurred by CNB (or allocable to CNB's in-house counsel) in
documenting or administering the Loan Documents or collecting any sum which
becomes due CNB under the Loan Documents, irrespective of whether suit is filed,
or in the protection, perfection, preservation or enforcement of any and all
rights of CNB in connection with the Loan Documents, including, without
limitation, the fees and costs incurred in any out-of-court work-out or a
bankruptcy or reorganization proceeding. All amounts due under this Section 8.1
will bear interest at the highest rate provided for any of the Loans exclusive
of LIBOR Loans extended under Section 2 above, from the date of expenditure (or
allocation), and if not paid within ten (10) days of CNB's demand therefor (and
without constituting a waiver of an Event of Default), at a rate five percent
(5%) per year higher than such interest rate until such amount (and interest
thereon, to the extent permitted by law), is paid in full.
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8.2 DISPUTE RESOLUTION.
8.2.1 MANDATORY ARBITRATION. At the request of CNB or Borrower, any
dispute, claim or controversy of any kind (whether in contract or tort,
statutory or common law, legal or equitable) now existing or hereafter arising
between CNB and Borrower and in any way arising out of, pertaining to or in
connection with: (1) this Agreement, and/or any renewals, extensions, or
amendments thereto; (2) any of the Loan Documents; (3) any violation of this
Agreement of the Loan Documents; (4) all past, present and future loans; (5) any
incidents, omissions, acts, practices or occurrences arising out of or related
to this Agreement or the Loan Documents causing injury to either party whereby
the other party or its agents, employees or representatives may be liable, in
whole or in part, or (6) any aspect of the past, present or future relationships
of the parties, will be resolved through final and binding arbitration conducted
at a location determined by the arbitrator in Los Angeles, California, and
administered by the American Arbitration Association ("AAA") in accordance with
the California Arbitration Act (Title 9, California Code of Civil Procedure
Section 1280 et. seq.) and the then existing Commercial Rules of the AAA.
Judgment upon any award rendered by the arbitrator(s) may be entered in any
state or federal courts having jurisdiction thereof.
8.2.2 REAL PROPERTY COLLATERAL. Notwithstanding the provisions of
subsection 8.2.1, no controversy or claim will be submitted to arbitration
without the consent of all the parties if, at the time of the proposed
submission, such controversy or claim arises from or relates to an obligation
owed to CNB which is secured in whole or in part by real property collateral.
If all parties do not consent to submission of such a controversy or claim to
arbitration, the controversy or claim will be determined as provided in
subsection 8.2.3.
8.2.3 JUDICIAL REFERENCE. At the request of any party, a controversy or
claim which is not submitted to arbitration as provided and limited in
subsections 8.2.1 and 8.2.2 will be determined by a reference in accordance
with California Code of Civil Procedure Sections 638 et. seq. If such an
-- ---
election is made, the parties will designate to the court a referee or referees
selected under the auspices of the AAA in the same manner as arbitrators are
selected in AAA-sponsored proceedings. The presiding referee of the panel, or
the referee if there is a single referee, will be an active attorney or
retired judge. Judgment upon the award rendered by such referee or referees will
be entered in the court in which such proceeding was commenced in accordance
with California Code of Civil Procedure Sections 644 and 645.
8.2.4 PROVISIONAL REMEDIES, SELF HELP AND FORECLOSURE. No provision of this
Agreement will limit the right of any party to: (1) foreclose against any real
property collateral by the exercise of a power of sale under a deed of trust,
mortgage or other security agreement or instrument, or applicable law, (2)
exercise any rights or remedies as a secured party against any personal property
collateral pursuant to the terms of a security agreement or pledge agreement, or
applicable law, (3) exercise self help remedies such as setoff, or (4) obtain
provisional or ancillary remedies such as injunctive relief or the appointment
of a receiver from a court having jurisdiction before, during or after the
pendency of any arbitration or referral. The institution and maintenance of an
action for judicial relief or pursuit of provisional or ancillary remedies, or
exercise of self help remedies will not constitute a waiver of the right of any
party, including the plaintiff, to submit any dispute to arbitration or judicial
reference.
8.2.5 POWERS AND QUALIFICATIONS OF ARBITRATORS. The arbitrator(s) will
give effect to statutes of limitation, waiver and estoppel and other affirmative
defenses in determining any claim. Any controversy concerning whether an issue
is arbitratable will be determined by the arbitrator(s). The laws of the State
of California will govern. The arbitration award may include equitable and
declaratory relief. All arbitrator(s) selected will be required to be a
practicing attorney or retired judge licensed to practice law in the State of
California and will be required to be experienced and knowledgeable in the
substantive laws applicable to the subject matter of the controversy or claim at
issue.
8.2.6 DISCOVERY. The provisions of California Code of Civil Procedure
Section 1283.05 or its successor section(s) are incorporated herein and made a
part of this Agreement. Depositions may be taken and discovery may be obtained
in any arbitration under this Agreement in accordance with said section(s).
8.2.7 MISCELLANEOUS. The arbitrator(s) will determine which is the
prevailing party and will include in the award that party's reasonable
attorneys' fees and costs (including allocated costs of in-house legal counsel).
Each party agrees to keep all controversies and claims and the arbitration
proceedings strictly confidential, except for disclosures of information
required in the ordinary course of business of the parties or by applicable law
or regulation.
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8.3 CUMULATIVE RIGHTS AND NO WAIVER. All rights and remedies granted to CNB
under the Loan Documents are cumulative and no one such right or remedy is
exclusive of any other. No failure or delay on the part of CNB in exercising any
power, right or remedy under any Loan Document will operate as a waiver
thereof, and no single or partial exercise or waiver by CNB of any such power,
right or remedy will preclude any further exercise thereof or the exercise of
any other power, right or remedy.
8.4 APPLICABLE LAW. This Agreement will be governed by California law.
8.5 LIEN AND RIGHT OF SETOFF. Borrower grants to CNB a continuing lien for all
Obligations of Borrower to CNB upon any and all moneys, securities and other
property of Borrower and the proceeds thereof, now or hereafter held or received
by or in transit to CNB from or for Borrower, whether for safekeeping, custody,
pledge, transmission, collection or otherwise, and also upon any and all
deposits (general or special) and credits of Borrower with, and any and all
claims of Borrower against CNB at any time existing. Upon the occurrence of any
Event of Default, CNB is authorized at any time and from time to time, without
notice to Borrower or any other Person, to setoff, appropriate and apply any or
all items hereinabove referred to against all Obligations of Borrower whether
under this Agreement or otherwise, and whether now existing or hereafter
arising.
8.6 NOTICES. Any notice required under any Loan Document will be given in
writing and will be deemed to have been given when personally delivered or when
sent by the U.S. mail, postage prepaid, certified, return receipt requested, to
the address listed at the end of this Agreement or such other address which a
party may provide to the other.
8.7 COUNTERPARTS. This Agreement may be signed in any number of counterparts
which, when taken together, will constitute but one agreement.
8.8 INDEMNIFICATION. Borrower will, at all times, defend and indemnify and hold
CNB harmless from and against any and all Claims (as that term is defined in
Section 4.12.4) arising out of or resulting from (a) any breach of the
representations, warranties, agreements or covenants made by Borrower herein;
(b) any suit or proceeding of any kind or nature whatsoever against CNB arising
from or connected with the transactions contemplated by the Loan Documents or
any of the rights and properties assigned to CNB hereunder, and/or (c) any suit
or proceeding that CNB may deem necessary or advisable to institute, in the name
of CNB, Borrower or both, against any other Person, for any reason whatsoever to
protect the rights of CNB hereunder or under any of the documents, instruments
or agreements executed or to be executed pursuant hereto, including attorneys'
fees and court costs and all other costs and expenses incurred by CNB (or
allocable to CNB's in-house counsel), all of which will be charged to and paid
by Borrower and will be secured by the Collateral. Any obligation or liability
of Borrower to CNB under this Section will survive the expiration or termination
of this Agreement and the repayment of all Loans and the payment or performance
of all other Obligations of Borrower to CNB.
8.9 ASSIGNMENTS. The provisions of this Agreement are hereby made applicable to
and will inure to the benefit of CNB's successors and assigns and Borrower's
successors and assigns; provided, however, that Borrower may not assign or
transfer its rights or Obligations under this Agreement without the prior
written consent of CNB.
8.10 ACCOUNTING TERMS. Except as otherwise stated in this Agreement, all
accounting terms and financial covenants and information will be construed in
conformity with, and all financial data required to be submitted will be
prepared in conformity with, GAAP as in effect on the date hereof.
8.11 SEVERABILITY. Any provision of the Loan Documents which is prohibited or
unenforceable in any jurisdiction, will be, only as to such jurisdiction,
ineffective to the extent of such prohibition or unenforceability, but all the
remaining provisions of the Loan Documents will remain valid.
8.12 COMPLETE AGREEMENT. This Agreement, together with the other Loan
Documents, constitutes the entire agreement of the parties and supersedes any
prior or contemporaneous oral or written agreements or understandings, if any,
which are merged into this Agreement. This Agreement may be amended only in a
writing signed by Borrower and CNB.
8.13 JOINT AND SEVERAL. Should more than one Person sign this Agreement, the
obligations of each signer will be joint and several.
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This Agreement is executed as of the date stated at the top of the first
page.
"Borrower" Signature Eyewear, Inc.
498 North Oak Street
Inglewood, California 90302
Attention: Mr. Michael Prince, CFO
Telephone Number: (310) 330-2700
By: /s/ Michael Prince
-------------------------------------
Michael Prince, Chief Financial Officer
"CNB" City National Bank
13191 Crossroad Parkway North, Suite 107
City of Industry, California 91746
Attention: Manager
Telephone Number: (562) 463-2024
By: /s/ Kenneth E. Barton
-------------------------------------
Kenneth E. Barton, Vice President
with a copy of all Notices to: City National Bank, Legal Department
400 North Roxbury Drive, 5th Floor
Beverly Hills, California 90210-5021
Attention: General Counsel
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EXHIBIT A
REVOLVING CREDIT NOTE
(FOR PRIME AND/OR LIBOR OPTIONS)
496077 #24593
$5,000,000.00 City of Industry, California
October 27, 1997
For Value Received, the undersigned, SIGNATURE EYEWEAR, INC., a California
corporation ("Borrower"), promises to pay on the Termination Date to the order
of CITY NATIONAL BANK, a national banking association ("CNB"), at its Office
located at 13191 Crossroads Parkway North, City of Industry, California 91746,
the principal amount of FIVE MILLION DOLLARS ($5,000,000.00) or so much thereof
as may be advanced and be outstanding, with interest thereon to be computed on
each Revolving Credit Loan from the date of its disbursement at a rate computed
on the basis of a 360-day year, actual days elapsed, at the rates, times and in
accordance with the terms of that certain Credit Agreement between Borrower and
CNB, dated as of October 27, 1997, as may be amended from time to time (the
"Credit Agreement"). Capitalized terms not defined herein shall have the
meanings given them in that certain Credit Agreement.
All or any portion of the principal of this Revolving Credit Note
("Note") may be borrowed, repaid and reborrowed from time to time prior to the
Termination Date, provided at the time of any borrowing no default exists under
this Note and no Event of Default or Potential Event of Default exists under
the terms and conditions of the Credit Agreement and provided, further that the
total borrowings outstanding at any one time shall not exceed the Revolving
Credit Commitment less the amount of Letters of Credit issued and outstanding
under the Credit Agreement. Each borrowing and repayment of a Revolving Credit
Loan shall be noted in the books and records of CNB. The excess of borrowings
over repayments as noted on such books and records shall constitute presumptive
evidence of the principal balance due hereon from time to time and at any time.
If payment on this Note becomes due and payable on a non-business day,
the maturity thereof shall be extended to the next business day and, with
respect to payments of principal or interest thereon shall be payable during
such extension at the then applicable rate. Upon the occurrence of one or more
of the Events of Default specified in the Credit Agreement, all amounts
remaining unpaid on this Note may become or be declared to be immediately
payable as provided in the Credit Agreement, without presentment, demand or
notice of dishonor, all of which are expressly waived. Borrower agrees to pay
all costs of collection of this Note and reasonable attorneys' fees (including
attorneys' fees allocable to CNB's in-house counsel) in connection therewith,
irrespective of whether suit is brought thereon.
This is the Revolving Credit Note referred to in the Credit Agreement
and is entitled to the benefits thereof.
Upon CNB's written notice to Borrower of the occurrence of an Event of
Default, the outstanding principal balance (and interest, to the extent
permitted by law) shall bear additional
<PAGE>
EXHIBIT A
interest from the date of such notice at the rate of Five Percent (5.0%) per
annum higher than the interest rate as determined and computed above, provided,
however, for the purposes hereof, a LIBOR Loan shall be treated as a Prime Loan
upon the termination of the Interest Period, and continuing thereafter until the
Event of Default is cured.
This Note shall be governed by the laws of the State of California. If
this Note is executed by more than one Borrower, all obligations are joint and
several.
"BORROWER"
SIGNATURE EYEWEAR, INC., a
California corporation
By:
-----------------------
Michael Prince, CFO
<PAGE>
EXHIBIT B
NOTICE OF BORROWING/INTEREST SELECTION
This Notice of Borrowing/Interest Selection ("Notice") is executed and
delivered by Signature Eyewear, Inc. ("Borrower") to City National Bank, a
national banking association ("CNB"), pursuant to that Credit Agreement entered
into by Borrower and CNB as of October 27, 1997 ("Agreement"). Terms not defined
herein will have the meanings as defined in the Agreement.
1. REQUEST FOR A REVOLVING CREDIT LOAN. Borrower requests a Revolving Credit
Loan as follows:
1.1 Interest Selection-State "LIBOR" OR "Prime": ___________
1.2 Principal Amount of Loan: $ ___________[if LIBOR Loan, minimum
advances of $ ________________, increments of $ ______________]
1.3 LIBOR Loan-Effective Date of Interest Period: _____________, 199_
1.4 LIBOR Loan-Interest Period: _______ days/month(s) [1, 3, 6, 9 or 12
months only]
2. CONVERSION TO LIBOR LOAN. Borrower requests conversion of an outstanding
Prime Loan to a Libor Loan.
2.1 Effective Date of Conversion: _________________, 19__
2.2 Principal Amount of Conversion: $ _______________[if LIBOR Loan,
minimum advances of $ ____________, increments of $ ___________]
2.3 Interest Period: _________ days/month(s) [1, 3, 6, 9 or 12 months only]
3. RENEWAL OF LIBOR LOAN. Borrower requests renewal of an outstanding LIBOR
Loan as follows:
3.1 Principal Amount of Renewal of LIBOR Loan: $ ___________[if LIBOR
Loan, minimum advances of $ ________, increments of $ ___________] (Amount of
LIBOR Loan not renewed as a LIBOR Loan will be a Prime Loan)
3.2 Date of Renewal: ___________, 19__ [last date of current Interest
Period]
3.3 Interest Period: ____________ month(s) [1, 3, 6, or 12 months only]
4. CONVERSION TO PRIME LOAN. A LIBOR Loan will automatically convert to Prime
Loan at the end of an Interest Period if CNB fails to timely receive a Notice
for an outstanding LIBOR Loan.
5. WARRANTY. In connection with the action requested herein, Borrower hereby
represents and warrants to CNB that, as of the date of such request, no Event of
Default has occurred and is continuing.
This Notice is executed on ______________, 19___, by an authorized officer
of Borrower, on behalf of Borrower.
"Borrower" Signature Eyewear, Inc. a California corporation
By: _____________________
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED
FINANCIAL STATEMENTS OF SIGNATURE EYEWEAR, INC. FOR THE YEAR ENDED OCTOBER 31,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<CASH> 8,133,423
<SECURITIES> 0
<RECEIVABLES> 4,073,834
<ALLOWANCES> 60,316
<INVENTORY> 6,827,613
<CURRENT-ASSETS> 19,963,922
<PP&E> 2,205,591
<DEPRECIATION> 1,126,055
<TOTAL-ASSETS> 21,175,315
<CURRENT-LIABILITIES> 3,859,510
<BONDS> 0
0
0
<COMMON> 9,400
<OTHER-SE> 15,190,389
<TOTAL-LIABILITY-AND-EQUITY> 21,175,315
<SALES> 33,175,733
<TOTAL-REVENUES> 33,175,733
<CGS> 13,498,250
<TOTAL-COSTS> 15,667,228
<OTHER-EXPENSES> 296,452
<LOSS-PROVISION> 41,839
<INTEREST-EXPENSE> 359,604
<INCOME-PRETAX> 3,713,803
<INCOME-TAX> 128,800
<INCOME-CONTINUING> 3,585,003
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,585,003
<EPS-PRIMARY> 0.61
<EPS-DILUTED> 0.61
</TABLE>
<PAGE>
EXHIBIT 99.1
SIGNATURE EYEWEAR, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
OCTOBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
Balance Additions
at charged to Deductions Balance
beginning costs and from at end
of year expenses allowance of year
---------------------------------------------------
<S> <C> <C> <C> <C>
Year ended October 31, 1996:
Allowances deducted from related
balance sheet accounts:
Accounts receivable $24,028 $20,972 $ - $45,000
======= ======= ====== =======
Year ended October 31, 1997:
Allowances deducted from related
balance sheet accounts:
Accounts receivable $45,000 $15,316 $ - $60,316
======= ======= ====== =======
</TABLE>
